Trend Watch: 2015

, Trend Watch: 2015

From banking to cannabis stocks to cultivation, a look at what’s in store for the year ahead

by Tony C. Dreibus & John Schroyer

Those who fear change shouldn’t own a cannabis company. The marijuana business undergoes more shifts, twists and turns in several months than other industries experience over the course of several years. This creates unexpected challenges and new headaches for cannabis companies. But it also creates new opportunities. So what can you as a cannabusiness professional expect in 2015? More change, of course. But also more progress and growth as the industry takes its next steps toward legitimacy.

To help you get an idea of what’s coming down the pipeline, Marijuana Business Magazine dusted off its crystal ball and asked several industry leaders to read the tea leaves for the year ahead. We then came up with a list of 10 important trends to watch in 2015.

Some of these trends arise every year or started in 2014 and will likely gain steam in the coming months, while others are relatively new developments that we expect to crop up soon. All will have a big impact on the future of the industry and your business.

Trend #1: New MMJ, Rec States

Which states will legalize medical or recreational marijuana next? It’s an annual question of massive importance to the cannabis industry. The more states that legalize, the bigger the overall market – and the more business opportunities in general.

Last year was a good one on this front: Minnesota and New York legalized medical marijuana, while voters in Alaska, Oregon and Washington DC approved recreational marijuana. These moves will create hundreds of millions of dollars in revenues and pave the way for thousands of new startup companies.

So what’s in store for 2015? Given that it’s not an election year, any movement would have to come via state legislatures. The Marijuana Policy Project (MPP) – a leading lobbying group working on legalization measures – estimates that there might be enough support among lawmakers in Rhode Island and Vermont to push through recreational marijuana laws this year. Washington DC’s city council could move in that direction as well.

On the medical side, Florida could be back in play after voters sunk a legalization measure in 2014. Orlando trial attorney John Morgan – who largely bankrolled last year’s MMJ effort – has promised an attempt to get the state Legislature to legalize medical marijuana. If that fails, Morgan said Sunshine State voters will see MMJ on the ballot again in 2016.

Beyond that, it’s anyone’s guess in terms of which states will legalize MMJ or rec in 2015.

“You never know with state legislatures,” said MPP spokesman Mason Tvert.

Regardless, 2015 will still shape up to be an important one even if no states legalize, as activists across the country will begin laying the serious groundwork for important measures in 2016. MPP is supporting recreational marijuana pushes for 2016 in a handful of states already, including Arizona, California, Maine, Massachusetts and Nevada. Separate campaigns have also begun for ballot measures legalizing recreational cannabis in Mississippi, Rhode Island and other states. The momentum built in 2015 could have a direct impact on whether these measures qualify for state ballots – and ultimately gain enough voter support – in 2016.

Trend #2: Banking Progress

Banks will likely become more familiar – and comfortable – with cannabis-related guidance issued by government agencies last year, leading to a potentially dramatic increase in the number of financial institutions willing to service cannabis companies.

The federal guidance in essence allows banks to open accounts for the marijuana industry if they take a host of specific steps, such as verifying that the businesses are properly licensed and informing the government if they suspect any wrongdoing. The guidelines didn’t have an immediate positive impact, and in fact some banks actually stopped serving the industry because they felt the guidance was vague. However, the situation began to loosen up later in 2014 – setting the stage for this year.

While the guidelines are stringent, companies that want to “get banked” will be able to do so in 2015 if they follow the policies set forth by the agencies, said John Sullivan, the chief executive officer at First Security Bank of Nevada, which has opened accounts for marijuana companies.

“I am very hopeful in the next six months any members of the industry who want to go through the pain of the forensic process – you will be able to get banked,” he said at the recent Marijuana Business Conference and Expo in Las Vegas.

Many banks remain hesitant to work with cannabis companies. But more are doing so (an estimated 100-plus in 2014). And some, such as First Security in Nevada, are even willing to talk about it publicly. If these banks are successful, expect many more to follow their lead.

“Cannabis banking is going forward despite the tension” with federal laws, said Paula Givens, owner of Industry Assurance & Oversight LLC, which works with banks to service the marijuana industry.

We also could see movement on the federal level in regards to banking. Read more on this in the next trend below…

Trend #3: Federal Action on Marijuana Issues

Is 2015 the year we’ll finally see the federal government move on key marijuana legislation?

Some observers think so.

Don Murphy, a federal policy analyst with MPP, sees reason to be optimistic when it comes to the 2015 Congressional session. Especially when it comes to cannabis banking.

“The banking thing has got to be resolved sooner rather than later. I think it’s the first thing that’ll get fixed,” Murphy said. “If the Senate passed a bill over to the House, I think the House would pass it, and I think that’s the first thing that will happen.”

Murphy said the Republican takeover of the Senate is no reason for marijuana activists to be concerned. Many conservatives in Congress support not just states’ rights when it comes to governing the marijuana trade, but also individual choice on the matter.

There are at least a dozen marijuana-related bills hovering in limbo in the U.S. House of Representatives. As of late 2014, not one of those bills had been voted on by a committee or even a subcommittee, let alone the full House or Senate. And many date back to early 2013 – which means they’ll have to be re-filed.

But the federal government has shown it can move forward with marijuana-related measures. President Barack Obama signed a federal Farm Bill in 2014 that included a bipartisan provision to allow states that have already legalized industrial hemp to grow the crop for research purposes. In addition, the House passed an amendment to a Financial Services Appropriations bill to make it illegal for the government to penalize banks that work with legal marijuana businesses, though the Senate has yet to take action on that measure.

That bodes well for the potential of federal action on at least one marijuana measure in 2015.

Trend #4: Mergers, Acquisitions & Consolidation

Mom-and-pop businesses, beware: Bigger companies are coming for you.

Growth in the cannabis industry will lead to further merger and acquisition activity this year as larger established companies – particularly on the ancillary side of the industry – seek out smaller, underfunded businesses to gain leverage and expand.

At the same time, some marijuana markets are maturing, and only the strongest are able to survive. Dispensaries, edibles companies and cultivation sites in these markets are starting to gobble up their weaker competitors or push them out of business completely. Additionally, some companies in the edibles space are looking to expand nationally, and it’s possible two of them will team up via a merger.

Smaller companies tend to thrive in heavily regulated industries because larger firms are afraid to enter volatile markets, said Leslie Bocskor, managing partner of the Las Vegas-based advisory firm Electrum Partners and chairman of the Nevada Cannabis Industry Association. That’s especially true in the cannabis sector, which has long been a cottage industry.

But the industry in general has become more stable, and the sheer volume of small, local companies makes the marijuana business ripe for M&A activity down the road.

Everything from software providers and security companies to human resources firms focusing on the cannabis industry have opened in recent years. These types of businesses will become targets for larger, well-funded companies looking to expand.

The industry “will gradually see bigger and bigger players” move into the market as they feel the rewards outweigh the risks, Bocskor said.

We’re already seeing this play out with some publicly traded companies. Viridian Capital & Research data shows that of the 70 companies in its stock index, 21 completed a total of 33 acquisitions in the first three quarters of last year. That trend will continue in 2015 as marijuana businesses become more mainstream and larger firms look to expand the size and scope.

Investment money is also rolling in, giving companies the ability to swallow up their competitors.

Trend #5: Cannabis Stock Activity

Volatility and fluctuation will define the market for publicly traded cannabis companies.

Last year saw a surge in the number of companies trading on the over-the-counter markets. Many of them will likely sputter this year, as they have no real business model to speak of and are simply trying to capitalize on a hot new market. However, we’ll likely see a new wave of public cannabis companies take their place.

Institutional investors are beginning to test the waters, while average stock investors are clamoring to put their money in marijuana given the industry’s continued growth, prominence and mainstream acceptance. These trends will lure many cannabis companies – both legit businesses and shady operations – to the public markets.

Businesses involved in licensing, real estate, compliance and technology will likely crop up in the next year, and some will likely seek a move to over-the-counter markets. And several companies that actually handle marijuana themselves – or do so through subsidiaries – will roll the dice and go public.

Moving from a private company to one that’s publicly traded won’t be without its hurdles – regulations by the Securities and Exchange Commission could make the shift difficult. Most dispensaries, growers and infused products companies will probably continue to operate privately because it’s unclear how the SEC will respond.

Still, with the market evolving so quickly, more companies will look to go public in 2015. And don’t be surprised to see a cannabis company debut on a major exchange such as the Nasdaq or the New York Stock Exchange.

Trend #6: National Expansion & Brand Growth

As marijuana legalization expands, established dispensaries, makers of edibles and infused products, and ancillary companies will increasingly attempt to grow nationally.

Companies in mature marijuana states are poised to expand into some newer markets, including Illinois, Massachusetts and Nevada. Others are hoping to get involved in Minnesota and New York on the MMJ side and Alaska and Oregon on the recreational side.

One trend helping pave the way for this type of expansion: Regulators in many states are looking for businesses that have a proven track record in the cannabis industry to avoid fly-by-night firms that may not have the know-how to navigate rough legal waters, said Kris Krane, the managing partner for the cannabis consultancy 4Front Advisors. The goal is to bring experienced players into the fold and boost the chances of success, rather than have only those who have never done it before control the industry.

Established firms have and will continue to partner with locals who want to get in on the business opportunities, while some will license their products to startups in other states, Krane said.

“Since most licensing processes tend to favor locals over folks from out of state, but also award points for cannabis experience, it tends to be a winning combination to team an established brand with local applicants,” Krane said.

Despite the industry being in its infancy, some companies are already getting a foothold using branding and expansion.

Edibles companies like Bhang Chocolates, Dixie Brands and G FarmaLabs serve multiple states and are racing to further expand. Dispensary owners and experienced growers in Colorado, California and Washington State have been part of teams that won licenses in Nevada and other markets. Testing labs are expanding into multiple markets. And ancillary business – such as software companies and legal firms – have built household names in the industry.

Trend #7: New Legal Issues

For years, the biggest legal threat to the industry was the fact that marijuana businesses were essentially illegal from the federal perspective. With that worry abating, a new host of legal issues – from product liability and asset protection to human resources and trademarks – could arise this year.

While these legal issues are prevalent in many traditional industries, they haven’t cropped up too often in the cannabis sector. But that could change this year.

Attorney Manny Singh said that a lack of liability insurance and asset protection is a “gaping hole” in the cannabis industry, and that either businesspeople will wise up, or they’ll eventually get sued for some reason or another and learn the hard way.

Additionally, publicly traded cannabis companies could be the target of shareholder lawsuits, while edibles manufacturers could face legal action by customers tied to potency, labeling or safety issues. Plenty of cannabis companies are also ignorant on the legal differences between patents, copyrights and trademarks. This will set up some interesting legal battles over intellectual property.

Another problem: Many cannabis companies don’t have drug testing or consumption policies, given the cultural side of the industry. “There are some policy changes that will have to happen” regarding personnel management, said cannabis industry consultant Todd Mitchem. “There are probably 1,000 HR violations flying around the industry, and that’s just within one week.”

The legal issues facing the industry go far beyond what’s discussed here. There are many, many more that could arise in the year to come.

Trend #8: Emergence of Large Grows

Behold the era of the massive grow.

Cannabis cultivators in some key markets are poised to grow significantly this year as they look to capitalize on economies of scale and mass produce marijuana – lowering prices and making it harder for little players to compete.

Colorado, which recently opened up its market to wholesale cannabis, could be on the forefront of this trend. The state recently adopted new regulations that allow indoor producers to increase the number of plants they grow, depending on their license.

Cultivators in some states are also moving to greenhouses or even outdoor grows, where they can produce many more plants, more efficiently. In states where sunlight is abundant, a large operation won’t spend as much money on electricity because it could take advantage of the sunlight. Outdoor cultivation also means producers won’t be limited by the amount of warehouse space they can procure.

While there will always be room for smaller growers, larger producers will begin to dominate in areas with a robust wholesale market. Large growers will improve profitability as they sell on volume, which could lead to true vertical integration in the industry becoming a thing of the past, industry experts said. That might not play out for years, but we’ll likely see some strong signs of this in 2015.

“I may not have to have my own marijuana facility because someone can do it for me,” said Tripp Keber of Dixie Brands, which makes infused products and grows some of its own cannabis.

Keber added that growers should “go big … or you’re going to get pushed out of the market.”

Trend #9: Stricter Edibles Regulations

Edibles producers could be in for a rough ride.

While the long-term prospects are as bright as ever – edibles demand is growing rapidly in many markets – stricter edibles regulations are on the horizon in some states.

Colorado and Washington State have already been moving down this path on the recreational side. In Colorado, edibles manufacturers were handed a new set of rules to follow in July, after they’d already been operating for months in the new rec market. The regulations included rules on potency, packaging and serving sizes.

In Washington State, the Liquor Control Board approved regulations in June, less than a month before its rec market began selling raw marijuana and cannabis products. Every edible in Washington and the package they’re sold in has to be approved by the state Liquor Control Board. Both Colorado and Washington also require child-resistant packaging.

Some industry leaders say these are knee-jerk reactions to fear-mongering by police and those opposed to marijuana. Regardless, edibles requirements are likely to get tighter in other markets as edibles become even more mainstream.

More states will likely decide to err on the side of caution and either adopt similar laws to Colorado and Washington or come up with their own. Expect to see Alaska and Oregon grapple with this issue in 2015, too, as they look to develop rules and regulations on their emerging recreational marijuana industries.

Trend #10: Cannabis Tourism Wars

Competition for the cannatourist is about to heat up.

Recreational marijuana businesses in Colorado and Washington State have seen an influx of customers from across the United States and as far away as South Africa and New Zealand. Some retail cannabis sales even generate the bulk of their sales from tourists. A host of new marijuana-related companies – from those offering tours of retail stores to cannabis-friendly bed and breakfasts – have cropped up in both Colorado and Washington as well.

Expect these businesses to ratchet up their marketing, advertising and special deals – possibly on a national scale – to attract this demographic as the recreational marijuana industries in these two states vie for tourists.

Another player is emerging as well. In Nevada, a reciprocity rule implemented this year will allow those with medical marijuana permits from other states and countries to buy cannabis from local dispensaries, giving tourists another reason to visit a state built on selling vice. This could sway some tourists with MMJ cards in other states to visit Nevada over Colorado or Washington, if cannabis is top of mind.

Nevada even could play up the marijuana angle in a bid to lure a new type of tourist.

“We’re going to advertise it,” Nevada state Sen. Richard “Tick” Segerblom said. “It seems like a natural fit.”

This competition will only increase over time, as Alaska and Oregon develop their recreational industries and other states legalize cannabis for adults.

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