European lessons from the US cannabis legalization journey

By Mitesh Makwana, founder and chairman of AltoVerde

It cannot be denied that in recent years great strides have been made in the legalization of cannabis and the growth of a new industry. The legal marijuana industry in the US was valued at $ 13.6 billion in 2019, with 340,000 jobs devoted to plant handling, despite the fact that the plant is illegal as a List 1 drug under federal law. In addition, a total of 35 states and the District of Columbia have legalized marijuana for medical purposes, 16 of which will allow adults to legally use the substance for recreational use as of April 2021.

In Europe, there has been brisk activity in mergers and acquisitions of companies focusing on medical cannabis in Europe with a value of over 5 million euros since the beginning of 2019. A total of around 100 million euros in new money has been invested in companies with a focus on medical cannabis across Europe in the last 18 months. Compared to the period before 2019, this is a sharp increase, but Europe is still a long way from the values ​​of North America. This article takes a look at the key lessons Europe can learn from the US in order for its medical cannabis industry to reach similar heights.

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Legal and regulatory landscape

As the U.S. cannabis industry has grown and developed over the years, it has had to constantly adapt to an ever-changing landscape. Much of this landscape is related to the legality of the drug, as different states within the United States have different laws regarding the legality, use, distribution, and growth of the substance. While cannabis remains illegal at the federal level, a growing number of states are allowing cannabis companies to grow thanks to local legalization decisions at the state level. This has made it very difficult for cannabis entrepreneurs to start and grow their business, and has also acted as a deterrent for investors considering getting into the industry. This extremely unpredictable regulatory framework has made it very difficult for the U.S. cannabis industry to navigate.

Even if cannabis companies set up in a legalized state, they still face a variety of legal and financial obstacles. As a result, many companies are being forced to raise capital from Canadian investors as Canada has already legalized cannabis and found a suitable structure to facilitate the growth of the industry.

If European governments want to build an efficient, high-growth medical cannabis industry for both businesses and investors, they need to create a universal and easily applicable regulatory and legal framework. This framework should also be incorporated into UK legislation to avoid cross-border complications. Europe should also ensure that the industry is accessible to a broader segment of the population and put in place simplified rules to prevent smaller businesses from going bankrupt in favor of a monopoly.

Regulate taxes appropriately

In order for the European legal cannabis industry not only to thrive but also to displace the illegal market, taxes must be kept at an affordable level. If taxes, and therefore the total cost of legal products, are too high, consumers will continue to shop from alternative sources and unregulated markets. As of August 2018, California was missing its forecast annual tax revenue by $ 100 million after marijuana legalization. It’s no coincidence that California has high marijuana taxes. An eighth of an ounce (about 3.5 grams) that would cost $ 40 on the black market is about $ 70 in stores. Setting lower tax revenues will greatly benefit the legal industry, attracting new consumers and driving out illegal sellers for good. Once the illegal market dries up, taxes can be revalued to ensure that the legal cannabis industry remains sustainable.

To benefit from legalization, Europe should steer clear of 40% taxes on medicinal cannabis, which was the case in some parts of California before reforms. As predictable, high cannabis taxes are encouraging consumers to return to the black market. Conversely, imposing high taxes on cannabis companies, not the consumer, can lead to bottlenecks. An earlier iteration of Washington state legislation imposed 25% taxes on growers, producers, and retailers.

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Scale strategically

Maximizing production in and of itself is not a viable strategy. Cannabis producers need to strategically differentiate themselves from their competitors in order to optimize production and build a consumer base that will fuel their business. By moving away from trial and error and refining products through scientific research, companies can focus on product development that sets them apart from their competitors. Meeting a certain quality standard will also be crucial to stand out in a new market. Judging by the growing number of high quality cannabis products that will hit the market, inferior, mass-produced buds will become increasingly difficult to sell.

Access to banking

If European governments are successful in legalizing cannabis, banking will be the next area to be addressed and possibly the biggest role in growing the industry. As of this writing, cannabis companies in most states in the United States do not have access to banking services, preventing them from accessing much-needed funding and investment opportunities. Opening up banking to European cannabis companies will also be paramount in getting more cannabis companies public and opening them up to the kind of investments that will fuel innovation in the European cannabis industry. Only when cannabis is legalized across Europe will investors gain the confidence it needs to accelerate the growth of the industry and drive innovation to unlock the industry’s full potential.

All interested European parties, from banks and investors to long-term industry professionals and those who are looking for a first entry into the industry, must absolutely take note of the path taken by the USA and its missteps. Europe can use the US experience as a blueprint for building a competitive medical cannabis industry and as a lesson to avoid repeating its mistakes.

This article originally appeared on Benzinga and was republished with permission.