Cannabiz the pros cons of starting a marijuana business in the US

Cannabis. Marijuana. Pot. Call it what you want - in America it’s now big business. A sudden influx of tax dollars has quelled some concerns about the effects of the drug, and fast-tracked its legalisation. Yet despite this explosion of business interest, cannabis is still illegal at the federal level, and has faced a crackdown from Attorney General Jeff Sessions.

The contrast in federal and state laws is unlikely to last, and even Republican-leaning states are trending towards legalisation. Yet the pall of smoke over the legal pot business is putting off some investors, who fear it may yet be criminalised by the current administration. So what is the state of the U.S. cannabis business, and is it really safe for investors to get involved?

The path to legalisation

Cannabis has been a Schedule I controlled substance since the inception of the list in 1970. Schedule I substances are the only drugs not allowed to be prescribed by physicians in the US and are deemed to have no medical value. This classification has been disputed almost ever since, with a national commission recommending its reclassification in 1972 (to no effect).

Individual states reserve the ability to enforce their ‘State’s Rights’ through laws passed by the state legislature. The federal government has many powers which technically override those of the states, but usually neglects to enforce them too heavily. The federal government has however traditionally spent a large amount of resources on drug enforcement.

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States have gradually come around to the legalisation of cannabis, with the first legalisation for medical use arriving in California in 1996. As of 2018 a majority of U.S. states have legalised medical marijuana, with the first legalisation for recreational use occurring in 2012. Nine states have now legalised recreational use, with all but one allowing for the commercial sale of the drug.

The federal government was previously passive to this development, and under the Obama administration issued the Cole Memorandum, providing conditions under which states would be effectively immune from legal marijuana prosecutions. However, in January 2018, Trump appointee Attorney General Jeff Sessions rescinded this memo, reaffirming his personal opposition to cannabis and the role of the government in enforcing federal law.

The pros

  • Expert backing

The scientific case on cannabis is not settled beyond all doubt, due in part to the fact that until recently, federal law made it extremely difficult to acquire cannabis for research. The studies that have been conducted however point to legitimate medical grounds for cannabis use, and its relative safety compared to other legal substances.

Studies support the use of cannabis as a form of chronic pain relief, such as in cancer cases; as a treatment for Crohn’s Disease, IBS and other bowel conditions; as a treatment for MS; and as a means to slow the progress of Alzheimer’s Disease and other neurodegenerative disease. Many of these findings are summarised in this paper, hosted by the British Medical Journal. The availability of medical marijuana also appears to correlate with a decrease in opioid addictions.

Thirty-one countries have now legalised or decriminalised cannabis usage in some form, or in certain territories. A Bill is currently being debated in the UK Parliament to legalise medical marijuana, where the drug is currently a Class B narcotic; elsewhere, Canada is expected to become the first G7 nation to legalise cannabis for recreational use when it reaches a final vote this June. Mexico and Peru both legalised medical marijuana in 2017, and local councils in the Netherlands will begin a trial to supply ‘coffee shops’ later this year.

  • Financial impetus

Legalisation makes money, and this money is driving change. The U.S. marijuana industry took $9bn in 2017, and that figure is expected to snowball as states continue to change their laws. The state of Nevada made $25 million in taxes in the six months to January 2018, while Colorado, Washington and Oregon - the three earliest legalisers - have made an estimated $1.3bn in tax revenue to date.

Studies compiled by New Frontier Data suggest that nationwide legalisation could create an additional $132bn in tax revenue in the next decade, and as many as a million new jobs. This was however based on the current corporate tax rate of 35%, and not Trump’s proposed rate of 21%. Regardless, taxes could be levied on a business that is entirely illicitly operated, and currently produces no tax revenue at all in most states.

The recent success of legal cannabis businesses has also created a swell of funding for cannabis lobbying. A USA Today survey found that hundreds of thousands of dollars from marijuana firms was being donated to lawmakers and political action committees, with a particular focus on Congressional Republicans. Some have suggested that John Boehner’s recent change of heart has been driven by money, as he has joined the board of advocacy firm Acreage Holdings (Boehner claims he wants to improve access for injured veterans).

  • Political momentum

Sessions may represent the official line on the issue, but the ruling Republican Party has shown signs that it is willing to back legalisation. Spearheading this policy shift is prominent Republican John Boehner; the former Speaker of the House of Representatives (a position 2nd in line to the Presidency). Boehner is just one of a number of high-ranking politicians who have performed an about-face on cannabis, with hardline Senate Majority Leader Mitch McConnell currently working to legalise hemp as an agricultural product.

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Support for cannabis legalisation has more than doubled since the turn of the millenium, with public fears about its health effects diminishing. It has now become an issue that Democratic politicians are happy to exploit, with many campaigns centering on recreational use. New Jersey governor Phil Murphy won by a 14-point margin on a legalisation ticket last year, and there are signs that the Democratic nominees for Texas and New York may unseat Ted Cruz and Bill De Blasio, respectively.

As with many issues, President Trump’s stance on legal cannabis has fluctuated. He had supported medical marijuana on the campaign trail, but more recently backed the appointment of Jeff Sessions, and reportedly made Israel shelve plans to export medical marijuana to the US. However, the President has failed to comment on events this year, where the push for legalisation has gained momentum. Most recently, he struck a deal with Senator Cory Gardner to end the federal crackdown on cannabis businesses in states that have legalised.

The cons

  • Current administration

In spite of the rights of states and their movement towards legislation, the possession and use of marijuana for any purpose is still a federal crime. That this isn’t applied relies on the limited resources of the federal government, the respect held for the immutable rights of individual states, and the common-sense approach of previous administrations. 

However, the opposition of the current Attorney General increases the likelihood that the federal government could supercede states’ rights. The Attorney General is the head of the Department of Justice (DoJ) and the government’s chief legal authority, and has the power to dictate the application of policy. Only the Supreme Court is likely to challenge his judgements, and they have previously ruled in favour of the DoJ in appeals about cannabis’ classification.

The shift in Republican sentiments perhaps marks the end of institutionalised opposition to the drug, and it is entirely possible that this will be a single-term Presidency, giving Sessions and other prohibitionists less time to make sweeping changes. However, they are unlikely to be deterred in their goals unless Trump takes an official stance on the issue - and he is unlikely to undermine his own appointment to the DoJ.

  • Health issues

While the weight of evidence points towards a number of health benefits of cannabis, this is not to ignore the potential health issues it can cause. Cannabis is known to increase feelings of depression and anxiety in some cases, and to cause schizophrenia in individuals with an acute susceptibility. The potential to exacerbate mental illnesses is especially worrying given the United States’ well-documented difficulty in identifying and treating these conditions.

Research into the effects of cannabis on children and young people is also lacking, although evidence suggests that it could change the structure of developing brains and have a negative impact on short-term memory. Pregnant and breastfeeding women are advised not to take cannabis, although this also applies to alcohol and many medications. Frequent cannabis smokers have also been shown to have an increased risk of bronchitis.

A focus of many campaign groups has been the notion that legalisation will be seen as a ‘green light’ for young people to take up the drug and will lead to a general spike in uptake. With uncertainties lingering over the long-term effects of cannabis, this has the potential to cause a health crisis. This would however not necessarily impact the medical marijuana industry, which would largely avoid concerns around misuse.

  • Tobacco parallels

The success of the nascent cannabis industry has led to an influx of money, and an increase in spending on political lobbying. While some would suggest that this is redressing a balance - much more has been spent lobbying against cannabis, and for myriad other products - others are concerned about this new-found influence. Memories persist of the tobacco lobby, which until recently dominated the political landscape in the United States and elsewhere.

There are concerns that the cannabis industry could invest money to cover up any health issues or other problems, accelerating its rise ahead of proper scrutiny. Equally, some worry that the industry will come to be dominated by the same large corporations that control tobacco and have made a similar move into ‘vaping’. The corporate dominance of the substance could force out the many smaller firms which have started as passion projects, and potentially raise the price to a point that people revert back to illegal suppliers.

There can be no doubt that the momentum behind legalisation has shifted in 2018. With medical marijuana now legal in a majority of states, and politicians from both major parties campaigning to relax drug laws, it will be tough to derail the progress towards federal recognition.

For the time being however, investors should remain cautious. While cannabis has already proved to be big business, there is theoretically nothing stopping the federal government from a crackdown, be that on all businesses or those with a more recreational bent. Interested parties should lay the groundwork for future investments and continue to keep abreast of the drug’s legal status.

For more information about company incorporation in the USA, along with any other issues including bank accounts, EIN numbers, tax advice and visas, please contact us on 0033 (0)1 53 57 49 10 or email us from our contact page and we’ll be happy to help.

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