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Forbes: America's Cannabis Industry: Balancing Strong Regulation

Updated: Dec 19, 2019

By Lewis Koski


Less than ten years ago, the legal cannabis industry barely existed; only a handful of states had legalized medicinal cannabis programs and none had legalized adult use. By 2020, at least eleven states will have legalized cannabis for adult use and 33 states will have legalized medicinal use in some form. But, surprisingly, while cannabis is one of the fastest growing industries today, it is also one of the most regulated.


This is no accident. At a time when most regulation lags behind industry developments (look no further than the technology industry), there is near-unanimous agreement among stakeholders that the cannabis industry should be well regulated from the outset. Because of this, regulation is helping to shape the market and not, as is more common, the other way around. This is only possible with a regulatory framework that’s both balanced and flexible.


I’ll start with flexibility. It’s impossible for regulators to know just how the policy will look in practice, what the unintended consequences and downstream impacts will be, and how the market will react within the emergent landscape. Once the regulatory policy is established, and the market starts to take shape within that framework, active “in practice” regulation must mold to this evolving market, and vice versa. Only by being responsive can a state support both the regulator’s ability to effectively regulate and the regulated community’s ability to comply..


But this in-practice flexibility must be paired with balance. On one end, rigid regulatory enforcement in states can dissuade eventual industry growth as smaller or economically disadvantaged businesses find it too challenging to compete in the legal cannabis market. Regulators who find themselves focusing mostly on enforcement end up in an adversarial relationship with an industry that, in turn, opts for more political influence. In such a rigid environment, the industry will either die or become too small to be effective.

At the other end, without the right government oversight and support, the industry growth described above can be disruptive and potentially dangerous. And loose oversight of state law may limit the advantages of businesses who are legal and compliant.


Dietary supplements, for example, have strong rules and provisions, but the market suffers from poor enforcement. They are so loosely regulated that the United States FDA reported only 69 percent of Class I recalls -- dangerous products that could cause serious health problems or death -- were successfully withdrawn between 2004 and 2011. Because 28 percent of dietary supplement manufacturers fail to register with the FDA, and due to other enforcement inefficiencies, serious health safety concerns have diminished consumer trust in businesses across the board.


Similar pitfalls exist for cannabis licensees despite their strong desire to comply. One of the biggest challenges the industry faces is finding efficient ways in which to demonstrate compliance. Laws and regulations are very dynamic in the cannabis industry so businesses are often buffeted by the constant changes that may or may not require capital investment and operational changes. Rules contain extensive record-keeping, product accountability, and public health and reporting requirements. The mandates are necessary and prudent but can create barriers for businesses that are not equipped with the tools, money, or personnel to obey them.


Because of this, it is not uncommon for licensed businesses in the cannabis sector to operate at a competitive disadvantage to illegal actors refusing to transition into the regulated framework. Bad actors evade burdens such as taxes, cost of compliance, packaging labeling, testing, and subsequently increasing retail prices. However, all of these costs saved come at a much higher price if a non-compliant business is discovered. This is why improving the focus for regulators right from the start will save everyone time and money in the long haul.


As has become evident in early-adopter states, cannabis markets have benefited from a more comprehensive structure that empowers regulators while fostering an industry’s will for accountability. Colorado, the first state to legalize recreational cannabis, experienced 266 percent growth in tax revenue from 2014 – its first year of legalization – to 2017, surging from $67 million to $247.4 million in that timeframe and generating more than one billion dollars in tax revenue to date. The sheer number of businesses now integrated into Colorado’s legal market, thanks to the state’s strong and flexible policy framework, have produced a booming market that helps fund government programs and initiatives.


After spending nearly a decade working on the government side of cannabis policy, I have found that the overwhelming majority of legitimate cannabis licensees have a strong desire to comply. Regulators must be intentional in informing policy changes that best equip businesses to fully adapt to all laws and standards. Establishing this trust will encourage a safe industry from the beginning, creating a strong baseline from which the market can eventually grow and evolve.


Originally published on forbes.com September/3/2019


Link to original article on Forbes


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