- In November 2020, five states will have ballot referendums on the legalization of cannabis, potentially expanding the cannabis industry into new markets.
- Each state has its own laws governing the medicinal and recreational use of cannabis, and every business must follow these state laws.
- Cannabis remains illegal at the federal level, but enforcement against state-legal businesses has largely been suspended and lacks congressional funding, making these markets effectively safe.
- This article is for entrepreneurs who are thinking about starting a cannabis business and need to understand the regulations surrounding a complex and growing industry.
In 2019, about a dozen states were poised to put some form of cannabis-legalization initiative on their ballot referendums. Due to the COVID-19 pandemic and stymied petitioner campaigns, though, that number is now down to five states. Still, if these ballot referendums pass, the cannabis industry could see the expansion of existing markets and the opening of new ones in 2021. If you've been thinking about starting a cannabis business, now could be the time.
The value of the U.S. cannabis industry
The market value of the U.S. cannabis industry is projected to reach $30 billion annually by 2025, according to industry research group New Frontier Data. This projection comes at a time when cannabis remains federally illegal despite the legalization of medical marijuana by 33 states and Washington, D.C., and the legalization of adult-use cannabis (sometimes called recreational use) programs by 11 states and Washington, D.C.
As cannabis-legalization movements expand into new states and some members of Congress advocate for reform and even federal legalization, the cannabis industry could soon break into new markets as well.
Key takeaway: The cannabis industry is a multibillion-dollar business that's poised to grow rapidly as new markets open and more states legalize both medical and adult-use programs.
States voting on cannabis legalization in 2020
Five states are confirmed to vote on some form of cannabis legalization during the November 2020 election, with a sixth potentially joining depending on the result of a pending court decision.
- Arizona: In Arizona, voters will determine whether the state legalizes an adult-use cannabis program. Petitioners in Arizona collected more than 420,000 signatures and defeated a lawsuit to secure the ballot referendum. The state's adult-use cannabis market is expected to generate $750 million in value annually, according to Cannabis News Box.
- Mississippi: Voters in Mississippi will have multiple medical-marijuana-legalization referendums on the ballot in November. One, called Initiative 65, was developed through a grassroots campaign that gathered more than 105,000 signatures. A competing measure proposed by state legislators, known as Alternative 65A, will also be up for a vote. If approved, both measures would legalize medical marijuana, but regulatory details would vary.
- Montana: After petitioners gathered more than 130,000 signatures, Montana voters will have the chance to approve an adult-use cannabis program in a state that recently oversaw reform to its existing medical-marijuana program. In 2018, Montana's medical-marijuana program generated $45 million in sales; expanding the industry into the adult-use market would likely increase that value substantially.
- New Jersey: After several failed attempts to legalize adult-use cannabis through the state legislature, New Jersey is leaving it up to the voters this November. If the measure is approved, the state would have one of the lowest sales-tax rates placed on cannabis in the country. New Jersey's cannabis industry could be worth $1.5 billion annually if the measure passes, according to projections from Marijuana Business Daily.
- South Dakota: South Dakota voters will have the opportunity to vote for the legalization of both medical marijuana and adult-use cannabis. No other state has legalized both medical-cannabis and adult-use-cannabis programs at the same time.
Nebraska could potentially join these five states with a cannabis-legalization measure on the ballot. Petitioners looking to get a medical-marijuana-legalization referendum on the ballot collected 182,000 signatures – 60,000 more than required by Nebraska state law. However, Nebraska's push for a medical-cannabis vote has faced a challenge in court by Lancaster County Sheriff Terry Wagner. A final ruling on whether the referendum will be on the ballot is expected this fall.
Key takeaway: Five states have cannabis-legalization ballot measures planned for the November 2020 election, with a sixth possibly joining the list. This could prompt a significant expansion into new markets in 2021.
How to start a business in the cannabis industry
It is easy to think of the cannabis industry simply as the cultivators who grow the plant, the manufacturers who refine it into products and the dispensaries that sell those products. However, while these elements are central to the legal-cannabis supply chain, the cannabis industry is much more complex and varied than those businesses.
Cannabis businesses can be broken down into two broad categories: plant-touching businesses and ancillary businesses. Here's a closer look at each, along with some examples of the businesses in each category.
Plant-touching cannabis businesses
Plant-touching businesses include those that might come to mind when you think of the cannabis industry, such as breeders, cultivators, manufacturers and dispensaries. However, there are other plant-touching businesses that might not be so obvious, including the transportation and delivery companies that bring harvested cannabis and finished products from point A to point B.
- Breeders. Breeders are focused on the proliferation of existing strains of cannabis and the development of new strains through selective breeding. They are responsible for developing the seeds used by cultivators, as well as identifying and propagating the highest-quality genetics for future generations of plants.
- Cultivators. Cultivators manage immense growing facilities, which are generally indoor operations stored in large buildings such as warehouses. They engage in a variety of cultivation methods to grow healthy, high-quality cannabis plants, which are then harvested and often sold wholesale to processors or dispensaries.
- Manufacturers. Manufacturers, such as extractors, are responsible for processing harvested cannabis flower into finished products, such as concentrated extracts, edibles and topicals. Manufacturers make a wide variety of cannabis products available on dispensary shelves possible.
- Dispensaries. Dispensaries are the distribution hubs of the cannabis industry, operating much like retail stores in other industries. Dispensaries vary in their approach to the point of sale, but they typically maintain a staff of knowledgeable people who can help guide patients and consumers in making the right buying decision based on their needs and preferences.
- Transportation and logistics providers. Without a transportation network, the cannabis industry couldn't survive. Fleets of trucks bring cannabis flower and products from sellers to buyers and deliver the equipment cannabis businesses need to continue operations.
Plant-touching businesses are the most heavily regulated companies in an industry already characterized by immense oversight. To open a plant-touching business, entrepreneurs typically need to secure licenses through an application process, which can be lengthy and expensive, with no guarantee of success. Application processes for licensing vary from state to state, but there is typically a cap on how many licenses are available, similar to the way liquor licenses work.
Some states require what is known as vertical integration, in which the cultivation, processing and dispensary businesses are all managed by one company. Other states instead employ a system of specialization, in which licenses for each type of operation are kept separate and are often awarded to different companies.
Ancillary cannabis businesses
Ancillary cannabis businesses comprise all of the other types of companies in the cannabis industry. These companies are required for the support of plant-touching businesses but are not necessarily involved in the process of breeding, growing, refining or distributing cannabis products. They can include professionals, such as lawyers and marketers, as well as companies that produce packaging or machinery that can improve plant-touching businesses' processes.
- Professional services. Lawyers, accountants and digital marketers are all examples of professional services that are familiar to businesses in all industries. They are also crucial for cannabis businesses. Given the significant regulatory constraints and highly varied framework of rules from state to state, these professional advisors must have additional expertise focused on the cannabis industry.
- Packaging. Businesses that produce packaging rarely touch the plant directly, instead focusing on regulatory compliance, shelf appeal and branding. Packaging companies need to consider business needs – such as how to appeal to consumers and demonstrate company branding – as well as regulatory considerations. In many states, colorful packaging or certain approaches to branding are considered illegal.
- Equipment. There are many different types of equipment that plant-touching businesses require to get things done. For example, manufacturers use large machines to extract compounds from harvested cannabis flower to create cannabis oils and waxes. Similarly, cultivators might want to flash freeze their harvested flower for preservation during transportation.
- Construction. Cultivation facilities and dispensaries often must be built with strict adherence to state laws and regulations, so there is a significant demand for contractors that are well versed in the development of these facilities.
- Security. The cannabis industry relies on security for both regulatory and practical business reasons. On one hand, regulators often require specific areas to be viewable by security cameras in cultivation and dispensary facilities, as well as certain lighting and systems for monitoring the premises. Additionally, many cannabis businesses are forced to operate largely in cash because of the financial constraints posed by the ongoing federal prohibition of cannabis, making them prime targets for robbery.
- Investment. Because cannabis businesses are largely precluded from normal financing options, private financiers – such as venture capitalists and angel investors – have entered the industry to provide funding. Private family offices, which are private wealth management advisory firms that specialize in serving high-net-worth investors, are common sources of financing for cannabis businesses, and investors have looked into this high-growth industry with relish. This is especially important for plant-touching businesses that face application fees in the tens of thousands of dollars and require substantial capitalization to gain approval.
While many people are excited about the prospects of starting a plant-touching cannabis business, ancillary businesses arguably offer a lower barrier to entry. Ancillary businesses still face significant regulation compared with many non-cannabis businesses, but they don't have to vie for a license through a complex and costly application process.
Additionally, many ancillary businesses can be started by pivoting your existing business into the cannabis space, or by developing a new brand associated specifically with cannabis. For example, with a bit of research and networking, a digital marketer with years of experience in building websites, running social media campaigns and buying advertisements for clients could easily pivot into the cannabis space.
Key takeaway: The cannabis industry is diverse and comprises a wide range of businesses. Consider your existing skill set and how you can enter the cannabis industry with expertise under your belt.
Common challenges for cannabis businesses
There are a number of challenges facing cannabis businesses above and beyond those that startups in other industries face. Navigating these challenges in the early days of your business and building a foundation that allows you to adapt as regulations inevitably change will be key to your success in the cannabis industry.
Here are some common challenges cannabis businesses encounter and some tips for overcoming them:
Developing the right partnerships
It is difficult, if not impossible, to go it alone in the cannabis industry. The partnerships you develop at the early stages can make or break your fledgling cannabis business.
Scott Rudder, president of the New Jersey Cannabusiness Association, said how you establish your company in the beginning is critical to its long-term success.
"The best way to do it right now is hiring a consultant who can help develop your plans with you," Rudder told Business News Daily. "You need to develop partnerships and relationships across the country to give your team a competitive advantage – the right processes, the right SOPs [standard operating procedures], the right security plan. Get the right local attorney and local CPA … with experience in cannabis."
It's also likely that the regulations that apply to your cannabis business are subject to change, as the industry is a new and evolving space and public officials are regularly working to revamp and revise rules and regulations. Jess Gonzalez, a cannabis and intellectual property attorney at Bressler, Amery and Ross PC, said to engage with an experienced attorney who can look ahead.
"Given the fluctuations in regulations across the country … the best way for folks to keep apprised of what their state requires is to have a lawyer who is able to interpret the regulations and statutes," Gonzalez said. "We all recognize in cannabis that the industry is always changing, so as … entrepreneurs, we need to be ready to pivot at a moment's notice."
Banking, financing and insurance challenges
Banking is a particular pain point for cannabis companies. Because the federal government still considers cannabis an illegal Schedule I drug under the Controlled Substances Act, many banks are hesitant to work with cannabis businesses for fear of losing their FDIC status or inviting money laundering charges related to "drug trafficking," despite cannabis's legal status in many states.
"In any other industry, you could open a business bank account and name your LLC or corporation anything you wanted, and it's not an issue," Gonzalez said. "But if you go to bank and you have 'cannabis' in your name, you may have a lot of trouble finding a banking partner. I'm not saying to lie to your bank about what you're doing, but … by having 'weed' or 'cannabis' in the entity name, you're cutting yourself off at your knees.
"I always advise folks when creating an LLC or corporation to stay away from those names, because it inhibits banking options and insurance options as well," she added.
Advertising and marketing restrictions
State regulations and private company policies limit how cannabis businesses can advertise themselves. Not only is advertising cannabis on the radio, television or billboards often banned, but many social media channels, including Facebook, prohibit the purchase of sponsored content for cannabis businesses. This means many cannabis businesses have to rely on a combination of content marketing and more organic social media content, email marketing campaigns and in-person marketing opportunities at trade shows and industry events. Networking and word-of-mouth referrals are essential tools in a cannabis business's marketing toolbox.
Stigmatization of cannabis
Cannabis still faces a stigma that it's just about "stoner culture," when in reality, cannabis patients and consumers come from a broad range of backgrounds. Avoid reinforcing the stereotypes associated with cannabis, like the head-shop vibe or the underground associations linked to nearly a century of prohibition. Instead, work closely with community stakeholders and elected officials to be a responsible member of your community. Doing so will go a long way toward not only gaining any necessary regulatory approvals but also broadening accessibility to your target customers, who are likely more turned off by the stigmatized trappings of the past than you might think.
"There are outdated historical stereotypes of who cannabis consumers are," Rudder said. "They are moms and dads, lawyers, pipe fitters – it covers the gamut of who cannabis consumers are. The foundation of cannabis is as a medicine, and it will be for a very long time. It's very important for people to understand … the science side and medical side of the industry.
"The consumer, whether a patient or adult-use consumer, is getting smarter and doing their own research," he added. "When people start asking questions, you need to have those answers."
Key takeaway: Cannabis businesses face a lot of challenges, but by forming your company with these challenges in mind and creating the right plan and partnerships, you can overcome them.