Publications

MJBizCon/Las Vegas is the world’s largest B2B conference focused on the Cannabis industry. This year’s event drew more than 27,000 attendees (an increase of 60% from last year) from all fifty U.S. States and over 60 countries around the world. Over 1,100 exhibitors filled the convention floor and over 65 lectures or panel discussions were held throughout the week on a wide variety of topics that affect the industry. James Rieger, who leads Tannenbaum Helpern’s Cannabis Law practice, attended the event and the following are his key takeaways from the week on issues facing the future of the Cannabis industry.

Green Rush

Needless to say, the Cannabis business is one of the hottest young industries since the dawn of the internet. Attendees included growers/cultivators, processors, extraction companies, retailers, edibles manufacturers, insurers, real estate brokers, real estate firms holding land or buildings for sale or lease to the industry, consultants, accountants, lawyers, manufacturers of all varieties of equipment, beverage companies, software and IT providers, providers of payment solutions and banking or alternative banking solutions, Cannabis-focused investment firms and merchant banks, individual investors, data analytic, advertising and social media firms. The phrase “Green Rush” was ubiquitous. Like the California Gold Rush in the 1800s, there seemed to be many more “pick and shovel” companies serving the industry than companies actually “touching the plant.”

One Giant Startup

The Cannabis industry was described variously as “just out of the starting blocks,” onto the “Cannabis 2.0 phase” and “one giant startup.” It is fairly obvious that from high licensing application fees, zoning, banking and typical startup costs, virtually no one outside the ancillary service suppliers or equipment suppliers is making money today. The confiscatory nature of Section 280E of the U.S. Tax Code, which denies touching-the-plant businesses all normal business operating deductions other than for cost of goods sold, also serves to handicap the economic fundamentals of the industry at this time. Those participating and investing in the industry all readily acknowledged the need to absorb losses today to grow the great businesses of tomorrow. The 2025 and 2050 global annual market opportunity for Cannabis was described by two speakers (with credible sounding supporting methodology) as $600 billion and $2 trillion, respectively, including ancillary businesses.

Limited Access to Capital

Aside from the obvious massive regulatory challenges now facing the industry, including the constant (if probably low-level) threat of Federal prosecution, the biggest challenges discussed facing the industry are lack of capital and banking. Because Cannabis is still a Schedule I drug for purposes of the Controlled Substances Act, large institutional investors and nationally chartered Federal banks are essentially absent from the ecosystem^[1]. The funding gap is currently being filled by angel investors (often high-net-worth individuals from many walks of life, including those whose employers are not currently participants in Cannabis) and an increasing number of Cannabis-focused private investment funds. However, the typical investment ticket for these transactions is still fairly small in relation to the amount of capital needed by the industry. The field for Series A, B and C venture financings was described as wide open for investors with few well-capitalized players and a dozen or so proven Cannabis-focused funds able to pick and choose from many investment opportunities. Growth is explosive; there were only $15 million of Cannabis financings in 2013, $593 million in 2017 and an expected $758 million in 2018.

The Giants Are Coming

That was a recurring theme. Massive consumer packaged goods companies including Coca-Cola, Altria, Constellation Brands, Diageo and Molson-Coors have either made investments or are rumored to be stalking investments or joint ventures within the industry. Federal de-criminalization, if it happens (more on that later), would obviously open the floodgates to this type of investment and competition from the giant multi-nationals in mature businesses, such as big tobacco and beverages, desperate for growth-drivers. Alcoholic beverage companies seem to be particularly unnerved by the potential for more widely available Cannabis to disrupt their sales. More Cannabis was sold in Aspen Colorado in 2017 in terms of dollar sales than all alcoholic beverages combined. One speaker stated that their research showed that 82% of Cannabis users reduce their consumption of alcohol with 12% stopping drinking altogether.

Pharmaceuticals Play Catch-Up

The pharmaceutical sector is perhaps the largest long-range market opportunity for Cannabis, due in part to the high price point of branded pharmaceuticals. Alas the FDA has taken a hyper-critical stance regarding pharmaceutical research into Cannabis to date and the U.S. pharmaceutical industry has lost many decades of potential research. So far, only one drug involving a compound with a Cannabis-related ingredient (for pediatric epilepsy from GW Pharmaceuticals, plc) has received FDA approval. Israel is currently the epicenter for ethical Cannabis-related pharmaceutical research.

Branding Will Determine the Future

Because of several factors, including Canada requiring Cannabis to be sold in plain white packages devoid of branding or logos, a severe limit on advertising in Canada, Facebook and other social media shutting down Cannabis-related content, and the current Federal illegality in the U.S. which effectively prohibits interstate commerce in Cannabis in the U.S., Cannabis has been a local, largely generic business without significant brand equity. There was fairly universal agreement at MJBizCon that this will change sooner rather than later and this very fragmented business will one day be dominated by three or four large multi-nationals that build major brands in the space. “Brand or die” and the importance of “mindshare” were notable themes. As one speaker said, we don’t yet know if we have our Google or our Amazon amongst us – remember Netscape and AskJeeves were once the leaders of their respective businesses.

Federal Legislation May Be Coming

A highlight of the week was sitting in a fairly small lecture hall for a panel discussion with a member of the U.S. House of Representatives, Dave Joyce (Republican, Ohio). Congressman Joyce was a long-time prosecutor prior to joining Congress and is one of the industry’s biggest supporters. Congressman Joyce is the sponsor of the “Joyce Amendment” to the House appropriations bill,^[2] which prohibits the U.S. Department of Justice from spending any monies investigating or prosecuting Cannabis-related businesses that are otherwise compliant with their home State’s medical marijuana or adult recreational use marijuana laws. Congressman Joyce is also one of the sponsors in the House of the bipartisan proposed legislation referred to as the STATES Act. The STATES Act, if passed by both the House and Senate and signed by the President would effectively de-criminalize Cannabis at the Federal level so long as state laws were complied with, solves the industry’s potential money-laundering problem with Federally chartered banks and fixes the industry’s Section 280E tax problem. The effect on the industry of the potential passage and implementation of this legislation simply cannot be overstated. Put on the spot by the moderator to predict whether the STATES Act would become law in 2019, Congressman Joyce said to rapturous applause “Very few things are for sure in D.C., but this [Vegas] is a gambling town and I would bet a fair amount of money on it.” Well then!

Canada is (currently) the Silicon Valley of Cannabis

In October 2018, Canada became the second nation in the world to permit adult recreational use of Cannabis on the national level. Because of that head-start and because the Canadian Securities Exchange for years has permitted stock listings of “touching-the-plant” businesses, while U.S. securities exchanges have forbidden them, today there are 40 growers/cultivators publicly traded in Canada with a $60 billion aggregate market cap and essentially no such companies publicly traded in the U.S. that operate in the U.S. In addition, because of the Federal prohibition in the U.S., until quite recently many investors would only invest in U.S. companies that did not touch the plant and those investors focused their investment dollars on plant-touching businesses in Canada. Accordingly, Canada’s Cannabis business is much more mature than that of the U.S., a disproportionate amount of innovation is occurring in Canada, and investment dollars are flowing to Canada. In fact, the trend is for U.S. touching-the-plant companies to list on securities exchanges in Canada and those companies and their Canadian counterparts are beginning to use their valuable shares as currency to engage in mergers and acquisitions to consolidate the fragmented industry. The number of times that Canada was mentioned during the four day conference cannot be overstated. Canada wields influence in this industry like it does in no other.

Craft Beer Comparison

The analogy to the industry moving in the direction of craft beer came up numerous times. There will be consistent suppliers of safe product at low price points for edibles, drops and vapes and there is room for a much higher priced, carefully grown, curated flower product at significantly higher price points for connoisseurs.

Social Justice Issues are Front and Center For the Cannabis Industry

If Cannabis is one day decriminalized at the Federal level, should jailers and prosecutors immediately let everyone out of prison serving a sentence^[3] for a Cannabis-related conviction? Some U.S. States with adult recreational Cannabis use are confronting the social justice issues head-on by prioritizing applications for Cannabis-related licenses such as retail^[4] or growing for those with prior convictions or from communities with disproportionate incarceration for Cannabis-related offenses. Contrast that with a Cannabis-focused fund manager who told a dispensary owner with several prior felony convictions that, as a fiduciary for his limited partners, he couldn’t possibly consider an investment in the dispensary owner’s company. The Cannabis industry is nothing if not complicated.

Finally, the industry is looking far into the future toward a vastly liberalized regulatory scheme allowing importation of Cannabis into the U.S. (as well as export) and the movement of Cannabis throughout interstate commerce. It was suggested that North American growers, particularly those in less sunny and warm parts of the U.S. and Canada could one day have a hard time competing with cheaply grown Cannabis in places with better growing climates, like Columbia – but this scenario is perhaps decades away.

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^[1] A nationally chartered bank doing business with a Cannabis business would be at great risk of being considered engaging in money laundering for a criminal enterprise under current Federal law.

^[2] Formerly known as the Rohrabacher amendment.

^[3] One speaker stated that 15% of the U.S. prison population is incarcerated for Cannabis-related offences.

^[4] At the conference a hopeful San Francisco dispensary applicant commented that he needed to find a convicted felon and structure a way to give that felon 40% of his common equity in order to go forward with his license application.

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For more information on the topic discussed, contact:

• James Rieger  |  rieger@thsh.com  |  212-508-6728