JOINT VENTURES

Pot Industry Deals With Ultimate Buzzkill: Self Regulation

A new organization hopes to create universal standards for the fledgling legal marijuana industry.

The rules have to come from somewhere. For some cannabis industry leaders, they’d rather be the ones to set the rules and regulations for their businesses.  

It’s a double-edged sword when they say they just want to be treated like any other legitimate industry.

Equal treatment could of course be good for legal weed, especially if businesses were taxed at typical rates instead of double or even triple those rates, as mandated by IRS tax section 280E. But if federal regulators were to reschedule marijuana and treat medical cannabis products similar to pharmaceutical or agricultural products it would, as I wrote last year, add “costly and timely steps to the pot-selling process that some say could bankrupt most of these businesses.”

As Rolling Stone explained further: “If the federal government determines that medical marijuana must be subjected to FDA approval, companies would have to enter a process that can take years to complete and cost more than $1 billion per product. Few, if any, cannabis companies in the U.S. have the resources for that, which might open the door for Big Pharma to muscle in and take over the business.”

The current rules for any modern cannabis business can be found in the all-important regulations, from the federal government’s IRS Tax Code and Controlled Substances Act to the many state and territory regulations that direct more than 30 U.S. markets, from Hawaii to Guam.

Not all industries are subject to federal regulators. Films, for example, are mostly self-regulated by the Motion Picture Association of America, which rates films based on their content (G, PG, PG-13, R, NC-17) to help consumers make educated decisions. The organization was created in the 1920s “to resist mounting calls for government censorship of American films,” and the MPAA’s well-known voluntary movie-rating system shields the filmmaking industry from what they see as unnecessary government interference.

The pot industry is also starting to see a number of independent agencies putting forth their own suggested standards and regulations, including the 119-year-old standards organization ASTM International, the 121-year-old National Fire Protection Association, and the brand new Cannabis Certification Council, announced earlier this month as a merger between the Organic Cannabis Association and the Ethical Cannabis Alliance.

Of course the industry itself has plenty of ideas on best practices and regulations, and that’s where the just-announced National Association of Cannabis Businesses enters the conversation. Calling itself the legal marijuana industry’s first self-regulated organization (SRO), the NACB has assembled an impressive team to create uniform national standards that its founding members—including marijuana brands Buds & Roses, Cresco Labs, Etain, Green Dot Labs, Local Product of Colorado, Matrix NV, Mesa Organics and others—and future paid members will eventually abide by.

“It’s an entirely new industry—an entirely new legal industry, rather—and it’s so rare that that happens,” said Doug Fischer, the NACB’s D.C.-based chief legal officer and a former associate at Wall Street law firm Cadwalader Wickersham and Taft. “There are all these historical precedents of industries that have done a good or bad job or regulating themselves. But given the uncertain state of play at the federal level and the fragmented situation at the state level, the time is now for an organization like this in the legal cannabis industry.”

Heading up the NACB is president Andrew Kline, a former Assistant U.S. Attorney and senior advisor to then-Senator Joseph Biden, and CEO Joshua Laterman, who served as the longtime U.S. general counsel of global investment bank Natixis. NACB advisors are industry heavyweights with deep experience in regulated markets including Colorado, California and D.C.

Writing comprehensive regulations for a still-new industry is a daunting task, but the NACB has “identified five or six areas as primary ones we’d like to focus on now,” said Fischer, “and some are addressed by state law to varying degrees of effectiveness and some are not.”

The organization will soon begin conversations with members on setting regulations for advertising cannabis products, where they will borrow from tobacco and alcohol in deciding how, where and to whom marijuana can be marketed.

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NACB will also look at regulations for packaging and labeling restrictions, which will inevitably address child-proof containers, edible weed’s single serving size, and comprehensive on-package language containing all pertinent information and warnings. The organization will also address reputable financial integrity and accounting practices, a.k.a. audited and verified financial statements that fairly reflect the state of a cannabis business’ finances, including cost of goods sold, revenues, tax liabilities and assets including inventory.

“The industry needs to demonstrate that it takes these things seriously,” said Fischer.

Self-regulated organizations traditionally develop and enforce regulations for a specific industry, and some of the better-known SROs include the Financial Industry Regulatory Authority (FINRA), the National Association of Realtors and the American Medical Association.

“People wouldn’t want to do business with a broker who is not in good standing with FINRA,” said Fischer, “and we hope that will also be the case with the NACB.”

Of course the SRO concept has its detractors, especially given some of their cozy relationships with the industries they’re regulating. But in actuality “many self-regulatory schemes have been effective precisely because the self-regulated have recognized that complying has been in their interest,” former Federal Trade Commission chairman Deborah Platt Majoras told a gathering of the Council of Better Business Bureaus in 2005.

Platt Majoras continued in her speech: “In response to public concerns about the violent content of their products and its suitability for children, the motion picture (MPAA), music recording (RIAA), and electronic game (ESA) industries each have in place a self-regulatory system that rates or labels products in an effort to help parents seeking to limit their children’s exposure to violent materials. Their systems govern the placement of advertising for Restricted (R)-rated movies, Mature (M)-rated games, and Explicit-Content Labeled recordings in media popular with teens and require the disclosure of rating and labeling information in advertising and on product packaging.”

The NACB’s Fischer understands the differences between his organization and the MPAA: “There’s no federal law on rating movies because the industry took it upon themselves to do that. With something like cannabis, this is a drug that has such obvious public health and safety concerns, and it wouldn’t be realistic that the government would stay out of it as they have with motion picture ratings.”

But another section of Platt Majoras’ 2005 speech to the Better Business Bureaus acknowledges that the NACB’s early focus on universal cannabis advertising regulations is a solid place to start this particular SRO conversation: “The Distilled Spirits Council of the United States (DISCUS), as well as two other alcohol industry trade associations, the Beer Institute and Wine Institute, have adopted voluntary advertising codes governing the placement and content of alcohol advertising. The three codes have provisions designed to ensure that alcohol ads are not targeted to minors under 21, who cannot legally purchase alcohol, as well as to address other advertising and marketing issues.”

The NACB only launched on Thursday, and it has a long way to go before it can hold court with more established SRO counterparts in the alcohol and tobacco industries. But Fischer and his colleagues want consumers and potential members to know that they plan on growing into the kind of organization that can create meaningful, positive change for the cannabis industry and its millions of customers.

“At the outset, we’re a small organization and don’t have dedicated staff to inspect all our members,” said Fischer. “But over time we hope to move toward more robust enforcement mechanism, because to give governments and stakeholders assurances that our members are complying with relevant laws and our national standards, we will need to be able to back it up.”