March 15, 2024

Cannabis Startups: What You Need to Know

Thinking of entering the cannabis marketplace? Perhaps you’ve obtained a license as a grower, processor or distributor, or you have a product or a ancillary business that supports the cannabis industry. In any case – and now in many states including Maryland – new opportunities are on the horizon.

Nemphos Braue attorneys have a unique combination of legal expertise and operational experience directly in the cannabis space. From that, Bill Huber and Michelle Varkey share some key considerations to help entrepreneurs and startups get their businesses off the ground.

Full article featured in the Baltimore Business Journal

Learn more about our Cannabis practice 

The THCs for Cannabis Startups

The Legal THCs (ABCs) of Starting a Cannabis Business

Starting a cannabis business can be a complex endeavor due to the regulatory limitations, but it can also be extremely rewarding. Therefore, it is essential to approach this industry with careful planning and compliance to navigate through the unique challenges of this industry successfully. Consulting with legal, financial and industry experts is highly recommended. Below are a few suggestions to prevent your hard work from going up in smoke.

Regulatory considerations

As in any highly-regulated industry, there are important measures that need to be accounted for to remain compliant. Therefore, those who want to get into the cannabis space must familiarize themselves with relevant state and federal regulations at play. Balancing the line between federal illegality with state legality is hard to keep track of, especially with the ever-changing regulations. This is especially important as laws vary from state to state, so if a green cannabis entrepreneur enters the space with the hopes of expanding their business beyond their state, knowledge of the varying laws can help an entrepreneur break into new markets as more and more states begin to legalize cannabis.

Key pieces of regulation to know:

  • The Controlled Substance Act
  • The Marijuana Opportunity Reinvestment and Expungement Act (MORE)
  • The Secure and Fair Enforcement Regulation (SAFER) Banking Act

 

Financial considerations

Businesses also need to be mindful of keeping costs low as it is essential for business sustainability, especially in competitive markets. Below are a few financial considerations to keep in mind.

  • Access to capital and planning. As previously alluded to, unlike other startups that can access capital from financial institutions via loans or even credit cards, cannabis startups have limited access to traditional banking and financing options. Therefore, unless an individual has capital on hand, they must reach out to investors, venture capitalists and friends or family to start up their business. Due to this lack of banking assistance, cannabis companies end up taking on loans from investors on very onerous terms. Additionally, the well-publicized downfall of many public cannabis companies has scared away many potential equity investors over the past few years.
  • Upfront costs. To be able to participate in any cannabis activity, one must procure a state cannabis license, which is very expensive. Depending on the type of license, a licensee could pay anywhere from $2,000 to $11,000 in application fees and then $40,000-$165,000 for annual licensing fees. Further, a license is limited not only to the type of activity, but also to that specific activity in the state. A cannabis company would have to procure various licenses to not only grow, cultivate and sell in Maryland, but to do those same activities in other states. Therefore, companies planning to enter the space with the hopes of expanding their operations across state borders need to account for costs to replicate grow facilities and dispensaries and costs of any associated licenses when developing any future growth plans.
  • 280E tax implications. The effects of this rule of law have become the most crippling to the cannabis industry. 280E of the Internal Revenue Code limits businesses engaged in the “trafficking” of controlled substances from deducting ordinary business expenses (such as rent, utilities and marketing) when calculating their federal tax returns. So, until cannabis is removed from the Schedule mentioned above, cannabis entrepreneurs will need to consult with tax advisers to navigate through the complications from 280E.
  • Market supply and demand. In any consumable market, supply and demand will completely change your financial projections. Coupled with the 280E issues listed above, the cannabis entrepreneur must be forever cognizant with the adjustment to product pricing that supply and demand will naturally dictate. There are other variables within the supply-and-demand analysis that are important to recognize, such as quality of product, preferred products for a given market, number of licenses available, market competition, etc. But the most important takeaway regarding supply and demand is to be prepared at all times to edit your financial projections.

 

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