- What Might New Jersey’s Legal Weed Market Look Like?
- May 6, 2019
- Law Firm: - Office
Peter Barsoom lives in Denver, but he really wants to come home to New Jersey.
The son of Egyptian immigrants, Barsoom grew up in Jersey City and East Brunswick and earned his master’s degree in political science at Princeton University. For two decades, he was a successful Wall Street executive. But five years ago, he decided to roll the dice: He quit his day job at Intercontinental Exchange and dove headfirst into the nascent cannabis industry in Colorado.
Collaborating with botanists, chocolatiers and cannabis experts, Barsoom used his friends as guinea pigs and came up with a line of chocolate-and-cannabis edibles. He named his company 1906 Edibles, a reference to the year Congress passed the Wiley Act, which effectively began marijuana prohibition.
Today, he claims, 1906 Edibles is the fastest-growing edibles brand in Colorado. His products are in more than 200 Colorado recreational- and medical-marijuana dispensaries. Now he’s hoping to open a growing facility and dispensary of his own—in New Jersey.
Barsoom joins a long line of entrepreneurs, from near and far, champing at the bit to cash in on legal weed in New Jersey, thanks to a campaign promise of Governor Phil Murphy. But a bill that would legalize adult-use marijuana in New Jersey was pulled from consideration on March 25, when Murphy failed to garner enough support to guarantee Senate passage. At deadline, legislative leaders were regrouping and planning to reintroduce the bill later this year.
Conventional wisdom remains that it is only a matter of time before recreational marijuana becomes legal in the Garden State.
“History is rarely made at the first attempt,” Murphy told reporters in Trenton shortly after the bill was pulled just before a planned vote. “But eventually barriers do fall to those who are committed to breaking them down.”
Scott Rudder, a former Republican state assemblyman who is now president of the NJ CannaBusiness Association, endorses the governor’s optimism.
“Legalization is inevitable,” Rudder tells New Jersey Monthly. “We know that our neighbors in New York State are actively moving forward, and the discussion is starting in Pennsylvania. And we know that Canada has already legalized, and Mexico is on the verge … We know this is going to happen, so it behooves us to make it happen sooner rather than later.”
Victor Herlinsky, general counsel for the New Jersey Cannabis Industry Association (NJCIA), is more succinct: “The question is when, not if.”
Legal weed would create a new $850 million industry for the state, according to a May 2018 estimate. The industry is projected to produce thousands of direct jobs here—growers, processors and dispensary workers—and an equal number of ancillary jobs, including accountants, chefs, lawyers, lobbyists, community-relationship managers, security personnel, real estate professionals, compliance experts, technology and software consultants, and home-delivery couriers.
The bill that was pulled from a legislative vote, known as the New Jersey Cannabis Regulatory and Expungement Aid Modernization Act, would allow individuals 21 and older to possess up to 1 ounce of cannabis for personal use. Delivery services would be permissible, as would social consumption at dispensaries. The bill would also guarantee “expedited expungement”—or erasure—of prior arrests and convictions involving up to 5 pounds of marijuana. The bill had provisions that would incentivize participation in the marijuana industry of minority- and women-owned businesses, as well as disadvantaged communities. However, unlike other states, New Jersey would not allow home cultivation.
Opposition to the bill came from both sides of the legislative aisle. Concerns included training and funding of law enforcement to deal with marijuana-impaired drivers; the level of taxation for local governments; and the potential danger of edibles that could end up in the hands and mouths of minors.
Some legislators were concerned about the details of the expungement provision. “Five pounds is a lot of pot,” State Senator Christopher Bateman (R-Somerville) told the New York Times.
A recent Monmouth University poll found that 62 percent of New Jerseyans support legalization; only 32 percent are opposed. Five years ago, the state was almost evenly divided. Lobbying is also on the rise. Cannabis businesses and interest groups increased spending on lobbying fourfold to $1.4 million in 2018 from $330,000 in 2017.
Just what that industry would look like in New Jersey will come into sharper focus if and when the enabling law is enacted. It’s likely that the first order of business would be the creation of a Cannabis Regulatory Commission, a five-person body whose mission would be to make the marijuana market secure, responsible and profitable.
Given the need to set ground rules, it could be 18 months or more from legalization before any licenses are issued. Some interests are concerned that the illegal market could explode during the ramp-up period. New Jersey Policy Perspective estimates the black market for weed in the Garden State is worth more than $850 million a year. For that reason, it is expected that the first recreational licenses would be awarded to existing licensed medical operators, who are already preparing to expand their operations.
In hammering out the earlier weed legislation, Murphy and legislative leaders opted to tax legal weed by weight rather than price, which can fluctuate depending on market conditions. The most recent legislation would have set a tax rate of $42 an ounce.
Currently, illegal marijuana is cheaper than cannabis sold at legal medical dispensaries, which charge a 7 percent sales tax—much less than the anticipated recreational tax. If the legal-marijuana tax were set too high, it could push consumers to the black market. Historians remind us that the illegal alcohol market thrived for years after the end of Prohibition because a well-established black market offered far cheaper prices.
In addition to the state tax, municipalities hosting marijuana retailers could impose a 3 percent tax on the product under the legislation, while those that are home to a cultivator could get revenue from a 2 percent tax. Municipalities hosting a wholesaler could levy a 1 percent tax. The New Jersey League of Municipalities, the New Jersey Conference of Mayors and the New Jersey Urban Mayors Association want local taxes as high as 5 percent.
The legalization bill would have given municipalities 180 days after it became law to decide if they want to allow cannabis-related businesses, including marijuana sales, testing, processing and cultivation. As of March, as many as 50 towns had reportedly opted out. Rudder cautions town officials to take a wait-and-see approach. “Seventy percent of the towns in Colorado opted out when they legalized in 2012,” he said at a panel discussion hosted by the New Jersey Business Industry Association (NJBIA). “A lot of those towns are now trying to get back in.”
It’s a good bet you won’t find Bellmawr on the list of Jersey municipalities opting out of recreational sales. The Camden County borough already has a growing facility and the state’s busiest medical-marijuana dispensary. Curaleaf NJ, which runs the dispensary, has spent more than $20 million in Bellmawr setting up its operation, which opened in 2015, in a blighted, industrial part of town. In 2017, Curaleaf grew more than a ton of product to serve more than 6,000 patients, according to the state Department of Health. Curaleaf, based in Wakefield, Massachusetts, is a major industry player with 42 dispensaries and 12 cultivation sites; it operates in 12 states.
Curaleaf NJ president George Schidlovsky says New Jersey must keep a close eye on the quantity of marijuana it produces. (All NJ cannabis must be grown in state to avoid running afoul of federal law.) The state’s latest bill did not include any limits on the number of growing facilities or the amount of product they would be allowed to grow.
That is an existential issue, according to Schidlovsky. “It is vital to avoid overproduction, since that can lead to everyone losing. State tax revenues can fall, quality can fall, patients suffer, and producers are marginalized,” Schidlovsky says. He cautions that overproduction can tempt producers to divert product to the black market within the state and across state lines.
California offers a cautionary tale. It was the first state to legalize medical cannabis (in 1996) and the sixth to legalize the sale of recreational marijuana. About $2.5 billion of legal cannabis was sold there in 2018, half a billion dollars less than in 2017, when only medical marijuana was legal. Experts say overproduction caused the decline in value and has spurred a competitive black market with cheaper weed. California took in $345 million in tax revenue from legal cannabis during the first year of regulated sales in 2018, according to the state’s most recent figures—a far cry from the $1 billion analysts had predicted.
The opposite can also occur. When Nevada entered the legal market in 2017, its 47 licensed dispensaries proved incapable of handling demand. The product sold out in less than two weeks. State officials issued a “statement of emergency” and soon thereafter allowed medical dispensaries to sell in the recreational market. Nevada eventually recovered from this misstep and exceeded its own forecasts by selling nearly $425 million in the recreational market in its first 12 months.
The Nevada experience was a valuable lesson for George Archos, CEO of Chicago-based Verano Holdings, which grows and sells medical and adult-use weed in several states. “The most critical element of success is the launch; you need sufficient time for the existing licensees to ramp up,” he says.
Verano has a cultivation and production facility slated to open in Rahway later this year and a medical dispensary in Elizabeth. If New Jersey legalizes recreational use, “we’ll be ready,” he says. (At press time, Harvest Health and Recreation Inc. announced a deal to acquire Verano for $850 million in stock.)
It is widely expected that New Jersey will initially limit the number of recreational dispensaries upon legalization. That’s also seen as essential for a healthy market.
“In Colorado, we have more dispensaries than McDonald’s and Starbucks,” says Barsoom, the edibles entrepreneur. That has driven down prices and profit margins. “With too many dispensaries,” he adds, “retailers cannot invest in well-trained and well-paid staff to deliver a high-quality retail experience.”
But Chris Beals, a trustee and former vice president of the NJCIA, warns that too few outlets could fail to meet consumer demand, thereby fueling the illegal market. “Lawmakers must get it right or risk undermining the legal market,” he wrote in an op-ed for the website NJ Spotlight.
Barsoom predicts the New Jersey market for recreational marijuana will differ from the West Coast market, which he contends has a taste for stronger weed. “We don’t have that longstanding stoner culture in New Jersey,” says Barsoom. “This allows us to create something new, a market aimed at a more mainstream population of soccer moms and seniors, and not just young, stoner males.”
The edibles entrepreneur narrowly missed the cut last year when New Jersey doubled its medical-cannabis licenses from six to 12. After putting up a $20,000 application fee, he had proposed a growing facility in Jersey City right next to Liberty State Park and a dispensary in Hackensack.
Undeterred, Barsoom is preparing for the next round of license applications. He has spent more than $600,000 on legal and consulting fees and real estate down payments. This time, he’s teamed with two former governors—Jim Florio is on his advisory board, and Jim McGreevey provided input on a training program for formerly incarcerated individuals. He has also lined up $40 million in financing.
One of the selling points for legal marijuana is that it will be thoroughly tested and, theoretically, safe. “You’re not going to unwittingly buy an ounce of weed grown with pesticides or laced with fentanyl,” says the NJCIA’s Herlinsky, a partner in the Newark-based law firm Sills Cummis & Gross.
That’s where Scott Begraft believes he will fit in. In 2011, Begraft turned a hobby into a business, opening a home-brew supply store in Sparta. Last year, he added a new product, cannabidiol (commonly known as CBD), a naturally occurring compound found in the resinous flower of marijuana or hemp plants, with little or no THC, the chemical responsible for most of marijuana’s psychological and physiological effects. Within two months, his CBD sales exceeded home-brew sales twofold.
Now Begraft is liquidating his home-brew products and moving exclusively into CBD and related products. His next venture, he says, will be cannabis testing.
Currently, the New Jersey Department of Health operates one lab to ensure all cannabis products sold at the state’s medical dispensaries are safe and transparent regarding potency. Last year, it took four to six weeks to get lab results. Curaleaf’s Schidlovsky calls that “unheard of.” The lag resulted in shortages of several popular strains at the medical dispensaries and has left the state looking to outsource its testing operation, says Schidlovsky.
With that in mind, Begraft is in the process of acquiring a generic drug-testing lab in Branchburg and setting up a partnership with its former owner. He’s also partnering with a company that has developed testing software, which could be marketed to other labs.
Ekaterina Sedia has a different type of marijuana test in mind.
The Stockton University professor, who teaches plant ecology and botany, is coordinator of the school’s new cannabis minor program—the first in the nation. “This is a growing industry, and we want to prepare our students,” says Sedia.
Stockton launched the program last fall, offering two courses: Cannabis Law and Introduction to Medical Marijuana. Students filled the courses to capacity; 30 students have already declared a cannabis minor. This fall, Stockton will add two more courses—Social Botany and Cultivation—and launch an intern program.
Meanwhile, in January, William Paterson University launched the Cannabis Institute, a think tank of sorts to provide research and analysis for policymakers.
All kinds of institutions and businesses are showing interest in legal weed, a phenomenon not lost on Stu Zakim, a Montclair-based public relations executive with more than four decades in the business. His work for cannabis clients now takes up about 80 percent of his time. In 2013, he signed on as communications chief for the Marijuana Business Association (MJBA), a Seattle-based trade association. Last year, he organized the NJ Cannabis symposium for MJBA, a $400-per-ticket networking event and panel discussion at NJPAC in Newark. More than 800 people attended.
Says Zakim, “I can’t think of a better next chapter than using my skills to help change the image of and removing the stigma from this amazing plant.”
At a time when consumers use plastic for even the smallest transactions, marijuana—legal and medicinal—remains almost exclusively a cash business.
The reason is simple: Even in states where weed is legal, possession and sale violate federal law. Financial institutions that provide services to the marijuana business—such as credit card processing or 401K administration—risk criminal prosecution for aiding and abetting a federal crime and money laundering.
About 70 percent of the nation’s growers and dispensaries deal in cash only, according to the U.S. Treasury Department. In recent years, a number of state-chartered banks and credit unions have started to participate in the weed business in states where marijuana is legal. But financial institutions that choose to service the business are required to file a suspicious-activity report for every marijuana-related transaction.
Of course, federal legislation could change this picture. A congressional committee approved legislation in March aimed at increasing marijuana businesses’s access to banks, a move that heartened the pro-cannabis crowd.
For now, reliance on cash in the weed business remains a windfall for the security industry, which has a heavy presence at dispensaries and must guard all movements of cash outside the dispensaries.
Kevin Hart, CEO of Green Check Verified, believes he has an answer to the cash question. Hart has developed software designed to ensure regulatory compliance for businesses and banks. The software records details of every legal transaction, while also tracking inventory and supply-chain data.
“What we have is two independent, highly regulated industries that want to work together, but they don’t know how,” Hart says. “Our solution is the bridge and the verification engine that connects both.”
Green Check, based in Connecticut, is conducting three pilot programs and is in discussions with banks, businesses and government officials in 14 states, including New Jersey, where Hart says he has an agreement in principle with a state-chartered bank.
Other alternatives to cash payments include blockchain, a cashless business-to-business solution, and various virtual money applications for consumers. But such transactions could also raise eyebrows at the federal level.