So What Should California Do with On-Site Consumption?

In the 2016 election, California has important decisions to make regarding legal recreational marijuana beyond simply whether to allow it or not. Where and how consumers access the marijuana market is an equally important consideration that bill crafters and policymakers must give serious forethought to. Luckily, Colorado, Washington and the other legalized states have provided living laboratories for the different means of controlling and regulating a legalized recreational marijuana market.

My past have detailed the different legal and regulatory systems that Colorado, Washington, and other recreational marijuana states have implemented for their marijuana markets, specifically regarding on-site consumption businesses such as marijuana lounges, and how such businesses organize and operate themselves within the crisscrossing legal frameworks created by state anti-smoking laws, local ordinances and regulations, and the requirements of the marijuana bills themselves. From the patchwork of pros and cons observed from each regulatory system, patterns have emerged that can guide California policymakers and bill drafters to best craft sensible recreational marijuana laws that carefully balance the potential for state and business revenue against the perceived social costs and negative externalities of legalized recreational marijuana.

In this post, I will detail the recommendations for how California could craft sensible policy for the creation of on-site marijuana consumption businesses, including retail point of sale consumption (RPOSC) businesses, made throughout my previous blog posts. I will offer further guidance on how marijuana RPOSC businesses—distinct from the marijuana-lounge type enterprise which has been the predominant business form within the fledging marijuana hospitality market—can be used to redevelop areas within cities in a similar manner to the effect craft breweries, wine bars, and urban gastro-pubs have had in underdeveloped areas across the state. I will highlight the potential sales and business tax income that previously legalizing states have left on the table by not providing clear guidelines for the creation of businesses in the secondary marijuana hospitality market. Lastly, I will explain what can be done to best foster an environment where business, local government, and social health issues are all accommodated.

Increased tax revenue from new marijuana markets has been cited by advocates as an important reason to legalize recreational marijuana. Recent reports project the amount made in taxes for the last twelve months by the state of Washington at $44 million, while Colorado projects total revenue for the year since legalization at $69 million. Differences in the way marijuana is taxed in each state account for much of the differences in revenue, although experts still believe money is being left on the table by states who still allow relatively unfettered access to medical marijuana markets which aren’t subject to the same degree of taxation as recreational cannabis, and thus, sell at lower prices. The still substantial black market also still supplies a large share of the cannabis consumed in Colorado: a 2014 Colorado Department of Revenue report stated that of the roughly 130 metric tons of marijuana consumed in the state that year, only 77 tons of it was sold through medical and recreational dispensaries. As increasing data shines light on the potential state and local revenue lost to the black market, California can observe the patterns and better craft the laws governing its recreational marijuana market.

Indeed, in order to avoid many of the problems posed by the black market’s continued existence in recreational marijuana states, California must find a way to convince many of the growers and sellers in its black market to fold their historically illegal or quasi-legal (via the states barely regulated medical system) enterprises into the legal marketplace. This is represented most visibly by the Emerald Triangle in Northern California (Humboldt, Medicino, and Trinity counties), which has a long history with black market marijuana production. Allowing regions and cities to create tourist and entertainment destinations could be one way to convince otherwise reticent regions to join the legal market, especially if federal trademark law eventually allows marijuana entrepreneurs and regions to trademark particular “terroirs” or “appellations” as used in wine to differentiate growing regions, as well as marketing marijuana as specifically from the Emerald Triangle or grown through organic methods or by a particular grower. In fact, organizing the various growers in Humboldt County into a market resembling the wineries in Napa Valley is a goal of the Emerald Growers Association and the California Cannabis Voice-Humboldt, two industry advocacy groups for Northern California and the Emerald Triangle.

Experts such as Mark Kleiman from the University of California, Los Angeles, have also noted that if the increasing supply due to the newfound ease and legality of growing cannabis causes the retail price of cannabis to drop below the roughly $10-$20 a gram in current recreational markets, tax percentages tied to the value of sold marijuana would cause revenues to drop further. He offers two answers: a specific excise tax based on the quantity sold rather than the price, or a tax on the potency of the marijuana gauged via the THC content of the product, similar to the different taxation levels for beer and hard liquor. Taxes such as these could serve to simultaneously squeeze out the black market while reducing societal harms from increases in substance use disorder, similar to other “sin taxes” on cigarettes and alcohol.

While the question of how to correctly tax marijuana to balance the social costs and revenue for the state while maintaining a healthy market is a complicated one (see this series of blog posts by fellow classmate/blogger Alexa Quinn for an in-depth analysis of the tax issues related to marijuana), policymakers should also look for complementary means to generate revenue from the recreational marijuana market. This could be done by allowing the creation of entertainment/hospitality industries serving the marijuana market like the aforementioned RPOSC businesses from my other blog posts. These could be bud-pubs in the style of craft brewpubs, or cannabars attached to marijuana greenhouses like wine bars attached to vineyards in the Napa Valley which were mentioned above as potential industry models.

RPOSC businesses can also provide opportunities for the generation of state and local tax revenues beyond what is traditionally been generated by the cultivator-processor-seller cycle of the marijuana market. For instance, lawmakers could add another level of taxation by requiring taxes to be charged when the grower/processor sells to the RPOSC business like a budpub, and again when the budpub sells to the customer to be consumed on premises. This style of taxation would be similar to the way Washington state taxes its marijuana market, i.e. a sales tax for growers to processors, processors to retailers, and retailers to customers. This tax would be likely be passed onto the final price of the marijuana for the consumer, although if wholesale prices continue to fall as expected in recreational markets, the final price tag would only be slightly higher relative to the price when buying at a retail cannabis dispensary, analogous to the difference paid by purchasing a six-pack of beer or bottle of wine at a grocery store versus a pint of beer or glass of wine ordered from within a social bar setting. Whether the tax is based on a percentage of total sale price, quantity of product, or more sophisticated method like THC percentage would be up to policymakers and as noted above is its own complicated issue.

Fortunately, the organizations who are jockeying to craft the resolution that will be on the California ballot in 2016 have so far understood that the on-site consumption issue is a missing link to a complete and healthy marijuana market. The first submitted version of the proposed recreational marijuana bill for California’s 2016 election, titled “The California Craft Cannabis Initiative,” creates a new agency called the California Cannabis Commission which may develop a licensing system for retail locations where marijuana products “may be purchased, sold, served, consumed, and otherwise disposed of in a licensed premises in a manner similar to licensed premises serving alcoholic beverages,” i.e. RPOSC businesses. The bill also contains various zoning requirements banning craft and commercial marijuana grows from residentially zoned areas, while permitting municipalities to draft additional zoning laws for cultivation, processing, and on-site consumption businesses. This language shows the support and understanding from industry advocates not just for the development of a viable recreational marijuana market, but also for actual RPOSC businesses where cannabis is sold and consumed on premises. Future lawmakers should focus their efforts on the above mentioned form of RPOSC business, as opposed to on-site consumption business-types where customers are only allowed to bring and consume their personally acquired cannabis, rather than cannabis products sold from the cannabar, due to proprietors having to shoehorn their business model within conflicting marijuana laws not designed with on-site consumption enterprises in mind. Hopefully, other future recreational marijuana initiative proposals being written for California will also allow RPOSC businesses.

For municipalities and lawmakers, future RPOSC business forms have a number of advantages over the currently existing smoking lounge format seen in Colorado Springs and Nederland, Colorado. First, allowing the sale and consumption of marijuana on the premises allows for safe and easy monitoring of customer intoxication and age levels via carding and employee monitoring. This is augmented by providing opportunities for the business and consumer to be informed about the particular strains and form of the marijuana product (flower vs. concentrate vs. edible) through labeling and “menus”, and also how it will be consumed (vaporizing vs. concentrate/dab “rigs” vs. traditional smoking vs. eating) in a safe manner.

Second, by allowing these businesses to operate kitchens and/or other forms of entertainment like the pool tables, televised sporting events, parlor games, live music or DJs seen within currently existing lounge or pub-type establishments, the businesses could become profitable and desirable entertainment locations for 21 and up crowds outside of their attraction as cannabis consumption locations. This could reap additional taxes through food and drink sales and the corresponding corporate/income tax increase from a successful business. In addition, if considering the long term development of the area around a RPOSC business standing alone or as part of a larger marijuana tourism district, popular RPOSC businesses could increase property values and the economic activity of secondary businesses in the area (like other entertainment venues and restaurants/eateries) in a manner similar to the revitalization seen caused by new craft breweries in under-developed urban areas within California cities like San Diego, San Francisco and Oakland.

Third, legalizing recreational marijuana into a system similar to how California regulates alcohol and providing social settings for marijuana consumption via RPOSC businesses­ that only allow certified-legally grown marijuana—similar to the manner alcohol is sourced, purchased, and consumed at bars and entertainment venues—would create larger demand for marijuana grown and produced within the legal system. In this system, it is likely that user preference between different marijuana products in the marijuana market would necessitate patented, trademarked or otherwise certified strains, varietals, terroirs, appellations and marijuana business copyrights to handle the vast proliferation of products within the new marketplace.

For various reasons, the current smoking lounges existing in Colorado have not spurred this described proliferation of commercialized marijuana strains and brands. One reason could be because the marijuana smoking lounges in Colorado generally operate by requiring customers to bring their own marijuana products in order to maintain their anti-smoking exemption as “social clubs” under a state’s Clean Air Act (explained in greater depth in Additionally, some businesses that allow on-site cannabis consumption decline to personally sell recreational cannabis products due to local ordinances banning recreational marijuana sales. Although important for black market concerns, business owners have no easy way to determine whether the cannabis products their customers are consuming originate from legal growers, and likely don’t want to know. Thus, cannabis lounges that don’t sell marijuana products would seem to be less effective at stimulating overall tax growth and compliance with the legal scheme for recreational marijuana than RPOSC businesses because the marijuana consumed within is not guaranteed to come from the legal market. The equivalent access to social marijuana lounges, along with the lower prices, provides an continuing disincentive for consumers to purchase marijuana from the legal recreational market; conversely, RPOSC business in California that only sell legally grown and sourced bud, and do not allow in outside products similar to bars, could be a constructive tool for communities to reduce their black market grower and seller populations.

As noted above, future RPOSC businesses should be required to stock marijuana products grown from sellers operating within the legal market as certified by an agency responsible for monitoring that market.  As examples, the previously legalized states have often tasked their agencies controlling alcohol or revenue with the additional marijuana responsibilities. Colorado created the Marijuana Enforcement Division out of its Department of Revenue, while Washington expanded the mandate of its Liquor Control Board to also handle marijuana licensing and enforcement. Oregon vested its Oregon Liquor Control Commission with the authority to implement and enforce its new recreational market. What agency will take the lead in California is unknown, though the concept is clearly in play as evidenced by the California Craft Cannabis Initiative’s aptly named California Cannabis Commission. Whatever agency ends up with lead enforcement should be capable of monitoring simultaneously the production, processing, and retail sale aspect of the recreational marijuana market, and will likely need funding from the state’s budget in addition to a specific percentage of funds allocated from marijuana tax revenues.

Additionally, California’s federal lawmakers should make every possible effort in lobbying the IRS and major banks for changes to the way the financial system treats cannabis businesses. Currently, most business done by marijuana businesses in Washington and Colorado is conducted in cash due to reticence by banks to accept deposits from an industry that is still federally illegal. The IRS does its part in Section 280E of the federal tax code by denying tax deductions from marijuana businesses other than for costs of goods sold even for dispensaries operating within the law in legalized states. As Forbes notes, this means deductions can be taken on “wages, rents, and repair expenses attributable to production activities,” but not for wages, rents or repair expenses related to general business or marketing activities such as the actual maintenance of a storefront for the direct sale and consumption of cannabis products. If RPOSC businesses eventually settle into business and revenue cycles similar to bars and restaurants, they will need access to deductions from their state and federal taxes to remain viable investment and business opportunities.

Lastly, the interaction between RPOSC businesses and California’s Clean Indoor Air Act must be legislatively clarified to provide clear guidelines to future businesspeople who seek to invest in the cannabis entertainment and hospitality industry. The California Craft Cannabis Initiative’s language makes no mention of how the Clean Air act affects the potential business forms taken by RPOSC businesses, just that the Commission “may” create licenses for a business where cannabis is consumed onsite.

As I mentioned in my previous blog post, current guidelines (PDF) issued by the California Attorney General at the end of 2011 indicated that serving food or drink relegates the “primary purpose” of smoking-related business away from “smoking,” which previously qualified them for the workplace exemption to the Clean Indoor Air Act. This provision could be an issue for RPOSC businesses seeking to allow marijuana smoking inside their business, as they could not qualify for the same exemption that hookah bars and cigar lounges receive. This could be solved via a simple legislative amendment, though holding the California legislature to the same level of political cooperation and proactivity displayed by the Colorado and Washington legislatures in legislating fixes to their respective recreational marijuana markets seems an unsafe bet at best. It would be easier to write the amendment into the final initiative’s language, although this would make future efforts to amend it difficult due to the vagaries of the California initiative system.

All in all, California has a number of options about how to create a viable marijuana market in 2016 that addresses issues raised by the states that have previously fully legalized marijuana. However, it will require political will and cooperation between the various interested factions within the California marijuana market, from southern California storefront retailers to Bay Area intellectual property entrepreneurs on up to Emerald Triangle growers and cultivators to properly create a uniquely Californian market that best serves California’s varied regions and constituents, while simultaneously providing a successful example for recreational legalization efforts across the country. Along with many other important decisions in the 2016 election, California’s voters will get an opportunity to collectively choose their state’s future and relationship with legal recreational marijuana: hopefully, this blog has educated you, the reader, be you citizen, policy maker and/or entrepreneur with a stake in the market, about the efforts being undertaken now and in the past to shape the form and nature of the nascent marijuana market by California and her sister states, and what relationship we, as citizens, want our state to have with recreational marijuana.

Private Censorship in the Marijuana Industry

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Private Censorship in the Marijuana Industry Tech entrepreneurs are no strangers to the marijuana industry: just ask the teams behind Leafly or Weedmaps, two websites making millions off of their presence in the App Store and Google Play. With limited options to market and advertise, marijuana businesses often take to these types of apps and social media outlets to advertise their products and services.

Take Instagram, for example. Now owned by Facebook, Instagram is a popular photo editing and sharing app that can be found on the App Store and Google Play. With over 300 million users, Instagram is one of the largest worldwide social networks. To gain popularity on Instagram, people use hashtags (#) to categorize photos so that others can easily search and browse through different photo collections. In recent years, large and small companies of many different industries, including marijuana, have allocated thousands of dollars to market their brands and products to the masses on Instagram.

If you wanted to check out some photos of marijuana on Instagram, the first thing you might do is search by the hashtag “weed” (#weed).

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You’ll notice in the screenshot above that #weed doesn’t even exist on Instagram. What is the reason for this?

One theory is that Instagram is doing this to protect its users. Part of posting a photo on Instagram is geo-tagging the photo so that other users can see where the photo was taken. Recently, police across the country have been using this Instagram feature to pinpoint the whereabouts of lawbreakers and bring them to justice. Because posting photos of marijuana to social media sites is considered “reasonable suspicion,” police are using Instagram as a resource to supplement their more traditional efforts of law enforcement.

Another theory is that by allowing its users to freely post pictures of marijuana, Instagram executives, along with Instagram users, could be held criminally liable. A quick scan of Instagram’s Terms of Use reveals that:

“6. You may not use the Instagram service for any illegal or unauthorized purpose

14. You must not, in the use of Instagram, violate any laws in your jurisdiction”

Because marijuana is still federally illegal, Instagram can find a violation of terms #6 and #14 in just about any picture of or relating to marijuana. A possible justification for these broad terms is that, legally, allowing any picture that solicits the sale or promotes the use of marijuana – activities that still remain felonies under federal law – could put Instagram affiliates in harm’s way.

From Instagram’s perspective, censoring marijuana related photos might be in the company’s best interest. In 2011, Google executives faced potential incarceration for allowing Canadian pharmaceutical companies to advertise illegal prescription drugs via AdWords to consumers in the U.S. Since then, companies that rely on their own large ad platforms to generate revenue, such as Facebook and Google, strictly prohibit marijuana and related paraphernalia from their ad programs.

Although Instagram isn’t technically an advertising platform, their business model makes them responsible for controlling the content that is posted to their servers. Perhaps it is just not worth it for a company as reputable as Instagram to test the boundaries and risk their livelihood.

But one man’s ash is another man’s soil.

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Just ask Massroots – the marijuana tech start-up that is building an online community of cannabis consumers. From an objective view, Massroots is literally an Instagram clone. The only real difference is that Massroots is exclusively for marijuana related pictures and videos. Growing from 20,000 to almost 300,000 users in just over a year, Massroots recently filed for an initial public offering, and as of April 9th, is trading publically under the ticker MSRT.

In this instance, private censorship gave rise to a new (but hardly unique) business that was willing to take risks that others wouldn’t. This is yet another example of the marijuana industry beating the odds and finding a way to grow.

Jeff Madrak for Drug Law and Policy – Follow us on Twitter @DrugLawPolicy

Greedy Lawyers Are Good for the Environment: Controlling the Environmental Effects of Marijuana Cultivation through Private Enforcement

As momentum grows for marijuana legalization, many are worried about the environmental impact of cultivation. Enacting laws to control the manner of marijuana cultivation may protect California’s water and wildlife, but such laws are only effective if they are enforced. The 2014-2015 budget for California earmarked 3.3 million to help prevent destructive marijuana cultivation, (see p. 108-119) but with legalization on the horizon, the market for marijuana could dramatically increase and more funding may be needed. However, the responsibility of combating illegal and destructive cultivation does not have to lie solely with the government. Instead, private individuals can be incentivized to sue those who operate illegal grow sites. Forcing violators to compensate the cost of private enforcement will give a sufficient monetary incentive for private parties, as well as deflect costs and labor away from the government and its agents.

Both the state government and environmental groups are concerned about the environmental damage caused by marijuana cultivation. A study by the California Department of Fish and Wildlife (CDFW) on Humboldt County found that the water demand for cultivation often exceeded stream flow, causing streams to go dry around large scale growing sites. Scott Bauer, an environmental scientist with the CDFW estimates that over 95% of grow sites divert water without an official permit. Furthermore, he points out that growers also clear forest areas to make way for cultivation. In considering these issues, both the CDFW and the Nature Conservancy support an increase in funding for state enforcement to stop and deter harmful cultivation.

While tax revenue from marijuana can be diverted to provide for any increase in the costs of environmental enforcement, groups like the Nature Conservancy are worried that the laws surrounding marijuana legalization will not set aside tax revenue for environmental concerns. Such is the case in Colorado, where there is no tax revenue specifically set aside to manage the environmental hazards of marijuana cultivation. (See pg. 19-29.) Even if marijuana taxes are used to pay for enforcement, the price of marijuana may fall after legalization, to the point where tax revenue is unable to pay for enforcement. This fear of insufficient funding is built upon the idea that public enforcement, rather than private enforcement, is the primary method to carry out state rules and regulations.

Public enforcement is when sanctions against violators are carried out by government agents, either directly or by their consent. This is found in criminal law, where violations of the Penal Code, such as grand theft and murder, are asserted by the police and district attorney. On the other hand, private enforcement is when private persons and organizations are allowed to sanction violators without government initiative. This is often found in tort law where the California Civil Code defines and permits legal actions like negligence and products liability, but it is private parties who bring suit rather than government agents.  Private enforcement would alleviate the issue of government funding, as the cost and labor of enforcement would primarily come from private parties rather the state of California.

While there are environmental tort actions, they are effectively personal injury suits based on exposure to toxic chemicals. These “toxic torts” have been criticized for their lack of effectiveness in reducing environmental harm. Albert C. Lin in his article Beyond Tort: Compensating Victims of Environmental Toxic Injury points out the following faults of environmental tort actions: 1) injury and causation are difficult to prove; 2) environmental harms are often so diffuse that individuals do not have incentive to bring suit; and 3) the aforementioned issues lead to little deterrence, since the risk of liability is low.

Under the Clean Water Act and Clean Air Act, the US government has established provisions that allow for citizen suits based on statutory violations related to water pollutants and air emissions. (33 U.S.C. § 1365; 42 U.S.C. § 7604.) These allow any person to commence a civil action on his own behalf against another who is in violation of a standard or limitation of either act. These citizen suits also require a plaintiff to prove injury and causation, but the sufficiency of proof seems significantly easier to meet compared to toxic torts. (See Friends of the Earth, Inc. v. Laidlaw Envtl. Servs. (TOC), Inc., 528 U.S. 167, 183-85 (2000).) However, since injury and causation are still technically required, the concerns of Mr. Lin are still relevant and there may be risk of underenforcement.

There is another private enforcement option that makes it possible to avoid the issues of injury and causation. Qui tam is a legal concept that allows a private party to sue, despite not being personally harmed by the defendant’s conduct. While citizen suits are brought by persons on their own behalf, qui tam actions are brought by people on the government’s behalf. Essentially, plaintiffs filing a qui tam action are not trying to redress any personal injury, but instead are seeking enforcement of the government’s laws.1 For this reason, qui tam actions bypass the issues of harm and causation.2

Currently, qui tam actions are only allowed in federal “whistleblowing” suits – a common name for actions against federal contractors for defrauding the government.3 For these federal whistleblowing suits, liability is established by statute under 31 U.S.C. section 3729, which defines the actions that would be unlawful. A separate provision in section 3730 allows qui tam actions on behalf of the government.

Controls on marijuana cultivation could be set in a similar way. Statutes could establish legal requirements for cultivation that would encourage best practices, and failing to grow within the requirements would result in liability. For these statutes, a provision for qui tam actions on behalf of the government would also be included.

A plaintiff would only need to show that the defendant had violated a marijuana cultivation statute, making this a far more accessible action than toxic torts or citizen suits, as personal injury and causation would be irrelevant. Allowing qui tam actions would resolve the injury and causation issues, but for there to be adequate enforcement, a private incentive must be created.

Because environmental harm is generally diffuse, halting unlawful cultivation may not be enough incentive by itself, as the cost of litigation may exceed any personal injury. The solution is to create a provision that would allow courts to award the cost of litigation to the prevailing party, to be paid by the opposing party. This is already widely used: provisions for awarding the costs of litigation are available for citizen suits under the Clean Water Act and Clean Air Act, as well as for qui tam actions for federal whistleblower suits.

On top of awarding litigation costs, some monetary incentive must be established to allow plaintiffs to profit from a successful suit. While an award of litigation costs would create a supply of willing lawyers, there also must be an incentive for lay people to hire them and direct their attention to unlawful cultivators.

The federal whistleblower law awards the plaintiff a bounty for a successful suit. (31 U.S.C. § 3730(d).) This bounty consists of a percentage of the monetary damage that the government suffered as a result of the fraud. In the context of marijuana cultivation, a monetary award based on environmental damage would be difficult, as it would bring about the issues of injury and causation. Instead, the statutory requirements for marijuana cultivation could include fines for violators, where the plaintiff would be awarded some percentage. By awarding a portion of the fines to the plaintiff and compensating his attorney, the qui tam action would be adequately incentivized and create a private market for enforcement.

The award of fines and litigation costs can be further modified to encourage efficient and considerate enforcement. For example, the award can be increased or decreased based on the severity of environmental harm, either actual or potential. That way, the more egregious violators are prioritized in the private market. In order to discourage frivolous suits, the award of litigation costs could work similar to the attorney’s fee provision for civil rights actions, where a judge can award attorney’s fees to the prevailing defendant if the suit brought against him was “unreasonable, frivolous, meritless or vexatious.” (Christiansburg Garment Co. v. Equal Employment Opportunity Comm’n, 434 U.S. 412, 421 (1978).)

With the proper statutory framework, a provision for qui tam actions could establish an efficient enforcement method that works around the issues of injury and causation. Along with adequate monetary incentives for attorneys and their clients, it could create a private market of enforcement that would not require significant expenditures by the government. It shows that public enforcement is not the only way to dealing with the environmental problems caused by marijuana cultivation, and private enforcement solutions should not be ignored, but seriously considered for the cash-strapped state of California.

1. Evan Caminker, The Constitutionality of Qui Tam Actions (1989) 99 Yale L.J. 341, 344-45
2. Id.
3. Id. at 342-43

Green Money: The Basics of Investing in Marijuana

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It’s not often that an industry with multi-billion dollar growth potential materializes out of thin air. Despite the morality issues, legal risks, and ethical concerns that plague the marijuana industry, investors – big and small – are buzzing about the rise of marijuana. Whether you are an activist, looking for any way to help push the industry forward, or simply have dreams of doubling and tripling your money overnight, here is what you need to know.

Investing in Public Companies

If you are an average person with no in depth marijuana industry insight or business experience, the easiest way for you to get a piece of the marijuana industry is by buying stock. A good place to find marijuana companies that are offering equity to the public is http://marijuanastocks.com/.

The first thing you might notice is that shares in the marijuana industry are not listed on the major exchanges and are instead available over-the-counter (OTC). If you are not familiar with OTC trading (otherwise known as penny stocks), OTC or off-exchange trading is done directly between two parties, without any supervision of an exchange. It is contrasted with exchange trading, which occurs via exchanges. A stock exchange has the benefit of facilitating liquidity, mitigates all credit risk concerning the default of one party in the transaction, provides transparency, and maintains the current market price. In an OTC trade, the price of shares is not necessarily published for the public. There is an inherent danger in this as there is reduced oversight, and therefore increased risk with OTC stocks.

In regard to marijuana stocks, The Financial Industry Regulatory Authority (FINRA) recently warned investors about potential scams associated with marijuana-related stocks. In particular, FINRA warned about the well-known ‘pump-and-dump’ scheme, in which, fraudsters lure investors with aggressive, optimistic — and potentially false and misleading — statements or information designed to create unwarranted demand for shares of a small, thinly traded company with little or no history of financial success (the pump). Once share prices and volumes reach a peak, the con artists behind the scam sell off their shares at a profit, leaving investors with worthless stock (the dump). If you’ve seen the popular movie “The Wolf of Wall Street,” the pump-and-dump scheme is the same method employed by Jordan Belfort and his associates to defraud investors and make millions.

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For example, Growlife (PHOT), a large ancillary marijuana company that develops, markets, and deploys horticulture equipment and supplies, had the trading of its shares temporarily suspended by the Securities and Exchange Commission (SEC) in April of 2014. The SEC cited “questions that have been raised about the accuracy and adequacy of information in the marketplace and potentially manipulative transactions” in its shares. The root of Growlife’s problem was that a few unaffiliated investors decided to send fraudulent and misleading ‘blast’ emails through promotional websites and email addresses under their control with the intent of increasing demand for the stock. After several weeks of vigorous promotion, Growlife’s stock price artificially increased from 2.5 cents to 50 cents per share. The shares were then dumped for a profit of $223,000.

growlife

Once the SEC got involved, Growlife fell back down to 2.5 cents a share and now, a year later, is being traded at 2.4 cents a share. Although this occurrence was not completely Growlife’s fault, reduced oversight and regulation of the penny stock market allows for scenarios like this to transpire and are exactly what potential investors in the marijuana market must be wary of.

Investing in Private Companies – Angel Investors

Rarely will you invest thousands (or millions) of dollars into an unknown penny stock and see your money double overnight. If you are looking to make an investment in the marijuana industry with potential for sky-high returns (but also unmeasured risk), you might consider making a private investment.

Sky-high returns are routinely found in one place – heaven – and to get there, a pair of wings, and maybe even a halo, are essential. Enter the angel investor – an individual who provides capital to a business start-up in exchange for convertible debt or ownership equity in a company. Angel investors are usually affluent individuals who buy in to early-stage start-up companies in order to obtain a high return on their investment.

The best angels are experts at spotting emerging markets and utilizing their keen business instinct and knowledge to help young companies find success. If you are interested in this type of investing, a good place to start is a website like AngelList. At AngelList you can sign up, connect with marijuana start-ups, and apply to invest in companies looking for funding.

A more serious angel might consider joining an investor network like The ArcView Group. ArcView is a company that “facilitates the emergence of the legal cannabis industry by connecting investors and visionary entrepreneurs in an effort to meet the expanding and changing needs of responsible cultivators, dispensaries, and customers nationwide.” As a member of ArcView, early stage marijuana companies that are serious about getting funded come to you to pitch their ideas. However, you must be an accredited investor in order to participate, and you can be sure that there are fees associated with becoming a member and making investments. To date, The ArcView Group claims to have funded over 50 companies with over 40 million+ dollars invested.

Venture Capital

When deciding whether to invest in a particular market, a good way to measure the investor safety and security of the industry can be by watching what the big venture capital firms are doing. Similar to angels, Venture Capital (VC) firms also make high-risk high-reward type investments, but usually invest millions (as opposed to thousands) of dollars into earlier stage companies. Venture Capital firms normally have access to a large pool of capital that includes contributions from pension funds, private individuals, and other sources of big money. A key difference between VCs and angels is that VCs normally invest substantial time and money into due diligence (background checks, financial, market, and legal analysis) before they make an investment. When the time finally comes that a reputable VC firm invests in a company, there are usually several compelling justifications underlying why the investment is warranted.

Recently, Founders Fund, an investment firm created by Peter Thiel, joined a Series B round of funding worth $75 million for Privateer Holdings. Privateer, as I discussed in my last post, is a large marijuana-centric private equity fund that is investing millions into large-scale marijuana ventures throughout North America. Founders Fund did not disclose the exact amount of its investment in Privateer, beyond mentioning that their contribution was worth “multi-millions” of dollars.

To date, the investment by Founders Fund is undoubtedly the highest profile investment in the marijuana industry and could be a telltale sign that the time is now to invest in marijuana.

The Payoff

Similar to owning a business in the marijuana industry, finding success at investing in the industry has a lot to do with your own personal tolerance for risk. If you aren’t the risk taking kind, you might stay away from the industry all together and wait until marijuana becomes more nationally accepted. If you really want to play it safe and position yourself for the future of the industry, you might look to big tobacco stocks for safety – one of the most probable industries to expand into marijuana. If you want to test the penny stock market, do your research before you invest and be wary of suspicious stock price movement. If you want to break into the market as an angel investor, learn the business landscape and invest in companies that you truly believe in. Additionally, know that the biggest risk of all is that the federal government could, at any time, decide to pull the plug on the entire marijuana legalization movement. And lastly, remember, the higher the risk, the higher the reward.

Jeff Madrak for Drug Law and Policy – Follow us on Twitter @DrugLawPolicy

Licensing High Technology; Cannabis and Corporations

In a recent and excellent blog post, Jeff Madrak, a colleague of mine, addressed the current growth of “Big Marijuana.” The trick is lots of water and sunlight, but mostly it is careful adherence to the law. Cannabis’s legal status is a figurative hydra; ask a question about protecting children and you find yourself having to answer what harms current prohibition has and the long term effects of that regime; ask about taxing cannabis, and then you’re raising questions about specific tax types and similar industry approaches; and so on. Similarly, for every clever business strategy and solution, for every big picture analysis raised by that post, I found myself wondering about the policies served – if such solutions are “good” in more than a business sense, if society should punish or reward these “ganjapreneurs.”

Tackling that hydra is a task that is literally Herculean. This is cold comfort for business people, because business thrives best when the legal framework is well developed: such a framework reduces uncertainty, which reduces risk, and lower risk means greater long term return on investment. I want to address what I found to be a surprising result and a happy coincidence of law: namely the interaction of licensing intellectual property and the legal fiction of the corporate form.

An industry built on cannabis cannot operate on an interstate market without violating federal law and policy. Note the Cole Memo priority of “[p]reventing the diversion of marijuana from states where it is legal under state law in some form to other states” is facially violated even if marijuana is legal in those other states. Interstate commerce is the prerogative of the federal government, so Big Marijuana is restricted to operating on a state by state basis. However, the intangible nature of intellectual property and the economic convenience of the corporate form can provide an avenue between states that is already being explored by some.

The corporate form. It already sounds like a flimsy pretense, a phrase someone might casually drop as a parenthetical at a cocktail party and be met by a collective eye rolling of all within earshot. These days, the idea of the corporate identity is not only much more prevalent in the social dialogue but it is also more akin to an incantation. It is some sort of legal witchcraft, seeming to afford businesses protections traditionally reserved for actual people. I certainly have a degree of initial discomfort with corporate personhood.

Which isn’t to say there are not benefits to allocating personhood to a corporation. Probably the best justification for identifying a corporation as a legal individual is the allocation of liability. For one thing, investors are protected from personal liability, which promotes risk taking and innovation. Additionally, anyone harmed by the activities of a corporation can name this identity as a defendant in a court of law. In fact, a “person” can sue another “person” so long as they have standing. Standing is basically when one person has an injury that another person caused and the courts can give a remedy to, like Apple v. Samsung.

Legal personhood could also be applied to resolving unusual problems, such as an endangered animal being granted personhood via statute, allowing others to sue “someone” on behalf of that animal if that “someone” poses a threat to them or their habitat. While it has been indicated as possible for congress to grant such standing (an extraordinary step, indeed), courts have rejected standing for cetaceans, and declined to address the standing of sea turtles and birds. Not to digress too far into the realm of the Lorax, what is pertinent here is that our legal system defines “person” in a precise and artificial way to enforce certain rights and responsibilities.

Corporate persons generally have residency where they are incorporated. This is another convenience because courts are able to discern what laws apply to that corporation, and corporations are able to determine which state gets their taxes. Cannabis’ current legal hodgepodge makes this particular simplification incredibly useful. A business can very specifically choose a single state and act within those borders in both a literal and transparently legal sense. This distinction not only allows businesses to choose their laws, it also allows businesses to limit the federal illegality of their endeavors.

The California Artisan Cannabis initiative provides that “[a] person who is not a California resident, or not incorporated in California, shall not be qualified for a [cannabis] license.” (emphasis added). So the legal form, in this specific case, allows the legal cannabis market to thrive while limiting the breaking of federal laws, and promotes state self-governance. Finally, it keeps all of the profits and commerce contained within state limits, thus minimizing the effect of state legalization on neighboring states.

This raises the issue of licensing agreements between corporations in different states. Do such agreements subvert the policies and priorities of the individual states and the federal government, or do they, like the corporate form, actually work to preserve what few clear lines exist in the current legal schema? It is most likely that licensing agreements do neither of those things, but they do allow businesses to continue to flourish and to set up strategically for any potential federal-level changes in the legality of cannabis.

Intellectual property comes in various flavors, but is generally understood to refer to the protection of a particular expression of an idea. Intellectual property law is also often under the jurisdiction of the federal government, which, given the apparent contradictions between federal and state law, can lead to some interesting legal dilemmas. Licensing, however, affords private parties simple and interesting solutions to these problems.

Intellectual property is intangible. When you license someone to use it, you transfer legal rights, not an actual object. Normally a sale between a business in one state and a business in another state would be interstate commerce. Does a license to use a particular expression of an idea qualify as a transfer between state lines? Generally, no.

Without getting too silly, intangible properties, like debt, have no real location and so they are not physically transferred from one place to another. This legal technicality is important because the federal government only has jurisdiction over interstate commerce. In U.S. v. Lopez a federal statute barring guns from public schools was deemed unconstitutional and later had to be rewritten to include only those guns that have “moved in or that otherwise affect[] interstate or foreign commerce.”

Often, licensing will have territorial restrictions. With the current legal classification of cannabis, this is not only desirable and probably legally necessary for business, it also serves the voters’ preferences in determining the legality of cannabis for their state. Common intellectual property licensing practices come with various pros and cons.

What is interesting to this discussion is the availability of arbitration and non-assertion clauses, and the antitrust considerations raised by the latter. Arbitration agreements are a way to provide legally binding resolutions to any disputes that arise. They are wonderful because they avoid the public costs of a court, the individual costs of an attorney, and because they are not part of the court system they can be much more efficient, quick, and accessible to the poor. Of course, the flipside is that there are no fairness guarantees, appealing a decision is difficult, one party often has much more bargaining power and influence in the choice of arbiter (you’re probably bound to one with your credit card, your cell phone, your car, and so on), among other concerns. The primary focus of these concerns relates to labor agreements, or the protection of unsuspecting consumers.

I assume these business licenses are conducted by corporations that are legally savvy and cooperative, so many of those concerns are not present. Which is to say, arbitration agreements would largely function to save taxpayer money by keeping inter-business disputes out of the courts. An additional benefit of keeping disputes out of the courts is that courts would not have to weigh in on the divisive political debate over the legality of cannabis, arguably outside the purview of the court since strategy on how to enforce federal law is up to the executive branch.

Similarly a non-assertion agreement is a contract to not sue over certain property right infringements (often as part of a settlement in an infringement claim). This serves much of the previously mentioned arbitration benefits by keeping such controversies out of court but raises different concerns. Patents, specifically, grant a temporary monopoly on an invention and the dangers of monopolies have long been recognized. A non-assertion agreement can lead to a small group of businesses acting as an oligarchy by contract. Further, such an agreement potentially protects invalid patents from being challenged by competitors – certainly not a win for society since we prefer the full use of ideas in the public domain.

In conclusion, it appears that the legal technicalities of how corporations exist as entities and the intangible nature of intellectual property actually serves to avoid many of the legal problems surrounding cannabis.   While my initial impression was that corporations could use legal maneuvers to essentially be an interstate cannabis operation, the actuality is that these legal hoops need to be jumped through and actually function as further restrictions on interstate commerce for Big Cannabis.

Additionally it would be wrong to condemn a business for working within the existing legal framework. Furthermore, if they were trying to abuse that framework, courts are equipped to see through manipulations of the corporate form. Through these legal fictions, society is served by confining cannabis commerce to those states that wish to allow it without violating federal law and also potentially without placing unreasonable burdens on the judicial system.

Cannabis Land Use Regulation In the Warm California Sun: Santa Cruz!

Known for its beaches and beach culture, its boardwalk, and all things organic, Santa Cruz County is also a rich example of medical cannabis land use provisions and changes. In addition to its close proximity to San Jose, its similarity in provisions and increased restrictions provide some valuable lessons that can be applied locally. Santa Cruz finds itself struggling with issues of land use on two major fronts: in regulating dispensaries, and, most recently, in the use of its land for cultivation.

On March 9th, 2010, Santa Cruz enacted the ordinance that regulates the use of land by medical cannabis dispensaries within the city limits. Still used today, this ordinance uses regulations that are restrictive at times and relatively permissive at others. As with any other land use ordinance, the first aspect that must be addressed are the zones in which businesses can operate. Section 24.12.1300.1 for example, allows for dispensaries to be located in C-C (Community Commercial), C-T (Thoroughfare Commercial), and I-G (General Industrial) upon receiving a special use permit. This places medical dispensaries in the same category as other businesses like medical or dental offices, plant nurseries and greenhouses, and eating or drinking establishments.

Within these general zoning restrictions, the city then describes more particularized land use regulations. While the state sets the standard distance for medical cannabis dispensaries from places like residences at 1000 feet, Santa Cruz is much more relaxed. It only requires a dispensary demonstrate that it is not at “an intensity of use that is incompatible with the nearby residential use” in the event the dispensary is located within fifty feet of a residence. Unfortunately, the provision does not objectively define “intensity”, or what would be too intense for local residents. The provision also sensibly requires a demonstration of adequate security to insure the safety of the surrounding residences. Also more relaxed than the state recommended guidelines (yet sensible) is requiring the distance from sensitive areas like schools and rehab centers to be six hundred feet instead of one thousand feet. While these are a few provisions that stand out in Santa Cruz’s ordinance, it continues with a standard list of provisions about things like signage and loitering. Interestingly enough, a permit system governs the dispensaries that are to follow this long list of provisions. As of 2010 in this ordinance, the city stated that they would only grant two permits. By the time 2013 to the present comes around,

San Jose is not the only municipality in the South Bay that has recently made some changes to their local land use ordinance. Santa Cruz has also recently adopted a new land use ordinance, chapter 7.126, which they enacted to amend their original local ordinance, chapter 7.124. The ordinance itself recognizes that “the county’s unique geographic and climatic conditions, which includes dense forested areas receiving substantial precipitation, are favorable to cannabis cultivation.” So why is it that Santa Cruz, like the city of San Jose, is choosing to tighten their regulations? Is it because increased regulation is an improvement in itself? Or is there some optimal level of regulation that they hope to achieve? If so, where does San Jose find itself on this spectrum with its new ordinance? To answer these questions, let’s take a look at Santa Cruz’s ordinance.

Santa Cruz made its first amendment to the 2010 medical cannabis land use ordinance in December of 2013 by enacting local ordinance chapter 7.124. The county derived its power to enact this chapter in the same way other municipalities were able to (and by following my series of posts, we can see that San Jose is no exception). As I explained in my prior post, on May 6th, 2013, the California Supreme Court decided a landmark case in the area of local regulation. City of Riverside v. Inland Empire Patients Health and Wellness Center, Inc. (hereafter referred to as “Inland Empire”). The decision by the California Supreme Court interpreted Article XI, Section 7 of the California Constitution as saying that the rights afforded to Californians under proposition 215 and SB 420 do not pre-empt local regulatory measures. Article XI, Section 7 of the California Constitution provides local municipalities the policing power to use land as they see fit to maintain public health, safety, and welfare. To achieve these goals, the Inland Empire decision granted local municipalities the right to enact their own regulations up to, and including, an outright ban on medical marijuana within their jurisdiction.

With the Inland Empire decision, Santa Cruz passed chapter 7.124. Chapter 7.124 passed in reaction to the tight regulations set out in the 2010 which bred more transgression than compliance. This ordinance identified “demands placed on law enforcement and administrative resources; neighborhood disruption; the exposure of children to medical marijuana; drug sales to minors and adults; fraud in issuing, obtaining or using medical marijuana recommendations; robberies, burglaries, assaults, drug trafficking and other violent crimes” as unintended social ills that Santa Cruz was experiencing after the enactment of the 2010 regulation. To solve these problems, Santa Cruz seems to have loosened some restrictions by emphasizing the rational approach seen in the 2010 ordinance which looked at intensity of use when dispensaries were within fifty feet of residences. While standing firm on their two permit limit and even setting out a ban on medical cannabis dispensaries, 7.124 set out a number of additional provisions, which, if followed, will allow a dispensary to operate with immunity from the ban. While many of its tenets remain intact, this chapter was only in use for three months before the city felt the need to pass new amendments as chapter 7.126.

Chapter 7.126 was enacted on February 25th, 2014. It did make some minor changes like changing a dispensary’s potential of hours of operations from being able to open at six a.m. instead of seven a.m., and close at nine p.m. instead of seven p.m. It also enacted the increasingly popular provision of requiring patients to be a minimum of twenty-one years old instead of the previous age limit of eighteen. The most significant change, however, was in the way the city rezoned land use in regards to cultivation. Grouping cultivators as a medical cannabis business with the dispensaries (as opposed to some agricultural enterprise), cannabis cultivation businesses were rezoned to “SU (Special Use), TP (Timber Production), CA (Commercial Agriculture), A (Agriculture), AP (Agriculture Preserve) or RA (Residential Agriculture)”. The city chose these zones as ones that define the urban area. While this can be seen as reasonably reducing social ills like exposure to children, neighborhood disruption, and the enforcement that goes along with these ills, the provision also sets out some very difficult provisions to follow once the cultivators have relocated to the city’s outskirts. The grows can be no more than ninety nine plants, but must be located on a parcel no less than one acre, and in residential agriculture zones, no less than five acres.  There are various canopy size requirements depending on the acreage of the growing parcel. Additionally, cultivation businesses must then adhere to Title 16, Environmental and Resource Protection, which then sets out even more regulations. My hope in mentioning this sample of the long list of provisions is that it impresses upon the reader that this original drafting of 7.126 represents a certain degree of regulation. This degree, however, proved to be too great a strain on the legal market.

On March 24th of 2015, Santa Cruz revisited and revised chapter 7.126. Tipping their hat to the list of provisions from their previous version of 7.126, the county admits, “the creation of rules contains an inherent assumption that people will follow them. Our experience has been to the contrary when it comes to cannabis cultivation.” The county goes on to cite the known existence of 84 grows at the time the previous chapter was passed, and how that number rose to 139 at the time of this revision. It also cites specific provisions like those requiring certification of cannabis cultivation businesses and how “virtually no one is following those rules, and it has led to questions concerning their import and effectiveness.” Additionally, they notice that having rezoned cultivation businesses to non-urban areas has resulted in environmental damage. Given the proven impracticality of allowing cannabis cultivation businesses in non-urban zones, and zoning restrictions prohibiting their operation in urban areas, the city enacted a ban on the cultivation of cannabis other than personal grows associated with a qualified patient.

The degree to which Santa Cruz was regulating was ineffective. What this county, and others enacting similar to greater degrees of regulation, should consider is the implications of a ban. Creating regulations is like drawing a circle and determining who falls within it, and who is operating outside of it. Santa Cruz increased its regulations on a highly active market by passing chapter 7.124. Naturally, increased regulations will make the circle smaller, creating more who fall outside of it. When people transgress the regulations, it requires the county’s enforcement power. In an attempt to clean up those outside the circle, Santa Cruz responded by passing chapter 7.126, increasing regulations, and making the circle even smaller. With these increased regulations, Santa Cruz found even more operating outside the chapter’s limits, and an increased need to use funds for enforcement. Finding this degree of transgression unacceptable, Santa Cruz responded with a ban. A ban, arguably, is not only a further increase in regulation, it is an absolute. Thus, if the increased regulations led to increased transgression which increased the need for enforcement at a level the county finds unacceptable, then implementing a ban is the wrong direction for the county. Following the trend of their recent history of increased regulation, a ban could create the need for levels of enforcement beyond those which they have already deemed unacceptable. Perhaps the best option for Santa Cruz—and other similarly situated counties—would be to swing in the opposite direction and create looser regulations that businesses could realistically follow without creating attendant social harms.

But What Does it All Mean Man?: It’s High Time for a Solution, and We’ve Been Staring at it the Whole Time.

I’ve spent the better part of a law school semester explaining how much of a disaster virtually everything related to marijuana reform is shaping up to be. We didn’t have clear terms to discuss the issues. We have lawsuits, state borders, and widespread confusion. Wading through it all has given me quite a few headaches. Based on my last posts, it would seem that the only option for a logical system would be to enact comprehensive federal reform of recreational marijuana.

But what if there’s an easier option? One that might clear this whole mess up? One that might actually happen? I think there is: instead of throwing Band-Aid upon Band-Aid on the problem, let’s fix the system we have now. The best way to do this is to have universal medical marijuana with broad criteria at the state level, coupled with doing everything possible to ensure CARERS passes at the federal level. Remember that CARERS changes federal law to mirror state medical regulations. If a state has a medical scheme, everything covered under that scheme is federally legal.

Other authors on this blog have briefly discussed medical marijuana in California. A recap: it’s broad – almost anyone can get a card, and it’s largely unregulated – the state has no agency that deals with marijuana. California’s system is so broad that it is a stretch to call it medical – a whole industry of doctors has sprouted up to get people cards. As I’ve discussed previously, CARERS would encourage states to shift towards a system like California’s. While there may be some problems for other states if CARERS passes, California is in a prime position to capitalize on it.

In the town of North Bonneville, WA, there is a special kind of dispensary called Cannabis Corner. It’s run by the city. Of all the schemes happening across the United States, this one falls most squarely into the realm of State Participation. State Participation is also the one framework that explicitly invokes federal preemption. Cannabis Corner presents an insurmountable issue – without federal action legalizing recreational marijuana, it’s almost assured that Cannabis Corner will get shut down.

But federal recreational legalization is unlikely. Instead, we have CARERS. While it’s not likely that CARERS will pass, it’s certainly possible that it might.

If instead of rolling its medical marijuana into its recreational, Washington did the opposite, and ended up with an entirely medical scheme that nearly anyone could get a prescription to, what might happen?   If CARERS also passes and Cannabis Corner was a medical establishment, Cannabis Corner would become fully legal on a state and federal level.

This simple act would take one of the most, if not the most, pre-empted regulatory schemes and make it legal, clear, and the state prerogative to enact. There is still the issue of different medical schemes resulting in random and unexpected violations for federal law when crossing a border. This could be a big issue on the East Coast, where you can cross 5 states in a manner of hours. But this post is about California’s future, and that problem has some of the fewest implications in California due to its vast size.

California shouldn’t follow Washington state’s footsteps, folding medical marijuana into recreational. Instead, we should do the opposite. Many say this is a somewhat immoral system because many patients have no real medical need. However, this overbroad nature of this system is also a strength – it legally functions as a medical scheme as far as CARERS is concerned, but is broad enough to function as a recreational system for its users. Understanding why this is a good, and possibly the best, course of action requires looking at the issues implicated in both California’s current medical marijuana scheme and those implicated in a recreational scheme. Once we know what the issues are, we can then explore how CARERS and California medical marijuana would fix them.

The other authors of this blog provide a great sample for what these issues are. First, and frequently foremost: What about the Children. While my colleague Clare McKendry has written extensively on this (and I suggest you read her work), for our purposes two things are important: keeping marijuana out of children’s hands, and not ruining their lives if we do find it in their hands. While access is changed in a medical vs. recreational market, the ability to ruin children’s lives by minor possession is a likely constant in both.

Another big issue implicated by any marijuana reform is the environment. Studies by the California Department of Fish and Wildlife show that the way we are growing marijuana in this quasi-legal medical market is deeply flawed and is destroying the wilderness of Northern California. However, the way marijuana is grown now is not inherently tied to medical marijuana. Instead it’s tied to the crop being federally illegal and needing to be hidden.

These aren’t the only issues – there are a whole host of issues implicated by the fact that marijuana is federally illegal. These include the inability to patent, lack of banking for marijuana industries, and the inability to do federal research. Additionally, there is the issue of flexibility. Right now marijuana law is not static. Instead, it’s ambiguous and subject to significant change on both state and federal level. Any successful reform scheme must pay heed of this and attempt to be future proof.

This isn’t an all-encompassing list. Rather, these are some of the more significant issues relating to marijuana reform. My goal here is to examine some key issues that can be used to demonstrate the positive that could be gained by preserving and improving California’s medical marijuana system, instead of shifting to a recreational system.

With that in mind, let’s take a look at how an improved medical market in California can address all these issues, and what steps would actually be needed to “fix” medical marijuana in California. At the end of this we will be able to see that not only is the medical system a possible way forward, but that fixing it wouldn’t take much time, political capital, or money.

Starting with the kids, as I mentioned, there are two implications: access and destroying kids lives. Let’s talk about access. I have yet to hear a single person say anything to the effect of “Kids should have easy access to marijuana.” I’m not a betting person, but I would put money on that remaining true. Whatever happens, we need to ensure that kids can’t get marijuana easily.

In terms of kids’ lives being ruined, medical vs. recreational doesn’t change the equation much. It is possible that with changing the laws for either, penalties for youth will be reduced. That’s probably a good idea, but its independent from a medical vs. recreational debate.

Compare the access in a recreational vs. medical market. In a recreational market, buyers would go to the store and likely show their ID to be able to buy marijuana. It would be the same as going to 7-11 to buy beer or cigarettes. Like going to 7-11 for beer, kids will use fake IDs, pay someone else to buy for them, etc. While the staff at the local liquor store might be suspect, there is only so much they can do to prevent kids from getting their product. Enforcing these rules also requires outside money – police conducting liquor store stings isn’t cheap.

In a medical market, someone could still give a kid some of his or her marijuana, but if you need a verifiable prescription with your name on it to purchase marijuana at a dispensary, then you logically decrease the possibility of children being able to sneak a purchase. Enforcement here is easier as well – much of the regulation is baked into the process. Doctors must give prescriptions, and in the cost of the payment for the doctor’s visit is the price needed to cover the independent verification system. Furthermore, we already have this system.

Similarly, the environment is an issue that is constant across both recreational and medical markets. If we were growing recreational marijuana in the same way we grow medical marijuana, it would be just as unsustainable and harmful to the environment. One theory about why marijuana is grown in the mountains is that its quasi-legal nature requires it to be grown far from the prying eyes of government. This theory makes sense at a logical level, and while there isn’t good data to support (or deny) it, I think it is safe to say marijuana’s federal illegality is a significant factor in determining where it’s grown. This is equivalent to people putting stills up in the Appalachian mountains during alcohol prohibition.

So what changes with medical? Medical has a chance to become federally legal. Support for CARERS is growing, with even the president signing on. When you remove the illegality, marijuana is a crop – just like corn or almonds. When it is fully legal, a state can take steps to ensure that it is grown properly without worrying about the federal government stepping in and undoing all their work.

For example, the Mendocino County Sheriff had a program to tag legal grows. Growers who were following all the rules would get zip ties with serial numbers on each of their plants, demonstrating that the plant was legal. However, the DEA decided the sheriff couldn’t do that, and raided many of the zip tied farms. In a federally legal medical market, the state would have the freedom to enact programs like this. A medical market lets the state treat marijuana as any other crop, drag it out of the mountains and ensure that it isn’t killing salmon, dogs, and even bears.

Recreational legal marijuana, on the other hand, would still have federal issues. Even post-CARERS, the DEA could still raid fields, and prevent the state from acting to ensure that best agricultural practices are followed. This would require the state to figure out how to regulate the growing of a federally illegal substance. On the other hand, in a federally legal medical market, marijuana grows can be folded into the existing agriculture regulatory market. Just like almonds.

While the environment and the children are two of the biggest issues, there are a plethora of things that are problematic now, but would become nonissues in a better federally legal medical market.

Colorado is having issues ensuring safe banking for its recreational marijuana market. Marijuana industry players are keeping massive sums of cash on hand, and it’s creating a target for robberies. The challenge to patent strains is a huge issue. Because federal research is illegal under the CSA, figuring out how to do anything with evidence-based practices next to impossible.

However, remember that CARERS says that any act legal in the state under its medical marijuana scheme is federally legal in that state. While we don’t know how it would play out, it seems as if this would solve all three of these issues. Patents of medical strains would be just like any other medicine. Research could be conducted with federal grants. Again, we don’t know what limits would be imposed on a state by courts, but it seems like CARERS with our current scheme would put California in a cleaner, easier to regulate system than Colorado.

But that’s not the best part. What if California decides it wants to change something about its medical marijuana market? CARERS lets California do that in a way where it doesn’t have to worry about the preemption implications. Because CARERS is concerned with the text of the state law, if California changes its state law, the federal law effectively changes to match it. This would allow California the freedom to regulate as it sees fit.

Contrast this to Colorado. If Colorado decides it wants to change its recreational law, even under CARERS, it will continue to violate federal law. That means the DEA could come in at any moment and try and shut the whole thing down. However, with this risk comes reward. Colorado is getting a significant amount of tax from its recreational marijuana. In a fully medical market, California will not get the same amount of tax revenue. But, that tax revenue might be a false hope: Colorado’s marijuana price has fallen, with experts expecting the price to continue to fall further. Without that revenue, the biggest boom from a recreational market disappears, but all the risk remains.

In conclusion, the federal winds are blowing in a way that suggests federal medical marijuana might become legal. Furthermore, there is no indication that recreational marijuana will become federally legal.   California is in a prime position to do next to nothing, and reap all the benefits of a federal act allowing states to legalize medical marijuana. Unlike Colorado, California wouldn’t need to change its laws – it could instantly treat marijuana as any other prescription and crop. So for the kids, the salmon, and the bears, we should think about if recreational is really the best way to go. It looks like a broad medical program might be a more sustainable, cleaner, and easier to regulate system.