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Cannabis, Marijuana, and Hemp

By Chris St. Martin and Sarah Morgan

Late last month, the U.S. Department of Agriculture published regulations on domestic hemp production. However, there remains significant confusion surrounding the legality of cannabis, marijuana, and hemp.

Chris St. Martin

Sarah Morgan

This confusion comes from state and federal governments’ shifting approaches to regulating these industries. It is even more difficult to understand the legal framework surrounding retail sales, which include hemp and CBD products, as well as marijuana products sold by state-licensed dispensaries. In this article, we hope to provide some clarity regarding what the laws say about cannabis and how they are being enforced.

What Is Cannabis?

Cannabis is a plant genus, or family, composed of three species: Cannabis sativa, Cannabis indica, and Cannabis ruderalis. The species have physical variations between them that allow them to grow in different environments, flower at different periods during the growth cycle, and contain different chemical properties (see discussion on cannabinoids below) that produce different sensations when ingested.

Strains (think, ‘flavors’) produced from the Cannabis sativa species tend to incite feelings of euphoria, boost energy and creativity, and lead to a more head-focused high. Cannabis indica, alternatively, primarily affects the body, and is often helpful in reducing muscle aches and pains and inducing sleep. For these reasons, strains cultivated from indica plants tend to be more useful for medicinal purposes.

“THC, or tetrahydrocannabinol, is the cannabinoid responsible primarily for producing the psychoactive effect, or the ‘high,’ commonly associated with ingesting cannabis.”

Cannabis ruderalis is somewhat between sativa and indica, and has lower yields, but can often be cross-bred with other species to create medicinal strains. The stems of this species can also be used to make clothing and textiles.

The flowering buds of the cannabis plant produce a resin that contains cannabinoids, which are unique chemical compounds found only in cannabis and interact with different receptors in the user’s central nervous system to produce the effects described above.

The ratio of the cannabinoids in a particular strain depends on the genetics of the plant from which it is derived — in other words, how the plant has been bred by selectively combining sativa and indica plants to emphasize particular cannabinoids over others and create a unique strain with individualized characteristics.

More than 100 cannabinoids have been identified, most notably THC and CBD.

THC, or tetrahydrocannabinol, is the cannabinoid responsible primarily for producing the psychoactive effect, or the ‘high,’ commonly associated with ingesting cannabis. Although THC is most notable for its psychoactive properties, it has also been purported to have medical benefits on the user and can be used to treat a variety of conditions, including seizures, inflammation, pain, nausea, depression, and anxiety.

CBD, or cannabidiol, has anti-anxiety effects on the user and is utilized primarily for its purported medicinal benefits. It does not produce psychoactive effects (in fact, it may lessen the psychoactive effects of THC), and, for this reason, although CBD and THC have similar medicinal benefits, some people may choose to ingest only CBD to avoid feeling the ‘high’ brought about by THC.

CBD can be extracted from the resin of the cannabis plant and can be processed into essential oils, tinctures, and other non-smokable forms. CBD can even be added to body-care products and applied topically.

Marijuana or Hemp?

The term ‘marijuana’ is generally used to identify cannabis that is cultivated for its intoxicating effect on a user. Marijuana was made effectively illegal under federal law with the passage of the Marijuana Tax Act of 1937.

The Legislature later classified, and criminalized, marijuana as a Schedule 1 narcotic under the Controlled Substance Act of 1970, during the nascent ‘war on drugs’ declared by President Nixon. Classification as Schedule 1 — alongside heroin, LSD, and ecstasy — means that marijuana is deemed to have no currently accepted medical use and a high potential of abuse.

Public sentiment has recently begun to reject this classification of marijuana and the total federal prohibition. Although, at this writing, marijuana remains illegal at the federal level, 11 states, including Massachusetts, and the District of Columbia, have passed laws legalizing marijuana for recreational use, and 23 others have legalized the use of medical marijuana. Since 2016 in Massachusetts, individuals age 21 or older may possess up to an ounce or more on their person and up to 10 ounces in their homes without violating Massachusetts law.

The Cannabis Control Commission (CCC), the agency tasked with regulating the state’s marijuana industry, provides further information regarding the Massachusetts law on its website.

Cannabis that is selectively bred for non-intoxicating properties is considered ‘hemp.’ Industrial hemp is one of the oldest cultivated crops in the world and is useful in formulating textiles, rope, paper, plastics, insulation, oil, and body-care products. Because of this selective breeding, hemp plants contain only trace amounts of THC, but their CBD levels are unchanged.

“State and federal legal developments have created a confusing CBD marketplace. Stores everywhere are selling CBD products intended for human consumption and making health claims about such products. However, both types of sales are illegal, according to state and federal agencies.”

Hemp is cultivated to enhance its distinctively versatile qualities, such as longer, more fibrous stalks and shorter leaves, rather than for the leaves and flower buds for which marijuana plants are cultivated. Because of this, hemp cannot be consumed as an intoxicant. Nevertheless, the Controlled Substances Act did not distinguish between marijuana and hemp (since both are technically cannabis) in classifying marijuana as a Schedule I substance; therefore, hemp was swept up in the heyday of the war on drugs and made illegal.

Changing Legal Framework

Under the Farm Bill of 2018, the U.S. Congress, for the first time, legalized the production and sale of hemp at the federal level, eliminating its status as a Schedule I narcotic. The Farm Bill and regulations define hemp as cannabis containing not more than 0.3% THC. Cannabis plants containing any quantity of THC above that amount are classified as marijuana, and remain illegal under federal law. In late October, the USDA published interim regulations on hemp production, which means they are subject to change after a public comment period but were effective immediately.

These regulations also set forth licensing requirements, procedures for testing THC levels and disposal of non-compliant plants, and rules governing other aspects of the industry.

The FDA has taken a more cautious approach, citing concerns about whether CBD is safe to consume in food and supplements. In an April 2019 statement, the agency sought to clarify its position on hemp products. The statement indicated that enforcement resources are directed toward illegal sales of CBD products that claim to prevent, diagnose, treat, or cure serious diseases, such as cancer.

However, it also stated that it is unlawful to introduce CBD-containing food into interstate commerce or to market CBD products as dietary supplements.

This means that effectively all CBD food products, including those derived from legally grown hemp, are unlawful, according to the FDA. The only hemp products that can be legally added to foods are hulled hemp seed, hemp-seed protein powder, and hemp-seed oil, because the seed of the hemp plant contains neither CBD nor THC.

The FDA has undertaken to develop CBD regulations, but despite repeated urging from the USDA and members of Congress, the former FDA commissioner indicated that that the rule-making process around CBD food products would be more complex than conventional products and could take years.

Massachusetts legalized hemp production as a component of the same 2016 law that legalized recreational cannabis. However, after the change of law at the federal level, both the state Department of Agricultural Resources and Department of Public Health issued policy statements on the same day imposing strict rules on hemp products. These two statements echo the FDA’s prohibitions on adding CBD to food products and making health claims about CBD.

What Can We Buy and Sell?

These state and federal legal developments have created a confusing CBD marketplace. Stores everywhere are selling CBD products intended for human consumption and making health claims about such products. However, both types of sales are illegal, according to state and federal agencies. Consumers, retailers, growers, and other stakeholders are looking for information about what is legal, what is not, and why there is so much ambiguity.

CBD derived from marijuana remains illegal under federal law. However, the U.S. attorney in Massachusetts has indicated he will not direct his office’s resources to federally prosecute cannabis companies that are permitted under state law, a move that has allowed the cannabis industry in Massachusetts to flourish. Under this state’s regulatory regime, marijuana products containing CBD, as well as THC, can be bought and sold at cannabis dispensaries that are licensed by the CCC.

Retailers in Massachusetts sell cannabis flower, edibles, concentrates, and other forms of marijuana containing both THC and CBD. CCC regulations do not classify edible marijuana products as food, allowing dispensaries to sell CBD-infused edibles without contravening the state Department of Public Health’s policy.

In contrast, despite the federal and state legality of producing hemp, some of the most popular hemp-derived CBD products — food and supplements — cannot be sold under either state or federal law. Nevertheless, the CBD industry may avoid total extinction, since CBD can be added to topical lotions and other cosmetics without defying the laws.

Non-food CBD products, however, represent a small percentage of the potential uses of CBD, and the loss of a valuable opportunity for introducing additional, more profitable products containing CBD into the marketplace adds further demand for the FDA to promulgate its promised CBD rules. Furthermore, hemp can be legally sold for rope, clothing, building material, and other non-ingestible uses, but hemp farmers have stated that Massachusetts currently lacks the manufacturing infrastructure necessary to process the plant for these purposes.

Chris St. Martin and Sarah Morgan are both litigation associates at Bulkley Richardson; (413) 781-2820.

Banking and Financial Services

Growing Concern

The American Bankers Assoc. argued it’s critical that legal, cannabis-related businesses have access to the regulated banking system as it urged the Senate to advance the SAFE Banking Act in recent testimony before the Senate Banking Committee.

Joanne Sherwood, president and CEO of Citywide Banks in Denver and chair of the Colorado Bankers Assoc., testified on behalf of ABA. Sherwood explained how current federal law prevents financial institutions from banking any money derived from cannabis-related businesses and how a narrow, banking-specific remedy to the cannabis banking problem will reap immediate public-safety, tax, and regulatory benefits.

“Because cannabis continues to be illegal at the federal level, handling funds associated with cannabis businesses can be deemed money laundering,” said Sherwood. “That federal/state divide has particularly severe repercussions for banks and communities like mine, where the cannabis industry is fully operational, but it also impacts banks in every state.”

With limited access to banking services available, large amounts of cash remain on site in many of the cannabis-related businesses, which creates significant safety concerns for the communities where they are located. For example, on average, more than 100 burglaries occur at cannabis businesses each year in Denver, according to the Denver Police Department.

“Providing a mechanism for the cannabis industry to access the regulated banking system would help those businesses and their surrounding communities by reducing the high volume of cash on hand, thereby reducing instances of cash-motivated crime,” Sherwood said.

Additionally, since many cannabis businesses do not have a bank account, they are forced to pay their taxes in cash at local IRS offices. Processing paper-based returns costs the IRS nearly 17 times more compared to an e-filed return — a cost borne by taxpayers. Cash-based taxpayers are also more likely to underreport income than those who receive payment by check or those subject to third-party reporting or withholding.

“Banking the cannabis industry is a straightforward way to ensure that businesses have the means and motivation to remain fully tax-compliant,” Sherwood said.

The SAFE Banking Act, which is currently before the committee for consideration, would help address this urgent problem. The bill specifies that proceeds from a state-licensed cannabis business would not be considered unlawful under federal money-laundering statutes or any other federal law and directs the Financial Crimes Enforcement Network and federal banking regulators to issue guidance and exam procedures for banks doing business with legitimate cannabis-related businesses.

“Although the SAFE Banking Act does not cure all of the cannabis-related banking challenges, it would help the 33 states that have legalized cannabis in some form to make their communities safer, collect their taxes, and regulate their cannabis markets effectively,” said Sherwood. “ABA supports the SAFE Banking Act and urges the committee to mark up and advance this legislation as soon as possible.”

Cover Story Uncategorized

Cannabis Ink.

Michael Kusek

Suffice it to say the cannabis industry in Massachusetts is growing and changing at a torrid pace, and it will continue at this speed for some time to come. There are myriad aspects to this sector, from the many different kinds of businesses within it to the dizzying number of products now on the shelves. Michael Kusek, a veteran journalist, has now made it his business — literally and figuratively — to help the public understand all it needs to know.

$20 billion.

That’s the number Michael Kusek offered — somewhat reluctantly and after some hemming and hawing — when he was asked to try to guesstimate how big the still-fledgling cannabis industry might become in the Bay State.

He was reluctant because no one really knows the answer to that question at this point, and they may not for some time. And Kusek knows that better than anyone, which is why he was asked in the first place.

Indeed, Kusek has established himself as the pre-eminent journalist in these parts when it comes to the broad, as in very broad, subject of cannabis, status earned by starting a publication devoted entirely to that subject.

It’s called A Different Leaf, with the subtitle A Journal of Cannabis Culture, and it hit the streets — that’s an industry term — just a few weeks ago. This will be a quarterly publication, sticker price $7 ($10 in Canada), and it now carries the tagline “Bringing You the Best of Cannabis in Massachusetts.”

It is, as Kusek will tell you himself, just the latest of many entrepreneurial endeavors rooted in (yes, that will be the first of many puns you’ll read) the cannabis industry. And he obviously believes it will be a success.

The first issue provides ample evidence of the fact that this subject matter, and this industry, are now quite broad, and Kusek and his team will have plenty to write about. Story headlines include these:

• “Tale of Two Cities: Cannabis may be legal statewide, but what gives with certain cities?”;

• The Grandfather of Cannabis: If you want to learn Massachusetts cannabis history, start with Lester Grinspoon”;

• “And Justice for All: The cannabis industry holds huge promise for new jobs, but who is getting to start companies?”;

• “The Women of Cannabis: These women are shaping the industry”;

• “Going Gourmet with Cannabis: Chef David Yusefzadah’s gourmet take on cannabis edibles and fine dining”; and even

• “Sex & Cannabis: Strategies for combining sex and cannabis.”

To put out such a publication credibly, Kusek has obviously had to set himself up as an authority on this subject, something few other individuals can claim. And as BusinessWest talked with him, he certainly spoke the part.

The cover of the first issue of A Different Leaf, featuring a piggy bank with the word ‘weed’ on it, sends a strong message about the industry and its potential impact in and on the Bay State.

When asked about the pace of businesses opening and some of the latest additions to the landscape, he rattled off the names of new dispensaries in far corners of the state. He knows which communities have voted to ban such enterprises, and he’s even put together a color-coded map to show people the breakdown, a map he says is quite revealing and shows a different twist on business in the Bay State when it comes to east-west dynamics.

“Start on the Cape, and at Provincetown and work your way west — from Provincetown to the elbow, all legal; from the elbow to the armpit, all banned,” he explained. “You get to the South Coast, there’s a smattering, a few banned, and then you get to the suburbs of Boston: the majority of ‘banneds’ in the state form a giant red ‘C’ around the city of Boston, which is this green dot right in the middle.

“That ‘C’ ends at Route 495,” he went on. “And from there to the Berkshires and the New York border, it’s all green with the exception of a handful of towns. So in a state where the gravitational pull of Boston for industry is so strong, the cannabis industry is 495 west.”

As for that question about how big the industry might get in the Bay State, Kusek offered that number, $20 billion — the high end, he acknowledged — but quickly added a caveat.

“In a state where the gravitational pull of Boston for industry is so strong, the cannabis industry is 495 west.”

“It all depends on what our neighbors do,” he explained, noting that, while Massachusetts is alone in the Northeast when it comes to states that have legalized cannabis and also have mechanisms in place for selling it, this probably won’t be the case for long.

As for how big the playing field might get in terms of locations and how many might eventually become too many, Kusek said the market will essentially determine this.

“Right now, there are only 20 businesses in the state, and they’re all pretty much opening their doors to a reasonably healthy amount of traffic,” he said. “That’s going to change over time.”

For this issue, BusinessWest talked at length with Kusek about his new publication, but mostly about the business of cannabis what dimensions in might take in the years to come and how this ultra-intriguing development will change life in the Bay State.

Stirring the Pot

“I didn’t smoke pot until college, when one night my freshman roommate and a friend sparked up my first joint. Two things happened: I didn’t get high, but my fear of cannabis evaporated. This thing I had been taught would ruin my life didn’t seem frightening — and from there it became part of my social life.”

That’s how Kusek began his “From the Editor” piece that introduced his magazine to the reader on page 3 of the first edition. He would go on to talk about how he found that cannabis helped him sleep better, and a few sentences later, he hit at the heart of what this venture is all about.

“Much of the cannabis media is aimed at people who are knowledgeable about cannabis, work in the industry, and/or are in their 20s. Where was the magazine for the older occasional user looking to expand their horizon now that legalization is real?” he wrote, adding that A Different Leaf is the answer to that question.

This map, indicating which communities have banned cannabis businesses (red) and which ones haven’t (green), shows how Western and Central Mass. are the big players in this emerging industry.

It is, indeed, intended for those who, like Kusek in his freshman dorm room, may have overcome their fear of cannabis (that’s may) but still have questions about this product that until very recently was illegal in this state. And Kusek backed up his assumptions that there are many, many people in this category with some anecdotes.

He mentioned a woman in her 70s who was wondering, as he did, if cannabis might help her sleep better without having to resort to sleeping pills, while a younger man asked him if cannabis might provide some relief for his aching knees.

These are the kinds of questions, coupled with growing certainty that a publication targeted to the people who were asking them would be viable and profitable, that prompted Kusek to greenlight his media venture.

Actually, it’s his latest media venture.

Indeed, Kusek, who told BusinessWest he has ink in his veins, has an extensive background in journalism, a second career launched after years of working as a development professional left him looking for something new and different.

“People started running in the other direction when they saw me,” he joked, referring to the latter stages of work raising money for various institutions, including the Springfield Symphony Orchestra.

He changed course and went into public relations and communications work for several years, and while doing that was recruited to handle marketing for the Valley Advocate.

“I had been on the outside of media for a number of years, but this was my first professional stint inside the media, and I really liked it,” he said. “I thought I liked the journalism side of it, which I do; I’m fascinated by it. But what I really began to get interested in was the business side of media.”

He left the Advocate in 2008 with designs to start an arts magazine for New England, but quickly surmised that 2008, the climax of the Great Recession, wasn’t a good time to start any business, so he put those plans on ice and went back into communications.

When times were better, the start of 2014, he launched Take, an arts and culture magazine that, while well-received by readers and crtitics, “never found its niche with advertisers,” said Kusek.

By 2017, Take was winding down, and Kusek was again looking for another challenge. He found one, eventually, in cannabis and a need he identified to create something for older, as in over 50, audiences.

There is a need to stress eventually, because he Kusek certainly didn’t rush into this. He said he did his homework, in the form of extensive research concerning both the emerging industry and the press devoted to it.

“I went to the Barnes & Noble in Hadley and purchased every cannabis magazine they had on the stands, and then I drove to the one in the Northampton and did the same thing,” he recalled, adding that, by the time he was done, he had quite a pile.

He would break these publications down into three categories — the ‘legacy’ magazines such as the well-known High Times, a huge number of business-to-business magazines, and a smaller number of titles he labeled ‘bro’ magazines, aimed at a decidedly younger audience.

What was missing from this pile, he determined, was something devoted to those 50 and over and not exactly experts on this subject.

Growing Like Weed

He describes what he came up with to fill that void this way: “Wine Spectator meets High Times for the 45-to-50-plus crowd,” an intriguing combination editorially that he was reasonably certain would be well-received.

But he knew that solid content without advertising support wasn’t going to get him very far. So he said his next step was to Google ‘cannabis and advertising,’ and the first thing that came up was a Boston Globe article quoting sources talking about how businesses within the cannabis industry were struggling to find media outlets to take their advertising dollars.

“I said, ‘I can take their advertising dollars,’” he told BusinessWest, adding that laws prohibit such companies from advertising on the Google Display Network, Facebook, and other platforms. “I thought there was some space there from a revenue standpoint.”

The first issue gives some evidence of this space, with ads from a number of recreational and medical dispensaries, agencies such as the Mass. Recreational Consumer Council, a hydroponics outfit, and businesses that support the industry, such as Brigade, a Hadley-based company that has helped a number of cannabis-related businesses with branding.

“I think the biggest threat to what could be a really interesting and dynamic industry is if big money rolls over the small businesses. You have some large multi-state operators that could, with their capital, become like Dunkin, with locations on every corner; they have enough capital to make that happen.”

With enough of these advertisers secured — and it took some time to secure them — Kusek decided to let the presses roll. He’s optimistic about the venture and predicts that, as the industry grows and more businesses across the sector open their doors and then desire to market their goods and services, he will have a sustainable business model. And looking down the road, he said the venture could certainly be expanded into other states and parts of the country as legalization continues to spread.

While watching for business opportunities, Kusek is also watching the industry as it grows and evolves in the Bay State. And while watching, he noted that things are certainly happening quickly and the picture is changing almost every day, something he finds both intriguing and challenging as a journalist.

“What’s interesting about being in the industry as a relative newcomer is how dynamic it is and how it changes week to week and month to month,” he noted. “There are always new businesses coming into the pipeline, and there’s new people coming on to the scene. As a journalist sort of keeping an eye on that industry, it’s a lot — there’s a lot of info coming in.

“In this business, a week feels like a month, and a month feels like a year because things move so quickly,” he went on. “We’re in a state where highway improvements are measured in 20- or 30-year increments, so the idea that we have a state agency that got an industry up and running in two years is pretty amazing.”

Also intriguing is the high level of transparency in this new industry, something Kusek said is unique within state government — “you don’t see the head of the DMV writing any open letters right now” — which he believes is a byproduct of expectations.

“This is an industry that grew out of a political movement,” he explained. “Legalization was a political movement, so you have activists, even though it’s legal, continue to pay attention. You have patient activists continue to pay attention to the medical program to make sure it’s serving people really, really well.

“And that’s very different from saying, ‘we’re going to expand the alcohol program, and there are a bunch of activists making sure it’s done right,’” he continued. “Lobbyists, yes, but activists? That’s a different story, and that’s been the genesis for the openness you get from the cannabis commission. If you want to follow how this industry grows, you can look in and see how the sausage is made.”

Stirring the Pot

Kusek said he has been struck by, and quite impressed by, the entrepreneurs now doing business across this broad sector.

They are pioneers of sorts, he said, charting new territory in a fledgling industry, and they’re also survivors in what has become a rugged contest to gain a license and open the doors to a business, an assignment far more difficult than it might look to the casual observer.

“I spend a lot of time with people in this industry, and I have rarely met harder-working people,” he told BusinessWest. “The idea of these people being lazy stoners is far from the truth. These people work around the clock to make their businesses work, and you have to give them credit for that, because it’s not easy.

“They got a lot of curveballs thrown at them,” he added, referring to, among other things, the often complex and taxing host-community agreements and the many hurdles that must be cleared on the way to getting a license. “These people just keep slogging forward, and it’s pretty impressive.”

Elaborating, he said it takes at least a year to attain a license, and there are significant upfront costs and expenses to be incurred before one can earn a nickel.

“One of the challenges with opening a cannabis business is that the license is attached to an address,” he explained. “So once you get your host-community agreement and start the application process, you have to buy or rent a building. And it can take months before you get that license; there’s a pretty good burn rate on your capital before you earn any money.”

This hard reality was one of the factors that delayed the first issue of A Different Leaf, he said, adding that many of the businesses he was counting on to support that venture were still waiting to secure a license.

When asked to look down the road and project what the scene might look like in a year or two — or 10 — Kusek reiterated that this is difficult because Massachusetts certainly won’t be the only state in the Northeast doing this for much longer.

At present, large numbers of people are crossing over the borders to the Bay State to buy cannabis products, he said, adding that soon, a relative term to be sure, they may not have to.

When asked about what might go wrong as the industry expands and broadens its influence, Kusek this, too, is difficult to project.

“I think the biggest threat to what could be a really interesting and dynamic industry is if big money rolls over the small businesses,” he explained. “You have some large, multi-state operators that could, with their capital, become like Dunkin’, with locations on every corner; they have enough capital to make that happen.”

At present, the Cannabis Control Commission has governors in place to limit such a threat, he added quickly, noting that entities are currently limited to three stores. But moving forward, the state needs to keep such measures in place to prevent monopolies from developing.

Meanwhile, there is the state’s Social Equity Program, designed to provide a pathway for individuals and businesses in communities of “disproportionate impact” to enter the adult-use cannabis marketplace. That program is laudable, said Kusek, and it provides opportunities for certain demographic populations, but these individuals face stern challenges to enter the growing cannabis marketplace.

“Overall, I think the state is doing a commendable job, from where I sit, trying to balance fostering small businesses, fostering this cadre of businesses that are applying under the Social Equity Program, with the big companies that are coming to Massachusetts,” he said. “It’s a very delicate balancing act.”

What also remains to be seen is how and to what extent the cannabis industry and players within it become part of the business community on a regional and statewide basis, he said.

“Cannabis people are thinking, ‘are we going to be welcome?’” he said. “Traditional industry organizations like AIM [Associated Industries of Massachusetts]… AIM was not in favor of legalization, but now it’s like, ‘we have this multi-billion industry on our hands — how do we make them part of our organization?’ It will be interesting to see how traditional industries embrace this.”

Give and Toke

“One thing I’ve discovered about cannabis in the last year is that it is a topic full of evolution, learning, and change.”

That’s how Kusek chose to essentially wrap up his initial message to his readers.

To some, that might seem like understatement given how the landscape has changed over the past year and how it is destined to continuing changing in the months to come.

But it also a reality.

Kusek now has a front-row seat for one of the most compelling business stories in this state’s history, and he is really enjoying both the view and the challenge of trying to capture it all.

George O’Brien can be reached at [email protected]

Law

What’s Next for the Cannabis Industry?

The cannabis industry is off to a fast and quite intriguing start in the Bay State, and two new categories of license have particular potential to move this sector in new directions: one for home delivery of cannabis products, and another for social-consumption establishments, or cannabis cafés.

By Isaac C. Fleisher, Esq.

We are nearly three years into the Commonwealth’s experiment with recreational cannabis, and the industry is finally moving beyond an amusing novelty.

The Cannabis Control Commission (CCC) reports that retail sales in 2019 alone have already exceeded $190 million, and this is just the tip of the iceberg. To date, the CCC has issued only 72 final licenses for marijuana establishments, but there are currently another 400 license applications that are pending or have received provisional approval.

Isaac C. Fleisher

This all means that, over the next few years, the Massachusetts cannabis industry is set to grow at an unprecedented rate. What we don’t know is how this growth will change and shape the industry.

Much of the excitement and rhetoric around legalization has focused on the potential to create new business and employment opportunities for communities that have been disproportionately harmed by prohibition and for local entrepreneurs. Lawmakers attempted to pursue these goals (with mixed success) through the design of the original regulations, with provisions for local control by cities and towns, special categories for equity applicants, and caps on the number of licenses that a single business could control.

The CCC has recently been grappling with these issues once again as it revises its regulations.

On July 2, after months of policy discussions and hearings, the CCC released new draft regulations for both medical and recreational marijuana, which will be open for public comment until Aug. 16. While most casual observers will not find the draft regulations to be scintillating reading material, there are a number of interesting new provisions that can tell us a lot about what the future of Massachusetts’ cannabis industry could look like.

Two new categories of license have particular potential to move the cannabis industry in new directions; one for home delivery of cannabis products, and another for social-consumption establishments (i.e., cannabis cafés).

Social Consumption

A social-consumption license would authorize businesses to sell cannabis products to customers for on-site consumption. Just think of your neighborhood bar, but it serves cannabis instead of alcohol. Under the proposed regulations, cannabis could be consumed at a social-consumption establishment in almost any form, except for combustible (i.e. smoking it the old-fashioned way), but even that possibility is left open by a provision for an outdoor smoking waiver.

Cannabis edibles would have to be prepackaged and shelf-stable, but there is no prohibition on serving prepared food on site, so long as the food isn’t directly infused with marijuana. That means we could soon be seeing cannabis restaurants that offer gourmet food alongside gourmet pot.

“There is no prohibition on serving prepared food on site, so long as the food isn’t directly infused with marijuana. That means we could soon be seeing cannabis restaurants that offer gourmet food alongside gourmet pot.”

The CCC is taking an incremental approach to this new class of license by including provisions for a social-consumption pilot program that would be limited to only 12 municipalities. Towns that participated in a working group on social consumption — including North Adams, Amherst, Springfield, Provincetown, and Somerville — would be among those able to opt into the pilot program. Licenses would initially be available only to applicants that were already licensed as a ‘microbusiness’ or a ‘craft marijuana cooperative,’ or applicants certified by the CCC as an ‘economic empowerment’ applicant or ‘social equity’ applicant. The pilot program is an interesting attempt to address the demand for new cannabis markets, while still preserving access for small, local, and minority-owned businesses.

Home Delivery

A licensed ‘delivery-only retailer’ could deliver marijuana products directly to a customer’s residence. Advocates for home delivery have long touted its potential to level the playing field between large, well-funded businesses and the small, local entrepreneurs the CCC seeks to attract.

In theory, a delivery-only licensee wouldn’t need much more than a vehicle in order to begin operating. However, the draft regulations include a number of provisions that could create substantial barriers to entry for small-time operators. Home-delivery orders would still need to go through a traditional brick-and-mortar retailer, who would presumably not be particularly interested in providing their product to competitors at wholesale prices.

Additionally, the draft regulations prohibit deliveries to any residence in a town that has banned brick-and-mortar retailers.

Numerous security provisions included in the draft regulations create further costly (and controversial) requirements for delivery-only retailers. Each delivery vehicle would need multiple surveillance cameras, and delivery agents would need to wear body cameras to record the entire delivery, including the customer. This has predictably resulted in a number of concerns about privacy and regulatory overreach.

At a recent CCC meeting, Commissioner Shaleen Title pointed out that, “to the extent that home delivery to [medical-marijuana] patients has been ongoing, there may already be security in place that goes above and beyond our regulations, and to my knowledge there haven’t been incidents … That seems to be an argument that you should not be putting in additional burdens and regulations.”

While body cameras got the most attention at the CCC’s meetings, one provision in the proposed home delivery regulations with the potential to be far more consequential is the option to use a “third-party technology platform provider” to facilitate the ordering process. In simpler terms, we could soon be saying “there’s an app for that.”

While there is still a thorny tangle of federal and state laws preventing a true e-commerce for cannabis, it’s not hard to imagine startups racing to be the first ‘Uber for weed.’ This would certainly make the consumer experience even more convenient, but it would mean yet another blow to the delivery only retailer’s profit margin, and does not seem consistent with the goal of lowering the barrier to entry for small businesses.

Of course, excitement about new markets comes with the important caveat that the rules still need to be finalized and, in some cases, there would need to be a corresponding change in state law. Nevertheless, it is encouraging to see that regulators are willing to consider new ideas for Massachusetts’ cannabis industry. The lines around the block at the first retailers have everybody seeing dollar signs, but with no statutory limits on the number of licenses that the CCC can issue, it is only a matter of time before supply exceeds demand.

In states that are further along in this process there is already evidence of a boom-bust cycle, as oversupply causes wholesale prices to plummet and smaller operators are forced out of the market. In Massachusetts, where the cannabis industry is still relatively nascent, there is still opportunity for regulators, consumers, activists, and entrepreneurs to play important roles in shaping the future of the industry.

Attorney Isaac C. Fleisher is an associate with Bacon Wilson, P.C., where his practice is focused on business and corporate law, with particular emphasis on the rapidly expanding cannabis industry. An accomplished transactional attorney, he has broad experience in all aspects of business representation, for legal matters ranging from mergers and acquisitions to business formation and financing; (413) 781-0560; [email protected].

Opinion

Editorial 1

A year ago — and, actually, long before that — this region was awash in speculation about what the gaming industry might bring to the region and what its broad impact might be.

The industry was new to the state, and there were questions. There was also excitement, some anxiety, no shortage of opinions, and plenty of hope. A year later, most of those emotions are still in evidence, and there remain many questions.

But in the meantime, another industry has emerged that apparently has the potential to have far more reach and far more impact: cannabis.

As several different stories in this issue reveal, the cannabis industry has certainly put down roots in the four counties of Western Mass., and while it’s still too early to know for sure, it appears to have far more potential to change the landscape — in all kinds of ways — than gaming.

Why? Because this is a far-reaching industry with myriad moving parts and potential business opportunities — from cultivation to retail to real estate to, yes, a new publication (see page 6). Also, it is seemingly far more democratic.

Indeed, while the gaming industry is reserved for large, as in very large, players investing $1 billion or more, the cannabis sector offers opportunities for individuals and small groups of investors — not that getting into this business, let alone succeeding in it, would be considered easy in any way, shape, or form.

And, as Michael Kusek, founder of that publication, A Different Leaf, points out, this is one of the few industries in this state where the opportunities are in Central and Western Mass., not Boston and within the Route 128 beltway. That’s because the majority of cities and towns in this region are welcoming of this industry, while most of those surrounding Boston are not.

When Easthampton Mayor Nicolle LaChapelle said her community was “head over heels in love, I would think, with cannabis, and I don’t think that’s overstating it,” she wasn’t just speaking for many of her colleagues — remember, Holyoke’s mayor, Alex Morse, joked to a television reporter that his goal was to rename the city the ‘Rolling Paper City’ — but she was speaking about how this sector can be a real game changer in terms of everything from jobs to tax revenue to foot traffic on Main Street.

The cannabis industry is not an easy one to follow. As noted, there are a lot of moving parts, and the scene changes every month, if not every week, as new locations open, more host-community agreements are forged, and more real estate is acquired for the purpose of establishing businesses in this sector.

But as hard as it is to keep track of all that is going on, it’s a worthy endeavor, because this industry certainly bears watching. No one really knows how things will shake out as more and more locations are opened and, eventually, more states decide to follow the Bay State’s lead.

But it seems almost certain that this sector will bring more impactful change, from a business perspective, than anything this region has seen in decades.

Features

Hopes Are High

After recreational marijuana use became legal in Massachusetts in 2016, the expectation was that retail stores would pop up quickly within a couple of years. That hasn’t happened, as the state — and host communities — have taken a deliberately measured approach to permitting. But with early returns strong from a few shops, and towns reporting solid tax benefits and no real community disruption, the pace of openings should begin to increase — and so will the economic benefits of this new industry.

If Western Mass. was full of people who thought the sky was falling when recreational marijuana was legalized, well, Mark Zatyrka thinks fewer of them are saying the same thing now.

“I knew it would change. But I feel like it’s changed at a more rapid pace than I would have expected,” he said of public perceptions about the new access to cannabis products in the Bay State. “When we held our public meetings, we had a few folks who thought we were going to destroy the world and everything would come crashing down once we opened. But the opposite has been true.”

Take the location of INSA, the cannabis dispensary he owns in Easthampton, which has sold marijuana for medical purposes since February 2018, but began selling for recreational, or adult, use in December. Tucked beside Eastworks at the rear of the Keystone Mills building on Pleasant Street, he said some may have worried about INSA’s proximity to a nearby park where people hike.

“But, really, we bring more people to the area, we have cameras all over the place, it’s well-lit, so it’s actually a safer place to be,” Zatyrka said. “If the perception was that customers are hoodlums who come in, go out back, and get high and do crime, well, look around — we serve almost every demographic you can imagine, from seniors to millennials, rich and poor, and they’re not violent criminals. They’re not here to cause trouble. Yeah, the perception has changed pretty rapidly.”

Perceptions — pro and con — of this new industry have undoubtedly shaped a permitting process, on both the state and local levels, that has moved more slowly than first expected when recreational use became legal in 2016. The state’s first adult-use retail shops were expected to be open last July, but instead, the first two opened in November, and the pace of new shops since then has been leisurely at best.

But they’re coming. And the ones that are open are changing those worst-case perceptions.

Mark  Zatyrka says INSA has attracted a diverse array of customers

Mark Zatyrka says INSA has attracted a diverse array of customers since starting recreational sales in December.

Take New England Treatment Access (NETA) in Northampton, the Bay State’s first retailer of cannabis products for recreational use.

“For us, it’s been a positive experience,” Northampton Mayor David Narcewicz told BusinessWest. “We’re starting to see some of the economic benefits in terms of taxes, and I know our local businesses have been creative in embracing the new industry. Businesses back in November were offering specials to people who came into town and showed a receipt for shopping at NETA. If anything, I think the business community has been receptive.”

He noted that Northampton’s voters were among the most enthusiastic in their support of legal cannabis, both during the 2012 statewide vote to legalize medicinal marijuana, then for adult use in 2016. As mayor, he said, his approach has been to respect the community’s voice.

“So we’ve been very open and proactive; we created zoning regulations that essentially treat this new industry like any other business, and we did not impose caps on the number of retailers like many communities did.

“We also had the experience of having one of the first medical dispensaries in the state,” he added, speaking of NETA’s original business plan. “We had a track record of seeing how they had operated and had the chance to see what the potential impacts were. They’ve been a good member of our business community; they worked with us to make sure their opening went smoothly, and have been working with surrounding businesses to make sure there’s no disruption.”

Stories like this are why, despite the slow rollout of pot shops so far — and state tax revenue well under early projections — proponents are confident that the trends toward greater public acceptance of this industry, and tax revenues to match, will soon accelerate.

“As an industry, we’ve done a good job to ensure that things are done correctly, and the state’s done a good job putting measures in place to help ensure it is a safe industry and people are getting a safe product and it’s dispensed in a safe way,” Zatyrka said. “The state did a lot of things right, which is why we’re seeing a successful rollout. I know some people wish it moved quicker, but I understand why it didn’t. There are thousands of applications, a lot of inspections, a lot to oversee. It takes time. It’s a new industry for everybody.”

Green Growth

As part of its new marijuana laws, Massachusetts imposes a 17% tax — a 6.25% sales tax plus a 10.75% excise tax — on cannabis businesses, while cites and towns take another 3%, plus whatever else they may choose to impose as part of their host-community agreements.

In Northampton’s case, that’s an additional 3%, called a ‘community-impact fee.’ The city received two checks recently: $449,825 from the Department of Revenue representing the 3% tax rate for recreational marijuana sales in November, December, and January, and $287,506 from NETA itself, reflecting the 3% community-impact fee on recreational sales for December and January.

“When we held our public meetings, we had a few folks who thought we were going to destroy the world and everything would come crashing down once we opened. But the opposite has been true.”

Other towns are seeing their coffers benefit as well. Theory Wellness opened in Great Barrington in December, paying $90,000 in taxes to the town in its first month.

“They opened to long lines, which should level off as they get more competition,” Ed Abrahams, vice chair of the town’s Select Board, told BusinessWest last month. “This is new for all of us, but so far, there have been logistically few problems.”

Southern Berkshire County communities that embrace the cannabis trade are sure to benefit from the continued illegality of the drug in both Connecticut and New York, though leaders in both states have been talking about whether that should remain the case. Brandon Pollock, CEO of Theory Wellness, told the New York Post last week that about 15,000 New Yorkers have made purchases there since its Jan. 11 opening.

“I’d say we get dozens, if not hundreds, a day from the greater New York City area,” he noted. “We get people coming up in Zipcars, people carpooling, people who say they hardly ever drive at all — but will drive to purchase cannabis.”

That sort of consumer response is intriguing to towns that see this industry as a new economic driver.

“Some cities have been great to work with, some a little more difficult to work with,” Zatyrka said. “Easthampton is very progressive city, and early on it was very obvious they wanted us here.”

That’s important from a competition perspective, he said, because the application process is already time-consuming, and communities that want to make it even more difficult to move through permitting and craft a host-community agreement can tie up a project for years, while other shops in more amenable towns are opening and picking up crucial market share and customer loyalty.

“Easthampton was great,” he went on. “Everyone wants to find a solution instead of putting up roadblocks. They want us to be successful, to get their name on the map, and they saw the benefits early on.”

He’s seeing a gradual shift, too, in where proposed projects will be located, noting that, when INSA started cultivating marijuana for medical use, most such outfits were setting up in old mill buildings or industrial parks. “Now it’s not so restrictive — people can open up on Main Street, and wind up in locations that are made for retail use, for people to come visit.”

That’s certainly the goal in Northampton, which is looking at myriad applications from cannabis manufacturers, cultivators, testing labs, and retail establishments, Narcewicz noted. It welcomes them because it sees value in how NETA, which isn’t even located downtown, has impacted business.

“NETA has created good-paying jobs in the community, and it’s an important way to expand our tax base and grow our local economy,” he said. “We have a local economy focused on retail, dining, entertainment, and a very vibrant cultural economy. And I think this complements it.”

There have been traffic and parking challenges, he added, “but if you talk to most retailers, downtowns having too many visitors is never a bad thing. We’re kind of equipped to handle a lot of visitors. And NETA has been very responsive in terms of renting additional parking from neighboring businesses, which helps them as well by providing an income stream. So far, it’s been a very positive experience, and there’s no reason to believe that’s going to change.”

Making a Name

BRIGADE has certainly benefited from this new industry. The Hadley-based brand-services company has worked with INSA extensively, including the creation of the designs for all its products and marketing.

“Everyone calls cannabis the wild west, and it is from a branding and design perspective, too,” said Kirsten Modestow, BRIGADE’s owner and executive creative director. “The rules for a whole category are being written overnight. That’s challenging, but it’s also some of the most exciting stuff we’ve ever worked on.”

With some cannabis businesses coming out with 100 or more products, it presents a unique branding challenge, she added, because the goal is not only to create a memorable look, but to help customers, many of whom have little experience with marijuana, navigate the products.

“One of the upsides of this industry is the impact it’s having on our communities, and it’s providing a lot of new opportunities and jobs,” she said. “It’s providing a lot of work for people, even tapping into farmers and other people who have services to offer and know what they’re doing.”

The education aspect Modestow touched on is one that continues in the store, Zatyrka said. The sales associates — he prefers that title to the flip industry term ‘budtenders’ — are the same ones who have worked with medical patients for a long time, and they have the training to dig deep into the science behind the products, so they can effectively explain them.

“We understand it’s a product that needs to be consumed safely, and we take that seriously,” he said. “We don’t want to be liable for someone who doesn’t know what they’re doing and eats an entire chocolate bar and has to go to the ER. We do all in our power to prevent that from happening.”

The coming months and years will see more education (and more tax revenues) as pot-shop openings pick up the pace — including Evergreen Strategies, LLC, which recently inked a host-community agreement with Belchertown to bring a facility to that town as early as this fall.

The Boston Globe recently cited industry analysts who say Massachusetts has a much slower local approval process and a more complex system to navigate than other states, and the state Cannabis Control Commission has placed a premium on an adult-use regulatory structure that supports public health and public safety. The measured pace ensures that stores pass inspections, sell lab-tested products, hire vetted workers, and track their products.

“It’s a growing industry, and will continue to grow,” said Zatyrka, who plans to open an adult-use dispensary in Springfield and has a cultivating and manufacturing license in Pennsylvania as well. Meanwhile, INSA is doubling its cultivation — located directly above the Easthampton store — and is looking to triple it in the future. “We’re still a few years out before we can meet the demands of the state. So it’s going to be hard work until then to keep up our supply with demand.”

The work is rewarding, though, especially for someone who treated his chronic pain for more than 15 years with oxycontin, oxycodone, morphine, and methadone, and suffered side effects that drastically outweighed the benefits.

“Thanks to cannabis, I was able to stop taking them,” Zatyrka said. “Cannabis helped with the withdrawals, and now I only use cannabis to treat my chronic pain, and it works 100 times better than all the opioids. I know firsthand the power of cannabis versus painkillers.”

He tells that story not because it’s unique, but because it’s representative of many people he comes across, with stories about how cannabis has helped them with seizures, Crohn’s disease, arthritis, and multiple sclerosis. And if legal adult use is helping to tear down the last bits of stigma around cannabis, he’s all for it.

“It’s incredibly gratifying to hear the stories and how grateful people are,” he said. “They’re able to get benefits from cannabis, and don’t have to hide it like they once did.”

Joseph Bednar can be reached at [email protected]m