Editors Note: This article was originally published in Forbes on August 13th, 2018.
In the waning days of Colorado Governor John Hickenlooper’s last legislative session, he vetoed three cannabis bills in two days. One would have allowed cannabis to be consumed onsite at dispensaries. Another would have allowed autism to be a qualifying condition for medical cannabis. Those two vetoes dominated the next news cycle.
The less sexy or emotional veto was for legislation that would have allowed publicly traded companies to participate in the cannabis industry as licensees. It would have been the most significant legislation for the industry since legalization itself.
The need for capital is a growing concern among cannabis businesses in Colorado. Since traditional lines of loans and debt are not available for cannabis business owners, they have relied on personal wealth and friends and family money to start and grow their businesses. Now that some need to find a good way to either exit the market or grow their business as the industry consolidates, the lack of capital is becoming a growing concern. Attempts to make capital more accessible in the state have been met recently with regulatory resistance, lengthy approval processes, and overly-strict interpretation of the regulations.
The Colorado cannabis market has been viewed by many as a model for legalization. That model is at a critical turning point as other states and countries close in on the accomplishments achieved in Colorado. Large markets like California, Massachusetts, and Canada are well down to the road to implementing legalization and doing so with an open mindset that seems to be slipping in the Centennial State.
Make no mistake about it: the Colorado model, for all its successes and shortfalls, continues to be front and center in conversations nationally and internationally as dozens of jurisdictions work through the arduous process of developing and implementing cannabis policy. No one knows better than Colorado how hard it is, but newer jurisdictions can learn lessons from those cannabis policy pioneers and close the gap quickly with innovation and flexibility. Reducing unnecessary barriers to entry and freeing up access to capital are two areas where regulators in other states are making the cannabis industry more viable without losing credibility.
As a former regulator that grappled with this issue, it is easy to sympathize with government concerns. Regulators’ common default is to the status quo that requires them to enact comprehensive regulation that is strictly enforced. Regulators are fiercely protective of preserving their ability establish a credible regulatory framework, and part of that framework requires them to prevent criminal elements from infiltrating the industry.
Publicly traded companies bring with them complicated ownership structures with hundreds of shareholders/owners all of whom may or may not qualify for cannabis licensure. Regulators feel pressure to vet owners fully to ensure a criminal element is not participating in the industry. Publicly traded companies are more difficult to license because the sheer number of owners, the frequency with which ownership changes hands and the geographic spread of ownership makes checking out every person with an equity ownership impossible. The pressure to get this right is real for regulators, but it is a mistake and short-sighted of them to hold regulated businesses back by restricting their access to legitimate capital.
As the number of markets with more permissive cannabis laws continues to increase, Colorado cannabis licensees should be concerned about their role in a much larger marketplace. Even though there appears to be a lot of interest from investors to participate in the cannabis market, competition for these investment dollars can be fierce. Savvy investors may appreciate how well Colorado implemented and matured, but they may balk when they realize how likely their investment is to be marginalized by restrictive ownership laws. This places Colorado licensees at a distinct competitive disadvantage to other similarly situated licensees in jurisdictions that allow alternative ownership structures. Colorado licensees must be concerned about the limitations they face in attracting capital.
Colorado’s licensed cannabis industry has a real interest in seeing an increase in capital flowing into the state. Many of the pioneers who have survived the choppy and sometimes perilous journey to an established, legalized regulatory framework have an interest in monetizing their efforts and some may also want to expand operations and be competitive with other prospective brands with national intentions.
As cannabis laws evolve and the industry continues to grow, elected officials and regulators cannot ignore the market forces that will demand more access to capital. Some of the other states that allow for publicly traded companies may not be going far enough to adequately vet publicly traded companies, but strictly prohibiting them can’t stand the test of time. The bill vetoed by Gov. Hickenlooper would have been effective at shoring up the government’s ability to reasonably evaluate publicly traded companies while also providing a pathway to solving the capital problem for marijuana licensees.
The failure of this legislation and the broader effort to address a serious market challenge indicate that the cannabis stigma has not been fully extinguished in Colorado nor has the state fully accepted the industry it proudly claims to have tamed.
Lewis Koski is cofounder and Senior Director of Freedman & Koski, Inc., which is focused on working with government agencies and private businesses that are navigating the complexity of cannabis policy.