The State of Cannabis Entrepreneurship

Eric Rice By on January 29, 2017

Unless you have been living on Mars, you have more than likely heard some news about the cannabis industry and its potential to become one of the largest markets in the history of America. From the outside it may look like things are getting easier for cannabis entrepreneurs, but the fact of the matter is far different.

As of the date of this article, 28 states and the District of Columbia now have medical marijuana laws and 8 states have adopted recreational laws with regard to cannabis consumption. This means that in just over half the country a doctor can write you a recommendation for medical marijuana and in just 8 states (mainly West Coast) you simply have to be 21 years of age to buy cannabis.

Now for those who simply enjoy using cannabis or need it to treat illnesses, your life is going to get very easy. More and more places and products will pop-up over the next few years and it will become easier and easier to find and purchase cannabis. That’s truly awesome!

Despite the massive upside potential of the market, cannabis entrepreneurs face challenges that have never been seen before in any industry. To make matters cloudier, the market is chalk full of rookie entrepreneurs that simply do not have the basic business skills or advantages that almost all the other industries have.

But, before I go deeper into the road bumps being experienced in the market, let me give you a quick history. Below you will find a very simple, concise timeline of all the major events having to do with cannabis since the early 20th Century.

  • 1937 – Marijuana Tax Act of 1937 which effectively banned its use and sales.
    • During the hearings documented claims were made stating marijuana caused men of color to become violent and solicit sex from white women.
  • 1952 – Boggs Act provided stiff mandatory sentences for offenses involving a variety of drugs, including marijuana.
  • 1970 – Marijuana Tax Act was ruled unconstitutional and was replaced with the Controlled Substances Act which created “schedules” to rank substances according to their dangerousness. Cannabis is labeled Schedule I. Other drugs on the schedule I list include heroin, LSD, mescaline, MDMA, GHB, Ecstacy, psilocybin, methaqualone, khat and bath salts.
  • 1972 – The Shafer Commission (appointed by President Nixon) recommended that marijuana be decriminalized and removed from Schedule 1.
  • 1996 – California voters approved Proposition 215, the first legislation legalizing marijuana for medical purposes at the state level ending a 59 year reign as an illicit substance with no medical value.
  • 2003 – Patent 6,630,507 was issued to The United States of America as represented by the Department of Health and Human Services. This patent covers “Cannabinoids as antioxidants and neuroprotectants”
  • 2012 – Colorado became the first state to legalize the recreational sale of cannabis to adults over the age of 21
  • 2016 – DEA declines the de-scheduling of cannabis to Schedule II
  • 2016 – California passed Prop 64 approving adult recreational use for 2018
  • 2017 – Revenues from cannabis will surpass the revenue of the National Football League

 

As you can see, this is no simple market. It is chalk full of contradictions, conspiracy, rookie entrepreneurs and black market converts. From an Entrepreneurial point of view, this is definitely an exciting market, but one that is filled with obstacles and confusion.

No Peace of Mind

Unlike almost every other business in this country, cannabis entrepreneurs can never rest. The federal government can literally come in and shut down cannabis companies at any time they see fit. Hell, they can arrest them if they wanted to. It is tough to get peace of mind when you have no control over your own destiny.

No Banking, No Credit Cards

Then there is the banking situation. Because cannabis is illegal at the federal level and banks must adhere to the rules of the FDIC, (the Federal Deposit Insurance Corporation) they are not allowed to bank the cash being made in the market today. As an added element of adversity, cannabis companies cannot accept credit cards (which account for more than 50% of all US transactions) because the credit card processing companies work with the banks…who must adhere to federal rules. These simple luxuries make it very tough to collect and manage revenues.

24 Hour Security

Because cannabis companies can only take cash and have no safe place to put it, they are constantly paying for security to watch over their cash. This is an additional expense 99% of companies simply don’t have to pay for, because they can put their money in the bank.

Regional Restrictions

Since cannabis is a schedule 1 substance and federally illegal one cannot transport product from one state to another, even if the destination state allows for legal use. This makes cannabis one of the only industries in the world with legal restrictions based on locality.

No Marketing

Cannabis companies have more stringent marketing guidelines than security firms. Advertising restrictions on new business owners from state legislatures and websites make it extremely difficult to navigate what you can and cannot do. Sites like Google and Facebook will not allow any marketing for the cannabis industry. From an inside source, Google won’t even consider it until the plant is federally legal. Even if you could conduct real marketing campaigns you would have to find a firm that accepts cash!

No Tax Breaks

This is the biggest problem that no one is talking about. U.S. tax code 280E disallows businesses that sell illicit substances (like cannabis) from taking normal business tax deductions. To put it simply, if marijuana remains a schedule 1 substance, the businesses that sell products won’t be able to take any corporate income tax deductions, requiring them to pay tax on their gross profits instead of net profits.

No True Ownership

As you saw in the timeline, the United States government was granted a patent for the use of cannabinoids as antioxidants and neuroprotectants. One has to ask oneself the fundamental question here, “isn’t cannabis a schedule 1 drug with no medical benefits?” That’s right the government saw the potential for medical application and sealed the market using the law as its shield. Essentially, the government is owed a royalty for almost all uses, at some point in time.

Conclusion

Being a cannabis entrepreneur is just like any other industry except you

  • Might get arrested at any time
  • Can’t open a bank account or accept customer credit cards
  • Can only sell your products in the state they are grown/made
  • Must hire 24/7 security to guard your cash
  • Can’t do any meaningful marketing
  • Get no tax breaks.

Other than that it is pretty much like any other industry… J

In all seriousness, this is the best time to be in the industry. It isn’t quite ground floor, but it isn’t past the 3 floor yet. The barriers to entry in the cannabis market will never be lower. This is the time to enter the industry with innovations and intellectual property or strength of marketing power.

Battles for legalization are being won, but the war for federal legalization is still far from over. In my next piece I will break down all the traps that cannabis entrepreneurs face with the existing laws.