Operating A Cannabis Business: The Problems You Will Face. Part 1 of 2.

Certain cannabis industry problems repeat themselves, state by state.
Certain cannabis industry problems repeat themselves, state by state.

In a few weeks, the citizens of Ohio will consider whether to legalize recreational and medical marijuana and many more states will be considering legalization in November 2016. When a state legalizes marijuana, it sees a multitude of benefits, including increases in tax revenue, new job creation, and a less burdened police force. It sure beats prohibition.

But operating a cannabis business in a recently legalized state is no easy task. Our cannabis attorneys have seen business owners face similar challenges in every state that has legalized cannabis, whether for medical or recreational consumption. This industry is brand new and expanding rapidly, and growing pains are to be expected. Below are some of the most common problems we see in the industry in state after state.

Raising Capital. Just about anyone involved in the cannabis industry could conceivably be criminally charged with aiding and abetting and/or conspiracy. The federal prohibition against marijuana tends to cause traditional financial institutions and investors to refuse to participate in the cannabis industry. This greatly reduces access to capital and to banking. Raising capital is also restricted by states with residency requirements, that limit investments to only those who have lived within the state for a requisite period of time. Many new businesses require start-up capital and marijuana businesses are no exception.

We have seen businesses borrow money from less-than-ideal sources. We have seen founding members use their own personal capital to lend the business money and this can complicate the distinction between the person and the entity. We have also seen business owners borrow from friends or family, on behalf of the business, far too often without the sort of legal documents that help in such transactions. We also see loan sharks and hard money lenders lending money at high interest rates or for too much of a stake in the company.

Consumer Liability Issues. The media has recently taken to zealously covering stories on the lack of regulations on pesticides in the cannabis industry. Pesticide use is only one potential consumer protection issue. As a plant, cannabis is also susceptible to mold and mildew. Processing, cannabis products can add additional risk for consumers because of the chemicals used to create things like oils. Cannabis companies are at risk of serious liability if a consumer is injured as a result of using a product. This also applies to products ancillary to the cannabis industry. For example, new technology such as vape pens may pose as yet unknown health risks.

Marketing and Advertising Restrictions.  In an effort to comply with federal dictates most legalized states have enacted onerous advertising restrictions for marijuana businesses. For example, the Colorado Department of Revenue prohibits “advertising that is visible to members of the public from any street, sidewalk, park or other public place.” Such rules prevents local operators from advertising on billboards or bus benches. These heavy handed advertising strictures have produced a halo effect that has led to media self-censorship. For example, in both Colorado and Oregon, television stations have refused to run marijuana company ads, citing regulatory uncertainty and liability concerns. This advertising blockages limits the opportunity for cannabis businesses to reach new markets.

Regulatory Compliance. Compliance with state and local laws should be a top concern of anyone in this industry. State and local regulations typically cover everything from security and safety protocol to inventory management. States also expect companies to be transparent and they often require regular reports or inspections. Some counties or cities in states with legalization prohibit cannabis outright while some opt to regulate it. Nothing can be more frustrating to an entrepreneur than finding out that a city has banned cannabis after he or she has purchased or leased land in that area. Our cannabis litigation lawyers have handled many lawsuits against cities and counties and each battle has been different, depending mostly on the local laws in play. Complying with state and local cannabis regulations can be a full time job.

These are only some of the issues common to the cannabis industry. In part II of this series, we will examine another batch of hurdles marijuana businesses can expect to face, including real estate issues, a prejudicial tax code, steep barriers to intellectual property protection, and lack of access to bankruptcy courts.