Ten Lessons from Nineteen States: Making A Better Recreational Market 

By Paul Penney

The state of marijuana laws in the United States has changed considerably over the last two decades. Only 13 states had made marijuana use lawful for medicinal reasons at the time President Barack Obama took office, and none had made it legal for recreational use. Colorado became the first state in the U.S. to legalize marijuana for recreational use and sales when voters there adopted a ballot measure on election day in 2012. By the time Donald Trump took office, there were eight states (including D.C.) that allowed recreational use and a total of 28 states (plus Washington, D.C.) that allowed medicinal marijuana.

The states that have not yet approved recreational cannabis use can implement winning regulatory frameworks by focusing on what first-mover states did wrong (and right) in regards to their recreational cannabis regulations. Regulations vary widely from state to state, but there is one constant no matter where legal marijuana is sold: legislators need to do a better job of creating a regulatory framework that benefits all participants: operators, consumers, and the states themselves.

There are ten ways current regulations are hindering the growth of the legal cannabis industry:

I. License Caps

A handful of states such as Oklahoma, Oregon and Mississippi, have minimal or no limits on the number of approved cannabis licenses, which inhibits the ability of many operators to create a viable business model in the face of substantial competition. Out of desperation to remain open, some smaller private operators will sell to the illicit cannabis market in order to be able to keep their doors open.

II. Tax Structures

Onerous tax structures, along with “pay to play” fees at the state and municipal level, drives up costs for operators and incentivizes consumers to shop in neighboring states with more favorable and lower tax structures, or in many cases,migrate to unlicensed and unregulated cannabis sellers. The issue of having consumers “vote with their feet” a.k.a. traveling to states with less onerous tax regimes, is most prevalent in East coast centric markets where, from a geographic standpoint, it’s quite easy to travel to neighboring states. Other states are cannibalizing their recreational markets by charging materially higher taxes than they do for medical cannabis.

III. Local vs. State Municipalities

Massachusetts is one of several states that gives too much power to local township municipalities, including the ability to opt out or limit adult-use conversion, which leads to “cannabis deserts” in certain areas along with inevitable conflicts between local and state government agencies. Some states also allow local municipalities to limit the regulated market size and increase taxes, which can indirectly create additional challenges for some medical operators.

IV. Seed-to-Sale Tracking

Having a workable seed-to-sale tracking 3rdparty system is crucial to eliminate out-of-state flower, edibles, and other cannabis products to easily enter a state. While most states avoid this issue by using Metrc, BioTrack, Leaf Data Systems and other tracking services. Arizona is the only remaining state that doesn’t utilize a 3rd party tracking system.

V. Decriminalizing Before Legalizing

A few states decriminalized cannabis use before they legalized regulated sales, which indirectly propelled a strong and sustainable black market due to a lack of dedicated and ongoing enforcement. The companies that want to operate the right way and follow the law are the ones that end up suffering as a result.

VI. No Defined Timeline

Multiple markets in states like New York and New Jersey have been hurt by the lack of a clearly defined timeline and process for the implementation of cannabis laws. In some states, recreational oversight committees and rules still needed to be drafted long after legalization was announced leading to confusion for grandfathered medical incumbents wanting to convert from a medical to a recreational framework.

VII. Unfeasible Social Equity Programs

Social equity programs that are too restrictive have caused many cannabis operators to struggle to raise funding and/or scale their business. Alternatively, some state programs are too vague, which will drive many social equity operators to sell or partner with their licenses to companies who should not be benefitting from these programs. Oftentimes, these operators can become fronts for Multi State Operators (MSOs) which are “backdooring” their way into licenses by loosely associating themselves with a social equity campaign, defeating the earnest reason the programs were created in the first place.

VIII. Financial Services

Restricted access to financial services for cannabis operators can cause security issues such as an over reliance on cash, which often leads to robberies and a plethora of shady payment schemes that involve the defrauding of financial institutions. Companies that provide access to reliable banking solutions for cannabis operators help make communities safer; however, there remains limited access to reliable cannabis financing and banking solutions due to conflicting state and federal laws, along with unclear banking guidelines.

IX. Imbalanced Supply Chain

Limiting the supply chain within a market creates bottlenecks for operators, which ultimately harms the consumer. For example, at one point Massachusetts only had three independent labs testing all cannabis products for the entire state, which inevitably led to supply shortages in certain areas, but thankfully this is no longer an issue and has been resolved.

X. Micromanaging

Some states, mostly on the medical side, like Pennsylvania, have even attempted to restrict some categories such as not allowing edibles and pre-rolls or requiring white and uniform packaging (in Florida), as well as placing limits on THC percentages (total and individual servings) without consideration for consumer preferences.

The first decade of legalizing cannabis for recreational use has been a winding road but has overall been a success. The gradual introduction of a substance that had been illegal for many decades required a lot of planning and consideration. Industry experts expected to encounter complications—some of which were anticipated, while others came as a surprise. On the other hand, if these ten challenges are considered and properly solved, not only in the states where these measures have already been passed but also by avoiding similar issues in future legalization laws, the sector will become even more lucrative and successful for states, operators, and consumers.

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