So long as federal law deems the use and sale of cannabis unlawful, the states and their localities will likely remain the prime regulatory forces in the industry. Indeed, absent federal intervention by an agency such as the FDA, it is likely that regulation of cannabis products on an array of issues, such as labeling and product purity, will be left to the states.

Labeling and Purity

Even in states where cannabis is legal, there remain significant questions regarding the content of the drug products that are sold to consumers. Critically, in legal states, state laws require products to be assayed and labeled for the two major cannabinoids of interest—tetrahydrocannabinol (THC) and cannabidiol (CBD). THC is associated with psychoactive affects, whereas CBD is not (but users report anti-inflammatory and analgesic properties, among other potential benefits, from this compound). Unfortunately, cannabis labeling is not currently standardized from state to state, which may lead to patient errors in dosing, as well as other mistakes in the use of products containing the drug. In order to avoid liability in this area, then, industry participants should pay close attention to state law as well as recommended best practices, safe-practice recommendations, and guidance from the FDA and other authorities, to the extent available.  

Another concern is the possibility that consumers may confuse THC products with CBD products. Even bracketing this concern, though, some commentators have pointed to troubling and noteworthy statistics concerning CBD, which is widely legalized and turning up in a seemingly endless array of applications, including topical uses (e.g., salves) and oral/edible uses (e.g., gummies). While CBD is variously marketed as a cure for pain, anxiety, and other conditions, more research on its use and efficacy is needed, calling into question whether the compound is effective for its promoted purposes or if it is just an expensive placebo. Troublingly enough—and of great relevance to cannabis dispensers who vie for product accuracy and endeavor to avoid potential liability—a 2017 study concluded that only a fraction of studied CBD products contained the amount of CBD claimed on their label, and a number of them actually contained THC, which could lead to unintended intoxication or impairment of users. Given these concerns, dispensers and users alike should proceed with caution when selling or purchasing CBD products, aware of the risks in an area that has not yet had the benefit of thorough study and which may have purity issues.

In a federal system where cannabis sales are generally unlawful, businesspeople involved in the cannabis industry in legal states have stressed that complete and total compliance with state law and regulation is necessary to succeed in the business and avoid potential criminal prosecution. The complexity of compliance cannot be understated. Indeed, there are many facets to compliance in this regulated industry, including with respect to production, manufacturing, retail, delivery, distribution, and testing. It is seen to be so important that investors interested in placing money in the cannabis market have been advised to only consider those cannabis businesses that have hired executives with experience in other regulated markets, such as alcohol. And with the risk for noncompliance of possible criminal and civil penalties and both state and federal level, lawyers are viewed as a practical necessity. In Colorado, for example, a dispensary is required to comply with age restrictions (buyers must be at least 21 years of age), identification requirements, and cannabis purchasing restrictions (buyers are limited to one ounce per day), on penalty of significant fines or a lost license.

Local Issues

Zoning laws and local opposition have also been significant barriers to entry for businesses in the cannabis marketplace—even where the drug is legal. Dispensaries, for example, must comply with local zoning law as well as other legal restrictions contained in municipal code. In fact, some states have left the call whether to permit cannabis industry at all to individual municipalities, leading some cities to ban dispensaries or to enact zoning laws that render it all but impossible to open such a business.

One additional local issue pertains to licensing. Many local governments in jurisdictions where cannabis can be lawfully sold have adopted dispensary-licensing schemes that provide for the issuance of licenses to “equity” applicants who have been disadvantaged in some way, potentially on a discounted basis. These licenses are designed to diversify the cannabis market and ensure that individuals who reside in communities seeking to buy cannabis actually have a personal stake in the sales to that community, and especially seeks to empower and include in ownership the residents of communities where a disproportionate number of cannabis arrests were made. Despite noble intentions, however, critics have suggested that these laws have failed to actually effect change, and that those selected to receive equity are sometimes offered lucrative partnerships with main-line industry, allowing the ordinary industrial players to benefit from, and perhaps exploit, equity licenses.

Outside Investment

An additional issue affecting a state’s cannabis industry is the commodification of the legal market and increasing interest for private equity investment in cannabis firms in jurisdictions where the drug is now legal. Indeed, in 2019 alone, investors reportedly sank $1.2 billion into U.S.-based cannabis startups. Additionally, disruptive technologies such as “LeafLink,” an online platform for wholesale purchase of cannabis, have garnered significant outside investment.