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Cannabis Means Business

By Tom Ahern

Cannabis is big business right now, and the U.S. business is booming. Last year, the industry generated nearly $9 billion in sales in the U.S. – equivalent to the entire snack-bar industry, according to BDS Analytics—and is on track for $11 billion in 2018, and $32 billion globally by 2022.

Naturally, interest in adult use and medical cannabis is at an all-time high on Wall Street. The North American Marijuana Index (NAMMAR) has climbed more than 140 percent since its one-year low last September, according to Bloomberg, the same period the S&P 500 has risen only about only 17 percent. But its frenzied growth year has been marked by spikes, losses, and rebounds.

If the rise and fall of industry economics are dizzying, changing regulations—and the market opportunities they make or break—cause downright whiplash. As of January, nine states and the District of Columbia allow for recreational marijuana use and 31 allow for medical use. In July, the state of California put stringent chemical compliance standards in place, and recreational use and sales had only been legalized six months before. Also in July, the New York State Health Department issued a report recommending legalization of cannabis and Gov. Andrew M. Cuomo suggested that it was not a question of if, but when legalization would happen.

Next month our neighbor to the north officially legalizes the adult use of marijuana—the second country to do so, after Uruguay—opening an entirely new window to a frenzy of opportunity. U.S.-based Constellation Brands is investing $4 billion in Canadian producer Canopy Growth. And another Canadian grower, Cronos Group, brokered a $122 million partnership with Boston-based lab Ginkgo to genetically engineer the building blocks of marijuana. Think about that. Potentially taking the farmer out of the farm.

These are broad-brush changes that happen on the political and economic landscape. But what many cannabis entrepreneurs might not realize in this young industry is that equally significant— if not more — are the decisions made on the local level. Municipal planning and zoning laws are the primary tool for regulating where and how marijuana businesses can operate. Last month, for example, the Massachusetts Cannabis Control Commission voted not to scrutinize the contracts between marijuana companies and municipalities. This is a ruling critics say could leave cannabis entrepreneurs vulnerable to local officials demanding large sums to do business in their community.

Even more local: In the Massachusetts city of Newton, the presence of recreational-use marijuana — already approved by the state in 2016 — hangs on a citizens’ Opt Out ballet question that may or may not make it to the November election, and a second question that may or may not supersede it by asking for a two to four-dispensary limit in the city. Numerous other Bay State communities are rushing municipal bans to the ballot or local town meetings. The lesson learned is that even though voters approved adult use and sales, not all citizens want the next dispensary in their town.

Decisions like this are being made all the time on a case-by-case basis with no boilerplate blueprints, and smart cannabis executives have to keep a watchful eye on local regulations, and ways to have a voice in shaping public opinion.

Massachusetts requires applicants to have held a community outreach meeting and sign a Host Community Agreement (HCA) with the municipality. Community involvement is a requirement in the licensing process. And this is where many cannabis businesses get the squeeze, particularly if they miscalculate the potency of public opposition and the need for them to advocate on a grassroots level. Every vote, every ballot question, every town meeting, has the potential to make or break a cannabis company’s chance of expanding their business — or opening in a community at all.

Last week, the Securities and Exchange Commission warned investors in NAMMAR to be savvy about this fledgling industry, and not be so starry-eyed that they miss the danger signs of a shaky business. The same could be said of cannabis industry and the risks of underestimating the volatility of local public opinion.

Tom Ahern is a founding partner at Five Corners Strategies and leads the firm’s Boston, MA office.