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Colorado bill would allow for public investment in the marijuana industry

Posted: 7:44 PM, Mar 04, 2019
Updated: 2019-03-05 02:48:08Z
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DENVER — A Colorado legislative committee considered a bill to allow for more investment in marijuana businesses. The House Finance committee debated HB19-1090, which would pave the way for public investment in the cannabis industry.

Colorado’s cannabis capital

Right now, Colorado’s marijuana businesses are strictly regulated so that only a limited group of private investors can add capital.

“Today as a cannabis company in Colorado, your sources of investment need to be other Colorado residents who are willing to invest directly, personally, so you don’t have access to being publicly-traded,” said Paul Seaborn, an assistant professor of the management department at the Daniels College of Business at the University of Denver. “At this point, all of the investors in this industry have gone through a very rigorous, individual screening.”

That level of scrutiny only applies to businesses that are directly involved in cannabis products. Secondary businesses like marijuana technology, fertilizer or consulting companies do not have to follow these rules and can have public investment.

While those businesses are expanding, Colorado’s cannabis industry as a whole is growing much more slowly since there is only so much private investment to go around.

“There’s a concern that we have an industry today and that industry could end up going somewhere else,” Seaborn said.

The cost of doing business is also going up; real estate is getting more expensive, manufacturing is getting more sophisticated and the quality customers are expecting from their cannabis products is going up, according to Seaborn.

However, with other states like Florida and California already giving the green light to public investment, some are worried that Colorado is falling behind. More capital means more opportunity for businesses to grow, do research and development, hire employees, research new products and more.

The bill would allow publicly-traded companies to invest in marijuana businesses, but it would not allow those businesses to be publicly-traded themselves. That’s because marijuana is still illegal on a federal level.

“We’re still a long way from seeing a Colorado cannabis company’s ticker go across the stock exchange,” Seaborn said.

For Seaborn, the question comes down to how Colorado wants its cannabis future to look like.

“Do we want to continue to have a vibrant and growing legal cannabis industry or do we want to keep it kind of in a smaller scale and like other jurisdictions take the lead? Those are both valid choices,” he said.

Keeping up with the times

For Kristi Kelly, the executive director of the Marijuana Industry Group, the bill is about Colorado’s need to keep up with competition.

For years, Colorado was seen as the leader of the legalized marijuana industry. Lately, though, Kelly believes the state has been falling behind with its failure to adapt.

“Since other states have come online, Colorado’s treatment of capital has been somewhat inconsistent with the pace of other states. So right now, as a business in Colorado, you’re valued at one-sixth of what a similar business in another state would be able to be valued at and the access to capital is much more difficult,” Kelly said.

Because of that, it’s easier for entrepreneurs in other states to start a business than it is in Colorado, according to Kelly.

Right now, the Colorado marijuana industry employs more than 40,000 people who are directly dealing with the plants and many thousands of others who are not. The cannabis industry represents billions of dollars of business and is an important player in Colorado’s economy.

“It is our responsibility to create an environment that is cognizant of the will of the voters and supports the incredibly thoughtful investment that is continuing to occur in the state by these businesses by allowing them to do with any other business would be allowed to do,” Kelly said.

Some critics have expressed concern that the bill would allow bad actors to get involved in the marijuana industry, but Kelly says there would still be strict rules. She believes the bill is still a more conservative way for Colorado to move forward than other states.

“There are sufficient safeguards that are put in place to minimize that kind of effort including the component of local control and having a Colorado resident remain as a point of contact and responsible party to appropriately shepherd and steward the business,” Kelly said.

The case for public investment

One of the cannabis businesses that testified in favor of the bill was LivWell, one of Colorado’s larger dispensaries.

Executive director and chief legal strategist Dean Heizer says businesses are no longer competing against one another but against other states.

“We’re losing a lot of steam to California, Massachusetts, Florida and other states that will allow for freer investment,” Heizer said.

LivWell now operates 17 dispensaries throughout the state. However, Heizer says it has been a slow road to growth with the current state investment.

“Capital is necessary to grow any business in most circumstances,” he said. “In order for us to get back where we belong, which is the leader of this entire industry in the country, we need this infusion of capital.”

The lack of investment options is causing some businesses and employees to move to other, more marijuana business-friendly states, according to Heizer.

“All of our talent is leaving our state for bigger salaries, bigger opportunities,” Heizer said. “This bill is still going to be the most strict public and private ownership in the country but it’s going to free up enough capital so that we can retake the lead that we had.”

He also believes it would give some of the smaller businesses that are struggling with the opportunity to sell themselves to bigger companies without losing money.

The case against public investment

While some cannabis businesses support the bill, at least one testified in front of the House Finance Committee against the idea.

Chris Woods, the President and Founder of Terrapin Care Station says it’s important to get this piece of legislation right, so there’s no need to rush.

“We’re asking the legislature to take a pause here to carefully study how this is going to shape the business landscape for the cannabis industry for the next 50 years,” Woods said.

Woods has been closely monitoring how other states are handling public investment in cannabis companies and says some have had issues with things like banking since marijuana is still federally illegal.

He has serious questions about how Colorado businesses would be able to bank with money from a public entity, how financial reporting would work and how accurate it would be. He also has questions about who would be keeping track of that reporting.

“There’s a backdoor access to ownership of this industry and these businesses,” Woods said. “Colorado has always been a tightly regulated industry. To not have background checks or public scrutiny on who’s actually owning these businesses creates a huge public safety concern.”

Woods supports broader access to private capital but believes there are other ways to support businesses than what this bill offers.

Another possible consequence Woods believes could happen is the consolidation of pot shops to bigger entities, since they wouldn’t be able to keep up with the growth.

“We do see this bill as a way that this industry becomes homogenized. Smaller mom-and-pop, minority-owned businesses would have no choice but to sell to larger companies,” Woods said.

He believes the best solution is for the state to conduct a study on the idea of public investment before moving forward.

HB19-1090 passed unanimously out of the House Finance Committee Monday.