For Your Consideration...

The Impact of Legalized Cannabis in the U.S. – Part 1 of 2

There are now 33 States in the US with some form of medical marijuana program and 10 States that have legalized cannabis for adult use, and the question on everyone’s mind is “what will the impact of legalized Cannabis be on the US once prohibition ends?” This article will examine the potential impact on the US from several different perspectives.

American flag graphic in the shape of a marijuana leaf

  • Government: State and Federal Tax revenue
    Looking at a few States, Colorado reported a billion dollars in sales in 2018, adding $200 million to state coffers in tax revenue. Nevada collected almost $70 million in tax revenues in its first year of adult use sales and exceeded projections. Other states that are considering adult use legalization are releasing estimates. A 2018 report by the Illinois Economic Policy Institute (ILEPI) and the project for Middle Class Renewal at the University of Illinois at Urbana-Champagne projected that an estimated $1.6 billion would be sold in the state of Illinois with approximately $525 million generated in new tax revenues (pdf file) based on a 26.25 percent excise tax on retail cannabis in addition to the 6.25 percent general tax. In addition, over 23,600 jobs would be created and more than 2,600 new businesses would be formed. This would be a significant boost to the Illinois economy and represents a microcosm of the overall impact legalization would have on tax revenue, jobs and new business creation on a national level. On the federal level, a 2017 report by New Frontier Data estimated that legalizing cannabis at the federal level would lead to $131.8 billion in aggregate tax revenue being collected between 2017 and 2025. The number was based on a 15% retail sales tax, payroll tax deductions and business tax revenue. Although this estimate was based on a 35 percent retail tax rate before the tax cuts in December 2017, the revenue is still enormous. However, there is a catch-22…
  • Balancing Act
    The catch-22 in regards to federal legalization is that there are currently no tax exemptions available to cannabis companies under tax code 280E. This forces cannabis companies to pay tax on their gross profit rather than net profits, resulting in real taxation rates of 70% to 90% on income by some estimates. So while the plant remains classified as a Schedule 1 drug, the federal government continues to rake in an increasingly large windfall in tax revenue as the industry matures and larger players enter the space. The Motley Fool points out that “if the federal government removed marijuana as a controlled substance, it would no longer be subject to 280E. If marijuana businesses were allowed to take normal business deductions, its estimated that the federal government would lose $5 billion in tax revenue over the next decade.” Further, these numbers are based on 2017 projections which are low considering the financial breakout the industry experienced in 2018. Therefore, this reduces the fiscal incentive for federal policy makers to legalize nationally since they would see a reduction in taxes collected on cannabis companies.
  • Addition by Subtraction
    Yet, in the big picture, by removing cannabis from being a Schedule 1 Drug, the cost savings from the reduction in unnecessary arrests and incarceration to US taxpayers is significant. A 2013 report from the American Civil Liberties Union (pdf file) found that federal cannabis enforcement costs were approximately $3.6 billion per year. Also, by removing cannabis from the controlled-substances list, it would reduce the number of marijuana related court cases that go to trial every year. This number is difficult to extrapolate but undoubtedly in the tens if not hundreds of millions of dollars in terms of legal, law enforcement and judicial hours wasted combined with the burden on tax payers to incarcerate people who could be leading productive lives and contributing to the U.S. economy by paying their federal taxes. While the private prison industry might take a hit, the hidden benefit is that law enforcement agencies would not be wasting their time on minor offenses such as possession and minor trafficking and would instead be focused on reducing serious crime, which would be of benefit to all of society.

By Leslie Bocskor

About the Author
Leslie Bocskor is the Executive Chairman of Electrum Partners, a venture management company in the legal cannabis industry. Please direct inquiries to the Contact form on our website.

Follow Leslie on Twitter: @lesliebocskor
Follow Leslie on LinkedIn

Where does your business venture fit in the cannabis economy?

Remington Cowboys wrestling a bull

The cannabis industry offers seven different industry verticals for a new business venture to consider when entering the explosive growth cannabis economy. A big distinction is often drawn between businesses that “touch the plant,” or deal directly with marijuana, whether it’s cultivation, manufacturing, production or retail, or any of the professions which attend to these duties (delivery, or distribution), versus those that don’t. At my company, Electrum Partners, LLC, we have identified seven different industries which spiral off from this one plant. They are:

  1. Adult Use: Involves the cultivation, harvesting, curing, trimming, fertilizing, watering, lighting, manufacturing and processing the plant. This can involve whole flowers, edibles, concentrates and vaping solutions. From there, we can break down each category into specifics: for instance, concentrates. Forecasts are all over the map, but Forbes predicts legal cannabis spending will hit $57 billion by 2027. We believe this number is quite conservative.
  2. Medicinal: The endo-cannabinoid system is a recognized and vital homeostatic regulator of many of our body’s vital metabolic and healing processes. Cannabis is being actively explored for muscular dystrophy, glaucoma, appetite stimulus for AIDS/HIV and cancer patients undergoing chemotherapy (with research into mutant cell apoptosis ongoing), neuropathy and many other conditions. Global Market Insights predicts the medical marijuana market will be worth over $55 billion by 2024. Again, we see this number as quite conservative.
  3. Nutraceutical: The herbal supplement market is huge, with hundreds of products listed on Amazon overlapping with vitamin supplements, weight loss, sports nutrition and child care. The anticipated rescheduling of cannabis and further study will most likely expand the known benefits considerably, so we believe that this market will grow immensely in 2019. The nutraceuticals industry is projected to grow to almost $320 billion by 2023.
  4. Industrial Hemp: Historically supplanted under suspicious circumstances by wood pulp and cotton for paper and textiles, hemp may get its revenge as a less thirsty and environmentally burdensome alternative to both. Thousands of products that can be made from its stalks, leaves and stems, and the US currently loses a tidy sum each year in revenue from cultivators and manufacturers in Canada, China, South Korea and other countries. Once legalized, industrial hemp will certainly disrupt many different business models in its wake and all of us will be the beneficiaries. We believe industrial hemp is the sleeping giant within the cannabis economy. Grand View Research sees industrial hemp expanding at a CAGR of 14% to 2025. This number could change dramatically if the Farm Bill is passed in the US.
  5. Pharmaceutical: Cannabis is a powerful mood enhancer, which is why a vocal contingent of war vets have turned to cannabis to treat PTSD. Those who suffer chronic pain have also derived relief from cannabis via salves and ointments manufactured from the plant. Considering its high safety profile compared to other pharmaceuticals and its unique pharmacological composition of active compounds, mental health researchers will no doubt mine this plant for decades for new products and treatments. The next Prozac or Viagra may well result from these studies, allowing the pharma company that owned the IP to reap tens of billions in profits from a single FDA approved drug.
  6. Animal Health: Animals also possess an endocannabinoid system, not just humans. Consequently, a growing CBD-based medical industry for pets has developed with infused biscuits, pet food and oils, often for arthritis and joint pain among other ailments. We expect an explosion of CBD infused products for animal health and well-being to hit the market in 2019.
  7. Ancillary: Financial services, transportation, real estate, marketing services, legal compliance, publishing, media, conferences, concerts, events, festivals, manufacturing, security services, testing labs, software and IT services are examples of verticals in the ancillary component of the industry. Obviously, an immense amount of opportunity and growth for the entire cannabis sector in the years to come.

In short, especially in this early stage of the industry, virtually anyone can develop a product or provide a service that reflects his/her own unique skillset. And due to the ringed fence nature of the cannabis economy, larger, well-heeled conglomerates are forced to sit on the sidelines due to cannabis remaining a Schedule 1 Drug. This gives anyone with a unique idea, some seed money and a lot of determination to enter the cannabis industry with a head start that most entrepreneurs normally never have.

By Leslie Bocskor

About the Author
Leslie Bocskor is the Executive Chairman of Electrum Partners, a venture management company in the legal cannabis industry. Please direct inquiries to the Contact form on our website.

Follow Leslie on Twitter: @lesliebocskor
Follow Leslie on LinkedIn

Electrum Partners Hires Former U.S. Attorney Barry Grissom as Senior Vice President

LAS VEGAS, Nov. 5, 2018 /PRNewswire/ — Barry Grissom, former U.S. Attorney for the District of Kansas has joined Electrum Partners as its Senior Vice President of Global Policy and Corporate Counsel. Electrum Partners is an advisory services firm specializing in medical and recreational cannabis and ancillary businesses.

I am honored to join such a highly respected and innovative company like Electrum Partners. Electrum has helped the nascent cannabis industry grow into a full fledged market force in a responsible and ethical manner, and I look forward to contributing to the further maturation of legal cannabis market,” said Mr. Grissom.

Mr. Grissom was appointed U.S. Attorney for the District of Kansas by President Barack Obama in 2010 and served as such until 2016. As U.S. Attorney, he assessed and resolved a wide array of civil and criminal cases, managed three offices and a large legal workforce of 49 Assistant U.S. Attorneys and 53 support staff, while representing the Department of Justice in diverse communities across his district. Mr. Grissom’s law enforcement priorities included national security, violent crime, drug trafficking, financial fraud and crimes against children.

As U.S. Attorney, Mr. Grissom was selected by Attorney General Eric Holder to serve as one of 15 members on the Attorney’s General Advisory Committee (AGAC), which advises the Attorney General on matters of administration and policy. As a member of the AGAC, Mr. Grissom contributed to efforts to reform the federal criminal justice system through his Smart on Crime initiative. He also served on several sub-committees, including Financial Fraud, Health Care Fraud Prevention & Enforcement Team, Terrorism & National Security (Cyber), Native American Issues and Civil Rights.

We are elated to welcome Mr. Grissom to the Electrum Partners family and anticipate his extraordinary background and experience will help us take our business to the next level,” said Diane Katz, President of Electrum Partners.

About Electrum Partners
Electrum Partners adds value to your business through a combination of industry expertise and our extensive network of business associates and contacts. We assist with financing, corporate structure, market strategy, government relations, distribution partnerships and more. For Companies exploring the public markets, our experienced senior leadership team is well-versed in engineering the underpinnings of successful business entries and exits across the full spectrum of cannabis business verticals.

Cannabis is the next Internet, not the new Bitcoin

With the recent run up in stock prices of Canadian cannabis companies, several publications have made comparisons of legal cannabis to the wild fluctuations in prices of cryptocurrencies like Bitcoin, when in fact, cannabis correlates more to being the next Internet. Bill Alpert, Senior writer at Barron’s wrote a piece entitled, “Marijuana Stocks Are the New Bitcoin”, published on September 21st, 2018. In the article, Mr. Alpert discusses how the stock price of Canadian cannabis company Tilray, Inc. (NASDAQ:TLRY) fluctuated wildly during trading several days prior to the article and he reasoned that the valuations of marijuana stocks are not supported by fundamentals and thus are as speculative as Bitcoin and other cryptocurrencies. Bloomberg made a similar claim using a video and Newsweek made the comparison to Bitcoin a couple of months prior.

Sure, in the near term, some cannabis stocks are going to rise and fall in spectacular fashion but Tilray is not reflective of the strength and stability of the industry as a whole. I would argue that the dramatic rise in price Tilray and a few others experienced are more reflective of the pent-up demand by investors waiting to participate in a promising industry combined with the lack of cannabis investment vehicles currently in the marketplace. I believe that legal cannabis is a once in a lifetime opportunity. That is a big claim, and here are a few reasons why Cannabis and Hemp will actually surpass the Internet and is not the new Bitcoin.

First, a basic level set:

  1. The fall of cannabis and hemp prohibition is so much bigger than the fall of alcohol prohibition so as to obviously eclipse the economics beyond any reasonable comparison.
    a. The US was the only country to undertake prohibition of alcohol. We were an island surrounded by an ocean of legal alcohol markets globally.
    b. In contrast, the US exported cannabis and hemp prohibition with the life’s work of one Harry Anslinger – The Single Convention Treaty on Narcotic Drugs of 1961 making hemp and cannabis illegal globally.
  2. The US and Canadian markets for cannabis based products: adult use, nutraceuticals and supplements (what the medical marijuana market is evolving into), pharmaceuticals based on cannabis, and the ancillary markets to name a few, are based on a combined population of 360mm.
  3. The Spanish and Portuguese speaking world alone is 730 million people.
  4. The population of India is 1.3 billion.
  5. Hemp for plastic is a far superior renewable feedstock than fossil fuels.
  6. A hemp based plastic industry can easily become the largest carbon negative industry on earth.
  7. The global plastics industry is expected to surpass $1,000,000,000,000 (one trillion) a year in less than two years.
  8. The Declaration of Independence was drafted on hemp paper.
  9. Hemp is a far better for paper than wood-based pulp.
  10. The average US consumer uses more than 700 pounds of paper per year.
  11. Just the top 100 global paper companies represent $300,000,000,000 a year.

The legal cannabis industry is composed of a growing list of strong companies run by highly skilled professionals. This solid foundation stands in contrast to the misguided excitement over fly-by-night crypto companies claiming to be the next Bitcoin or Ethereum. The short-term speculation versus the long term sustainability provided by an existing, built-in customer base is a big difference between crypto and cannabis.

Cannabis is a real, tangible product. It represents a massive opportunity as a result of the global economy gradually overcoming the stigma associated with the plant due to the international export of Prohibition by Mr. Harry Anslinger in the 1930s. This is in contrast to crypto companies where the majority of trading activity is driven primarily by pure speculation from miners and insiders.

As stated in my level set, Cannabis is not one industry but is really an investment ecosystem made up of diverse vertical markets that include medical, adult use, pharmaceutical, nutraceutical, ancillary, veterinary, and the sleeping giant… industrial hemp, which is potentially a trillion-dollar economic engine itself as a disruptive force in the global plastics and related manufacturing/consumer sectors.

Due to the design architecture of cryptocurrencies, Bitcoin, Ethereum and larger cryptocurrency companies represent a winner take all scenario. The impact of legal cannabis is vast and far reaching in terms of new job creation, social justice and reduction of crime by cutting out the cartels through drastically reducing their customer base. There will be tens of thousands, if not hundreds of thousands of successful cannabis ventures globally, with sound fundamentals, led by strong management. This equates directly to significant M&A activity as established, legacy industries begin to “roll-up” startsups, allowing them to stake a claim in the burgeoning cannabis marketplace. All positive ingredients needed for the creation of a robust sector within the US stock market.

Unlike cryptocurrency, which is founded on the concepts of decentralization and autonomy, legal cannabis is a highly regulated industry that directly benefits States’ infrastructure and economies via taxation and higher employment. In respect to the benefits to the stock market, the positive societal and financial benefits of legalized cannabis will continue to win over and retain the support of local and state government officials, further strengthening the long-term success of publicly traded marijuana companies in the public markets.

The impact of articles with sensationalized titles cannot be overstated and I hope that this letter helps to illuminate the true value of legalized cannabis to the US and global economy.

by Leslie Bocskor
Executive Chairman of Electrum Partners, a business advisory services company in the legal cannabis industry.

Overcome objections to Cannabis as a Schedule 1 Drug

Have you ever had an argument with someone about the hypocrisy of cannabis being listed as a Schedule 1 drug, and you wished you had the facts to overcome their objections? Bias based on the negative stigma associated with cannabis has created strong opinions which continue to lend unfounded support to cannabis being listed as a Schedule 1 drug. However, when people like Former U.S. Attorney Barry Grissom are saying that federal classification of cannabis as a Schedule 1 drug is “absurd”, you know that change is in the air.

We offer three facts that prove cannabis should not be considered Schedule 1. The basis for the counter-arguments focus on one of the main requirements to be listed as a Schedule 1 drug, which is that there must be “no accepted medical use”.

  1. The U.S. has a program in place known as “The Compassionate Investigational New Drug Study Program” that treats medical patients using cannabis, a direct contradiction to their claims that there are no medical benefits of cannabis. In 1978, a man named Robert Randall suffering from glaucoma filed a lawsuit against multiple federal agencies including the FDA. DEA, National Institute of Drug Abuse, Department of Justice, Department of Health and Education and Welfare. The lawsuit centered on his right to use cannabis as a medical treatment for his condition. In a surprising victory, Randall won the lawsuit and the Compassionate Investigational New Drug Study program was born. Initially, Randall was the only patient enrolled, but over time, a total of 30 participants were approved to use cannabis for medicinal purposes as part of the program, which is still in use by several patients today.
  2. The United States government owns a patent that was granted in 2003, US Patent number 6,630,507, which covers the use of non-psychoactive cannabinoids (chemical compounds found within the plant species cannabis sativa) to protect the brain from damage caused by certain diseases, such as cirrhosis.

    The patent was granted to the US Department of Health and Human Services in 2003. Ironically, as a Schedule 1 drug, there is technically “no accepted medical use” and yet the government owns a patent for the medical use of marijuana.
  3. The FDA’s recent approval of the use of a cannabis based drug, Epidiolex (cannabidiol) [CBD] oral solution for the treatment of seizures associated with two rare and severe forms of epilepsy in children, Lennox-Gastaut syndrome and Dravet syndrome, directly conflicts with cannabis as a Schedule 1 drug with “no accepted medical use”. Epidiolex is the first FDA-approved drug that contains a purified drug substance derived from cannabis. CBD is a component of plant but does not have the psycho-active elements that cause intoxication or euphoria (the “high”) that comes from tetrahydrocannabinol (THC). There is also the recent announcement by Canadian cannabis company, Tilray, that the U.S. Drug Enforcement Agency (DEA) had approved the importation of cannabis extracts from Canada to be used in medical research by the University of California San Diego to study its effectiveness in treating tremors that afflict an estimated 10 million people. The approval by the FDA of a drug derived from cannabis shuts down the “no accepted medical benefits” argument completely.

Therefore, it makes no sense for cannabis to be listed as a Schedule 1 drug and to continue to throttle a massive economic engine for the US economy considering the aforementioned facts and important industry developments that are occuring at an accelerating pace.

By Erik Blakkestad

About the Author
Erik Blakkestad is an analyst for Electrum Partners, a business services advisory firm in the legal cannabis industry. Please direct inquiries to the Contact Us form on our website.