insight magazine

3 Things to Scrutinize Before Engaging With Legal Cannabis Companies

Watch for these red flags to ensure your investment, partnership, employment, or other engagement with a legal cannabis business doesn’t go up in smoke. By Merilee Kern, MBA | Digital Exclusive - 2019

canna-800

With the legal cannabis industry projected to exceed $50 billion by 2022, according to Cowen & Co., and related areas like agricultural technology, infused products, and software attracting copious investor dollars, the future for many stakeholders is decidedly green.

Given the legal cannabis industry is reported to be the single fastest-growing industry in the United States, it’s certainly no surprise that the “green rush” mentality has trend-driven, profit-minded companies, entrepreneurs, investors, job seekers, and even CPAs, putting politics and sometimes values aside to find ways to leverage the legalized cannabis industry to boost their bottom lines. However, “given the extent and complexity of issues surrounding safety and security, regulatory and compliance matters, technology and other key concerns that can vary from state to state, there are a number of key factors to examine before formally engaging or investing with a company operating in this space to best protect your interests,” warns Zachary Venegas, CEO of Helix TCS Inc., a provider of security and transport, data analytics, and compliance tracking solutions for legal cannabis businesses.

“It's imperative to proceed with extreme caution, as seemingly legitimate purveyors in this space can still be riddled with red flags and hazards that they themselves may or may not be aware of, which are often not apparent to an outsider without proper due diligence,” Venegas explains. “No profit-minded professional would prudently ignore such a market, but one must be mindful that this unique sector is rife with complex legal and regulatory risks.”

To help professionals navigate what can be a treacherous field of issues while engaging with cannabis companies, Venegas offers this advice for scrutinizing legal cannabis companies:

Be skeptical of fast expansion.

This can be an indication that a company is prioritizing growth over regulatory compliance, which varies drastically by state. Companies that play it safe usually aren’t the ones to end up making waves. But, when it comes to the cannabis industry, there’s a caveat: According to Venegas, being cautious with regulatory requirements isn’t a mistake—it’s good management. Not being methodical in complying with regulations at both the local and federal level means these businesses are a step away from disaster.

Consider that early adopter states like California intend to get tough on illegal pot purveyors. For example, California reports that state funds for enforcement would nearly double in the fiscal year that began July 1, 2019, and the state is actively driving public information campaigns to help consumers get "#weedwise" about making purchases from properly state-licensed cannabis businesses. Using tools like CApotcheck.com, consumers and industry players alike can readily vet an organization.

One other way to evaluate a cannabis business on this point is to examine their legal team. Any legitimate business who plans to stay in this game must have proper legal advice. If they don’t have lawyers, it’s highly possibly they’re not being mindful of this sector’s ever-changing legal landscape.

Avoid businesses without foundational advantages.

When trying to predict which companies will be around for the long-haul, investors should look to Canada, which legalized recreational marijuana in 2018. Nine out of the world’s top 10 cannabis companies, all Canadian, first had a solid grounding in supplying medical cannabis before branching into recreational products.

“An advantage in infrastructure is huge,” Venegas notes. “We all tend to like the story of the tiny startup blowing up overnight, but the businesses most likely to take advantage of legalization are those who have existing footholds in the industry and the connections to exploit them. A lot of these smaller operations will be squeezed out of the market once legalization is widespread and larger players join in.”

Mind executive experience.

A must in any engagement scenario is studying a company’s team, but this takes on another level of importance when it comes to the cannabis industry. The mess of varying state regulatory environments, future legal developments, and political concerns means every cannabis business will face a set of unique challenges that few other companies will. Executives or advisors with a background in the medical cannabis industry are ideal, as this can well-prepare a company for future changes across various verticals beyond pharma with respect to recreational marijuana and a litany of CBD and hemp-oriented consumer goods. Even executives or advisors in other industries that comparably navigate stringent regulatory and compliance challenges can be a boon. This might be why tobacco companies are betting big to become major players in the cannabis market.

“I’ve seen the good, the bad and the ugly at this point in my career—including how each of these scenarios has impacted the marketplace at large,” Venegas notes. “I’m thrilled to boil some of this key learning down to tips and tools that other professionals and businesses can utilize to keep themselves out of harm’s way...financially, legally. and otherwise.”

Keeping this bit of baseline wisdom in mind can help you avoid getting burned when endeavoring into the legal cannabis trade.

Merilee Kern, MBA, is the executive editor and producer of The Luxe List and an internationally regarded brand analyst, strategist and futurist. This article has been modified for INSIGHT. The original version can be viewed here.

Leave a comment