What Does 2017 Hold for California's Marijuana Economy?

Cannabis bud
Cannabis bud

Angelenos, we know how excited you are about legal weed in California post-Proposition 64. But while you're still lighting those victory joints, remember that we have more than a year to go until the state's adult use and medical marijuana regulations are in full swing. In many ways, California's cannabis economy in 2017 will look a lot like how it's always looked — while on the other hand, various sectors of the industry will start to plant seeds (yes, figuratively and literally) in preparation for full implementation of AUMA (Adult Use of Marijuana Act) and MCRSA (Medical Cannabis Regulation and Safety Act).

"Let's just understand that 2017 is sort of a transitional year between an unregulated system and moving toward licensure on the state level, which will happen in 2018 at some time," says Aaron Herzberg, partner and general counsel at CalCann Holdings, LLC, a holding company focused on municipally licensed marijuana real estate opportunities in California. In the meantime, he says, California will begin to see a greater influx of large-scale players, like traditional investors and funds that had been in other industries, now entering the cannabis market.

In the state's move toward regulation, with licenses soon-to-be necessary for everything from cultivation to manufacture to sale, says Herzberg, competition will get tougher for those who try to remain in the grey market. "At some point in the future, the illegal unlicensed black market dispensaries are going to be put out of business and the black market growers will be put out of businesses, unless they ship their marijuana illegally to other states."

With that said, anyone who tries to operate outside state regulations should fear backlash from the federal government. The greatest protection against federal interference, if Jeff Sessions were to become attorney general, is to have a robust regulatory system in place at the state level, according to Amanda Reiman, marijuana law and policy manager at the Drug Policy Alliance. The best way for cannabis businesses to prove state-level compliance begins with having regulations with which to comply — something California has lacked for the past 20 years.

In the coming months, the state legislature will work to harmonize both AUMA and MCRSA to smooth out any discrepancies in the two laws. The idea is to have two parallel systems for both medical and adult use marijuana. However, reconciling state and federal marijuana will take more work, especially with Trump's nomination of Jeff Sessions. With medical marijuana legal in more than half the states in the country, federal denial of that fact is becoming an increasingly untenable policy.

Sessions, himself, is among marijuana's most notorious foes. He's criticized Obama's administration for not enforcing federal law in green states and reported said he thought the Ku Klux Klan were okay until he found out they smoked weed. "He's not a friend of cannabis and he's not a friend of licensed and regulated cannabis," says Herzberg. "He's an anachronism back to the Reagan 'Just Say No' War on Drugs. We thought there would be a tremendous amount of investment immediately following the passage of Prop 64, but because of Trump's election, that sort of muted the excitement."

A couple protections are in place right now that could protect marijuana businesses, but it remains to be seen whether they will stand up in the new administration. The Cole Memorandum, issued in 2013, guides the Department of Justice not to challenge state-compliant marijuana businesses. The Rohrabacher-Farr Amendment disallows the Justice Department from using federal money to prosecute these operations, but it needs to be renewed annually. There's no guarantee it will be renewed this year, while neither the Rohrabacher-Farr Amendment nor the Cole Memo have the rule of law.

Tiffany Wu, an attorney at Harris Bricken/Canna Law Group, says we'll just have to wait for more information until next year before making any concrete predictions. But the tension between state and federal law will always be an issue, she says. "Maybe at this point, there hasn't been a need as long as [the federal government] has not been interfering, and now if they come in and try to shut down businesses that the state said are okay, maybe we'll see a final decision come down," she says. "But now, no one is really willing to do that. No rescheduling, no major court cases. If there is an impetus for that to happen, maybe it won't be such a bad thing."

So with the ever-present threat of federal interference, many of the companies that are cropping up are ancillary to actually touching the plant. Troy Dayton, co-founder and CEO of cannabis investment and research firm The Arcview Group, predicts more Silicon Valley and tech entrepreneurs becoming involved in everything from agritech to home growing systems, branding and marketing to software and information systems. Developing and investing in brands will be huge, says Dayton. "I think particularly investing in low-dose products and low-dose brands aimed at non-traditional consumers is a real opportunity," he says. "And I think a lot of stuff around genetics and testing will be interesting as more states mandate testing."

Los Angeles, alone, will emerge as the country's largest marijuana market, which already has nearly $1 billion in unregulated sales, according to Matt Karnes, founder of GreenWave Advisors, LLC. "In 2017, L.A. will likely pass an ordinance that will facilitate the licensing of marijuana businesses. This will spur growth throughout the marijuana ecosystem in the surrounding cities." Following $2.5 billion worth of sales in 2016, Karnes predicts $2.8 billion in medical marijuana sales in 2017.

"The financial industry has Wall Street, the tech industry has Silicon Valley, and the cannabis industry will soon have Los Angeles," says Adam Bierman, CEO of MedMen, a cannabis management and investment firm. L.A.'s medical industry alone is already larger than Colorado's entire recreational market, he says. "Surrounding cities are joining in with programs of their own that will support cultivation, production, and lab facilities. Investors have taken notice, too, and capital is flowing to fund local ventures." At the same time, the California state legislature launched a working group to address banking issues, Bieman added. "Expect to hear big news out of Los Angeles in 2017."


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