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The Long, Strange Challenge Facing Marijuana Entrepreneurs
 

The legal marijuana industry is potentially very lucrative, but small business owners should expect an uphill battle against federal law, banking regulations, and other obstacles.

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"There are a lot of hurdles to get through if somebody wants to do this, but the opportunities are there too," said Ryan Cook.

Indeed the opportunities are there: $30 billion worth, in fact. That is the approximate amount of money marijuana users spend on the drug annually, according to the RAND Drug Policy Research Center. It's a staggering market that Cook and a growing number of other entrepreneurs in the legal marijuana industry across the country hope to cash in on.

Cook is the general manager of The Clinic, a medical and recreational marijuana business based in the Denver area. It is just one of hundreds of companies in Colorado taking advantage of the recent change in Colorado law that allows for the recreational use and sale of marijuana in the state.

Colorado is not the only state that has become more lenient toward cannabis. Washington passed a ballot measure in November 2012 to allow recreational use of the drug (retailers will be allowed to sell it this spring), and there are 20 U.S. states that permit marijuana use for medicinal purposes. It seems that a change in public opinion regarding the drug is sweeping the country. Even President Obama has said that he thinks marijuana is no more dangerous than alcohol.

But public opinion only goes so far. For "potrepreneurs" tackling the nascent industry, the path is riddled with obstacles. Beyond the typical problems all small business owners face, they must also deal with advertising roadblocks, discrimination when renting retail space, and onerous banking regulations--not to mention federal law outlawing their product.

The Law

"Just because states are changing their laws, the fact is that you would still be violating federal law if you used or mass-sold marijuana, even at the medicinal level," said Bill Chabaan, CEO of Creative Edge Nutrition. "There is the long arm of the federal justice system. At any time [you] could be raided and put in jail."

Creative Edge Nutrition is a Detroit-based supplement company, but also has a subsidiary, CEM Biotech, across the Canadian border that has just been approved to grow and distribute 1.3 million pounds of medicinal marijuana per year for Canada's health department. The arrangement will make Creative Edge Nutrition the only publicly traded U.S. company allowed to grow and sell medicinal marijuana. And yet Chabaan says he refuses to enter the U.S. marijuana industry until the federal law is amended. For now, it is too risky.

"We are positioning ourselves in the Canadian market," said Chabaan. "It is a great place for us to set up our operation and iron out any potential kinks or issues. Once it does open up federally, we will be prepared to enter the U.S. market in a big way."

Small business owners in the pot industry have a lot of hoops to jump through at the state and local level as well. Even in Washington and Colorado, all towns, counties and cities have the authority to put a moratorium on the sale of cannabis. Businesses must comply with a seemingly endless litany of local and state regulations and obtain all manner of licenses to grow and sell marijuana.

"You have to have an understanding of the industry," says Ata Gonzalez, CEO of Washington-based GFarmaLabs, a producer and distributor of cannabis-based products." If you don't, you will crap out. It is just a lot of learning processes at first."

Banking Barriers

For many entrepreneurs in the industry, the conflict between federal and state laws regarding the production and sale of marijuana manifests itself most noticeably in their dealings with the banking industry. "Obtaining the proper capital in the specific realm that we chose to enter into was probably the hardest part," Gonzalez says. 

Under current law, all banks are subject to federal law, regardless of whether they are a national bank or a state-chartered bank. Under the Bank Secrecy Act, banks must report any suspected illegal activity to the federal government, according to Rob Rowe, vice president of the American Bankers Association, a banking industry trade group. This provision includes any transaction--including opening an account or applying for a loan--associated with a marijuana dispensary or retailer. In fact, such transactions are classified under the law as money laundering.

Gonzalez says he has relied on favors from friends and family to get his business off the ground without access to banks. "Hopefully, we can make it up in the future. That's it--family, friends, anything that we can get to make it happen. We go through it every single day but it’s the only way to really do it at the moment."

The banking regulations also force these companies to function on a cash-only basis, since legal restrictions prevent banks from processing credit and debit card payments. That not only creates a hassle for these businesses, but a safety hazard as well.

"It is creating environments that are unsafe and criminals realize that our businesses not only have a product that they would probably like to get their hands on, but now they have the impression that we also have cash there," says The Clinic's Cook. "It is unsafe for our employees, it is unsafe for our patients, and it is unsafe for the community in general."

It is not a concern that has gone unnoticed by the government, however. At the end of January, U.S. Attorney General Eric Holder said that marijuana businesses that are protected by state law should have access to the American banking system, and that the federal government would make changes in the near future to make that happen. One bill, the Marijuana Businesses Access to Banking Act, was introduced last year to address this problem, but the bill has yet to make it out of committee.

Other Obstacles

Marijuana entrepreneurs have experienced pushback in many other areas as well. Getting the word out to customers, for instance, is not as easy as writing a check for online ad placement.

"It has been extremely difficult to market marijuana products because there are not a lot of outlets out there for cannabis enthusiasts," says Justin Hartfield, CEO of WeedMaps, a website for finding legal marijuana. "It’s difficult to break a new product out in this space."

Indeed, both Facebook and Google have said that they will not allow companies that sell marijuana to advertise on their websites, even in states where it is legal, GigaOm reported.

But Google and Facebook aren't the only ones who refuse to do business with marijuana businesses. Many entrepreneurs--especially those in areas where the industry is still very young--have seen resistance from communities, landlords, and other businesses. Introducing a marijuana dispensary is not the same thing as bringing in, say, a hair salon. 

Many entrepreneurs say finding a place to house their dispensaries is very difficult because they can't get bank loans, and because some landlords refuse to rent to them. It is also hard to meet zoning requirements. In Colorado for example, marijuana businesses are forbidden from operating within 1,000 feet of a school or day-care facility.

Additionally, these companies face extensive taxes on their product. According to The Wall Street Journal, in Washington there is a 25 percent tax on recreational sales of marijuana. In Colorado, there is a 10 percent state tax on retail marijuana sales and a 15 percent excise tax on wholesale--on top of the 2.9 percent state sales tax and any local sales taxes. 

Then there is the production of the product itself. "No two growers were created equally," says Cook. "Growing cannabis is a very difficult process and it doesn't necessarily mean that because you can grow houseplants that it's something you will be capable of doing--especially not on an industrial scale."

As more and more businesses enter the marijuana industry, growers will need to separate themselves from the pack with a focus on product quality, as economies of scale drive prices down. To do so, businesses must have the right facilities, enough light, proper electricity, and regulated temperatures. 

The Future

Ancillary companies such as Hartfield's Weedmaps--which has been the beneficiary of some of the ad spending that Facebook and Google have refused--might actually be best positioned to take advantage of the marijuana windfall. Companies specializing in vaporizers, pipes, packaging, tourism, and security systems have been gaining business as a result of the burgeoning marijuana industry. Hartfield says there there is even a car service in Denver specifically purposed to take customers from dispensary to dispensary. "It’s like during the gold rush," Hartfield says. "You didn’t necessarily want to be a gold miner, but you wanted to be Levi Strauss."

Growers and sellers, meanwhile, have high hopes that their business will become simpler in the future. All they can do is keep waiting, and keep working. 

"It doesn’t seem like the federal law will be changing anytime soon, so we will just have to abide by the state laws," says GFarmaLabs's Gonzalez. "It is just making it harder to actually create a business, but there are ways that we can hopefully get around that. The greatest thing for small business is that we see it as a yellow light and we are proceeding with caution."

 

 

 

 

 

IMAGE: Redux
Last updated: Feb 11, 2014

ABIGAIL TRACY is a staff reporter for Inc. magazine. Previously, she worked for Seattle Metropolitan magazine and Chicago magazine.
@abigailtracy




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