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Attorney General Jeff Session's war on pot may become a war on small business

CNBC logo CNBC 1/13/2018 Chris Morris
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It's easy to get lost in some of the big numbers that get thrown around when it comes to legal marijuana sales. Colorado hit $1 billion in eight months last year. Medical marijuana sales in California last year topped $2 billion. And with the recent launch of legal recreational cannabis sales in that state, sales are expected jump to $5 billion this year.

But lost in those boggling figures is a different reality. The vast majority of operations in the legal cannabis field are small businesses. And Attorney General Jeff Sessions' decision to end an Obama-era policy that let legal marijuana flourish could have big repercussions on those mom and pops.

"No question; this is going to have a direct impact on small businesses in the cannabis space," says Glenn Ballman, CEO of Duber Technologies, a SaaS company that services the industry, and a cannabis policy expert.

Sessions last week repealed what's known as the Cole memo, a document that generally barred federal law enforcement officials from interfering with marijuana sales in states where the drug is legal. In a one-page memo, he directed federal prosecutors to use their discretion in deciding whether to bring charges against distributors, growers and processors, considering the seriousness of the crime and its impact on the community.

That could have a quick impact on the expansion of the cannabis market, says Ballman, not so much in terms of store openings or customer purchases, but in forward-looking research and development.

"It's going to have a chilling effect on investment," he says. "You'll see labs not reinvest in better equipment for testing. You'll see producers cut back on expansion plans. And you'll see processors that are buying equipment to make cookies, edibles and drinks start to cut back as well."

The move also could see companies at risk of racking up tremendous legal bills, should enforcement target their employees.

"Exposing your employees to this kind of risk becomes something you think about now," says Ballman. "It's one thing to take risk as an owner. It's another to hire people who are now exposed to that risk. With risk comes cost, potentially in the form of legal fees. If Sessions pushes it back into the realm of mass incarceration ... then you have small businesses that are currently considering expansion or investing into the business that will start taking profits off the table."

Part of the difficulty in forecasting how big of an impact the Sessions memo will have on cannabis-oriented small businesses comes in the uncertainty in how courts will rule when the issue inevitably comes before them.

Jim Hill looks over the marijuana he grows for medical purposes at his farm in Potter Valley, Calif. Hill believes passionately in marijuana's purported ability to treat the symptoms of diseases ranging from cancer to Alzheimer's. © Provided by CNBC Jim Hill looks over the marijuana he grows for medical purposes at his farm in Potter Valley, Calif. Hill believes passionately in marijuana's purported ability to treat the symptoms of diseases ranging from cancer to Alzheimer's.

Mike Sampson, a partner at global law firm Reed Smith LLP in Pittsburgh, notes that while businesses in the marijuana field should certainly be aware of the change in policy, Sessions did not order U.S. attorneys to disrupt the burgeoning industry. That could result in cases being handled differently from district to district.

Ultimately, he says, the issue will come down to how courts determine federal public policy regarding cannabis. If they determine Sessions' memo and subsequent actions don't constitute a true reversal, this could be nothing more than a symbolic act.

"The Cole memorandum has been something courts have relied on in determining federal public policy vis-a-vis marijuana," he says. "[In one prominent case], the court said 'there's the Cole memorandum and the government is not pursuing violations, so we can't say there's a public policy against marijuana.' Will they rely on the Sessions memorandum to say 'we now have public policy against cannabis' — or have events like state legalization overtaken us? ... There's a lot of wait and see here."

Don't, however, expect the Sessions memo to result in landlords and insurance companies changing existing relationships with cannabusinesses, says Sampson. Because those companies knew who they were partnering with (and what the business sold, grew or processed) when they signed the contracts, they likely won't be allowed to hide behind the Controlled Substances Act to get out of the business relationships.

Justice Department budgeting, also, is something small-business owners will want to pay close attention to. Prosecuting cannabis-focused businesses will take money and, for now at least, there's nothing earmarked for that. Should the department see a notable funding increase, that could be a red flag.

Despite the new threats, don't expect to see marijuana business shut down pre-emptively to avoid legal prosecution, says Ballman. While a showdown might be looming at some point, that's familiar territory for the industry.

"I believe the culture of the industry is that it has been mischaracterized for decades," he says. "The people who run shops today are very much of a generation that fought to get [cannabis] medically licensed. They also fought to get it recreationally legalized. I see them as a generation of fighters. I'd be surprised if any stores close."

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