Small Business

'Potpreneur' pipe dream? Better think twice

Problems for potpreneurs
Problems for potpreneurs

There's hardly a business model with buzz that rivals the cannabis industry. With 23 states and the District of Columbia having legalized the drug for medicinal use, and Colorado and Washington taking legislation a step further with recreational marijuana, entrepreneurs see opportunities.

A recent survey from NerdWallet, an online finance platform, found if all 50 states legalized cannabis today, they would collectively pocket more than $3 billion a year in taxes.

But for entrepreneurs, who want a piece of the lucrative cannabis pie, the battle can be uphill. Collectively, small businesses face many hurdles including a potentially high tax rate, marijuana pricing discrepancies, lack of support from local banks and couriers unwilling to deliver marijuana products to customers.

Crain's New York Business on Tuesday held a session to help marijuana entrepreneurs in New York state. Gov. Andrew Cuomo signed a bill in July legalizing medicinal marijuana in oil-based and vapor formats for certain patients. Drugs that can be smoked are not allowed, making the law more limited than other cannabis laws in the country. New York is now in an 18-month holding period so officials can hammer out details before patients begin buying marijuana.

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To be clear, federal laws still make possession, production and sale of marijuana illegal, according to the Controlled Substances Act.

Pricing and transportation

During the Crain's forum, called "The Business of Pot: The Stakes Are High," panelists addressed the complexity of transporting marijuana.

After a company makes a sale, cannabis can't simply be shipped to the buyer. In New York, for example, only the patient or a certified caretaker can transport medicinal marijuana. Some say in the near future, a courier industry devoted to cannabis products may develop.

But don't expect that in states like Connecticut, where regulations strictly forbid medical marijuana from being "sold, dispensed or distributed via a delivery service," according to local rules. Diversionor the drug finding its way into the hands of someone it was not meant foralso is a concern for lawmakers.

"There is an exception for caregivers who may deliver medical marijuana to the caregivers' patient. Given the federal concern with diversion, I suspect at least some states would be leery of allowing medical marijuana to be distributed through a delivery service," said Hanan Kolko, a lawyer at Meyer,Suozzi, English & Klein in New York.

Pricing is another key issue for growers and dispensers, according to Derek Peterson, a former broker and money manager turned "potpreneur." Peterson owns Blum dispensary in Oakland, California, and is also chief executive of a microcap company called Terra Tech, which provides equipment for medical marijuana companies.

Another concern is how marijuana prices will be set. Pricing can depend on variety of factors including the number of regional dispensaries, and prices in local black markets.

"At least they're looking to the black market as an example," Peterson said. "If they weren't doing that, and they were just dictating pricing, then a lot of patients would gravitate towards the black market because the access is easier and the prices are better."

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Licences, fees and banking

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Another hurdle for entrepreneurs is acquiring a license, attorney Kolko said. In Connecticut, Massachusetts, New York and Illinois, for example, there are limited numbers of licenses. Application fees also vary. In New York, if entrepreneurs cannot demonstrate they're in control or possession of the buildings, land or premises to cultivate, process and dispense marijuana, they will have to put up a $2 million bond, Kolko said.

And again because marijuana is still illegal under federal law, Kolko says banking relationships for cannabis businesses are far from simple.

"Banks are required to comply with strict laws regarding cash generated by illegal activities, so they have been extremely reluctant to do business with marijuana-related businesses," Kolko said. "The inability to have normal banking relationships is another hurdle entrepreneurs face."

Also, marijuana entrepreneurs can expect to be audited. And know your taxes will be sky-high, said Megan Sanders, chief executive of Gaia Plant-Based Medicine, a medical marijuana dispensary in Colorado Springs, Colorado.

Because marijuana entrepreneurs are technically selling a Schedule I drug, which is illegal under federal law, they are also unable to write off their business expenses. In some instances, they can pay an effective tax rate that's as high as 70 percent, Sanders, Peterson and Kolko all noted.

"It is an industrywide issue," Sanders said. "It doesn't matter where you exist in this space, if you are operating in a highly regulated industry such as cannabis in the U.S.—you will face the issue."

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Federal law limits

Overall, entrepreneurs also need to keep the federal Controlled Substances Act in mind, Kolko said. Just operating according to state rules is not enough.

"Any entrepreneur needs to navigate the potential risks involved in operating a business in violation of federal law," Kolko said.

New York state Sen. Diane Savino, D-Staten Island/Brooklyn, sponsor of the Compassionate Care Act, who worked closely with Cuomo in establishing guidelines for the program in the state, says the federal act is why the New York law has such tight regulations.

Correction: An earlier version of this story incorrectly stated California allows sales of recreational marijuana.