Written by Sunshine Lencho
With the passing of the Farm Bill in 2018, many business owners have their eye on the “marijuana legalization” prize - expecting that as early as 2020 we may do the unthinkable as a nation: legalize marijuana.
While it’s anyone’s guess as to when, there are a few lessons from the legalization of hemp that we can carry over to marijuana discussions to help plan and predict what federal legalization will bring.
1. Legalization Will Not Be Instant
When the Farm Bill passed last year, many business owners and consumers assumed that “CBD is legal” and therefore launched full steam ahead towards a new market in cannabinoids that previously weren’t available.
And, predictably, they're now encountering a myriad of issues on the local and national level with hemp-based products.
For those of you who aren’t familiar with the Farm Bill, here’s a quick summary:
Hemp is defined as cannabis sativa (same plant as cannabis/marijuana) containing less than 0.3% THC (the psychoactive ingredient). After being cultivated from the early years of our democracy, hemp was made illegal and could not be grown or sold except in limited circumstances.
With the passage of the 2018 Farm Bill, Congress removed hemp from the definition of marijuana under the Controlled Substances Act and set up a structure for taxing, regulating, and enforcing state and federal hemp laws.
The lead agency is the federal Department of Agriculture, however, state hemp programs are permitted to seek federal approval (rather than be preempted by federal law) once the system is set up.
We’re still waiting on the implementation of the Farm Bill.
Many of you may have noticed that there is enforcement against hemp-CBD based products. This is because while hemp is no longer federally illegal, the actual trade in hemp - interstate commerce - requires several steps before we see a robust hemp-based marketplace.
Similarly, we will need to see the various agencies involved in regulating consumer products (think: tobacco, alcohol, and food) launch rulemaking and provide for public feedback before there is anything close to a regulated federal marketplace.
And, as those of us who have reviewed federal regulations in the past know, the process is far from simple, the regulations can be onerous (3 columns of 8 pt font per page for hundreds of pages), and there will be far more than industry at the table to shape federal rules on advertising, packaging, dosage and form factors.
2. The Taxes Will Impact the Speed to Lawful, Regulated Markets
As was seen in Washington and is we’re now seeing in California - the tax rate set will impact not only consumer appetite for purchasing regulated products, but it will be a potential barrier to entry for those individuals that fed the nation’s demand for cannabis.
In Washington and California we see a state tax of nearly 40-50%. This translates into sticker shock for consumers in California, who, prior to the “legalization” of cannabis saw low prices and a wider variety of goods available.
Pricing drives choice, and despite the promise of clean, tested cannabis, ultimately the same consumer that felt comfortable going to their bike messenger delivery service prior to legalization is shopping for value, not values.
And as we’ve seen in California, the regulated marketplace cannot currently compete with those prices. Adding on the proposed 10-20% seen in some Federal bills would truly create a challenge to those state markets.
3. Licenses Will Be Required
Like alcohol, cannabis operations will be a privilege that is afforded those who are able to meet federal standards.
While we have yet to see a definitive piece of legislation be debated in congress, the various bills (REFER, Tax Marijuana Like Alcohol, Marijuana Justice Act) provide for such things as who may be qualified to operate a cannabis business, how the federal agencies are to regulate and tax such businesses, and how the transition from the 20-something state-legal markets to a fully federal system will occur.
Entrepreneurs and investors alike should pay close attention to the substance of federal legalization bills proposed as that may be the death or growth of your business model/investment.
4. There Will Be More Regulations
Currently, operators in the state-legal marijuana marketplace deal with only their state agencies.
In states like Washington and Michigan, they are regulated by a single agency. In California, in contrast, we deal with three separate agencies that sometimes promulgate conflicting rules and that individually released hundreds of pages of regulations.
Add to that the fact that state regulations seem to change semi-annually (in California’s case they changed six times in one year) we can only expect Federal regulations in the early years of marijuana legalization to be as extensive.
As seen with hemp, there will be a lead agency (some proposals place marijuana at the federal level in the Department of Treasury). However, the substance of the regulations will come from sister agencies like the Department of Agriculture and Food and Drug Administration (and possibly the CDC) as they have the expertise in cultivation and safe product production.
What will be interesting to see is how the various federal agencies tasked with regulating the extant cannabis industry in the separate states will allow for the continued operation of those industries as federal rules are taking shape.
To be sure, there will not be an overnight legalization of trafficking products from one state to the other (the definition of interstate commerce) however it is to be seen whether the existing regulations and products will be permitted by the federal authorities come rule-making.
What is clear, though, is the need for industry to take part in educating federal agencies on the form factors, consumption practices and quality assurance standards already in place.
We cannot count on our elected officials to have that bandwidth and we should assume that the federal employees at these agencies have absolutely no familiarity with our businesses.
5. The Competition Will Be Global
With the U.S. lagging behind our neighbors to the north and south on its cannabis policy, we will likely see importation of brands and goods from Canada and Mexico once we have federal legalization.
For those of you unfamiliar with what’s happened in Canada, you should know that (1) Canadians have had access to capital markets in their nation for a few years now allowing for their companies to raise funds while state-legal businesses in the United States have been struggling to find banking solutions, (2) they started adult sales in the fall of 2018 and (3) this came after years of having a lawful medical market where patients received their cannabis products by royal mail.
Brands in Canada will have an easier time coming to the U.S. given their regulated market required GMP standards of production, has had time to develop testing standards and will have had the benefit of U.S. and other tourism visiting the cannabis-friendly provincial shops and lounges.
Here’s hoping the Canadian government grants reciprocity and we can trade cross border when the time comes!
Sunshine Lencho is a graduate of Stanford Law School and cannabis law expert assisting companies, lawmakers and consumers in navigating the complex regulatory environment of medicinal and adult-use cannabis globally.
She is co-founder and former Board Chair of Supernova Women.
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