Pubdate: Tue, 26 Apr 2016
Source: Washington Post (DC)
Copyright: 2016 The Washington Post Company
Contact:  http://www.washingtonpost.com/
Details: http://www.mapinc.org/media/491
Author: Alex Halperin

SCATTERED LAWS BRING TOGETHER PARTNERS IN POT

Marijuana Companies Are Joining Forces to Expand Beyond Their Own 
State Boundaries

DENVER - Normally, when a company based in one state wants to sell 
products in another state, it starts calling truckers. For Strainz, a 
Las Vegas marijuana company, it was more complicated.

By early 2015, Strainz's owners knew they wanted to expand to 
Colorado and Washington, the states with the most normalized 
marijuana markets. Despite state laws that allow the sale of 
marijuana, it remains a federal criminal offense to ship it across 
state lines. And as Nevada residents, the husband-and-wife 
co-founders weren't eligible to apply for business licenses in either state.

The Hempel family's strategy for Strainz is one that marijuana 
companies are pursuing to build a national presence. Strainz, which 
recently announced that it has raised $8 million in funding, formed 
partnerships with the parent company of Zoots, a Seattle edibles 
maker, and Bronnor, a Colorado manufacturer.

The factory in Washington that makes Zoots edibles has started making 
Strainz products, and if all goes as planned, in the coming months 
Strainz and Zoots products will be rolling out of the Bronnor factory 
in Denver and one the Hempel family partly owns in northern Nevada.

The arrangement required Bronnor to build the factory in Denver, but 
Strainz chief executive Hugh Hempel shrugged off the expense with a 
hint at the profits in store. "Financially it's not a hard thing to 
justify a $4 million facility in a reasonably mature market," he said.

The market potential is enormous. In 2015, U.S. customers bought $5.4 
billion worth of legal marijuana products, billions more than they 
spent on ketchup, salsa, mayonnaise, mustard and hot sauce combined. 
But while a few big brands dominate each of those condiment markets, 
the nascent legal marijuana industry comprises thousands of smaller 
businesses. For the companies that want their brands to grow into the 
industry's Heinz or Tabasco, expansion is imperative.

Colorado and Washington voters legalized recreational marijuana in 
November 2012. The following August, then-U.S. Deputy Attorney 
General James M. Cole released eight priorities for federal marijuana 
enforcement. They include no distribution to minors and no contact 
between the industry and organized crime. And then this one, which 
complicates multi-state growth for entrepreneurs: "preventing the 
diversion of marijuana from states where it is legal under state law 
in some form to other states."

Since the Cole memo, pot companies that follow state laws have 
largely been able to operate unbothered by the Justice Department. 
Marijuana companies that sell products in more than one state may 
represent only a small fraction of the U.S. pot industry, but they 
are among the most ambitious players in the industry.

"Obviously all the conduct involved is criminal" under federal law, 
said Sam Kamin, a law professor at the University of Denver, "and 
this shell game does nothing to change that."

The companies involved want to grow without drawing attention from 
the federal government. But conditions that have led to multi-state 
partnerships could be irrelevant after Election Day.

The remaining presidential candidates have expressed varying degrees 
of comfort with the state-level experiments. But they are all hazier 
on the policy questions that surround federal legalization.

Pressure is likely to grow this year as California, Nevada, 
Massachusetts, Arizona and perhaps other states are expected to vote 
on full legalization, while several others will probably vote on medical use.

The next presidential administration, then, will have immense power 
to shape the industry. It could maintain the current hands-off 
approach or tear up the Cole memo and enforce federal law.

For the moment, legal marijuana companies are too consumed by the 
state and local laws that are enforced to worry about federal ones 
that aren't. The rules weigh heavily on companies that have a 
presence in more than one state because every state with a legal 
marijuana industry has its own laws on matters as varied as 
packaging, dosages in edibles (if they allow edibles) and dispensary security.

California is the largest legal medical marijuana market in the 
country, with more than $1 billion in sales last year, but some 
companies have stayed away because the state is a patchwork of local 
rules and enforcement priorities. For example, the Bay Area cities of 
Berkeley, San Francisco and San Jose each has its own packaging 
requirements for medical marijuana.

The Colorado company Dixie Brands has focused on Western states where 
recreational use is legal or could be soon. To Dixie, a large 
potential medical-marijuana market such as New York is less 
attractive because it can be difficult even for patients with severe 
conditions to access the drug. The five manufacturers in New York are 
"fighting over 200 patients," Dixie chief executive Tripp Keber said.

New York is more attractive to VireoHealth, a company that calls its 
products "pharmaceutical-grade cannabis-derived medicine." CEO Kyle 
Kingsley, also a physician, would ultimately like to see Vireo 
products incorporated into mainstream medical practice and regulated 
by the Food and Drug Administration. Vireo operates in New York and 
Minnesota, two states with medical-marijuana laws tightly focused on 
patients with a legitimate medical need. Neither state, for example, 
allows dispensaries to sell products designed for smoking. ( Vireo's 
manufactured products are vaporized or swallowed.)

More than 80 percent of Americans support medical marijuana in some 
form. Kingsley said that as more conservative states adopt medical 
marijuana laws, they'll find Vireo, which has raised $20 million in 
funding, a more palatable company than those that also have 
recreational businesses. Pennsylvania, which became the 24th state to 
legalize medical marijuana this month, will not allow smokeable products.

"Most states start pretty modestly and then about 18 months in you 
get an upward increase in patient participation," Kingsley said. "In 
Colorado, California and Washington, it really has been a 
free-for-all." ( Vireo owns both its New York and Minnesota 
businesses but is seeking partners to expand into new states.)

Not all of the multi-state partnerships are as complex as Strainz's 
three-state strategy. More typically, a company might franchise its 
brand and intellectual property to a partner in another state that 
follows the same protocols, much like a McDonald's restaurant that's 
owned by a franchise company is indistinguishable to one owned by the 
corporation.

Tom Downey, a lawyer at the Denver firm Ireland Stapleton, suggested 
that some of these deals might be more likely to attract scrutiny 
than others. "The place where people will get in trouble is if it's 
masked as a franchise but it's really [one company] controlling 
everything," Downey said. The federal government "will say this is a 
securities issue."
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MAP posted-by: Jay Bergstrom