Capitalization Requirements for Marijuana Businesses Are Unjust and Counterproductive
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Commentary

Capitalization Requirements for Marijuana Businesses Are Unjust and Counterproductive

States with legalized marijuana should let business owners experiment with all different kinds of models and let the market decide which ones are worthy of surviving.

Requiring cannabis businesses to prove capital assets in order to gain licensure is an economically ineffective and potentially damaging policy that several states have unfortunately adopted.

The requirements differ to some degree, but the basic idea is that in order to gain a business license from a state, cannabis businesses must demonstrate a certain level of both liquid and non-liquid assets.  Non-liquid assets are generally considered to be things like buildings and equipment and liquid assets are things like cash, stocks, and bonds. 

These types of requirements are not uncommon for certain types of businesses like banks and insurance companies, where their business models are dependent in part on the firm having enough liquid assets in order to cover withdrawals and claims. However, cannabis businesses share little in common with these industries, yet are being subjected to the same requirements. 

Some argue that the purpose of these requirements is to help ensure the long-term viability of the businesses, but the numbers don’t support that idea.  For example, in Michigan’s medical marijuana rules, even the state’s smallest class of growers— 500 plants or less—must prove they have $150,000 in total assets, with 25 percent, or $37,500, being liquid assets. 

Considering that property and equipment are necessary fixed costs in the business, how long is $37,500 in cash supposed to float a grow of that size?  Estimates vary, but let’s assume that in an indoor commercial grow of one plant can yield around three pounds per year and that the cost of production is $500 per pound.  At 500 plants exactly, annually this business costs around $750,000 to run. The $37,500 in liquid capital required by Michigan is roughly five percent of a small grower’s annual operating costs and it is far short of what would be needed to sustain the business in the long-run.  

The mathematics make it fairly obvious that capitalization requirements fall far short of actually providing or suggesting any long-term business stability. Instead, these requirements create an additional barrier to entry for aspiring entrepreneurs, especially by independent, small startups.   

Some cannabis businesses may be trying to transition from the grey markets into fully legal state markets. In those cases,  they may not have the bank records to prove they can meet capitalization requirements. Some are caught in a catch 22—where they cannot secure funding to prove capitalization until they get licensed but can’t get licensed until they get funding.

The rules are also problematic because using plant-count to categorize licenses for growers economically penalizes growers who might be interested in specializing in strains which yield less product per plant, growers with less efficient equipment, and smaller boutique operations. 

Ironically, most of the same states implemented these requirements are simultaneously running social equity programs aimed at helping those who have been impacted by the drug war, and people in low-income communities, launch cannabis businesses.

Given that cannabis businesses are unlike banks or insurance companies, it is unclear how requiring asset minimums, especially liquid assets, are supposed to create long-term business viability.  States with legalized marijuana should let business owners experiment with all different kinds of models and let the market decide which ones are worthy of surviving long-term. Capitalization requirements do not help achieve these states’ primary policy aims but they do undermine the social equity goals of cannabis legalization by making it more difficult for lower-income citizens to start businesses. 

Michigan, which had requirements for medical marijuana businesses, is ditching capitalization requirements in its newly formed recreational marijuana market. Hopefully, that serves as a signal to other states that a healthy cannabis market can exist without these capital requirements.  

Spence Purnell is a policy analyst at the Reason Foundation, where he works on pension reform, Florida policy issues and economic development.