The Federal Status of Cannabis – Is it Whitewashing the Industry?

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The cannabis industry is budding. Medical cannabis is legal in twenty-five states and the District of Columbia. Four states and the District of Columbia have legalized the adult-use of cannabis; Alaska, Colorado, Washington and Oregon, permit the sale and purchase of cannabis for adults, creating lucrative commercial markets generating billions of tax dollars. This November, the trend toward legalization is gaining more momentum, with nine states voting on cannabis initiatives. However, at the federal level, cannabis is still classified as a Schedule I narcotic in the company of heroin, ecstasy and LSD. This federal classification creates unique hurdles for the cannabis industry and relegates it to black sheep status. Within the industry, these hurdles have greatly contributed to a severe lack of minority participation. Translation – the cannabis industry is looking just as lily-white as it does green.

Perhaps the most significant reasons that explain the whitewash of the cannabis industry are: (1) prohibitively high pre-operational and subsequent compliance costs; (2) exclusion from traditional state and federal programs intended to promote minority business ownership; and (3) state regulatory schemes which prohibit awarding licenses to individuals who have a felony drug conviction on their record.

The federal status of cannabis means that the industry cannot benefit from the usual tax and government incentives that other industries utilize to promote diversity and small business ownership. Of the estimated 3,200 to 3,600 medical and recreational dispensaries operating nationally, only 1% are owned by African Americans. This figure is in stark contrast with the percentage of minority small business owners across all other industries.  According to 2012 statistics published by the Minority Business Development Agency, which is part of the U.S. Department of Commerce, an estimated 15% of the twenty-eight million small businesses in the U.S. were owned by minorities with almost half of these businesses, 49.9%, owned by African Americans.

The most insidious barriers to minority participation in the cannabis industry are state regulatory schemes. Uncle Sam’s ostracism of the cannabis industry imposes a layer of scrutiny that is not applied to other industries. This added scrutiny presses state legislatures to enact rigid cannabis regulations that require even the lowest level employee to have a clean criminal record and be able to pass a drug test. Specifically, all jurisdictions with cannabis regulations, prohibit individuals with a felony drug conviction from obtaining a license to cultivate, process or sell cannabis. Many jurisdictions also prevent these individuals from “touching” cannabis, i.e. working in the industry in any capacity. It is no secret that minorities are incarcerated at much higher rates than whites for non-violent drug offenses and, in the cannabis industry this disparity is exacerbated by these restrictive state regulations.

It takes money to make money. In most jurisdictions the cost of preparing and filing a license application for a cannabis entity may cost upwards of $100,000. Some jurisdictions also require applicants to show that they have significant liquid capital in order to even file a license application. The steep upfront costs, inherent legal risk and strict state compliance schemes limit the industry’s attractiveness to ultra-wealthy investors that can absorb the potential liabilities of a volatile market.

Of course, starting a business is always a roll of the dice, requiring capital and some level of risk. To encourage small business ownership, most states and the federal government have established lending programs, tax credit schemes and public grants for qualifying small businesses. These qualifying factors are intended to promote the participation and inclusion of minorities, women, veterans and other groups that have historically faced significant hurdles to entering and succeeding in business. Small business programs are not extended to the cannabis industry because there is a catch – the federal status of cannabis. The federal government’s failure to legalize and liberalize medical and/or adult-use cannabis prevents would be entrepreneurs, of any race, from benefiting from federal small business lending programs, tax credit schemes and public grant programs through federal entities.

The absence of federal funding for cannabis entities spills over to the state level. Many small business programs administered at the state level require all applicants to exhibit ‘high moral character’, implicitly excluding ‘amoral’ entrepreneurs from entering the cannabis industry. Maryland is a prime example. Maryland legalized medical cannabis in 2014 and is predicted to have the most lucrative medical cannabis market on the East Coast. Maryland politicians tout their state as ‘business-friendly’ with a robust lineup of programs designed to alleviate the financial risk of starting a small business, promote minority business ownership and create incentives for small businesses in economically disadvantaged communities. These programs include a myriad of tax credits and low interest financing options through local banks and state grants.  Unfortunately, the relief offered by these programs is not available to minority small business owners seeking to enter the cannabis space in Maryland. The absence of low interest financing options creates an uphill battle for anyone looking to break into the industry without significant liquid capital. Similarly, state tax credits allow small business owners to offset some of the expenditures associated with making a business operational. Since most small businesses will operate at a loss during their first year, tax credits and deductions equal a lower tax liability which could lessen the financial risks inherent in opening and operating a small business. None of these tax credits and deductions are available to cannabis entities.

Bottom line – the well is not dry, there is no well.  The federal status of cannabis prevents the resources and programs which are created to support small business owners from reaching the cannabis industry. To avoid federal conflict, it is not surprising that states with cannabis regulations may be hesitant to eliminate or even expand the ‘moral character’ requirement and permit entrepreneurs in this space to access small business programs and tax benefits. s a result of stringent state regulations, the cannabis industry is left with a host of state regulatory schemes which prohibit anyone with a prior felony drug conviction from participating in the industry in any capacity.

The forty-year war on drugs is the U.S.’s longest and most futile war.  The individuals and communities hit hardest by the war on drugs are overwhelmingly poor African American communities. According to the most recent Department of Justice statistics, in 2014 an estimated 37% of all people incarcerated in a state or federal correctional institution were African American, and 6% of African American men between thirty and thirty-nine were incarcerated.  These statistics are striking, especially when viewed in conjunction with the statistics for drug arrests. The number of drug arrests in the U.S. totaled 1,561,231; 83% of these arrests were for drug possession only. The statistics for marijuana arrests are even more disturbing; an estimated 700,993 individuals were arrested for marijuana offenses, 88% of these arrests for possession of marijuana. These statistics illustrate the exponential effect of the war on drugs on African Americans. In the context of the cannabis industry, this data helps explain why the industry is so homogeneous. Stringent state regulations in each of the thirty-one jurisdictions with legal medical or adult-use cannabis preclude individuals with a felony drug conviction from applying for or obtaining a license.

Baltimore, Maryland illustrates just how prejudicial these regulations can be.  African Americans in Baltimore are more than 5.6 times more likely to be arrested for possession of marijuana than whites. According to a 2015 ACLU and Justice Policy Institute Report, 92% of the arrests for possession of marijuana were of African Americans – one of the highest racial disparities in the U.S. Looking at these statistics it would appear that the majority of African American residents of Baltimore could be excluded from this billion-dollar industry.

The absence of diversity in the cannabis industry is systemic and must be addressed. As more states move to legalize medical and/or adult-use cannabis, the issue of diversity will fester. The conflict between state and federal cannabis law is a reality, a bitter pill that the industry must swallow. However, this conflict should not be used as an excuse to ignore the need to promote diversity within this rapidly growing industry. State regulators must be proactive and begin to enact laws which provide the same opportunities for the cannabis industry as other industries. If state legislatures do not act, the cannabis industry could suffer tremendously. In Maryland, the state legislative Black Caucus has publicly criticized the regulatory body of the state’s medical cannabis program and threatened to file an injunction which would halt the roll-out of the medical cannabis program. Similar legal challenges could delay the launch of medical or adult-use programs in other jurisdictions. The regulatory landscape surrounding cannabis is constantly evolving, and the industry should not create legislative obstacles that prevent its long-term success.

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