Hilary Bricken on investing in cannabis

Hilary Bricken heads the cannabis law group at at Harris Moure, PLLC  and will lead the panel on “investing in cannabis” at the NYU Cannabis Science & Policy Summit two weeks from now. She has some good advice both for firms in the cannabis business seeking investors and for potential investors about the risks the firms need to disclose and the investors need to consider.

Since Hilary is a lawyer, her primary stress is on risks posed by the fact that the entire industry – even the part regulated by the states – is still completely illegal under federal law.  I’ve read some pretty scary prospectuses in my day (back before Harold Pollack warned me about investing in individual companies), but I’ve never seen anything quite as bracing as this:

The federal government may raid us, seize all of our equipment and inventory, and arrest all of our employees, officers, and investors, including you.

Since I’m not a lawyer, but merely a close substitute for an economist, I would put even more stress on a less spectacular but far more probable risk, which I might put in prospectus language about as follows:

Future prices in the state-legal cannabis markets, or under federal legalization should that take place, are unpredictable, but almost certain to be far lower than current prices in those markets or in the illicit market. Cannabis is naturally cheap to produce, and competitive pressures will relentlessly force market prices for cannabis as a commodity down toward the level of costs. There can be no assurance that the Company’s best efforts to secure durable market advantage through branding, product innovation protected by intellectual property rights, or regulatory favoritism will succeed; if they do not, your investment will almost certainly become worthless.

So while all of Hilary’s legal advice is solid, I’d add one more word of economic advice about investing in the emerging legal cannabis industry.


Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact: Markarkleiman-at-gmail.com

One thought on “Hilary Bricken on investing in cannabis”

  1. Mark–I had a client who was approached with a proposal to invest in a Maryland business. Such an activity will soon be legal under Maryland law. My client did not go forward with the deal for a variety of reasons.

    However, I was very skeptical of the deal from the beginning because I couldn't for the life of me figure out how a "legal" marijuana business in Maryland will ever make money since (i) the business cannot deduct expenses for federal or state tax purposes (See IRC § 280E) and (ii) a point that you make explicitly, the costs of production are so low. My sense is that Point (i) will result in fairly high costs on the "legal" market since one cannot deduct ordinary and necessary business expenses and, of course, there will be a fairly high excise tax. This, in turn, encourage a lot of "grow your own" because the cost of home production is so low. This would be especially true in Maryland due to its proximity to Washington, D.C. which will allow home growing. (Yes, the amounts that one can legally grow under DC law are limited and the product can't be sold to third parties. In time, however, the de facto limits on production will likely exceed the de jure limits under the statute. And, police are likely to be relatively lax in actually policing illegal sales. The net result will be a lot of illegal selling into the Maryland marketplace.)

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