The Budding Cannabis Industry—Challenges & Opportunities27 August, 2019
When California legalized medical marijuana in 1996 (Proposition 215), it didn’t make a lot of noise. Years went by, and although momentum was building, it was relatively quiet momentum. Then in 2012, both Colorado and Washington legalized marijuana for personal use. In 2014, the first year that marijuana was fully legal anywhere in the modern world, the Colorado cannabis industry registered sales close to $700 million.
Today, medical marijuana is already legal across most of the US, and 10 states (plus Washington DC) have legalized marijuana for adult use. As of October 2018, it is now fully legal in all of Canada as well. Signed into law last December, the 2018 Farm Bill legalized hemp in the US, opening the door to a wealth of market opportunities.
The expansion and growth in the cannabis industry has been compared to the way broadband Internet spread in the 2000s, or even the dot-com boom. One of the latest predictions is that by 2020 more jobs will be created in legal marijuana than in manufacturing.
Part of the reason the state-regulated cannabis markets are so successful is that, unlike the dot-com boom, or the cell phone boom, a market for cannabis already existed long before the boom. The money flow is shifting from the black market into state economies in addition to adding new users, such as the middle-aged and elderly. And, the benefits are far-reaching. Economies profiting from the expanding cannabis market include pharmaceutical, health and beauty, construction, textiles, local banking, pet food, packaging, tobacco, alcohol and many more.
Meanwhile, cannabis is still illegal federally and designated as a Schedule 1 drug along with heroin, cocaine, LSD, ecstasy, Quaaludes and peyote, causing many mega corporations to sit on the sidelines awaiting the end of federal prohibition. There’s just too much at risk to get involved now and too much at stake to not get involved when the time is right. As a result, many of the biggest trends in cannabis are likely yet to surface.
Having a Schedule 1 drug designation also presents tax challenges. 26 U.S. Code Section 280E is the federal statute that states that a business engaging in the trafficking of a Schedule I or II controlled substance is barred from taking the tax deductions or credits available to other businesses. In short, cannabis entrepreneurs must pay taxes on all of their revenue (minus cost of goods sold) without the benefit of being able to use business expenses to reduce their taxable income.
There are also challenges with proof of efficacy and safety issues. The U.S. federal government, legislators, law enforcement officers and many healthcare professionals often use the “lack of clinical trials” argument with cannabis as a legitimate reason for continuing the marijuana prohibition. The Catch 22 is that the federal government has made it virtually impossible for U.S. researchers to study the therapeutic efficacy of cannabis.
There are also potential issues with FDA regulation, especially concerning CBD. The FDA’s website states, “The recent increase in the number of CBD products may be because of both recent changes in state law, and because the 2018 Farm Bill removed hemp—defined as cannabis and cannabis derivatives with very low concentrations (no more than 0.3% on a dry weight basis) of THC—from the definition of marijuana in the Controlled Substances Act. However, CBD products are still subject to the same laws and requirements as FDA-regulated products that contain any other substance.”
Recently, a federal appeals court in New York told the U.S. Drug Enforcement Agency (DEA) to “promptly” reconsider its classification of cannabis as a Schedule 1 drug. They did not, but clearly doing so would have been a further boon for an already thriving industry and put investors more at ease.
To learn more about this fast-growing global industry and its challenges and opportunities, join us for a live webinar on September 19th as David Traylor, Senior Managing Director at Golden Eagle Partners provides his insights on today’s quickly evolving cannabis sector and the implications for a broad span of industries and its investors.
“This is an exciting, fast-moving industry that is incredibly difficult to predict. I’ll make some speculations, but I’ll likely be wrong. One thing I can say with certainty is that it will be exciting no matter what happens. It won’t be boring, that’s for sure.”
Golden Eagle Partners
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