Cannabis Industry Risks

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Cannabis Industry Risks

Marijuana being illegal under federal law, increased tax rates, limited access to banking and financial services, monopoly of marijuana research, procurement and forward planning risks, and technology and intellectual property risks are some associated risks with producing or selling marijuana in the US.

FEDERAL GOVERNMENT LAWS VS. STATE LAWS

INCREASED INCOME TAX

MARIJUANA BUSINESSES AS CASH-ONLY ENTERPRISES

MONOPOLY OF THE NATIONAL INSTITUTE ON DRUG ABUSE (NIDA)

  • NIDA only allowed the University of Mississippi to conduct federally-approved medical and scientific researches and any other institution and private companies must coordinate with NIDA if they will conduct research.
  • Many prohibitionists oppose the legalization of marijuana because there is a little science on it and the main factor why this is happening in the research monopoly of NIDA. As of Jan 2018, not a single application to grow marijuana for research was approved and there are 20 pending applications.
  • Researches and Innovation in the marijuana industry are focused on tech products and vaporizers though they are currently banned from participating at CES2019.
  • Republican Congressman Rob Bishop of Utah introduced the Marijuana Effective Drug Study Act (MEDS Act) which opens up researches regarding medical marijuana if approved. Natalie Ginsberg, Policy and Advocacy Director at MAPS, said that she was "cautiously optimistic" that the bill will be passed. According to Congress.gov, the bill is still in progress.

FORWARD PLANNING AND PROCUREMENT RISKS (INBOUND LOGISTICS)

TECHNOLOGY AND INTELLECTUAL PROPERTY RISKS

RESEARCH STRATEGY

This response leveraged reliable data from government and reputable news sites as well as studies regarding the risk associated with the marijuana industry. As for the RC on how risk may change going forward, I have included bills that if passed, could directly address the issue. I have included sentiments on whether the bills were likely to be passed as available. Ultimately all risks will be lessened if marijuana is legalized at the federal level.
Sources
Sources

Quotes
  • "Despite federal prohibition, the Obama administration took a relaxed approach to marijuana, generally letting states do as they wish as long as they met certain criteria (such as not letting legal pot fall into kids’ hands or cross state lines). But the Trump administration has taken a tougher line, allowing federal prosecutors to crack down on marijuana even in states where it’s legal — which could let federal law enforcement shut down state-legal pot businesses."
  • "Under the scheduling system, the federal government classifies marijuana as a schedule 1 drug, meaning it’s perceived to have no medical value and a high potential for abuse."
  • "Pot’s criminal classification at the federal level has other serious ramifications for marijuana policy even in places where state law says the drug is legal. Many state-legal marijuana businesses, for instance, must function as cash-only enterprises, since many banks are nervous about dealing with businesses that are essentially breaking federal law."
Quotes
  • "As of May 1, 2018, 46 states and the District of Columbia permit some form of medical or recreational use, or both. Seventeen states have passed “pseudo‐medical marijuana” laws that allow limited cannabidiol oils and/or extracts, and 20 states have decriminalized (but not legalized) cannabis for medical use."
  • "Low availability and varying quality of suppliers to support development and supply of new products; Sustained availability of raw inputs (especially within an environment whereby cannabis materials cannot cross state lines) because of import restrictions;"
  • ""Crypto finance as a way to mitigate funding risk""
  • "A registered trademark protects a unique mark that is used in commerce. To obtain a federal registration, a party must show the use of the mark concerning the goods in “commerce”. The Lanham Act57 precludes the U.S. Patent and Trademark Office (USPTO) from granting a trademark on marijuana products because commerce in marijuana remains illegal under the CSA."
  • "A cannabis business will face risk from unethical competitors who steal the name or likeness of a company's products, in violation of what otherwise would be protected by a trademark. Quite possibly, a cannabis business could seek to obtain trademark protection in Canada (Malsbury, 2018) or possibly in another country."
  • "In the current regulatory environment, there is no easy way to protect the intellectual property rights and brands, indeed not while marijuana is illegal under federal law."
Quotes
  • "The nominee, who’s opposed to marijuana legalization, also wrote that “the legislative process, rather than administrative guidance, is ultimately the right way to resolve whether and how to legalize marijuana.”"
  • "The nominee, who’s opposed to marijuana legalization, also wrote that “the legislative process, rather than administrative guidance, is ultimately the right way to resolve whether and how to legalize marijuana.”"
Quotes
  • "Although marijuana is illegal under federal law, cannabis businesses in the United States still pay federal taxes on gross income. They are not allowed any deductions or credits for business expenses, by law, which can mean an effective federal tax rate as high as 90%."
Quotes
  • "The House Judiciary Subcommittee on Crime, Terrorism and Homeland Security debated marijuana reform. Reforming weed laws is gaining momentum in Congress. Some want lawmakers to focus pot law reform on racial and social equity."
  • "U.S. lawmakers weighed reforming pot laws in what advocates called a “historic” hearing Wednesday, with numerous members of Congress saying they wanted to loosen federal laws, even legalize marijuana."
Quotes
  • "In Exhibit 3, the individual again invests $100,000, and both he and the corporation are in the 35% (income) and 23.8% (long-term capital gains) tax brackets. After two years, the corporation is dissolved; the investor has a capital loss of $37,500, which is essentially the same as a sale in this case. "
  • "Would it be advantageous for the employees and vendors of marijuana business to be co–general partners in the venture and be taxed accordingly? Exhibits 4 and 5 examine this scenario. In Exhibit 4, the employees and vendors are not co–general partners; every party is taxed at 35%, and Social Security taxes for vendors are assumed to have been paid in income earned elsewhere. "
  • "With the separate taxation of partners, employee salaries, and vendors for rent, advertising, and administration, the total taxes incurred are $70,550, quite a large amount. Assuming a similar scenario where the employees and vendors are co–general partners, as shown in Exhibit 5, the total amount of taxes incurred by all parties ($44,020) would be significantly less."
Quotes
  • "Federal law ensures that much of that revenue remains unaccounted for in the United States financial system by preventing marijuana companies from accessing bank accounts, credit cards, payroll systems, or business loans. "
  • "In lieu of traditional banking, the business owners and employees are forced to hoard cash from cannabis sales, rendering the individuals as well as their communities vulnerable to violence and crime."
  • "In 2018, one of the most successful marijuana infused product companies in the country was robbed in California. The thieves destroyed computers, trucks, and safes before making off with hundreds of thousands of dollars in cash."
Quotes
  • "06/05/2019 Committee on the Judiciary discharged. 06/05/2019 Reported (Amended) by the Committee on Financial Services. H. Rept. 116-104, Part I. 03/07/2019 Introduced in House"
Quotes
  • "For decades, cannabis used in federally-approved medical and/or scientific research was required to be grown at and purchased from a farm at the University of Mississippi"
  • "Because the Drug Enforcement Administration (DEA) required that the National Institute on Drug Abuse (NIDA) administer a single contract for the cultivation and procurement of research-grade cannabis."
Quotes
  • "While Bishop’s bill would not reschedule cannabis, it would remove many of these unnecessary barriers to researching cannabis in a timely and responsible manner. This could completely shift the conversation around legalization as many prohibitionists continue to oppose marijuana by saying that there isn’t enough science on it. "
  • ""But since then there hasn’t been a single grower approved. More than 20 grow applications sit pending and, according to sources, the hold up is coming from Attorney General Jeff Sessions at the Department of Justice, not the DEA," explains Rob Hoffman of Herb."
  • "Despite these concerns, Natalie Ginsberg, Policy and Advocacy Director at MAPS, describes herself as “cautiously optimistic” in the bill’s ability to pass, and its viability to finally end NIDA’s research cannabis monopoly."
Quotes
  • "Employees of the dispensary also wear pins that are covert communication devices. When an employee presses the button on the pin, three programmed phones receive a text message indicating the pin is in trouble and its location."
  • "The dispensary also spent $18,000 installing a large vault, security cameras and bullet proof glass. The building is also retrofitted the walls with bulletproof steel so that no one can shoot through the walls of the facility. "
Quotes
  • "For a startup like Pax Labs, the type of exposure and backroom deals that can be made at a conference like CES can catapult a company from tiny startup to full-fledged industry leader."