Did Colorado Just Resolve a Major Concern of Marijuana Opponents?

By Markets Fool.com

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For investors, there aren't many industries that can pack as much growth potential as marijuana.

According to cannabis research firm ArcView, legal marijuana sales hit $5.4 billion in 2015, and they're on track to grow by an estimated 30% per year through 2020, thanks to organic growth in states that have already legalized it, as well as the expected legalization of marijuana in a number of new states. For added context, residents in nine states will be voting on a marijuana initiative or amendment in their state in the upcoming election next month.

If these sales figures aren't convincing enough or the movement's momentum, then perhaps the rapid expansion of marijuana at the state level is. Since 1996, when California became the first state to legalize medical marijuana, two dozen additional states have legalized medical cannabis. Furthermore, since 2012 we've witnessed four states, along with Washington, D.C., legalize recreational marijuana. Public opinion on the drug, according to Gallup, has switched from just 25% of respondents supporting nationwide legalization in the mid-1990s to 58% supporting such an initiative in 2015.

Cannabis' countless concerns

Yet for the incredible growth marijuana offers, investors are often inclined to remain on the sidelines, given a number of industry disadvantages.

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To begin with, financial institutions want next to nothing to do with cannabis-based business. Just 3% of the nation's roughly 6,700 banks are providing basic banking services to the marijuana industry. Those who abstain fear federal prosecution at a later date. Remember, marijuana is still considered an illicit substance at the federal level.

Image source: Getty Images.

Second, U.S. tax code 280E ensures that businesses that primarily sell an illicit substance have no ability to take normal tax deductions. The result is that marijuana-based businesses are paying corporate income tax on gross profits instead of net profits. In other words, they're being overtaxed compared to so-called "normal business."

Third, marijuana is -- and will continue to be for the immediate future -- an illicit substance. Following two petitions to alter the scheduling of cannabis, the U.S. Drug Enforcement Agency, along with the recommendation of the Department of Health and Human Services, decided to keep the schedule 1 (i.e., illicit) status on marijuana. This scheduling means that marijuana will have to be legalized on a state-by-state basis and that it's not recognized by the federal government as having medical benefits.

There are also regulatory concerns surrounding the marijuana industry. For instance, Nebraska and Kansas sued Colorado in 2014 following its legalization of recreational marijuana in 2012 on the grounds that Colorado's approval "created a dangerous gap in the federal drug control system" and that it would allow for easier access of marijuana into their states (where cannabis is still illegal). This suit was later dismissed, but it nonetheless speaks of the regulatory unknowns that keep investors mostly on the sidelines.

Additional regulatory concerns of marijuana opponents focus on what might happen with drivers under the influence of the drug, as well as how the industry will keep the drug from falling into the hands of children and teenagers, especially when it comes to edible marijuana products, which in many cases can be almost indistinguishable from non-THC-based foods.

Image source: Getty Images.

Colorado may have resolved a big marijuana worry

As you can see, there is a laundry list of concerns for the marijuana industry. However, Colorado may have resolved one of the biggest concerns of marijuana opponents last week.

As reported by CBS News, a new regulation concerning marijuana edibles went into effect in Colorado on Saturday, Oct. 1, which should substantially reduce the likelihood of marijuana edibles being mistaken for non-THC-based products, and vice versa. The new regulation now requires all edible marijuana products to come with a diamond-shaped stamp that bears the letters T-H-C, which is symbolic of the psychoactive ingredient tetrahydrocannabinol found in cannabis.

As CBS News notes, there aren't any national figures on how many children accidentally eat marijuana edibles each year and wind up in the hospital. However, a 2016 study examining admissions at Children's Hospital Colorado found that the rate of children treated for accidental marijuana ingestion had essentially doubled from 1.2 cases per 100,000 prior to legalization to 2.3 cases per 100,000 two years after legalization. Admittedly, though, cases of children eating marijuana edibles remain pretty rare, with just 81 cases total reported at Children's Hospital Colorado between 2009 and 2015.

Despite these nominally low figures, access to marijuana products by children remains a serious worry. On top of requiring that edible manufacturers now follow this new labeling code, the state also mandates that edible packages contain the phrase "Keep out of reach of children."

Beginning in 2017, Colorado will also implement a ban on marijuana edibles that are in the shape of a fruit, animal, or human. This builds upon the existing ban on cartoon characters and other images that could be deemed attractive to children.

Image source: Getty Images.

A step in the right direction, but worries still persist

Colorado's proactive move to improve its labeling requirements for marijuana edibles could indeed remove a big concern of cannabis opponents and reduce what few reported cases there are of children ingesting marijuana-based products. In many respects, Colorado should be applauded for its efforts to streamline a rapidly growing and evolving industry.

However, all of this added regulation means another concern for the marijuana industry: extra expenses. For example, new regulations that require a diamond-shaped stamp with the letters T-H-C in the middle mean that marijuana edible manufacturers likely had to create a completely new molding template for their products, or at least add a stamp after molding, if they're a smaller operation. That's an added cost that comes on top of the seemingly exhaustive process of labeling and marketing marijuana edibles.

Investors also can't overlook the sort of Catch-22 the cannabis industry is caught in at the moment. If marijuana remains a schedule 1 drug, its expansion is inhibited by the legislative or ballot process in each state. However, if marijuana is rescheduled to schedule 2, it would open the door for a sea of likely regulations from the U.S. Food and Drug Administration. These regulations could include costly clinical trials to prove the medical benefits of marijuana in treating specific ailments. No matter what happens to the marijuana industry, short of a full de-scheduling, it'll be forced to deal with the prospect of rising expenses and/or reined in expansion opportunities.

This remains a situation to avoid for investors.

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Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.

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