Election 2016: Cannabis at the Crossroads

, Election 2016: Cannabis at the Crossroads

Thousands of business opportunities, billions of dollars at stake in November

by John Schroyer

Tipping point.

These words aptly describe where the marijuana industry stands heading into the 2016 general election, when up to 11 states across the country – from California to Florida – could vote on whether to legalize medical or recreational cannabis.

This election could quickly and significantly alter the course of cannabis in the United States and tilt the playing field in favor of both the industry and the movement. Legalization in even just a few states (particularly California, Nevada and Massachusetts for recreational and Florida

for medical) could create an avalanche of business opportunities, pave the way for tens of thousands of new jobs, generate billions of dollars in additional annual revenues for the industry and usher in a new era of expansion for existing marijuana companies.

It could even ultimately lead to national legalization.

“The movement is cresting,” said U.S. Rep. Earl Blumenauer, D-Oregon, a longtime cannabis proponent. “I think we can see light at the end of the tunnel. There’s an opportunity here to get this all falling in place. Five years from now, it could be game over if we do these things right.”

On the other hand, if all or most of these measures fail at the ballot box, it could be seen as a major public rebuke to the marijuana industry’s explosive growth and potentially stall the movement for years to come.

The Big Picture

This year is already shaping up to be one for the record books. Pennsylvania and Ohio legalized medical marijuana in the first half of 2016 through their respective state legislatures, creating two potentially huge new markets. Louisiana, which legalized medical marijuana decades ago but never set up a workable program, passed new laws earlier this year that make MMJ cultivation and sales a real possibility.

These developments have created a perfect setup for the November elections.

As of mid-August (press time for this magazine), eight state campaigns had qualified recreational or medical legalization measures for the fall ballot, with more likely on the way. That’s the most state-level legalization proposals on the ballot in a single year in American history. Legalization groups in another five states were working to get proposals in front of voters, and a handful seem poised for success.

There’s now a good chance that more states will legalize in 2016 than in any other year. The previous record-holder in terms of pro-cannabis victories came just two years ago, when the legislatures of Maryland, Minnesota and New York legalized medical marijuana, and voters in Alaska, Oregon and Washington DC legalized recreational cannabis. The industry would beat that record if five states legalize medical or recreational cannabis this fall, which would put the total for 2016 at seven when Ohio and Pennsylvania are included.

In a best-case – albeit highly unlikely – scenario, six states could legalize recreational marijuana in November and five more could legalize medical. In a more likely scenario, four to eight states could successfully legalize MMJ or recreational cannabis, which would still be a gigantic win for the industry.

Nearly everyone connected to cannabis agrees that California’s rec initiative is the 800-pound gorilla.

“I don’t think we’re going to get all (of them), but I think we can get 60%-70% of (states with measures on the ballot) to legalize, and I think the biggest one in there is California,” said Douglas Leighton, managing partner of Massachusetts-based investment firm Dutchess Capital. “I think California is a shoo-in the way that it’s polling right now. That alone could shift the market so much, because it’s so massive.”

Business & Investing Impact

Indeed, California is seen as a must-win battle this fall by many in the industry. If the state legalizes adult-use marijuana, retail cannabis sales in California (including medical) could easily hit $5 billion-$10 billion once the market matures. That’s more than the $4.3 billion the entire industry is expected to generate in retail sales this year, according to top-end estimates in the Marijuana Business Factbook.

But there are several other immensely important markets from a business perspective as well, specifically Nevada. Given the massive tourism industry in Las Vegas, the legalization of recreational marijuana in the state could prove to be enormous – for both new businesses and existing ones in other states looking to expand.

Colorado-based Wana Brands, which makes infused products, is getting ready to launch in Nevada’s medical marijuana market. The legalization of recreational marijuana there would be “a huge opportunity for us,” said Nancy Whiteman, the company’s co-founder.

On the medical side, Florida is the big prize. A legalization measure has already qualified for the ballot, and support runs strong in the state.

Whiteman said she would be interested in expanding to a market such as Florida if legalization succeeds there. She’s also keeping a close eye on the rec initiative in Massachusetts, which she calls the “hub of New England.” Arizona would also be a significant new rec market if a measure there succeeds at the polls, given that an initiative was poised to qualify for the ballot as of early August.

“Those are some of the key ones that I’m looking at,” Whiteman said.

Another company that’s watching the election for potential business opportunities is PharmaCann, which already has licenses in Illinois and New York. The company’s chief compliance officer, Jeremy Unruh, said depending on the outcome of the elections, the firm may try expanding to California, Florida and Massachusetts.

“You go into one state and plant your flag and do everything from the ground up, or you find somebody and you partner with them and you collaborate with them, and our company is open to either of those methods, and either California or Florida (initiatives) lend themselves to those,” Unruh said.

Investors are also eyeing the election closely.

Dutchess Capital’s Leighton said there’s “literally tens of billions of dollars on the sidelines” in investment money that could flow very quickly into the cannabis industry, depending on how the election goes. That means both existing companies and new entrants could find financial partners much more easily after November than they could in years past.

“That just gives people more comfort,” Leighton said, referring to popular votes in favor of cannabis. “Nothing has changed (regarding federal law) … but people perceive this as a safer investment.”

Investment banker Leslie Bocskor of Nevada-based Electrum Partners agreed with Leighton’s assessment that the election could shatter the dam holding back investment money.

“We could hit $10 billion in the next three years of investment in the cannabis industry in the U.S., not including real estate or ancillary businesses, just in plant-touching companies,” Bocskor said. “That’s a big number. That’s massive. That’s just massive.”

And that’s Bocskor’s guess if only seven state campaigns succeed.

Other states weighing legalization this fall such as Missouri or Arkansas won’t have the same overall impact on business or investments, but they would still create ample opportunities and extend the industry’s overall reach.

The ‘Snowball’ Effect

The upcoming elections could lead to much bigger changes for the industry from a political and legal perspective.

As more states allow medical or recreational cannabis, the pressure is mounting on politicians to change laws – both at the federal level in Washington DC and at the state level in areas that have not yet legalized. That could lead to rescheduling, reforms that would improve the situation for cannabis banking and taxes, and even possibly legalization at the national level, as well as more states approving the use and sale of marijuana.

“Generally, more support leads to more support,” said Kyle Kondik, a political analyst for the University of Virginia’s Center for Politics. “Efforts to liberalize marijuana laws could have a snowball effect across the country as we get more voter evidence of what people’s preferences actually are, and polling evidence as well.”

Though Kondik is skeptical of how much the needle may move in the near future in DC on cannabis reform, simply because Republicans will likely still control at least the House of Representatives after November, others are more optimistic.

“The only thing holding medical back in Congress are key chairs in Congress,” said Bill Piper, senior director of national affairs for the Drug Policy Alliance. Piper said that legislation such as the Compassionate Access, Research Expansion, and Respect States (CARERS) Act, a bipartisan MMJ measure introduced in 2015 in the U.S. Senate to essentially legalize medical cannabis, could conceivably pass in 2017 or 2018.

“The CARERS Act on the Senate side … that’s got pretty strong bipartisan support,” Piper said, noting that 19 senators are co-sponsoring the measure, including three Republicans.

The main issue that’s been holding it up, he said, is the lone anti-cannabis chair of the Senate Judiciary Committee, who has refused to grant the bill a hearing. If the Democrats win back the Senate in November, that problem is solved. And even if they don’t, and cannabis wins multiple elections across the nation, that could send a strong message to Washington DC.

“Politicians have a good sense of what the polls are and have a good sense of where the political winds are blowing,” Kondik said.

If Hillary Clinton wins the presidency, change at the federal level could come quickly. Clinton has said she wants to move marijuana to Schedule 2 from Schedule 1, which would open the door for more research. Congressman Blumenauer said he’s also seen indications that Clinton will back further federal cannabis reform that will bolster the industry.

“I’ve had a couple of conversations with Hillary Clinton, and I think we’re going to get support dealing with the things we need to do with banking, fair taxation and, most important, not interfering with progress at the state level,” Blumenauer said.

Don’t Celebrate Yet

Although polling in general for medical and recreational marijuana legalization is strong across the country, it’s possible that many state measures could fail in November.

Industry insiders are sounding the alarm over California in particular, saying a defeat there would set the movement back significantly and give anti-marijuana politicians ammo to sink other proposals at the federal level. Even California Lt. Gov. Gavin Newsom warned about complacency from the industry in supporting the measure financially, saying at a June conference in Oakland that recreational legalization is not a lock in the state by any means.

The industry itself also is split on some state-level measures. Marijuana professionals and advocates increasingly have different ideas of what legalization should look like – particularly when it comes to business-related issues, such as the criteria for who can get involved, barriers to entry, home growing and number of licenses allowed.

For example, there’s grassroots opposition in the pro-cannabis community to the ballot initiatives in both California and Arizona. Hezekiah Allen, executive director of the California Growers Association, said in mid-July that his membership was evenly divided on Proposition 64, the measure to legalize recreational cannabis in the state. Because of the way the proposal is structured, it would likely force many existing small businesses out of the industry or push them back to dealing in the black market.

“Significant concessions were made to big business” in Prop 64, Allen said. “This thing is backed by big money, and it reflects the interest of big money. Californians don’t really like that as a general rule.”

Allen said he gives the measure a 50-50 shot of passing in November, though others are much more bullish on its chances, with one California attorney even saying that even asking whether it will pass is “a stupid question.”

Still, many marijuana professionals fear that the elections will truly throw open the doors to big business and change the very fabric of the industry, leading to the demise of most mom-and-pop operations. This has already been occurring in recent years as bigger players emerge and get involved, regulations and costs escalate, and mainstream corporations kick the industry’s tires. If half-a-dozen or more states legalize, these trends will certainly accelerate.

Additionally, a handful of legalization efforts are experiencing headwinds.

In Arizona, the latest polls show more residents oppose a measure to legalize recreational cannabis than support it. The campaign is also fighting a war on two fronts: It faces opposition from influential business groups such as the Arizona Chamber of Commerce, and also from a pro-cannabis grassroots movement that wants to defeat this year’s initiative and return in 2018 with a rewritten measure.

In Arkansas, there’s the very real possibility that two medical cannabis legalization measures could make the ballot, which might wind up splitting support and sinking both initiatives.

And in Massachusetts, the latest polling is also cause for concern over a measure to legalize recreational marijuana that has qualified for the ballot. Public opposition includes Republican Gov. Charles Baker, Boston Mayor Martin Walsh and a number of other anti-cannabis Democrats.

Dutchess Capital’s Leighton, who lives in Massachusetts, says he doesn’t expect the initiative there to pass.

And even if many of these measures pass, it won’t be a road to overnight millions for entrepreneurs. Longtime cannabis businesswoman Greta Carter predicted the vast majority of new businesses that attempt to get into the industry will end up failing.

“There’s this fallacy out there … that this is easy money,” said Carter, a pioneer in Washington State’s medical marijuana industry who recently moved to California. “A lot of people are going to be jumping in, and we’re going to see, even on a smaller scale, high fail rates, lots of people losing money.”

There’s also the possibility that Republican Donald Trump will become the next president and then appoint New Jersey Gov. Chris Christie the next attorney general of the United States. If that happens, it could lead to a crackdown on the current recreational marijuana market, or the beginning of a serious battle between the federal government and states over adult-use cannabis. Christie is firmly in the anti-marijuana camp, having famously warned Colorado during his brief presidential run that “as of January 2017, I will enforce the federal laws.”

Trump has also, however, expressed solid support for MMJ. But the fantastically non-traditional politician is anything but predictable, so it’s impossible to tell if he’d stick to his past statements if elected.

The End Result

Even with all of those hurdles, however, the most likely outcome on Election Day is more victories for marijuana. And that overall equates to moving the ball further down the field for cannabis interests in general, making it much harder for the new president and Congress to take anti-marijuana stances.

If Clinton wins, said the University of Virginia’s Kondik, she’ll at least maintain the status quo of “hands off” when it comes to federal intervention in state marijuana policy.

“I would probably expect some continuity with Obama on that issue,” Kondik said. “In a lot of ways, Clinton is running for Obama’s third term, and there’ll be some changeover in the administration if she wins, but some of the mid-level appointees will stay the same, and there may be a fair amount of continuity if in fact Clinton takes over.”

The chances are high that the election will create more new markets for cannabis entrepreneurs tap. That will contribute to the political pressure nationwide that has been building for years, all adding up to one eventual result: federal legalization.

“You can’t roll this back,” Congressman Blumenauer said. “The case for medical marijuana is overwhelming, and more than half the country has it. Each additional step moves us closer to repealing the failed policy of prohibition.”