Marijuana apps – not plants – taking off while legal uncertainty persists

 

Will Gaudet was born into the cannabis industry. A Berkeley native, he grew up watching his father’s passion for growing marijuana. But now, 25, he has decided not to follow in his father’s footsteps as a cultivator, and instead, start his own cannabis startup company.

“I believe that if I am going to do anything about changing the industry that I love, I need to start where the most money is being poured into,” Gaudet said. “And it’s not being poured into growing. It is being poured into the tech that will be able to revolutionize the way the cannabis industry is.”

Gaudet is the founder and CEO of Campfire, an app that connects peers to meet and share cannabis. Investing in or starting ancillary businesses like Gaudet’s — ones that do not directly touch the plant — may be an easier way into the cannabis industry.

Cannabis businesses that grow, manufacture, transport or sell marijuana products must obtain both a city and state license, while dealing with the difficulty of being in an industry that still remains federally illegal.

“I think any company that is not touching the plant is a safer investment because of how the regulatory framework could pan out,” Gaudet said, adding that he is thankful he doesn’t have to get a state and city license to start his company.

Proposition 64, or the Adult Use of Marijuana Act, passed on Nov. 8, legalizing the recreational use of marijuana in California. Because Proposition 64 allows cities to create their own regulations — taxes or even completely banning marijuana businesses within their borders — a patchwork of laws will exist for cannabis across California.

Understanding all of the legal hurdles to getting a city license will most often require hiring a lawyer, said Daniel Yi, director of communications of MedMen, an investment management company for the legal cannabis industry.

“The patchwork of ordinances, the legal side of cannabis is so complicated,” Yi said. “You need people who are experts in the application process, the zoning laws, the city ordinances, so it is becoming a harder business for you to get into.”

Cities in California have until January 1, 2018 to create regulations for the licensing process, so it is difficult to estimate the cost of obtaining a license. However, many predict that the regulations for recreational cannabis will mirror the regulations for medical cannabis. In San Francisco, for example, just the application to open a new medical dispensary costs $8,973, regardless of whether it is accepted or not. An additional $4,019 is required annually to keep the license. A California state license is also required, but the California Bureau of Marijuana has not yet determined the fees.

Regulations at a federal level are even more of a potential hassle. Because cannabis is still classified as a Schedule I drug along with heroin, LSD and ecstasy, many marijuana companies that touch the plant have difficulty securing bank accounts, forcing many to conduct business in all-cash and to spend extra money on security measures.

“Unfortunately, nothing has changed even with the passing of Prop 64,” said Beth Mills, a senior vice president at the California Bankers Association. Mills said California banks understand the concern and security risk of having an all-cash business, but many refuse to help cannabis businesses because they do not want to risk losing their charter.

Because the federal government under President Barack Obama has taken a very laid-back approach with dealing with states that have legalized marijuana, a few banks have ignored the federal regulations and opened accounts with cannabis businesses. Mills said this could potentially all change once President-elect Donald Trump takes office.

“A new administration could come in and decide to crack down on some of these banks and businesses, so it will be interesting to see in 2017 with the new administration what all that may look like for the marijuana industry,” Mills said.

Troy Dayton, CEO of Arcview, an Oakland-based cannabis research and investment firm, said that investors have expressed concern over Trump’s appointment of Jeff Sessions as United States Attorney General. In April, Sessions said, “Good people don’t smoke marijuana,” and that cannabis is a “very real danger” that is “not the kind of thing that ought to be legalized.”

“I think it would be political suicide for the Trump administration to go against a campaign promise on a hugely popular issue that did very well even in red states,” Dayton said. “We won Florida with 71 percent, North Dakota with 65 percent, and in these places, cannabis got more votes than Trump did.

Alison Malsbury, an attorney with the Canna Law Group, agrees: “We are really in the mindset that the toothpaste is out of the tube on this one, and it would be really hard to go back at this point especially now with California having legalized adult use,” she said.

Gaudet said he has had no trouble getting a bank account for Campfire, and without having to get a city and state license for his company, he can scale his business to any place in the world that has access to a smartphone. He does acknowledge, however, that companies that touch the plant may be more profitable in the long run.

Yi of MedMen agrees. “It is a safer bet (ancillary products), but it won’t give you the type of same returns that a direct investment to a cannabis company, if that company is successful because the projections are astronomical for this industry.”

The Arcview Group publishes an annual “State of the Legal Marijuana Markets,” which predicts that the U.S. market for legal cannabis, a $7.9 billion market in 2016, will grow to a $21 billion market by 2020.

“Now is an amazing opportunity for small- and medium-size players to take a run at the multibillion-dollar industry before they are competing with the big dogs,” Dayton said, citing the fact that there are no big multinational companies or big investors in the national cannabis industry yet.

Overall, Gaudet said predictions for the growth of the cannabis industry excite him because he expects the market for ancillary products to match it.

“A lot of these ancillary companies that are selling the picks and shovels and aren’t the gold miners, those are also going to be really profitable in the years to come,” Gaudet said.