The Top Four Risks for Cannabis Businesses and Investors in 2024

02 Jan The Top Four Risks for Cannabis Businesses and Investors in 2024

2024 is going to be a crazy year for cannabis businesses and investors. Among many other things, there will be a general election, possible rescheduling to Schedule III of the Controlled Substances Act (CSA), an upcoming Farm Bill that could re-tool how hemp and hemp products are regulated, and maybe even some federal cannabis legislation. Okay, that last one is probably a longshot given how incompetent Congress has been on cannabis, but we’ll see.

Changes in law lead to a lot of predatory conduct. Even the mere possibility of changes leads to predatory conduct. This means that both existing cannabis businesses, as well as investors, have a huge amount of risk going into the new year.

Our cannabis business attorneys have been representing clients in the cannabis industry since 2010. During that time, we’ve seen the industry face a whole host of problems. Today I want to talk about some of the biggest potential risks that I think cannabis businesses and investors will face in 2024.

1. The unrelenting illegal market will get worse

I’ve been writing about the illegal market problem forever. Just look at what I’ve written about for California. The illegal market is not going away. It has gotten bigger over the years and there is no apparent end in sight. No amount of enforcement will change that. The only way to change it is to wrap illegal operators into the legal market, and the only way to do that is to make it very easy to get into the legal market. But there is no momentum for that.

There are a lot of vested interests in keeping the industry small, especially in states or jurisdictions with hyper-restrictive caps. That’s going to just make things harder. So expect the legal market to grow – and to grow big. And expect its growth to come at a major cost to the success of licensed cannabis businesses who pay taxes, get licenses, and do things right.

Why will 2024 be different? Well, all of the changes in law that we anticipate mean big changes for how state-regulated cannabis businesses operate. But they have essentially no impact on the illegal delivery service or illegal grow operating in the dark. Changes in law may make things easier for state-licensed businesses in the future, but they will come with initial costs, making it even harder to compete.

Additionally, as people realize that in some states (looking at California) there is virtually no penalty for illegal operations, expect the illegal market to grow and grow and grow.

2. Intoxicating hemp laws will change

In 2018, President Donald Trump signed what’s commonly referred to as the 2018 Farm Bill. That law, among other things, removed hemp from the Controlled Substances Act. It did not explicitly legalize any hemp-derived consumable product, instead dealing with hemp cultivation and reserving authority over many consumable products in the FDA.

Following the 2018 Farm Bill, CBD exploded in popularity. Then something else happened – people started selling a host of natural, and then synthetic, intoxicating hemp cannabinoids – everything from delta-8 THC to THCA flower. These intoxicating hemp products are one of the most existential threats to the state-regulated cannabis industry. They are produced and sold across state lines with often little to no oversight or regulation, and virtually no enforcement.

Proponents of intoxicating hemp products cite purported loopholes in the 2018 Farm Bill to claim that these products are 100% legal. However, as I’ve explained before, many of these claims are either wrong or are a big stretch. And to make matters more complicated, the answer is susceptible to change on a cannabinoid-by-cannabinoid basis and subject to wildly different state law approaches.

Here are some of the things I expect could happen in 2024:

1. States will continue to ban intoxicating hemp, and stakeholders will continue to sue those states
2. Congress could restrict intoxicating hemp in the next Farm Bill iteration
3. Cannabis businesses will be forced to compete with intoxicating hemp products, and there may be lawsuits between the two – or many cannabis companies will start offering intoxicating hemp products on the side

Why is all of this in an article about risks? Investors contemplating an investment into an intoxicating hemp business, as well as cannabis businesses looking to pivot into the space, have no idea what the future will hold. What could be a promising business model or investment today could turn into mush in five months if federal law changes. Nobody really knows what the future holds.

3. What’s going to happen with federal law?

For a while now, everyone’s been predicting that federal laws will soon change and that cannabis will be on schedule III of the CSA. But a lot of the reporting is based on an extremely limited public data set – virtually all of the publicly available documentation has been redacted beyond belief. And there is ample opposition to rescheduling within the federal government.

All of this means that rescheduling is by no means guaranteed – let alone on any fixed timeline. I tend to think that rescheduling will happen in 2024 and before the election – it’s clear that Biden is trying to appeal to voters on the cannabis issue with his recent pardons – which do not go even remotely far enough – and a limited rescheduling will give him a push with voters. However, schedule II rescheduling is also possible, which would not help resolve many federal tax issues.

It’s important to point out that even if cannabis is placed onto schedule III, nobody really knows exactly what would happen. Go ahead and look online – you’ll see opinions ranging from “rescheduling will be the end of the industry” to “rescheduling equals full legalization” and anything in between.

All of this is to say that we don’t know what the future holds. Basing a business model off of the potential that cannabis will (1) be rescheduled, (2) be rescheduled onto schedule III, and (3) that the post-rescheduling landscape will look any particular way is, well, foolhardy. Many cannabis businesses will do it anyway, and will face the consequences. So too will investors who fail to diligence their targets.

4. Unwary investors will lose big time

In 2024, we fully expect to see a level of fraud and mismanagement that we have not seen yet. A lot of smaller investors – and even institutional ones – are going to lose a lot of money investing in cannabis businesses in the coming year. We expect to see is that OTC market and Canadian public companies will use expected changes from the upcoming Farm Bill and rescheduling, as well as the opening up of new cannabis markets, to pump and dump stock. As we explained:

It almost seems that publicly traded stock companies are more focused on selling their stocks than on competing in the market. The herd mentality of investors seems to encourage this. Here’s how that basic logic works: Marijuana is booming. Therefore, marijuana businesses must be booming. In turn, all marijuana businesses must be booming. Therefore, I need to invest in a marijuana business. The only way I can easily invest in a marijuana business is to buy the stock in a publicly traded marijuana business. And so the stocks just keep booming.

This will be a problem with publicly traded cannabis businesses, but will be rampant for private companies that are subject to much less oversight from securities regulators. We expect to see investors being hoodwinked by overly aspirational, or outright fraudulent pitch decks from cannabis businesses. Again, a lot of this will be based on false promises about federal legalization and/or the effects of federal legalization on tax and banking issues. This has been a persistent problem for years and years, but with the potential for rescheduling actually on the horizon, we expect to see a lot more of it.

For years we’ve represented investors in evaluating potential investments into the industry, or in suing companies when things go south (and they do a lot!). There are telltale red flags when doing diligence of cannabis businesses, and a lot of them are much different from what you’d see investing into any other type of business. Investors who are not sufficiently prepared and who do not do their diligence will lose a lot of money in 2024.