WHAT COMES AFTER ESSENTIAL?

On March 23, 2020, Maryland Governor Larry Hogan issued an emergency “shut-down” order declaring that a catastrophic, statewide health emergency existed within the State due to the outbreak of COVID-19.  The Order closed all “non-essential businesses” to control the spread of the disease — effective immediately.  But tucked into the Governor’s Order prohibiting the public from attending large gatherings and events was a curious exception to the list that had never before been mentioned as critical infrastructure.  Indeed, the Order permitted the Maryland’s Medical Cannabis growers, processors, and dispensaries to remain open during the pandemic and serve the public.

While it should not come as a complete surprise that Cannabis was listed as an “essential” industry under the Order — it is noteworthy how quickly and dramatically its public reputation had changed.  One might recall that less than six years ago, during the heart of the War on Drugs, Maryland introduced its first legislation seeking to decriminalize Cannabis and create a medical recommendation system for patients.  Less than six years later, Cannabis in Maryland has transcended its “street-drug” label.  It is no longer considered in Maryland to be an illegal, highly addictive, Schedule I drug with no known medical benefits that is unlawful to possess.  Now it’s considered part of Maryland’s critical Public Health Sector.

But the Cannabis market around the country (or Maryland’s market, for that matter) did not begin its ascendence as a commodity by virtue of a change in law alone.  Rather, the Cannabis industry began its rise to prominence due to a corresponding development of companies that saw the opportunity to support the industry through technology, software, and business processes.  These companies can be best categorized by their business’ function as it relates to the Cannabis plant.  Not surprisingly, companies in the Cannabis industry are termed to be either “plant-touching” or “ancillary.”

Plant-touching businesses handle the Cannabis plant itself, either cultivating, distributing, processing or selling it.  These tend to be the businesses most people think of when they imagine the Cannabis industry.  Plant-touching businesses are generally subject to the strictest regulations and must navigate complicated licensing processes before they can begin manufacturing, processing, or distributing Cannabis.

On the other hand, ancillary businesses support the growth, processing, and sale of Cannabis products throughout the supply chain.  These businesses include data platforms, agriculture-technology companies, point-of-sale systems, payment processors, digital marketers, attorneys, accountants and more.  They are the same types of companies that would support business processes in any other industry.

Some examples of ancillary companies include developers of seed-to-sale compliance software like METRC or BioTrackTHC, manufacturers developing packaging for products from dried flower to concentrates, the providers of cultivation equipment and supplies such as Scotts Miracle-Gro’s subsidiary Hawthorne Gardening Company, and the point-of-sale software and analytics firms like Baker Technologies and BDS Analytics.  By next year, experts believe that the revenue from the ancillary Cannabis market will exceed the market for medical and adult-use Cannabis products combined.

Beyond what these sales numbers suggest, ancillary businesses are essential for a number of other reasons also.  First, ancillary Cannabis businesses do not carry the risks associated with plant-facing businesses.  Fundamentally, businesses built around ancillary products such as growing media, lights, and packaging do not have the same problems associated with interstate commerce, banking, or legal liability.

For example, ancillary businesses can conduct business across state lines, while plant-touching businesses cannot.  Plant-touching businesses generally have difficulty scaling efficiently since they are currently not able to ship their products across state lines, even in conjoining states where recreational use is legal in both. Cannabis products produced in legal state markets cannot be shipped to other legal states, as crossing state boundaries constitutes interstate commerce and falls under federal jurisdiction. This exposes any investment in a plant-touching business to additional regulatory risks and costs.

Finally, banking remains one of the last impediments to normalizing essential businesses that serve the Medical Cannabis market.  This problem primarily plagues plant-touching industries, because Cannabis remains illegal under federal law, and is currently labeled a Schedule 1 drug under the Controlled Substances Act.  As a result, any bank that provides services to a legal Cannabis business faces possible criminal prosecution for “aiding and abetting” a federal crime and money laundering.

Banks may choose to service a legal Cannabis operator, but the government requires them to file a suspicious activity report for every transaction involving a Cannabis business. These rules extend beyond the Cannabis operator itself to any company it interacts with, from accountants to cleaners, resulting in mountains of red tape and expense that most banks simply choose to not deal with.  Still, most Cannabis business owners cannot accept credit cards, pay their payroll taxes by check or make wire transfers to other businesses because of the federal prohibition.

As a result, Medical Cannabis may have made the leap to becoming an “essential” industry during the pandemic due to Governor Hogan’s Order.  However, due to its traditionally disfavored status, the industry still has a long way to go before it can enjoy the same benefits that other businesses enjoy under the law.

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