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Marijuana Industry News November 20, 2022 MJ Shareholders

From President Joe Biden’s October announcement on federal cannabis policy reform to voters in Maryland and Missouri approving adult-use legalization in the Nov. 8...

From President Joe Biden’s October announcement on federal cannabis policy reform to voters in Maryland and Missouri approving adult-use legalization in the Nov. 8 election, the industry continues to face rapid change, and it can be difficult to discern the opportunities and obstacles ahead.

So, what’s next for the cannabis industry following the midterm elections?

Election Day Victories

The passage of adult-use cannabis legalization ballot measures in Maryland and Missouri was perhaps the most obvious win for the industry this election cycle.

While both states already have medical cannabis programs in place, officials have plenty of work ahead to draft adult-use regulations and launch a business licensing process.

The Missouri Department of Health and Senior Services (DHSS), which currently oversees the state’s medical cannabis market, released draft rules for the expanded industry Nov. 10—less than 48 hours after voters approved Amendment 3. Officials plan to launch the adult-use market as early as February, and both cannabis programs are now being managed within the department’s Division of Cannabis Regulation.

Zachary Kobrin, an attorney within Akerman LLP’s cannabis practice, is encouraged by Missouri’s swift action.

“I was so happy with what I saw coming out of Missouri,” he says. “I think it’s pretty impressive that they’ve already been proactively working on rules ahead of the amendment passing.”

Maryland’s adult-use legalization measure, Question 4, asked voters: “Do you favor the legalization of the use of cannabis by an individual who is at least 21 years of age on or after July 1, 2023, in the State of Maryland?”

Following the measure’s passage on Election Day, adults can legally purchase and possess up to 1.5 ounces of cannabis, 12 grams of concentrate, 750 milligrams of delta-9 THC or two plants for personal use. Lawmakers are now tasked with determining additional specific market parameters, including business licensing and taxes.

Jonathan Havens, partner at Saul Ewing, says that while lawmakers and regulators have much work ahead to implement the will of the voters, he is optimistic that both states are already setting themselves up for successful adult-use market launches.

“There’s still quite a bit of work to do in both states, but it’s not like voters vote and then they’re starting from scratch,” Havens says. “Both states are already ahead, and it’s just a matter of standing up these programs, which is not an easy task. For everyone who’s been involved in this process, we know it takes time, but both states have already started to go down that path, so it’s just a matter of time.”

Havens expects both states to build on their existing medical cannabis programs to expand the marketplace.

Missouri’s Division of Cannabis Regulation will begin accepting requests Dec. 8 from the state’s existing medical cannabis licensees to convert to a “comprehensive” facility to serve both markets.

“In New Jersey, that’s what they did,” Havens says. “Once operators demonstrated the ability to meet the medical needs, they transitioned to adult use. It takes a while to stand up the market, but I think if you have existing medical operators [launch adult-use sales] first, [it expedites the program].”

Missouri’s Amendment 3 aims to establish a lottery to distribute additional licenses equally among eight congressional districts. A new category of cannabis licenses is reserved for small businesses, which, over time, will add a minimum of 144 licensed facilities to the state’s existing 353 medical cannabis businesses.

“I think with both states, you’re still going to run into the same kind of issues we see in any kind of limited-license market with co-locating medical with recreational, zoning issues … [and] environmental plans,” Kobrin says, adding that the newly legalized markets may not launch on schedule.

“Maryland, even though they’re shooting for July, … I don’t think it’s going to happen,” he says. “I think we’re looking at 12 to 15 months … before we really start seeing sales because they’re probably going to require regulatory and legislative processes, and that obviously takes time. So, it’ll probably be end of 2023, beginning of 2024 when we see recreational sales in Maryland. In Missouri, I’d love to say that they’ll really get the ball rolling that quickly. I don’t think it’s going to happen. … History has shown that these never go as fast as they’re supposed to go.”

What’s Your Plan?

While the business licensing processes have yet to be unveiled in Maryland and Missouri, there are steps entrepreneurs can take to get a solid business plan in place before the license applications become available.

“Whether you want to have a dispensary or a cultivation or manufacturing or processing facility, one thing is to have a strong business plan in place now,” Kobrin says. “It’s important.”

Rachel Gillette, partner at Holland & Hart, also stresses the importance of drafting business plans early, before even applying for a license.

“If you’re thinking about starting a business, the one thing people don’t necessarily think about is forming that company, what the ownership structure might look like, what are the rights of the shareholders, and making sure that’s all documented well in advance of having to apply for a license,” she says. “If you’re stuck scrambling and you’re having to negotiate with multiple parties, … that’s not something you can do very quickly, and you should take the time to do that right and get it all documented correctly.”

Gillette also advises business hopefuls to participate in the rulemaking process, including submitting public comment on any proposed regulations, to ensure that the final regulations aren’t problematic for the industry.

In Missouri, the Division of Cannabis Regulation is encouraging public feedback through Nov. 25 for its first draft rules via an online suggestion form.

“Participating in the process is very important, understanding what the regulatory framework’s going to look like, [and] helping to inform or educate regulators [and] those that are drafting rules,” Gillette says. “Sometimes you have folks that are making decisions that aren’t really familiar with how business operations work with cannabis, or they’ve never grown marijuana plants, for example. There’s an amount of education.”

And although the business license applications for Maryland and Missouri aren’t yet available, Havens says applications in other states can offer clues to what Maryland and Missouri regulators will likely request in their applications. For example, he says the applications will likely require details about security plans, logistics pertaining to cultivation, processing and/or retail (depending on the license type), real estate, and financing.

“Think big picture,” Havens says. “How are you going to demonstrate to these regulators in a limited-license opportunity that you should be selected above somebody else?”

Kobrin says potential applicants must ultimately understand their target markets and how to serve them .

“I’m going to open up X, I’m going to target this market [and] I’m going to do this,” he says.

Real estate is “extremely important,” Kobrin adds, and he urges potential applicants to start working on securing a location early in the process.

“Depending on the markets, if you have state regulations that are … very locally driven, you’re going to need to be on the ground, working with local councilmen, local representatives [and] local zoning officials to make sure that where you want to locate your facility is going to be permissible. That’s stuff that you can absolutely start working on now.”

Irina Dashevsky, partner and co-chair of the Cannabis Law Practice Group at Greenspoon Marder, also says that securing real estate is critical for those looking to win a license in new markets.

“Whether it’s required as part of applying or whether it’s required on the back end, like your final license doesn’t get issued until it’s tied to a certain site, it’s going to be required,” Dashevsky says. “So, understanding the state, where you want to put the project, and having conversations on the ground with municipal government is important. Local governments are in charge of zoning, and … usually they can opt out [of the cannabis program] or zone things in a way where there are very limited places where you could put your operation. So, I think you want to start having those conversations with municipal governments and having boots on the ground.”

Robert DiPisa , co-chair of the Cannabis Law Group at Cole Schotz, says it’s imperative to locate in a municipality that’s friendly to cannabis.

“Oftentimes, no matter where you’re trying to set up, if your municipality doesn’t want you, you have an uphill battle and all that’s going to do is delay your timing to get open and operational,” he says. “I think once your team is formed and you have your team together, you can present to a municipality. Making those inroads with that municipality first and foremost is super critical on the front end. … It helps to guide the group to a property where the municipality will permit the use or want the use.”

Another critical component of any cannabis operation is capital, Kobrin says, and while most applicants can come up with the initial application and licensing fees, running a business is expensive, and regulators want to see how applicants plan to fund the operation.

“You have to be able to take your business plan and start raising capital,” Kobrin says. “Find the money you need to hit the ground running. … [Regulators] want to read an application and say, ‘OK, they’re going to have a dispensary that’s 4,500 square feet. It’s going to be in this location. They’ve already got their government approvals. They’ve already got their budgets, and they estimate it’s going to cost them $2 million a year to operate their business with X amount of employees. They’ve already got a business plan and they’ve got access to capital for the first two years.’ Those are the kinds of things that regulators want to see, not ‘Hey, I got a cool name and I’ve got a cookie-cutter application from 10 other states.’”

Not This Year

While adult-use legalization measures found success in Maryland and Missouri, voters in Arkansas, North Dakota and South Dakota struck down legalization initiatives. While the defeats are setbacks for advocates in those states, the attorneys shared that they expect these states—which all have medical cannabis programs in place—to flip to adult use sooner or later.

“I don’t ever view the failure of these adult-use legalization measures as a roadblock,” DiPisa says. “I view it as almost the first step. If you look at the map and you look at all the jurisdictions and the changes, there are stutter steps before programs really get going, and then really the first step is a medical program which turns into an adult-use program. I would be shocked if this issue does not come back up in North Dakota [and] South Dakota, where they are going to vote on it again. And I think it will eventually pass.”

Havens echoes that sentiment, saying, “I think there’s still a lot of support in these states and the folks who brought forth these ballot measures will get another bite at the apple in another election cycle.”

So, why did the measures fail this time around?

It could be due to the way they were written, Havens says.

“One possible conclusion is that the measures were written in a way that people couldn’t support them, or they were confusing,” he says. “But I don’t think we can say voters in these states don’t support cannabis reform.”

Voters in South Dakota had previously supported legalization, voting in 2020 to approve medical and adult-use cannabis legalization on the same ballot.

While the state’s first medical cannabis sales launched in July, the South Dakota Supreme Court ultimately struck down the adult-use legalization measure.

Advocates came back with a more simplified legalization initiative that would have legalized the possession, use and distribution of up to 1 ounce of cannabis or 8 grams of concentrate for adults 21 and older. The measure would have also allowed adults to grow up to three cannabis plants at home, but it did not set a foundation for a commercial adult-use cannabis cultivation or retail program.

Kobrin says the different approach to legalization may have hurt the measure’s chances of passing.

“South Dakota is an interesting one because that’s a reversal,” he says. “South Dakota passed in 2020, and then the courts overturned it after the ballot initiative passed. … I believe part of the reason that the South Dakota measure passed [in 2020] was it was different. [The 2022 measure] was pretty much just a home grow initiative. … It wasn’t opening up full adult-use. … I think people saw problems with the ballot initiative in South Dakota.”

Kobrin calls Arkansas a “wild card,” noting that it has a strong medical cannabis market but perhaps also a large percentage of the population that still believes in the stigma.

“In more traditional or conservative jurisdictions, they can get their head around [the] idea of medical, but the idea of opening it up for full-on business takes more time,” Kobrin says. “Florida is the perfect example. Everywhere else is going adult use before Florida. But I think Arkansas was going to be tough. … I think it was something where they could come back in two years and potentially pass, or it could be something where the Legislature will do it on its own, [but] I doubt it. I think this wasn’t meant to be the year for Arkansas.”

Dashevsky says that the defeats in Arkansas, North Dakota and South Dakota could stem from those states’ populations being comfortable with cannabis for medical purposes, but not quite ready for an adult-use market.

“These are conservative states,” she says. “Largely, cannabis is not a polarizing issue. It’s got pretty wide bipartisan support, actually. It’s one of the few things, I think, both sides are generally OK with. It’s a question of paces in these places. The Dakotas and Arkansas, the medical cannabis has been slow-going. The base populate isn’t yet fully exposed to cannabis in their backyards and ready for this measure, where in Maryland, it’s been around for a while. I think the folks there are ready and they’re surrounded by it on the East Coast. Similarly, Missouri’s been around for a while. So, I think it’s just one of those things, I see it happening ultimately, it just didn’t pass this time around. I don’t see this as a significant defeat.”

For Gillette, more pressing issues may have distracted voters from cannabis legalization, which they may view as a less critical issue this election cycle.

“I know that there’s public support for cannabis legalization—it’s at an all-time high, and it certainly crosses political divides,” she says. “There are opponents on both sides, but I think people are thinking about other issues, too. Maybe they’re thinking this is not an issue that’s of importance in their state. They’re thinking about the economy or inflation. … Those issues are just more important, and cannabis legalization seems like a more fluffy issue in these states and not of as much importance.”

The Federal Landscape

Post-election, Democrats have control of the executive office and the Senate, while Republicans won majority control of the House. Where does that leave pieces of incremental cannabis policy reform, such as the SAFE Banking Act? And how will the makeup of Congress impact Biden’s recent announcement to pardon thousands of people with previous federal cannabis possession charges, urge governors to do the same at the state level, and review how cannabis is scheduled under the Controlled Substances Act?

“We certainly couldn’t get it done when [Democrats] had control of both the House and the Senate,” Gillette says. “I’m trying to imagine a scenario where we see more progress with a split House and Senate, but it’s possible because perhaps they will recognize that they have to negotiate, and they have to make concessions to both sides if they’re actually going to govern and get things done.”

In any case, Biden has already set in motion a scheduling review and federal pardons for an estimated 6,500 people.

“The Biden announcement was really interesting, and it was interesting more because Biden has never really been a huge supporter or at least vocal about his support for cannabis,” Kobrin says. “So, to see him come out with any effort—even if it was politically motivated—was a nice step.”

When it comes to Biden’s probe into whether cannabis should be rescheduled or descheduled, Kobrin says without a definitive timeframe or deadline to complete the review, it could take years for additional action.

“Was it great to see Biden do something? Yes,” Kobrin says. “What I’ve told everybody after it happened was take a giant deep breath because it’s awesome, we should relish it, but it doesn’t mean things are happening overnight.”

In the meantime, Kobrin is hopeful that legislative reform efforts will get passed, especially since Republicans did not take control of both chambers of Congress.

“If you were to ask me that question a week ago, I would say there’s no way SAFE Banking is happening during the lame duck session—nothing happens during a lame duck session—but the red wave didn’t happen,” he says. “The fact that the Dems held onto the Senate gives me some hope that they may try to pass SAFE or that there’s more support for it.”

Havens echoes the same sentiment, adding that cannabis has become a bipartisan issue.

“Cannabis doesn’t fall along both traditional party lines,” he says. “I’d be curious to see what sees the light of day in the new Congress and if anything can get out of the lame duck session, which by the way, is pretty crowded. There’s a lot that’s expected to be considered in the lame duck session. So, while I’m hopeful that SAFE Banking passes, there are competing measures [that could take precedence].”

Dashevsky is also optimistic that additional cannabis policy reform efforts will find their way through Congress, especially considering Biden’s announcement .

“Separately from the executive branch, the legislative branch has been passing legislation like SAFE Banking in the House time and time again,” Dashevsky says. “I think we’re closer than ever in the Senate, and we’ve also seen things proposed recently like the CLIMB Act, the MORE Act. With President Biden’s expungement, there are conversations about SAFE Banking ‘Plus’ and what does that plus look like?”

The “plus” in SAFE Banking Plus was being discussed as expungements and other social justice-focused reform, but with Biden’s federal pardons, Dashevsky says that conversation may shift. “I’m hearing that the ‘plus’ may include a fund for state-level expungements as federal-level expungements are already happening, and also include elements from the CLIMB Act like access to U.S. capital markets.”

“I think if they can hammer out what the plus is in the Senate, there’s a chance, especially with the Democrats holding the Senate at this point, that you could see federal legislation happen during the lame duck session,” Dashevsky adds.

Kobrin says that while the SAFE Banking Act is “the most obvious choice for marijuana legislation,” he would love to see Congress pass the Capital Lending and Investment for Marijuana Businesses (CLIMB) Act, which would allow U.S.-based, plant-touching cannabis businesses to list on U.S. stock exchanges.

“I think the stock exchanges are the biggest impediment right now to seeing full-blown access to cannabis within the marketplace,” he says. “Right now, the New York Stock Exchange will not allow U.S. plant-touching operators to be traded. So, that means that … Procter & Gamble, Coca-Cola, Unilever—[consumer packaged goods] companies, food manufacturing companies—they can’t operate in cannabis. Even Big Pharma can’t operate in cannabis because they’re listed on these public exchanges.”

Whether it’s SAFE Banking, the CLIMB Act or another cannabis policy reform bill, Kobrin expects some form of legislation to pass within the next two years.

“I also think the results of the election potentially leave room for more incremental changes, stuff that can actually get done,” he says. “So, [maybe it’s] insurance reform, maybe tax reform, … or research and development, or VA benefits. Instead of looking for the home run, umbrella cannabis reform bill, let’s just pass something small. One domino then begets another, and another.”

In the meantime, lawmakers passed the bipartisan Medical Marijuana Cannabidiol Research Expansion Act with the Senate’s voice vote Nov. 16 after the House approved the bill in July. Pending Biden’s signature, the legislation will be the first piece of standalone federal cannabis reform enacted since the Controlled Substances Act of 1971 categorized the plant as a Schedule I drug. The bill aims to encourage and facilitate research on cannabis and its potential health benefits by streamlining the application process for studies and removing the U.S. Food and Drug Administration (FDA) barriers for research.

Looking ahead, DiPisa believes any legislation that federally decriminalizes cannabis must let states take the lead on regulations.

“I think the federal government will continue to take a hands-off approach,” he says. “At the end of the day, for the federal government to layer a whole new set of regulations on top of all the state regulations, I think it would just be a logistics nightmare from an operational perspective for these operators to now shift again to comply with both the federal and the state regs. I don’t think it’s productive and I think it’s unlikely. … Hopefully it’s just loosening of regs, passing of things like the SAFE Banking Act so banks get more comfortable and they jump in, and I think that’s where we end up with this.”

Dashevsky and Kobrin are also optimistic about what’s to come.

“I think the trend’s going the right way and hopefully the industry, which currently isn’t going very well, can get a much-needed boost and relief from this,” Dashevsky says.

“This has been an interesting year,” Kobrin adds. “You’ve got a couple more states [that legalized]. You finally got Biden to at least come off of the sideline and make some kind of policy statement, even though it was a little empty. Looking back on 2022, I’m not going to sit there and say, ‘Oh, it was a terrible year for cannabis.’ I think it was a great year.”