Marijuana historically was an illegal substance under both state and federal laws. Over time, growing acceptance of the drug in American society has led to its legalization in over two-thirds of the states for medical purposes. Over one-third of the states have gone even further, legalizing marijuana for general recreational use. The federal government continues to ban marijuana, though. Sporadic efforts to reform its drug laws have not gained momentum.
Thus, entering the cannabis industry is a high-risk, high-reward decision. Entrepreneurs building marijuana businesses may reap huge profits as demand surges, especially in states that have legalized recreational use. However, they must navigate a complex web of regulations at state and local levels. Cannabis business owners and employees also must shoulder burdens imposed by operating in a sector that is prohibited under federal law. Below is an overview of some issues and challenges inherent to this fast-growing industry.
Starting a Cannabis Business
A business owner usually must meet certain requirements to enter the cannabis industry, such as residency requirements and criminal background checks. They also must complete a licensing process at state and possibly local levels. This can last for a year or more in some locations. The licensing process varies depending on the type of business. For example, a cannabis growing operation will face different requirements from a marijuana dispensary.
Most new cannabis businesses will need an infusion of capital to launch their operations. This can be challenging to obtain because traditional types of loans may not be available. Since federal law continues to criminalize marijuana, banks tend to be reluctant to work with cannabis businesses. Federal regulations governing the banking industry make issuing loans to an illegal business risky and complicated. Alternative financing sources may include venture capital or private equity funds, angel investors, and certain private loan issuers that offer high-interest loans.
Potential Changes to Federal Banking Rules
Members of Congress sporadically propose changes to banking regulations that would allow banks to work with cannabis businesses. One of these proposed bills passed the House of Representatives in the spring of 2021. However, its fate in the Senate remains uncertain.
Operating a Cannabis Business
Once a cannabis business has opened, it must continue to carefully monitor state and local laws for any changes that could affect its operations. Since this industry is so new, regulations may change suddenly and dramatically. Failing to adjust to changes could result not only in the loss of a license and the closure of a business but even in criminal charges for business owners.
Similar to bank loans, checking accounts and other services normally provided by banks may not be accessible to business owners in the cannabis industry. As a result, they may need to rely on cash for most transactions with consumers, vendors, employees, and government authorities. Cash is a cumbersome and sometimes risky foundation for operating a business. A business owner should make sure that they are willing to deal with these burdens if they cannot get services from banks.
States heavily tax the cannabis industry, and business owners still must pay federal income taxes, even though the federal government does not recognize the industry as legal. Meanwhile, cannabis businesses are not eligible for federal tax credits and tax deductions under the Internal Revenue Code.
Working in the Cannabis Industry
If an employee passes background checks and meets other requirements for entering the industry, a job at a cannabis business can offer significant benefits. However, employees should be just as careful as business owners in complying with applicable laws and getting any required licenses. They could face criminal prosecution for violations. Employees also should be aware that working at a marijuana business does not mean that they can use drugs on the job. Drug testing and smoking bans may be just as strict as in other industries. Owners of cannabis businesses may even take extra care to preserve a clean image.
Some states require or incentivize cannabis businesses to accommodate unions. This may involve a labor peace agreement, under which a business agrees to stay neutral in the labor organizing process, while the union agrees to refrain from planning work stoppages and other tactics that put pressure on employers. Labor peace agreement mandates rest on uncertain legal ground but have not faced major challenges.
Protections Against Employment Discrimination
Although the federal government criminalizes the production and sale of marijuana, federal anti-discrimination laws still protect workers in the cannabis industry. These include Title VII of the Civil Rights Act, the Age Discrimination in Employment Act, and the Americans With Disabilities Act, among others.
Investing in the Cannabis Industry
Despite its fast rate of growth, the cannabis industry remains a risky proposition for investors. Tight regulations and high tax rates cause some investors to refrain from entering this sector. Marijuana businesses also may struggle to find funding sources and generate profits in their early stages. As with other new industries, the balance between supply and demand is not always easy to predict and maintain. This can lead to fluctuating profits and investor returns. Thus, an investor likely should exercise caution if they choose to enter the cannabis industry.
If an investor feels reluctant to invest in a specific cannabis company, they might consider buying shares in an exchange-traded fund. Some ETFs focus on the marijuana industry, holding stocks of many companies at once. An investor also might mitigate their risks by investing in a business that offers some non-cannabis products. If a business receives a substantial part of its revenue from these products, it may be more stable than a company that operates exclusively in the cannabis industry.
What are some examples of cannabis businesses? Common examples of cannabis businesses include cultivators and harvesters of marijuana plants, processors of raw cannabis materials, and retail facilities like dispensaries that sell products to consumers. Less mainstream types of businesses include companies that make products used to consume marijuana, delivery services that transport marijuana products to consumers, and testing facilities.
Why is it hard for cannabis businesses to get services from banks? The cannabis industry remains illegal under federal law, and banks must comply with federal regulations that make it challenging to lend to an illegal business. A bank may need to file a suspicious activity report for each transaction involving a marijuana business, for example, and they may not be insured by the Federal Deposit Insurance Corporation if they issue loans to these businesses.
Can I smoke marijuana on the job if I work for a dispensary? Probably not. Most dispensaries and other cannabis businesses impose rules regarding employee drug use and drug testing that resemble rules at other businesses. Some businesses in this industry may monitor employee drug use even more carefully than the average business, since they are especially concerned about preserving a clean image.
Can a cannabis business ignore federal laws protecting employees from discrimination? No, a cannabis business cannot ignore federal laws protecting employees from discrimination. Laws such as Title VII of the Civil Rights Act apply to these workplaces, even though the cannabis industry is illegal under federal law. The Equal Employment Opportunity Commission even has pursued litigation to assert the rights of employees at marijuana businesses.
How does a marijuana exchange-traded fund work? A marijuana exchange-traded fund can hold the stocks of many companies in the cannabis industry. Investors then can buy shares in the ETF rather than a specific company. This can be an attractive alternative for an investor who is interested in entering the cannabis industry but does not want to commit to a single target.
Licenses for Cannabis Businesses A cannabis business owner must get and maintain licenses from state and sometimes local agencies, which may require complying with rules specific to cultivation, manufacturing, or retail sales.
Taxes for Cannabis Businesses States often heavily tax cannabis businesses, and the income that they generate is subject to federal income taxes, although they do not qualify for federal tax credits or tax deductions.
Delivery Services in the Cannabis Industry Marijuana delivery services may need to get specific permits and comply with tight restrictions in areas such as GPS tracking, record-keeping, and the quantity of cannabis in their vehicles.
Unions in the Cannabis Industry Some states require or incentivize cannabis businesses to refrain from interfering with the organizing efforts of unions, while unions refrain from interfering with business operations.
Buying Cannabis Seeds A business usually should purchase seeds from a local seed company or dispensary, since bringing seeds across state lines or international borders can lead to confiscation and criminal charges.