Cannabis as a legal agricultural product is a new concept, and the industry in California is undergoing revolutionary change. With recent legislation to regulate medical marijuana, and at least one initiative on the ballot next November to legalize recreational marijuana, growers are cautiously emerging from underground, illegal operations and state and local governments are struggling to implement regulations.
And with numbers in the billions of dollars, California is poised to become the largest market in the country for cannabis production, use and sale.
“California is the heart of all the industry activity, with massive potential from an economic standpoint, greater than Colorado and Washington combined,” said Emily Paxhia, co-founder of Poseidon Asset Management, a San Francisco-based investment hedge fund that’s based entirely on the cannabis sector.
Along with her brother, Morgan, Paxhia moved to San Francisco from the East Coast after their parents died of cancer. Their interest in cannabis is a result of seeing what it could have done to help them.
Paxhia was the keynote speaker at a cannabis networking event at SoCo Nexus in Rohnert Park on Dec. 3. It brought together about 40 people, everyone from those just thinking about getting into the business to a growers legal estate planner, a business coach, and a woman who home-delivers a wide range of cannabis products. Those products include lotions, extracts, baked chocolate and vapor pens delivered to those who prefer not to go to a dispensary for their medical marijuana.
The event was presented by Women Grow, a national professional network that connects leaders and entrepreneurs in the marijuana industry. Although anyone can attend, the group supports female leadership through programs and events across the country. Created in 2014, it has 30 chapters nationwide with monthly events in more than 33 cities across the country.
Poseidon invests in the ancillary elements of cannabis, seldom in growers, in everything from early startups to expansion capital for companies. The interest in this type of investment is so strong, Paxhia said, by the number of emails she gets “It’s like directing a firehose on your face and trying to breathe.”
We are about to see an influx of new technology around cannabis. Technologies that are being developed include regulating water using solar power, effective lighting solutions and climate control.
“People involved in the cannabis industry are coming up with innovations that are influencing other industries. From an environmental standpoint, new setups are almost carbon neutral,” Paxhia said. “People in cannabis are progressive and don’t rest on existing structure. Change is the status quo. They love challenge and love to solve problems.”
Also coming is machine data indexing. Operators have not had use of this kind of technology before, which will give them metrics to know where their product is going and who is using it.
“It will be a big change for companies in terms of distribution, technology and communication,” Paxhia said. “Not only will we have data, it will be contextualized and nuanced, rather than a broad brushstroke, ‘we think this is what’s happening.’”
Regulation and cultural shift
Under pressure from the federal government, California in October passed Assembly Bill 266, which states that city and county governments have until March 1, 2016, to put regulations into place, or jurisdiction will fall back to the state.
Medical marijuana is not federally legal, but a number of states have adopted the measure, including California. Proposition 215 allowing the use of medical marijuana in California was enacted almost 20 years ago and has been without strict regulation all this time.
Regulations under the new law are not expected until early 2017, and licensing is not anticipated to begin until early 2018.
As local municipalities are scrambling to put something in place before the March deadline, that date will most likely be pushed back for reasons including the fact that the state has yet to hire a cannabis department director or put regulations in place. Communities will likely be able to put a placeholder ordinance in place and then go back and work out ordinance. The other option is to ban dispensaries.
So far, Napa County, Calistoga, Yountville and American Canyon and St. Helena have taken steps to ban marijuana dispensaries and outdoor marijuana cultivation.
“2016 is going to be the year about working out local regulations. It’s a big shift for everybody and a high learning curve for sure,” said Ruby Steinbrecher, a business and estate planning attorney for growers, an advisor for the nonprofit Sonoma County Growers Alliance and president of Madrone California, growers of medicinal cannabis. She grew up in the “weed world” in the Emerald Counties.
There are an estimated 55,000 small cannabis farms in California, with the majority concentrated in the so-called Emerald Triangle that includes Humboldt, Mendocino and Trinity counties.
In the past few years farmers have been organizing and forming alliances to keep track of what’s happening to the industry. Cannabis Consciousness News is a weekly radio show for the North Coast that holds discussions on best organic practices, water preservation and environmental regulation.
While growers are welcoming the opportunity to become legitimate, they are also concerned about what compliance will entail. And after a long history of seizures, there is caution about coming above board.
“So much of this change is a cultural shift, not only for people who come from outside of the industry to come to terms that medical cannabis is legal now, but for people within the cannabis industry to be able to trust that the new rules are really going to protect them,” Steinbrecher said.
As the regulations are coming, Steinbrecher advises growers to protect their business by coming into compliance. She also guides them through setting up their operation up as a real business, with a payroll and paying taxes, creating a track record to prepare for getting a license.
“I believe that we should be treated like any other industry, and compete like any other marketplace. I want it to be reasonably taxed and regulated. I want this to be a normal industry,” she said.
Legalization of recreational cannabis
Currently, there are several legislative initiatives vying to appear on California’s November 2016 ballot, which would legalize marijuana use for all adults older than 21.
The last attempt to legalize marijuana in California, in 2010, was broadly shot down by voters. This time around, the measure has significant support. Lt. Gov. Gavin Newsom was behind a report outlining possible solutions for legalizing and regulating legalized marijuana.
Other heavy hitters have thrown their weight behind the movement including Founders Fund, a $2 billion company that made its name investing early in new companies like Facebook, Spotify and SpaceX and former Napster co-founder and Facebook founder Sean Parker.
Parker has put up funding for an initiative — the Adult Use of Marijuana Act, which has been endorsed by the California Cannabis Industry Association — that would place a limit of six plants on personal cultivation. Growers would pay taxes, and the measure proposes a sales tax similar to that of alcohol and tobacco. The state generates $354 million in alcohol taxes each year and $839 million from tobacco.
In Colorado, legalized recreational marijuana is now generating more tax revenue than alcohol.
“If cannabis becomes legal, everything will start to change. New segments of people will discover what it means in terms of treating ailments like anxiety and well-being instead of using alcohol,” Paxhia said.
The California vote would coincide with the presidential election, which tends to draw a greater number of young voters to the polls. Legalization would have national and global impact, including possibly slowing or stopping illicit market forces.
But Steinbrecher thinks it’s too soon.
“I would rather (legalization) not happen right now,” she said. “We’re not there yet as far as having regulations that are in place. We need to figure out what’s going to be reasonable and sustainable with regard to things like taxes and licensing fees and staff to do compliance checks.
“We’re the frontrunners in this. We’ve been doing this the longest. The cannabis industry is our country’s first opportunity to create business practices and industry standards that are for the social and environmental good, and we have the opportunity to build it correctly from the ground up. Once we throw recreational in, it will be rushed and everybody will just get blindsided. Lets give ourselves the chance to work out the kinks create a really solid infrastructure, then go recreational by just taking the word ‘medical’ out of your bureau of medical marijuana, and you can regulate both.”