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The Business of Cannabis

A Los Angeles Times Roundtable

In recent times, especially in California, cannabis has emerged as a multi-billion-dollar industry that has “taken root” in sectors including healthcare, pharmaceuticals, consumer goods and agriculture. Public companies with growing valuations are making waves in innovation, while established blue-chip companies are partnering with or purchasing cannabis-related businesses to gain entry into the industry.

As the legal landscape around cannabis continues to evolve and public support for the products and services grows, an increasing number of consumers, businesses and investors have taken note. As with any emerging industry, learning about the ins and outs of the diverse and fast-growing sector can be overwhelming.

The Los Angeles Times' turned to trusted advisor and Greenberg Glusker Cannabis Group Co-Chair, Priya Sopori, to share insights about developing trends in "The Business of Cannabis" roundtable.

Q: What are some of the legal and regulatory risks and challenges that are faced by cannabis businesses in the current climate?

Sopori: Effective July 1 of this year the city of Los Angeles amended its municipal code. The new ordinance grants the city the authority to revoke a license at any time without a hearing. The city contends that the regulation applies only to “temporary licenses,” but the reality is that virtually all licenses are “temporary licenses.” According to the Department of Cannabis Regulation, the amendment benefits applicants, because applicants would receive an earlier determination of land-use compliance for cannabis licenses. From the perspective of a cannabis business, however, the amendment could be a wolf in sheep’s clothing – seeking to deprive businesses of a property right, while stripping them of their right to due process. Should the city lack the capacity to complete the review process and issue a permanent license, every dispensary could lose its license without notice at any time based on, for example, nothing more than unfounded social or political pressure to move a retailer elsewhere.

Q: What are the biggest challenges for a cannabis business owner in California in 2021?

Sopori: I have to go with unlicensed competition, especially those that sell counterfeits of branded product, and are a scourge of the industry. We need to recall that for over two decades prior to the legalization of recreational cannabis, California had a prolific “gray market” for medical cannabis. Many of those operators have zero incentive to enter the regulated market. The unlicensed business is able to under-sell the licensed, because the former avoids the expense of complying with laws and regulations, including those that exist for the safety of the consumer. The unlicensed business does not pay prohibitively high cannabis taxes and can sell product that has not been tested or approved. Not only are licensed businesses at a competitive disadvantage, but licensed businesses can also find themselves wrongfully sued on the basis of illegal conduct perpetrated by an unlicensed business that used the trademark or name of a licensed business.

Q: What are the most common liability risks you see cannabis businesses facing?

Sopori: Because the federal government continues to classify cannabis as a controlled substance, cannabis businesses risk running afoul of federal law in their daily operations unless they steer clear of all things controlled by federal law. All aspects of the business directly related to cannabis must originate in and remain in California. Banking must be with institutions that are not FDIC insured. Even the use of credit cards by consumers is problematic. The high volume of cash transactions increases vulnerability to theft and security issues. On the other hand, a cannabis business may use interstate commerce to purchase equipment, supplies, and insurance, to name a few. When a lack of clarity meets risk, businesses will always be at risk of liability, and because the cannabis space is notoriously underserved by the insurance industry, businesses have difficulty obtaining policies that meet their unique needs (including the risk of liability)!

Q: What advice would you offer California-based cannabis companies who want to expand to other states?

Sopori: In a nutshell, don’t do it without assistance! Under current law, operations in other states are illegal. Any attempt to skirt those laws or to set up straw entities to disguise those operations would only create the appearance that a California business knew the operation was illegal (and that appearance would, in fact, reflect reality). A proper, legal expansion requires corporate separation and formalities, compliance with brand new regulations and ordinances that literally affect everything from seed to sale, including where and how the plant is farmed and the employees who are hired to sell it to a store. Moreover, it’s crucial to first solidify your company’s market position in California. 2019 saw major companies prioritize expansion over branding and profitability, and the results were less than desirable! Be conservative in your modeling. Lower operating expenses result in higher EBITDA, and a stable balance sheet is necessary to support an expansion.

Q: How do you expect the cannabis industry to change over the next five to ten years?

Sopori: In five to ten years, federal law will likely decriminalize cannabis. That will open the gates for (more) institutional investors and well-funded companies to enter the market and attempt to muscle out the smaller businesses. If we see an attempt at complete federal regulation, hold on to your vape pens, because we may see what happened with big tobacco happen with cannabis, which seems somewhat contrary to the independent – dare I say it – cowboy nature that has been cultivated (so to speak) by the cannabis industry itself!

Read the full roundtable here.

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