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Who Will be the Winners and Losers When Federal Cannabis Prohibition Ends?

The pioneers who braved federal threats to create the legal cannabis market are least likely to benefit commercially when prohibition eventually ends.
Who Will be the Winners and Losers When Federal Cannabis Prohibition Ends?
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Contributor
Attorney at Law
7 min read
Opinions expressed by Green Entrepreneur contributors are their own.

Time to break out the bongs?

Most analysts are predicting no longer whether, but when, cannabis will become federally legal for adult use in the United States, as it has in Canada, Uruguay and a few other countries, with others such as Mexico expected to soon follow. It may come in the form of the government itself removing cannabis as a scheduled drug under the Controlled Substances Act (CSA). It may come in the form of the current STATES Act pending in Congress, which would remove state-legal compliance from being subject to the CSA, or through other Congressional action. It may come through court action, such as the current constitutional challenge to the CSA as it applies to cannabis, whose initial dismissal was recently argued on appeal.

Related: What Is Schedule I and Why Is Marijuana on the List, Anyway?

Let us step back, however. Paraphrasing political activist Michael Moore in reacting to the Trump election: “How the **** did this happen?” Cannabis was prescribed for many ailments prior to its U.S. federal criminalization, first in the 1930s and again in 1970. In short, racism, business and politics explain. Strong Mexican immigration in the early 1900s took lower paying jobs away from Americans, sowing racist anger. Major newspaper publisher William Randolph Hearst, whose timber interests were threatened by hemp, published scathingly negative articles about the immigrants and the evil “marijuana” they brought with them. Not to mention companies like DuPont feeling that their then newly patented nylon also was at risk.

The head of the Federal Bureau of Narcotics from the 1930s through the early 1960s, Harry J. Anslinger, was infamous in his hatred of cannabis. One of his tamer quotes: “By the tons it is coming into this country -- the deadly, dreadful poison that racks and tears not only the body, but the very heart and soul of every human being who once becomes a slave to it in any of its cruel and devastating forms. ... Marihuana is a shortcut to the insane asylum. Smoke marihuana cigarettes for a month and what was once your brain will be nothing but a storehouse of horrid specters. Hasheesh makes a murderer who kills for the love of killing out of the mildest mannered man who ever laughed at the idea that any habit could ever get him.”

This, of course, with no scientific evidence backing up any of his claims.

Thus Congress outlawed cannabis in the 1930s. Then in 1968, activist Timothy Leary was arrested for cannabis possession. He fought in the courts and in 1969 the Supreme Court overturned the 1930s criminalization as unconstitutional. The Nixon Administration, starting to worry about the 1972 election, had to do something. Nixon’s domestic policy chief, John Ehrlichman, who was eventually jailed for his role in the Watergate scandal, gave a surprisingly honest interview in the 1990s after his incarceration. He said this: “The Nixon campaign in 1968, and the Nixon White House after that, had two enemies: the antiwar left and black people. You understand what I'm saying? We knew we couldn't make it illegal to be either against the war or black, but by getting the public to associate the hippies with marijuana and blacks with heroin, and then criminalizing both heavily, we could disrupt those communities,” Ehrlichman said. “We could arrest their leaders, raid their homes, break up their meetings, and vilify them night after night on the evening news. Did we know we were lying about the drugs? Of course we did.”

Those of us of a certain age remember the brainwashing that took place in schools throughout these decades. Cannabis makes you crazy. It makes you commit crimes. It is a clear gateway to more serious drugs. So now, as more and more states are legalizing, we are at last breaking down the stigmata and realizing that the fear-mongering was not based on any scientific evidence of harm. With federal legalization near, who wins and loses when that happens? Let’s examine what I consider the top five of each.

Winners when the U.S. legalizes cannabis.

Big alcohol, pharma, beverage and tobacco: The giant “sin” companies and other operators realize that they would rather join than fight, and have been investing heavily in legal countries, particularly Canada.

Big multistate cannabis operators: Those that have been quickly building their businesses to be as large as possible likely will sell to the giant multinationals.

Farmers: Growing cannabis and hemp is generally profitable compared to other crops. Hemp is environmentally benign and is good for the soil. In addition, having a national, or even potentially international market, as opposed to state-limited market will enhance potential sales.

Investors: Until now public U.S. cannabis companies have been prevented (with one exception) from listings on national exchanges such as Nasdaq and the NYSE. With legalization these companies, a number of which have market values well in excess of $100 million, would see the benefits of trading on the larger exchanges.

Taxpayers: Legal cannabis means tax revenue. It is expected that, much like with cigarettes, the federal government will, upon legalization, impose taxes on top of those already being charged by states that have legalized cannabis.

Related: Steep Taxes on Recreational Marijuana Are a Powerful Incentive for States to Legalize

Losers when the U.S. legalizes cannabis.

Drug Traffickers: It is estimated that in 2016 about 18 percent of drug trafficking arrests related to cannabis. Legalization is hoped to significantly erode this black market.

Smaller Operators: “Craft” brands may emerge much as with alcohol but I fear that those with a single dispensary or grow facility will be challenged by the economies of scale and marketing muscle that larger operators and brands will enjoy. It reminds me a bit of when the big box hardware stores like Lowe’s entered the market and crushed most of the decades-old local hardware shops.

Social Media and Content Sites: A number of cannabis-focused sites likely will find stiff competition from larger similar sites that until now have eschewed cannabis content and advertising. When companies such as Yelp, Facebook, news outlets and others enter the space, they will challenge these operators (or possibly acquire them).

Opioid Manufacturers: Studies are beginning to confirm that cannabis use can help folks reduce or eliminate the use of highly addictive opioids for pain. This is one reason the pharma companies are planning big investments in cannabis to prepare for this challenge.

Related: Is Big Pharma for or Against Legalizing Medical Marijuana? Maybe Both.

Service Providers: Many law, accounting and consulting firms have come “out of the closet” in recent years to start representing U.S. cannabis companies. Most of the largest of their competitors have stayed away until now. Once they enter (as they have already begun to do so working with legal Canadian operators), those who took the risk early on will face much stiffer competition.

If I were to add a sixth winner, it would be U.S. workers and, indirectly, the overall U.S. economy. It is estimated that hundreds of thousands of jobs will be created by a legal U.S. cannabis industry. If I were to add a sixth loser, it might be, sadly, Canada. They are likely to become essentially an asterisk in the cannabis legalization story once it happens here. U.S. companies will no longer see the need to go public or raise money there, or be incorporated there. Canada’s population is smaller than that of California, and while it is expected they will continue to grow their cannabis industry, the U.S. will dominate and dwarf them in comparison.

Place your bets and ready the bongs. The U.S. is going to legalize cannabis.

By Javier Hasse
From retailers to growers, producers, and suppliers, there’s a seemingly never-ending list of startup opportunities in this emerging market. In Start Your Own Cannabis Business, marijuana, biotech, and entrepreneurship reporter Javier Hasse introduces forward-thinking entrepreneurs like you to the industry and shares hard-earned tips and success stories from pioneers and visionaries in the marijuana industry.
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