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 Vireo Health, 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.”