The organic growth of the cannabis industry in the

1. The Organic Growth of the Cannabis Industry in the U.S. is
Curtailed by Conflict of Laws, and is Costing the Government
and Private-Sector Billions of Dollars in Lost Revenue
Since the 1970’s, American law and policy have greatly
progressed due to the changing societal needs, specifically with
regard to cannabis use. Although the Federal government has
remained somewhat consistent with the Treaty since its
enactment with regard to cannabis, the 50 states had a different
view of the Treaty. Since the enactment of the CSA in 1970,
medical research technology advanced at an unprecedented rate.
Specifically, medical research into cannabis, its extracts,
tinctures and oils, has led to 33 states plus D.C. to allow for the
medical-use of cannabis. In 2012, Colorado and Washington
became the first states in the U.S. to legalize the recreational -
use of cannabis, in its entirety, completely in conflict with

2. Federal law that prohibits such use. Since 2012, eight more
states amended or enacted new laws to allow for the
recreational use of cannabis, for a total of ten states. While
states continue to legalize the recreational use of cannabis,
newer studies and technologies are evolving which are creating
newer forms of cannabis medicines that may be able to treat a
wider range of diseases, cancers, and disorders. Further,
scientific research into the cannabis plant utilizing newer
technology has been able to yield more than one hundred
different cannabinoids, or chemicals, deriving from the plant,
that all may treat different illnesses. As a result of research and
the introduction of such forms of cannabis, the cannabis sector
flourished as a market of its own but only to be held back by the
conflicting international, federal, and state laws.
The Federal Government has lost and is losing a great amount
of money due to the forgoing of the collection of taxes within
the cannabis industry, which is caused, mostly, by the conflict
of federal and State laws. In the U.S., the cannabis industry has
become a sector in and of itself with an estimated equity market
capitalization of over $25 billion in 2018 (1). Since 2014, the
total sales of cannabis have grown at approximately 30% per
year, totaling to about $9 billion in sales in 2017. (1). In
California for example, a state tax of 15% is imposed on all
cannabis sales, plus mandatory city and county taxes, which
bring the average sales tax at about 24%, while a similar
mechanism is used for other recreational states such as
Colorado and Oregon. At $9 billion in sales, total tax revenue
would equal to a little over $2 billion to the states while the
federal government has received nothing. While the Federal
Government is dealing with a growing federal budget deficit,
the collection of taxes from cannabis-based businesses will
certainly create one way of reducing the spending deficit, and
the federal debt as a whole.
The private sector has been greatly harmed in that commerce
regulations and financial laws prohibit the deposit of any money
derived from cannabis sales into banks. Banks that are backed

3. by the Federal Deposit Insurance Corporation (FDIC), which
insures the banks and depositors up to $250,000 in economic
crises, are prohibited to accept money from any person or entity
that derives the money from cannabis-based businesses. (2).
Further, the private sector is being curtailed in that mergers and
acquisitions within the industry, which are fundamental to any
sector, have been prohibited in cases where State laws are at
odds with each other. For example, an investment company
based out of Idaho may not be able to acquire a highly-
profitable cannabis company in California because the laws of
Idaho do not allow such a move. The Securities and Exchange
Commission (“SEC”) may also have an issue with an American
company looking to acquire a Canadian company because the
Federal Government may not allow such taxes to be collected as
a result of such merger. Although many issues with the financial
laws may not have been litigated in the U.S. courts, yet, they
are apparent in the practice and will inevitably have to be dealt
with if this Federal prohibition continues. It is now apparent
that the only solution to this dilemma is that Federal law, within
the CSA and financial laws, is amended to allow for the
cannabis industry to prosper as it should have.
In 1961, 186 countries, including the United States, signed the
Single Convention on Narcotics Drugs (“the Treaty”). At its
core, the Treaty is an agreement between the participant States
to prohibit the Federal production and supply of a list of agreed
upon “narcotic drugs” except for scientific research or medical
purposes. Among the drugs listed are hydrocodone, methadone,
heroin, and cannabis (including cannabis extracts, tinctures, and
oils). (3) Following the Convention, the U.S. ratified the treaty
and began looking into creating a domestic enforcement-arm of
the treaty, as is required by most, if not all, international
agreements. In 1970, Congress passed the Controlled Substance
Act (“CSA”) which, inter alia, provided for the domestic
enforcement of the treaty by extending the Federal Drug
Administration’s duties, and also created the Drug Enforcement

4. Agency (“DEA”) which was to begin scheduling drugs in order
to further regulate and essentially comply with the Treaty.(4).
The CSA became a popular piece of legislation in the U.S., but
the piece of the Act that called for the prohibition of cannabis
has since turned out to be problematic not just for the U.S., but
for other signatories of the Treaty as well.
Several states in the U.S., and other State signatories of the
treaty have since quasi-violated the treaty with regard to
cannabis. Not all signatories have complied with the Treaty,
leading to a somewhat adverse view of an international treaty’s
binding-power as a whole, which has been a major issue since
the inception of international law post World War Two. On
December 10th, 2013, Uruguay, a signatory of the Treaty, took
an unprecedented action when their Senate passed legislation
that allowed for the legalized production, sale and consumption
of cannabis for non-medical purposes. (5). In October 2018,
Canada, also a signatory of the Treaty, became the second
country to violate the Treaty by passing federal legislation to
allow for the recreational use of cannabis. Two weeks later, the
Supreme Court of Mexico ruled that a federal law banning the
recreational use of cannabis was unconstitutional under the
Constitution of Mexico. Although Mexico has yet to create a
law similar to Uruguay and Canada, many legislators have said
that legislation will be introduced to their legislative bodies in
the coming months for consideration and a highly-possible vote.
(6). Many of the State signatories of the Treaty other than those
that have already legalized cannabis use are also growing
interest in doing the same for themselves, which will inevitably
lead to an even greater concern that future treaties will not be
abided by. This dynamic has created uncertainty not only within
the international law sphere, but has spilled-over onto the U.S.
market, curtailing private investment by creating a distinct risk
factor; uncertainty of law, both internationally and
domestically.
In 2012, the Colorado electorate voted to amend the Colorado

5. Constitution to allow for the recreational sale and personal use
of marijuana, including its concentrates, tinctures and oils; the
vote passed. (7). Under the new section of the Constitution, the
purpose of the law was for the enhancement of revenue, and the
efficient use of law enforcement resources. The purpose is as
follow:
In the interest of the efficient use of law enforcement resources,
enhancing revenue for public purposes, and individual freedom,
the people of the state of Colorado find and declare that the use
of marijuana should be legal for persons twenty‐ one years of
age or older and taxed in a manner similar to alcohol.
.
After the amendment to the Colorado Constitution, new
sales of recreational marijuana in Colorado began in 2014,
which generated a whopping $67,594,323 in total tax revenue
for the state in the first year. The following year, tax revenues
nearly doubled to $130,411,173 in 2015, and continued to grow.
In 2016, tax revenue rose to $193,604,810, and last year, in
2017, saw a total of $247,368,473 in tax revenue for Colorado.
(8). Without a doubt, these numbers signify an organic growth
of the marijuana industry, but at numbers not seen since the
days of Standard Oil or the “Dot-Com” boom. At a total of $1.5
billion in total marijuana sales in 2017, marijuana revenue
generated more economic activity than 90% of all other
industries in Colorado. (8).
Retail stores in Colorado also showed to be a proven
success, with over 95% of retail marijuana stores remaining in
business, creating a lucrative and sustainable business model for
investors (8). In 2014, the state of Colorado issued 322 licenses
for retail stores within the state, mostly in Denver. (9). The 322
licenses prompted many business experts and academics to
project an overflow of supply, and many of them projected that
the oversupply would dilute the sector as a whole, leading to a

6. major shutdown of stores the following years. Not only were
they wrong, but almost every single licensed store that opened
remained open, and the number of active licenses within the
state grew from 322 to 424 in 2015. In 2016, the number grew
to 459, and in 2017, the number continued to grow to 509. At
the same time, retail stores saw an unnatural increase in their
cost of rent, with some landlords demanding an almost 50%
increase in rent simply because the business is a marijuana
retail store. (10). Not only was the marijuana industry growing,
but the industry grew at a rate not seen in any sector since oil or
the internet.
At the same time that Colorado legalized recreational sales
of marijuana, Washington was doing the same thing in its own
legislature. In 2012, the Washington State legislature passed
Initiate 502 (I-502) which essentially decriminalized the sale
and use of marijuana, while allows for the licensing and
regulation of new marijuana businesses. I-502 was popular
among Washingtonians due to the agriculture sector that
dominates most of the state, and allowed farmers that were
otherwise suffering from lack of business in the winter, to
continue working year-round. (11). Further, fierce competition
among farmers in Washington meant that profits decreased to
near null. Marijuana growing became a new business within the
agriculture sector, and allowed growers to shy away from the
fierce competition surrounding the growth of fruit such as
Apples, and moved toward a more profitable business.
Tax revenue in Washington state, similar to that of
Colorado, exploded for the state since its introduction in 2014.
In 2014, Washington state recorded approximately $16 million
in marijuana tax revenue, prompting many critics to question as
to its credibility. The following year however saw a massive
and unexpected growth of revenue to about $129 million. In
2016, $256 million, and $314 million in 2017. This equals to
$742 million in total marijuana tax revenue for Washington
State in four years. (13). Although some of this tax revenue
derives from recreational retail stores, the majority of this tax

7. revenue comes from the booming farming industry. Washington
has seen some of the highest rates of profitability with the tax
revenues that have been recorded. Although tax revenues may
not be an accurate depiction of the inner-workings and finances
of a given industry, they are telling of the overall health and
growth of a sector.
Washington State has seen a growth in the cultivation of
cannabis almost double the rate of retail dispensaries. (12).
Washington is mostly suburban to rural in its geography, and
most of the cities in the state are much less populated than
bigger states such as California or Texas. It is not difficult to
see why not many retail dispensary stores are needed, but the
number of producers of cannabis seem to double in number than
retail. In 2017, the state of Washington reported 1,009 licenses
were issued to producers, while 507 were issued to retail
licenses. (13). The industry in Washington seems to be centered
in on the cultivation, where profitability in retail stores may not
yield as high of a return as it would in cultivation. Further, as
we will see later on in this research, retail stores in any state
face great barriers in banking and management laws, which also
adds to the decrease in profitability. Washington is also known
for its agricultural sector, and the popularity surrounding its
main export; apples. With the growing number of apple
producers in the U.S. and with the growing increase in produce
imports, cannabis cultivation has been a profitable alternative to
farming fruits. Washington has a $49 billion agricultural
industry, which employs about 140,000; one of the highest in
the country. The state also sees 13% of its economy coming
from agriculture, which places the state, and any other similar
state, in a great position to shift its operations to farming new
and more profitable crops such as cannabis. (14). Although
much cannabis is cultivated as marijuana, hemp may also be
grown to assist with the demand for paper products, oils and
non-toxic diesel fuel. The growing numbers of Washington’s
cannabis sector show that the industry is growing, but continues
to face many hurdles that curtail its organic spur.

8. While Colorado and Washington state were seeing massive
tax revenue due to the newly formed industry, every other state
in the U.S., and other countries such as Canada and Mexico
were watching closely as the newly formed cannabis market
began its inception. With a fear that marijuana legalization
would prompt things like an increase in crime, deaths, and loss
of jobs, quite the contrary occurred. However, the biggest risk
was still that, on its face, the State laws were completely at
odds with federal law. Although the tax revenue figures in
Colorado and Washington showed that, inherently, the
marijuana sector was extremely prosperous, the sector was stil l
significantly curtailed. By 2015, retail stores were literally
collecting millions of dollars in sales, and paying millions back
in taxes, wholly in cash. Further, direct individual and corporate
investment from out-of-state investors was reaching an alarming
demand rate, but was being curtailed by the uncertainty of
governing law. Investors were afraid to invest in this new sector
with the fear that they might be in violation of federal law,
which until now, does not recognize such recreational or
medical sales to occur. Innovation of marijuana products
continued to spur, creating new forms of cannabis such as
concentrates, vapes, oils, and tinctures. Although Colorado was
doing a lot of research into new forms of cannabis, the cannabis
industry took a turn, for the better, when it found a new home
for research and development.
On November 8, 2016, the California electorate voted to
pass Proposition 64 by a vote of 57% which legalized the
cultivation, distribution and sale of cannabis within the state.
(16). California began legal sales of recreational cannabis on
January 1st, 2018 and many had projected that total tax
revenues were to exceed $1 billion for 2018.(15). In San Diego,
the Center for Medicinal Cannabis Research, which was created
in 2000, was further funded by Proposition 64 to continue its
research and development of cannabis. The mission of the

9. Center is to “facilitate high quality scientific studies intended to
ascertain the safety and efficacy of cannabis and cannabinoid
products and examine alternative forms of administration.”(17).
In a departure from the private-sector-led industries in Colorado
and Washington, California funded its own state-funded center
to handle research and development for the sector. This
centralized and state-run center symbolized California’s
handling of the sector, and has since provided the state with
studies, statistics, and scientific information to lawmakers and
policymakers to better assist with the growth of the industry.
California encountered several roadblocks and hinderances to
the sector, for several reasons, but has seen tax revenue hit over
$100 million since its inception. Although far lower than the $1
billion than was expected, California’s private-sector blamed
much of the lack of anticipated growth on administrative
hurdles such as obtaining licenses and the rules governing
businesses, which all stem out of the uncertainty of compliance
with federal and state law.
In 1996, California lawmakers, frustrated with the
Governor’s veto of all efforts to pass legislation for medically-
prescribed marijuana, took the issue directly to the voters
utilizing Proposition 215. (18). The Proposition called for the
allowing of licensed physicians to prescribe cannabis to treat an
exhaustive list of specific disorders and illnesses. Some of these
illnesses include cancer, AIDS, chronic pain, headaches and
glaucoma. Intentionally or not, this Proposition paved the way
for medical cannabis in California. As a result of the
proposition, over 200 new cannabis caregivers were created,
which led to a surge of job growth within the industry. (18).
Although tax revenues for the medical industry are not easily
accessible through public records for this period of time, it is
without a doubt that California’s 15% excise tax on all medical
marijuana sales created some additional revenue and job
creation for the state.
Proposition 215 was just the first step in the medical
marijuana industry creation in California, but the law became

10. famously confusing, leading to many courts to interpret the
Proposition in different ways. In 2003, lawmakers and business
owners grew increasingly frustrated with the wording of
Proposition 215, and deemed the vagueness to be a curtailing of
the growth of the industry. Lawmakers took to the California
Senate to clarify the conditions, administrative requirements,
and amount that a medical patient was entitled to purchase.
With those concerns, lawmakers introduced, and eventually
passed Senate Bill 420. The Senate Bill 420 did several things
for California’s medical cannabis industry. First, it clarified
many terms of the law in order to avoid the many arrests and
prosecution of caregivers that were simply confused as to what
is allowed and what was against the law. Second, the law called
for a “uniform and consistent” application of the law within
every county of the big state of California. Third, it created a
controversial mandate upon all counties of the state to issue
identification cards for all caregivers and patients of medical
marijuana. Finally, the intent of the new law called for the
addressing of “additional issues” of the law that may have arose
after the enactment of Proposition 215. (19). Many took the
meaning of the “additional issues” as a means of seeking out
recreational cannabis, which eventually would pass several
years later.
With a few hurdles pertaining to amount limits and the
mandatory identification system, the medical cannabis program
of California was a financial success for the state. By 2011, the
California Department of Public Health wound up issuing over
57,000 marijuana “cards,” although some studies showed the
estimated actual number is in excess of 1 million patients. (20).
Also by 2011, the number of registered caregivers skyrocketed
from several dozen to a little less than 6,000. San Francisco
County, where the movement of Proposition 215 initially arose
out of, saw the highest number of state-registered patients at
close to 20,000. (20). With these figures, it is obvious that the
medical cannabis industry in California was not just the biggest
in the nation, but was seen as a model for other states to

11. consider. Other states, seeing the popularity of California’s
medical marijuana program, and the potential to create an
additional source of tax revenue, followed in their footsteps.
California has also been at the forefront of cannabis-
product innovation, branding, and marketing. As the nations
entertainment capital, Los Angeles is home to some of the
biggest television and advertising companies in the world.
Although research is limited, or may not even exist, California
has led the industry in branding and marketing. Utilizing social
media platforms, magazines, and films, the cannabis industry in
California has innovated itself and has recreated the image of
cannabis in its entirety. One of the biggest, if not the biggest,
retail marijuana dispensaries “MedMen” was started in Los
Angeles several years ago. The company essentially leads the
industry in marketing, choosing a modern/contemporary style in
its advertising. The company has been seeking to create a brand
that looks and feels like Apple with its simplicity and high
quality. (21). Medmen is a unique company that controls
everything from cultivation, to curing, to retailing marijuana in
13 states, recreational or medical. In West Hollywood, Los
Angeles, MedMen has a prime presence in the area and has
priority over billboard placement over, arguably, any other
cannabis company located in Los Angeles. A visit to a retail
store will show any interested person that the store is indeed
“the Apple of cannabis.” (21).
California’s cannabis market is continuing its growth at an
unprecedented rate, even with the turbulence of the first year.
The state currently has over 40 million people, which includes 1
million medical marijuana patients, that make up its sector, and
is estimated to grow in the next ten years. The California
market, at this point, represents almost one-third of the U.S.
cannabis industry. Although California missed estimates of $1
billion in sales in its first year, analysts estimate that even with
the legal and financial hurdles the sector faces as a whole, the
California market should reach sales in excess of $5 billion by
the end of 2019. (22). Despite the current hurdles in the market

12. today, the California market is an example of the cannabis
industry’s growth in America.
THE FEDERAL POSITION
After California’s success in implementing a medical
marijuana program, and seeing what Colorado and Washington
had done with regard to recreational programs, nearly a dozen
states have since followed in the footsteps. As of the date of
this paper, the following states have passed legislation to allow
for the creation of recreational marijuana programs: Alaska,
California, Colorado, Maine, Massachusetts, Michigan, Nevada,
Oregon, Vermont, Washington, and Washington D.C. Although
unofficial, states such as New York and Florida, with medical
programs already in place, have floated the idea implementing
recreation programs as early as 2019. As the marijuana industr y
is being opened up in newer states, and with current state
markets expanding at an unprecedented rate in business, the
entire industry is booming. However, the industry continues to
suffer from the conflict of laws among state and Federal law,
and Federal law conflicting with international agreements.
These conflicts of laws, among other circumstances, have
created barriers to investment in this industry, and is
significantly hindering the organic growth of the sector.
Conflicting laws create significant risks to investors, personal
or corporations, which directly lead to a decrease of otherwise
available capital. Absent clear and concise laws, such as the
medical marijuana laws of California prior to Senate Bill 420,
the chances of litigation and possible sanctions create liabilities
for investments, and prompts fear which increases volatility.
The federal Government has not issued any sort of “green-light”
towards the current states with recreational marijuana programs,
and has been silent on the medical programs as well. The
primary guidance that the Federal government relies on with
regard to questions of cannabis legality is the 1961 Single
Convention on Narcotic Drugs Treaty. The Treaty is the first
step of unpacking the Federal government’s position on this
issue.

13. The Single Convention on Narcotics Drugs Treaty prohibited
the signatories from manufacturing and distributing of any form
of cannabis. As a result of the signed treaty, Congress enacted
the Controlled Substance Act, which is somewhat a federal law
enforcing the international agreement and which schedules the
same listed drugs as those in the Treaty. Since 1961, cannabis
has remained on the list of drugs listed in the original Treaty.
Uruguay and Canada, both signatories of the Treaty, have si nce
clearly and directly violated the Treaty by passing federal laws
allowing for the sale and distribution of cannabis. In looking at
those countries, the U.S., possibly concerned with violating the
Treaty, has since seen the majority of states passing laws
creating medical and recreational marijuana programs. With the
uncertainty of how, and if the Federal government will
crackdown on these businesses that are in clear violation of
federal law, financial investment into the start-up, marketing,
branding, and production of cannabis businesses have been
significantly curtailed. The text of the Controlled Substance Act
in the U.S. pertaining to marijuana is as follows:
The term "marihuana" means all parts of the plant Cannabis
sativa L., whether growing or not; the seeds thereof; the resin
extracted from any part of such plant; and every compound,
manufacture, salt, derivative, mixture, or preparation of such
plant, its seeds or resin. Such term does not include the mature
stalks of such plant, fiber produced from such stalks, oil or cake
made from the seeds of such plant, any other compound,
manufacture, salt, derivative, mixture, or preparation of such
mature stalks (except the resin extracted therefrom), fiber, oil,
or cake, or the sterilized seed of such plant which is incapable
of germination.
The Federal law makes clear that any possession of
“marihuana” will lead to a felony drug offense. The term
“felony drug offense” means an offense that is punishable by
imprisonment for more than one year under any law of the
United States or of a State or foreign country that prohibits or

14. restricts conduct relating to narcotic drugs, marihuana, anabolic
steroids, or depressant or stimulant substances. . The language
of this provision of the CSA is tantamount to investors and
capital-holders in the U.S. that are seeking to invest in the
industry. It is difficult to pitch to investors the idea of investing
in a business that, while legal under an inferior state law, the
superior federal prohibits such acts. Although some investors,
such as we have seen in Colorado and California, have chosen
to take the risk with the hopes that the benefits will outweigh
the risk, the majority of businesses in cannabis today are private
individuals or newly-formed entities, with only four companies
that have a market capitalization of over $1 billion. Compare
that with other industries that have most investing companies at
over $1 billion in market capitalization, and it is evident that
the companies associated with cannabis are simply high-risk
takers.
Another reason as to why capital is very limited in the
cannabis sector is the access to traditional banking.
Traditionally, new businesses that comply with deposit
regulations, such as those prohibiting businesses to deposit
money from illegal sources, were allowed to utilize a bank’s
services. Of importance are the services pertaining to mass-
depositing of cash, the writing and issuing of checks, pay-roll,
wire-transfers, and certified check issuance for the maintenance
or acquisition of new assets or property. In fear that banks
would be in clear violation of the Federal Deposit Insurance
Corporation (FDIC), almost every single major banking
institution has refused to deal with cannabis companies. The
FDIC prohibits banks from receiving and investing deposits
from entities or individuals engaged in money-laundering
services. Under Federal law, money-laundering is a crime
committed by “whoever, knowing that property involved in a
financial transaction represents the proceeds of some form of
unlawful activity, conducts or attempts to conduct such a
financial transaction which in fact involves the proceeds of
specified unlawful activity with the intent to promote the

15. carrying on of specified unlawful activity.”(23). Since the
cultivation, possession, and sale of any amount of marijuana is
“unlawful activity” under federal law, §1956 implicates any
bank that assists in the business of such, even if they are simply
depositing the money.
As a result of bank’s refusing to accept cannabis money
from businesses, that are otherwise permitted to conduct such
activities under State law, banks have lost, and are currently
losing the opportunity to deposit tens of billions of dollars of
corporate revenues. In 2017, the cannabis industry drew in over
$9 billion in revenue, which are simply estimates. It is almost
impossible to verify the total number of revenue when an entire
sector is engaged in a cash-only transaction system, but using
the numbers we have now, banks are foregoing on over $1
billion of revenue per year. According to the Federal Financial
Institutions Examination Council, in 2018, banks averaged
about 12% return on deposits and equity that were acquired
from legitimate and federally-allowed …