Cannabis Law Center
Marijuana historically was an illegal substance under both state and federal laws. Over time, growing acceptance of the drug in American society has led to its legalization in over two-thirds of the states for medical purposes. Over one-third of the states have gone even further, legalizing marijuana for general recreational use. The federal government continues to ban marijuana, though. Sporadic efforts to reform its drug laws have not gained momentum.
Thus, entering the cannabis industry is a high-risk, high-reward decision. Entrepreneurs building marijuana businesses may reap huge profits as demand surges, especially in states that have legalized recreational use. However, they must navigate a complex web of regulations at state and local levels. Cannabis business owners and employees also must shoulder burdens imposed by operating in a sector that is prohibited under federal law. Below is an overview of some issues and challenges inherent to this fast-growing industry.
Starting a Cannabis Business
A business owner usually must meet certain requirements to enter the cannabis industry, such as residency requirements and criminal background checks. They also must complete a licensing process at state and possibly local levels. This can last for a year or more in some locations. The licensing process varies depending on the type of business. For example, a cannabis growing operation will face different requirements from a marijuana dispensary.
Most new cannabis businesses will need an infusion of capital to launch their operations. This can be challenging to obtain because traditional types of loans may not be available. Since federal law continues to criminalize marijuana, banks tend to be reluctant to work with cannabis businesses. Federal regulations governing the banking industry make issuing loans to an illegal business risky and complicated. Alternative financing sources may include venture capital or private equity funds, angel investors, and certain private loan issuers that offer high-interest loans.
Operating a Cannabis Business
Once a cannabis business has opened, it must continue to carefully monitor state and local laws for any changes that could affect its operations. Since this industry is so new, regulations may change suddenly and dramatically. Failing to adjust to changes could result not only in the loss of a license and the closure of a business but even in criminal charges for business owners.
Similar to bank loans, checking accounts and other services normally provided by banks may not be accessible to business owners in the cannabis industry. As a result, they may need to rely on cash for most transactions with consumers, vendors, employees, and government authorities. Cash is a cumbersome and sometimes risky foundation for operating a business. A business owner should make sure that they are willing to deal with these burdens if they cannot get services from banks.
Working in the Cannabis Industry
If an employee passes background checks and meets other requirements for entering the industry, a job at a cannabis business can offer significant benefits. However, employees should be just as careful as business owners in complying with applicable laws and getting any required licenses. They could face criminal prosecution for violations. Employees also should be aware that working at a marijuana business does not mean that they can use drugs on the job. Drug testing and smoking bans may be just as strict as in other industries. Owners of cannabis businesses may even take extra care to preserve a clean image.
Some states require or incentivize cannabis businesses to accommodate unions. This may involve a labor peace agreement, under which a business agrees to stay neutral in the labor organizing process, while the union agrees to refrain from planning work stoppages and other tactics that put pressure on employers. Labor peace agreement mandates rest on uncertain legal ground but have not faced major challenges.
Investing in the Cannabis Industry
Despite its fast rate of growth, the cannabis industry remains a risky proposition for investors. Tight regulations and high tax rates cause some investors to refrain from entering this sector. Marijuana businesses also may struggle to find funding sources and generate profits in their early stages. As with other new industries, the balance between supply and demand is not always easy to predict and maintain. This can lead to fluctuating profits and investor returns. Thus, an investor likely should exercise caution if they choose to enter the cannabis industry.
If an investor feels reluctant to invest in a specific cannabis company, they might consider buying shares in an exchange-traded fund. Some ETFs focus on the marijuana industry, holding stocks of many companies at once. An investor also might mitigate their risks by investing in a business that offers some non-cannabis products. If a business receives a substantial part of its revenue from these products, it may be more stable than a company that operates exclusively in the cannabis industry.
