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Too many rules and black-market rivals could stifle California's marijuana industry, experts say

Sacramento Bee logoSacramento Bee 11/25/2017 Brad Branan

Video by KCRA Sacramento

LAS VEGAS — Nearly 20,000 people, eager to profit as cannabis becomes legal in more places around the world, learned last week that tapping one of the biggest markets, California, will prove challenging because of the state's legendary regulations and huge black market.

Investors, growers, regulators and others gathered for the country's biggest marijuana business conference, MJBizCon, held by Marijuana Business Daily at the Las Vegas Convention Center. Attendance at the publication's conferences has mushroomed, nearly doubling in the past year, organizers said.

The enthusiasm is the result of more states and countries legalizing cannabis. The biggest state to do so, California, will allow sales of recreational marijuana to adults 21 and over starting Jan. 1. However, it remains unclear exactly where consumers will be able to purchase adult-use marijuana, as local jurisdictions continue to develop their own regulations related to retail sales and delivery.

Before approving their own rules, many cities and counties had been waiting for the state to clarify its guidelines, which it did last week, releasing regulations for the nascent commercial market and updating those for medical marijuana.

The new regulations allow the state to begin issuing temporary licenses for growers, distributors and sellers at the beginning of the year. They offer specifics on the tracking and testing of marijuana, and its packaging and potency. (Serving sizes for edible products, for example, cannot exceed 10 milligrams of THC, and there can be no more than 100 milligrams of THC in the entire package.) They also spell out the different licenses and fees, and give guidance in areas including inspection, enforcement and advertising.

The state's decision not to enact a 1-acre cap on growing sites as previously expected created concern among many growers in the state.

The lack of limits on farm size could increase California's existing problem of overproduction and put smaller growers at a disadvantage, said Hezekiah Allen of the California Growers Association. Already, industry and state regulators estimate that only a sixth of the cannabis grown in California is consumed in the state, leading to questions about interstate trafficking.

State and local regulations will challenge the cannabis business, as will the ever-present threat that the federal government will resume enforcing national prohibitions on the drug, speakers said during the three-day conference.

"We fear the feds would like to make an example out of businesses in California," Graciela Castillo-Krings, a legislative aide to Gov. Jerry Brown, said in a panel discussion.

Fears about federal intervention stoked by Attorney General Jeff Sessions' negative remarks about marijuana have limited investment from big companies, speakers said at other panels.

Conference participants from California said the more immediate concern is addressing the state's complex local regulations. Proposition 64, which legalized recreational marijuana, gave local governments the authority to ban or regulate commercial marijuana production and sales. So far only about a half-dozen areas have indicated a willingness to accept commercial sales, including places in the Bay Area, Southern California and the Sacramento region.

"California is a difficult state to do business in," said Amanda Reiman, vice president of community relations for marijuana distributor Flow Kana. "I don't want to understate how difficult it is to sell marijuana in a state that over-regulates everything."

Castillo-Krings agreed. "There's still very much a hesitance, and that it's taboo," she said.

Related gallery: The next 15 states to legalize marijuana (provided by 24/7 Wall St.)

a group of people standing in front of a crowd: <p>A record high 64% of Americans support legalizing marijuana for recreational use, according to a 2017 Gallup Poll. Support for legalization is rooted in changing perceptions of the drug’s potential harm, as well as the prospect of hundreds of millions of dollars in marijuana sales and excise tax revenue for state governments.</p><p>The growing acceptance of marijuana among Americans has also been reflected in the ballot box. Currently, eight states and Washington D.C. have legalized recreational marijuana. Pro-pot initiatives passed in eight of the nine states in which they made it to the ballot in November 2016. Voters in Arkansas, Florida, Montana and North Dakota approved or expanded medical marijuana laws in their states. In Maine, Massachusetts, Nevada and California, voters approved recreational pot. Only Arizona’s push for full legalization failed.</p><p>All four states that legalized recreational marijuana in 2016 made 24/7 Wall St.’s list of the next states to legalize pot that same year.</p><p>Despite widespread acceptance of the drug, only about 21% of the U.S. population lives in states or districts that have legalized recreational pot. In all likelihood, that share will only grow in the coming years.</p><p>Though every state to legalize pot so far has done so through ballot initiatives, going forward, states have a variety of options for making pot legal. Predicting which states will be next to legalize requires weighing a range of legal circumstances and cultural conditions. 24/7 Wall St. reviewed marijuana usage rates, existing marijuana laws, and legislative processes in each state to identify the states most likely to legalize pot next.</p> The Next 15 States to Legalize Marijuana

As dispensaries establish records of legal sales, cities are likely to ease some of their regulations, panel participants said.

Morgan Paxhia, of San Francisco-based Poseidon Asset Management, said state and local taxes, which run as high as 45 percent, also threaten the market's potential.

An-Chi Tsou, a California-based consultant, said new marijuana businesses can expect increased costs from local governments approving requirements for living wages and health insurance for workers.

Despite the cost of doing business in California, the number of potential customers makes the market irresistible to some.

Chris Leavy, co-chair and partner at MedMen, a Los Angeles-based private equity fund specializing in the business, said he expects the amount of legally sold marijuana in California to triple within a few years.

"One of the reasons we're so bullish on the market is that demand is so high," Leavy said.

Nic Easley said he too is bullish on the California market simply because of the state's large population. He said he has more than 200 licenses for a variety of cannabis businesses in the state.

At the same time, Easley, CEO of SC Consulting, said he is concerned about the black market. He said he can't compete with growers who operate illegally because they can sell for less by not paying taxes.

Pete Kadens said success in the ever-expanding marijuana business could come down to just trusting your instincts.

Kadens is CEO of Green Thumb Industries, an Illinois-based company with retail and cultivation sites nationwide, including in Carson City, Nev. GTI is not in California and for now has no plans to enter.

"There are already so many people with licenses and a huge black and gray market," he said.

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