This article was originally published on Atrium’s Blog covering hot topics founders are wrestling with every day as they build their companies.
By Jason Kornfeld and Jennifer Gumer
In the last few years, we have seen remarkable momentum in the cannabis industry – especially in California. However, the past several months have proven rocky for the entire US cannabis market as regulatory variables are negatively impacting major players in the industry and putting a pause on their growth initiatives. In fact, many are struggling and signaling the need for more clarity and flexibility in regulations to sustainably operate and grow their businesses.
As we look at the year ahead, 2020 will be a defining year for cannabis businesses as key legislations get decided on. To help us uncover some of the trends we’ll likely see next year, Jennifer Gumer, a cannabis legal expert from CGL, weighs in below.
Continued cooling of the US cannabis market
In the last several months, we’ve seen layoffs at major cannabis companies like MedMen and Eaze due to the cooling of the domestic market. In 2020, we’ll likely see more big players back away from the growth-oriented strategies that have characterized the last several years and perhaps engage in similar retractions.
The thin profit margins that characterize the industry due to the federal tax burden caused by 280E, high state taxes, cost of compliance, and competition from black market are finally catching up to these companies. The detrimental impact of black market competition on the legal cannabis industry is particularly pronounced due to the lack of enforcement against black market shops, the fact that 80% of local jurisdictions in California still prohibit cannabis businesses, and the ability to charge lower prices because illegal shops don’t pay taxes or compliance costs.
Low-profit margins are leading to slow growth for businesses in this industry, and we’ll continue to see more companies like those mentioned above laying off large numbers of their workforces.
More pressure placed on lawmakers
To reverse the cooling trend noted above caused by undue regulatory burdens and black-market competition, regulators will feel some heat from the cannabis industry to:
● lift some of the regulatory load (e.g. by lowering state taxes, changing the legal status of cannabis at the federal level, lessening of banking and tax burdens, and/or putting pressure on local jurisdiction to remove cannabis bans in California); and,
● take more enforcement action against the black market.
In fact, there has already been progress on this front. In September, the SAFE Banking Act passed the House and if the bill passes the Senate, banking for cannabis will be legal for the first time. In November, the MORE Act, which would deschedule cannabis and remedy some of the injustices caused by the war on drugs, passed the House Judiciary, becoming the first bill aimed at descheduling cannabis to pass a congressional committee. Although both bills have a long way to go before becoming law, they signal hope for the cannabis industry.
We may also see more states legalize cannabis and respond to pressure by taking action to lighten the crushing regulatory burdens on the industry. California, however, just took a step in the opposite direction by increasing state cannabis taxes much to the dismay of the industry. A better way for the state to increase its lackluster tax revenues would be to, as noted above, take actions to decrease black market competition and therefore increase the profitability of the legal market.
Investors will turn towards global cannabis markets
In response to the cooling cannabis market (and regulatory environment) in the US, investors will turn toward global markets as countries increasingly legalize medical and recreational use of cannabis. Countries that have legalized cannabis like Canada, Germany, and other EU countries will start to trade products with emerging markets (e.g. Columbia and Thailand).
Certainty around the legal status of hemp and CBD products
Since the US passed the 2018 Farm Bill to remove hemp from the Controlled Substances Act’s Schedule 1 status of marijuana, hemp-CBD products have existed in a regulatory grey area due to the lack of an applicable, comprehensive state or federal regulatory regime.
Simultaneously, the FDA and some states have said that hemp-CBD cannot be marketed as dietary supplements or foods despite such products being widely sold and marketed throughout the country. States, however, are starting to devise regulations applicable to hemp-CBD products, which will for the first time require testing among other controls. The FDA has also stated its intention to devise federal regulations applicable to hemp-CBD products, including foods and dietary supplements, and is receiving significant pressure from industry and Congress to act fast.
Regulations will dictate more compliance and safety for consumers that will provide more certainty in the market but will also add more costs. Increased regulation may serve as a death knell for some existing companies who cannot afford the costs of becoming compliant while new companies will enter the market given the security and certainty that the regulations will provide.
Next year will prove to be a critical year for the industry with much activity taking place at both the federal and state levels to better define regulations and provide clarity to the market. We’re hopeful lawmakers, regulators will help improve cannabis market conditions, and that 2020 can be a defining year for the industry.
If you’re a newly formed cannabis startup, check out some of our founder-related resources such as starting a cannabis-focused business and getting in front of cannabis investors, in addition to CGL’s Insights blog on more regulatory focused topics (e.g. navigating California’s cannabis regulations).
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