California Cannabis: Show Me The Money
Based on recent deals in the California cannabis industry, the real money seems to be made in five sectors.
Hilary Bricken
With passage of the Medical Cannabis Regulation and Safety Act (MCRSA), my firm’s California cannabis lawyers have been representing a steady onslaught of investors looking to get into California’s MMJ industry in some way, shape, or form. And with the vote on Proposition 64 coming up in November, excitement about the Golden State is palpable.
But it’s not all roses when it comes to current California MMJ laws and investing.
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I tell these investors that California is still a risky place since its current state MMJ laws (which were not repealed by MCRSA’s passage) do not satisfy federal directives on “robust state marijuana regulation.” I also tell them that despite a high-level federal court blocking the Justice Department from enforcing the federal Controlled Substances Act against California MMJ providers, it’s no slam-dunk that either you or your investment will be safe in California.
When I get investors tell me that they’re going to “invest in a California collective,” I have to tell them that is legally impossible because California MMJ “collectives” are either non-profit mutual benefit corporations or non-profit collectives. Once potential investors find out that the most they can legally do is make a loan to a collective, they quickly begin asking about other, more profitable avenues into California’s MMJ market.
So, where is most of the money in California’s MMJ market? In the California Gold Rush, those who sold the pick axes and the shovels tended to make more than those who actually panned for gold, and the California cannabis industry has seen a similar dynamic.
Based on the transactions my firm has done in the California cannabis industry, the real money seems to be made in the following sectors:
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- Real estate. I cannot count the number of calls I’ve received from across the U.S. and even from overseas (Spain, Germany, Israel, Russia and Australia, mostly) from individuals and companies seeking to acquire and build turn-key cannabis facilities in California. Investors and real estate developers know MMJ-friendly properties are difficult to find in California due to the threat of federal asset forfeiture, banks barring their landlord clients from renting to cannabis businesses, local law restrictions and bans, MMJ land use and zoning laws, and the threat of ever-present NIMBYs. All these difficulties make the few good cannabis properties all that more profitable and REITs, property developers, property management companies, and landlords are rushing to invest in and develop cannabis commercial properties to lease or sell to cannabis businesses.
- Technology. As an ancillary service, technology is a less scary for financiers than investing directly into a business that violates the federal Controlled Substances Act. Market entry is also considerably easier because current California MMJ laws don’t affect or prohibit outside software providers — and it’s very unlikely either the MCRSA or Prop 64 will either. The primary void today seems to be in software that provides business-to-business solutions or that increase cannabis business efficiencies. California is going to birth some of the best CannTech in the U.S. and maybe the world — a belief with which even Seattle-based Microsoft would probably agree.
- IoT. The “Internet of Things” is picking up speed in California’s cannabis industry — and in the industry everywhere else as well. Cannabis growers are turning to automated grows, and cannabis patients are getting turned on to automated products. For more on IoT and the integration of cannabis, go here and for the liability issues that stem from cannabis and IoT, go here.
- Collective Management Companies. Given California’s non-profit restrictions, a popular “business model” is for managers and directors of collectives to form a parallel, for-profit management company that assists the collective in its day-to-day operational activities. Oftentimes, the management company is a vehicle for investors to get a piece of the MMJ industry, and it can also serve as a way to help the collective capture the costs of goods sold to better deal with the IRS. These management companies can be extremely risky as they can actually increase liability if used improperly to dodge taxes or to lie to banks to secure a bank account for the collective. In “The Great Eight California Marijuana Industry Pitfalls,” I wrote about why investors and collectives should use extreme caution when contemplating the management company model.
- Intellectual Property and Licensing. Many out-of-state cannabis brands and celebrities are using their brand names, their reputations, their intellectual property and their trademarks to try to capture or increase market share in California’s current MMJ industry. Usually, the licensor of the IP will have a separate company to which it assigns its protectable IP, and that company will license the IP down to a collective or to a collective’s management company for use in the actual marketplace. The list of celebrities with some form of branded cannabis is growing at an exponential rate. Snoop Dogg, Willie Nelson, Bob Marley, Roseanne Barr, and Melissa Etheridge are all on this list. I talked about the growth of celebrity cannabis in my TEDx Talk on “Big Marijuana,” and I urge you to check that out. If you are contemplating investing in a “national cannabis brand,” a licensing model is still available to you in California.
If you want to know more about California’s medical marijuana industry and laws, three of my firm’s California cannabis lawyers (Tiffany Wu, Alison Malsbury, and me ) will be putting on a FREE webinar on September 14, moderated by my firm’s lead cannabis corporate lawyer (Robert McVay). This webinar will focus on what you should be doing now to prepare your existing or future cannabis business for California’s soon to be legalized landscape. Go here on Eventbrite to sign up to attend.
Hilary Bricken is an attorney at Harris Moure, PLLC in Seattle and she chairs the firm’s Canna Law Group. Her practice consists of representing marijuana businesses of all sizes in multiple states on matters relating to licensing, corporate formation and contracts, commercial litigation, and intellectual property. Named one of the 100 most influential people in the cannabis industry in 2014, Hilary is also lead editor of the Canna Law Blog. You can reach her by email at hilary@harrismoure.com.
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