Editors Note: This is a guest post.
Cannabis legalization is picking up steam throughout the United States. The industry is already booming, and it’s set to grow over the next decade, prompting investors and entrepreneurs everywhere to jump on the bandwagon to try to cash in.
There will certainly be some impressive entrepreneurial and investment opportunities in the near future, but before you make any big financial decisions (or take any big business risks), there are some things you should know.
Regulations Can Be Messy
Just because cannabis has been legalized for recreational or medical use in your state doesn’t mean you can grow and sell cannabis however you want. There are strict regulations in the cannabis industry you’ll need to consider, from how you can grow and sell cannabis to how to handle cannabis waste. For example, in California alone, there are three different cannabis agencies, each with their own waste handling regulations.
This is extremely tricky for several reasons:
- Federal, state, and local rules. For starters, remember that cannabis is still illegal at the federal level. Additionally, state-level laws and regulations vary wildly, and local laws and regulations may vary even further. There are multiple levels of laws to consider, and many of them will come into conflict with one another.
- Changing laws and regulations. On top of that, laws and regulations are almost constantly changing. For the most part, regulations are easing; it’s becoming easier to open and manage a cannabis business, and business owners are getting more flexibility. However, it’s still important to remain aware of new laws and regulations as they emerge.
- Opaque rules. To a newcomer or someone not familiar with legal documents, cannabis regulations are often opaque and difficult to understand. Working with a lawyer can help clear things up, but this is an additional expense you’ll need to take on.
- Untested waters. There’s a lot of ambiguity in cannabis laws, and many scenarios that simply haven’t been tested; this could be a major vulnerability.
Competition Is Fierce
The legal U.S. marijuana industry was valued at $13.6 billion in 2019, supporting more than 340,000 jobs. That’s impressive, but remember, competition is fierce. Thousands of savvy business owners and investors have already flooded into the space, hoping to get an early piece of the pie. They’re more experienced than you are and much more familiar with the limitations of building a cannabis business from the ground up. If you’re going to stand a chance of success, you’ll need some way to differentiate yourself.
Banking May Be a Problem
Due to its illegality at the federal level, many banks refuse to do business with cannabis-related companies. Accordingly, you may find it difficult, or even impossible to get the loans you need to build your business from scratch. You may also experience financial complexities as you begin to manage your business; for example, you might find your merchant accounts unexpectedly getting shut down, or you may find that your prospective business partners are unwilling to do business with you because they don’t want to be affiliated with a weed company.
Expected Values Are High
Many investors, including individual shareholders, are flocking to the cannabis industry because they know it’s a market poised for growth in the next several years, if not decades. However, it’s important to realize that stock prices don’t change based on real value but instead based on expected earnings and expected value. If everyone in the country believes a specific company is going to perform incredibly well, the price of that company is going to increase to a level far beyond its “real” value. This often results in investors overpaying for stocks, and in some cases, pricing plummets as investors begin touching base with reality once again.
Your Intellectual Property Will Be Vulnerable
Again, the federal illegality of cannabis stands in the way; it’s almost impossible to secure trademarks for any of your cannabis-related products and services. You can register trademarks with your state, but this process can be complicated. In any case, your intellectual property may be vulnerable, no matter what you do.
Advertising Is Practically Off Limits
Most businesses rely on marketing and advertising to grow, but in the world of cannabis, many traditional marketing channels are inaccessible. Major platforms like Google and Facebook forbid any cannabis-related advertising, and you may not be able to manage an effective national-level campaign. That said, creative marketers can always find a workaround.
It’s no secret that the cannabis industry is growing explosively, and will likely continue to do so—but as you’ve seen, that’s certainly no guarantee that your cannabis business will be a success. Make sure to do your due diligence before making any kind of business or investment decision.