When Washington state first legalized marijuana in 2012, some people expected a deluge of entrepreneurs to rush in to take over a wide-open industry.
As legalization takes effect, new pot businesses are indeed starting to flourish in Washington. But entrepreneurs have to overcome some big challenges if they want to cash in on the “Green Rush.”
Hilary Bricken, a founder of the Canna Law Group, has guided some of these folks through the thicket of regulations that entangle businesses selling a product that the federal government says is illegal.
Bricken told Business Insider in a recent interview that the legal marijuana industry is uniquely open to small businesses — provided they can operate on a cash-only basis. Banks typically don't deal with marijuana businesses, even in states where it's legal, because they fear retaliation from the federal government. Consequently, these businesses often can't take checks or credit cards like other businesses.
Pot shops also get a raw deal from the IRS, which says they have to pay taxes but can't deduct most expenses because they're selling something that's "illegal." Despite the difficult situation, Bricken thinks the reward could be worth the risk.
Here’s what Bricken had to say about the industry:
BI: Have you seen a marked increase in businesses as legalization gets closer?
HB: That is a resoundingly, large yes … It has increased exponentially. Four years ago, we had 50 regular clients. Now, we have over 200.
BI: Will the industry be made up of small or large businesses?
HB: On the whole, mostly garage startups [such as growers, processors, retailers, software providers, and supporting businesses]. The maximum size you will see is middle-tier. You are not going to see R.J. Reynolds Tobacco or Philip Morris jump in yet. So long as marijuana remains a federal crime, it’s not a big enough target for them. The industry is not lucrative enough.
When you are answering to investors and you invest in a federal crime, it is very likely you will see a lawsuit at the end of the day against the board of directors. It's a potentially massive loss of investment if you make yourself a big enough target.
Smaller business owners have a unique opportunity to proliferate in this cottage industry, develop their brand, and then when the federal prohibition falls — which I'm confident it will — position themselves for a huge acquisition. At the heart of it, Philip Morris doesn't know how to grow pot. When the time comes, they will buy out the farmer. That is realizable in the future [if the federal government legalizes pot].
BI: What legal issues are the businesses you work with having?
HB: On the state level, the businesses have been told to go forth and be real businesses and bring in tax revenue, but the state hasn’t equipped the businesses with all the tools to accomplish that because of the federal prohibition [on marijuana]. Businesses cannot bank or gain financing through a federally chartered entity, and it's very difficult for them to pay taxes. There is a provision in the federal tax code that says illegal businesses are still taxable and they can’t take deductions. That’s crippling for businesses.
BI: Do you think the money politicians promised — the state estimated $600 million annually in tax revenue— is going to materialize?
HB: The money that people are expecting to come out of this will materialize at a very regular rate. The problem is accommodating those funds and allowing those businesses to perform. Do I think Washington is going to net billions of revenue in the first two years? No.
The revenue will be realized, but if the state wants it to be as robust as it can be, they need to push the federal government for tax reform and federal banking laws.
If these businesses cannot maintain bank accounts, their full performance will never be realized. Although we have seen entrepreneurs successfully operate on an all-cash basis, it's wildly inconvenient and expensive.
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BI: Does the lack of legitimate banking and tax codes have a chilling effect on investment?
HB: Yes, there is a chilling effect. Locals are, for the most part, the only ones turned on by the prospect [of investing in marijuana], because they've watched how the federal government has behaved in the state of Washington.
In Washington, we have a political topography, as well as a geographic. There are two different U.S. attorneys, one in eastern Washington and one in western Washington. [These lawyers work for the federal government, which prohibits pot.]
The attorney for the West is located in Seattle and is very liberal and very relaxed when it comes to enforcement. The one in the East is located in Spokane. The Eastern part of the state is a red state and, because of that, the attorney is very conservative and vigilant with enforcement.
An investor in Spokane is probably going to be less enthusiastic than an investor in Seattle.
BI: What are some of the more interesting businesses you've worked with?
HB: The run-of-the-mill client is producer, processor, or retailer. One of the more interesting companies I’m working with is creating a medicated patch, like a nicotine patch for marijuana. Clever companies that find new ways to use marijuana are the most interesting to me. With marijuana, you are seeing all kinds of vehicles for how it will be getting used.`I think those are the companies that are going to do really well.
Auxiliary businesses, like WeedMaps (Yelp for dispensaries) and Leafly (WebMD + Yelp for marijuana) will do really well also. They are taking over that grey area gap, where they are facilitating marijuana exploration but not committing a federal crime.
BI: Will there be a Budweiser of pot?
HB: Not in the first two years, because of the way our rules are written. Our state is trying to keep it small. Once the rules are relaxed and full-blown lobbying takes place in a realistic way, you could see a Budweiser of pot trot out.