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From Sea to Shining Sea

There is no denying that we’ve seen huge strides in the legalization of cannabis in the last few years. We have effectively watched the birth – and growth – of a new industry. The US legal cannabis industry was estimated at US$13.6 billion in 2019 – with 340,000 jobs devoted to the handling of plants, despite the plant being illegal under federal law as a Schedule 1 drug. As of April 2021, 35 states and the District of Columbia have legalized cannabis for medical use –  and 16 of those allow adult recreational use

As for Europe, there has been a flurry of activity in mergers and acquisitions involving companies focused on medical cannabis since the beginning of 2019. In total, north of €100 million of new money has been invested in medical cannabis-focused companies over the past 18 months. Though this represents a sharp increase compared with the period before 2019, Europe is still far from experiencing the growth seen in North America. So, what key lessons can Europe learn from the US if it wants its medical cannabis industry to reach similar heights? Here, I outline four areas of consideration.

I. Legal and regulatory landscape

The US cannabis industry has had to continuously adapt to meet the demands of an ever-changing landscape. Much of this landscape relates to the legality of the drug, with different states implementing different laws regarding the legality, use, distribution, and growth of the substance. Though cannabis remains illegal at the federal level, state-level legalization decisions have allowed the growth of cannabis companies; however, the extremely unpredictable regulatory framework has made the US cannabis industry (understandably) hard to navigate. As a result, cannabis entrepreneurs struggle to start and grow their businesses, while investors are deterred from entering the industry at all.

Even if companies want to establish themselves in a state where cannabis is legal, they must still tackle a myriad of legal and financial barriers – and that’s why many companies have been forced to raise capital from investors in Canada, which has already legalized cannabis and found a suitable structure to facilitate the industry’s growth. 

If European governments are to build an efficient, high-growth medical cannabis industry for both companies and investors, they must establish a universal, easily applicable regulatory and legal framework. (Given the post-Brexit landscape, any framework should also be adopted into UK legislation to avoid cross-border complications.) Europe should also ensure that the industry is accessible to a broader demographic and establish simplified regulations to prevent smaller companies from going bankrupt to the benefit of a monopoly.

II. Regulate taxes appropriately

For the European legal cannabis industry to not only thrive, but drive out the illegal market, taxes must be kept at an affordable level. If taxes and, subsequently, the total cost of legal products are too high, consumers will continue to source from alternative sources and unregulated markets. By August 2018, California fell $100 million short of its projected annual tax revenue following marijuana legalization. It isn’t a coincidence that California has high marijuana taxes. An eighth-of-an-ounce (approximately 3.5 grams) that would cost $40 on the black market is around $70 in stores. Setting a lower tax revenue will serve the legal industry tremendously, attracting new consumers and driving out illegal sellers for good. Once the illegal market dries up, taxes can be re-evaluated to ensure the legal cannabis industry remains sustainable.

In short, Europe should stay clear of 40 percent taxes on medical cannabis – the amount companies in California were charged before reforms. Especially given that levying high taxes on cannabis businesses, rather than on the consumer, can lead to short supply. An earlier iteration of Washington state legislation levied 25 percent tax on cultivators, producers, and retailers – to great success.

III. Scale strategically 

Maximizing production is, in and of itself, not a viable strategy. Cannabis producers must strategically differentiate themselves from their competitors to optimize production and establish a consumer base that will drive their business. By moving away from a trial-and-error model and refining product through scientific research, companies will be able to focus on product development that will set them apart from their competitors. Meeting a certain standard of product quality will also be key in standing out in a new market; measured against the growing number of high-quality cannabis products that will flow into the market, low-grade, mass-produced flower will be increasingly difficult to sell. 

IV. Access to banking

If European governments succeed with the legalization of cannabis, the next area to be addressed – potentially the one that will play the largest role in the industry’s growth – should be banking. As it stands right now, cannabis companies in most US states cannot access banking services, blocking them from much needed financing and investment opportunities. Opening banking up to European cannabis companies will be paramount to seeing more businesses make their entrance on the stock market, opening them up to the kind of investment that will kickstart innovation within the European cannabis industry. Only when cannabis is legalized across the whole of Europe will investors gain the necessary confidence to accelerate the industry’s growth to its full potential. 

It is important that all interested European parties, from banks and investors to long-time industry professionals, take note of the path forged by the US, as well as their missteps. Europe can use the US’ experience as a blueprint to establish a competitive medical cannabis industry – and as a lesson in how to avoid repeating their mistakes.

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About the Author
Mitesh Makwana

Founder and Chairman of AltoVerde

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