Colorado Regulatory Landscape Shapes Budding Cannabis Industry

Silverpeak Apothocary, Aspen, CO  Photographer :  Michael Brands

Silverpeak Apothocary, Aspen, CO Photographer: Michael Brands

In our last post, we examined some of the basic principles underlying the marijuana supply chain, from growing, to processing, to product design, distribution and retail sales. 

Regardless of which link in the cannabusiness supply chain one chooses to undertake, as the legal cannabis industry grows and matures, one fact has become abundantly clear: the regulatory framework that states choose to adopt will have a fundamental effect on how the industry in that state will develop.

States are legislative laboratories, where different systems are implemented, examined and (hopefully) improved upon.  As more and more states begin to experiment with different ways to implement legalization frameworks, we have begun to see how state regulations can influence and form supply chains.

For example, Colorado’s Amendment 64 tasks state regulators with preventing black market weed from entering the supply chain.  The amendment accounts for the likely eventuality that, simply because existing cannabis supply chains now have the option to operate legally and above board, not all of them will choose to do so, rather deciding to accept the risks of running afoul of state regulations and criminal laws in exchange for avoiding government taxes on their profits.

So, since we know that there will still be black-market cannabis available in legal markets, regulators had to think of a way to prevent ill-begotten cannabis from being used in legitimate cannabusiness.

U.S. Attorney General . . . will not hesitate to intervene if cannabusinesses cannot

· Keep marijuana away from kids;
· Ensure that criminal gangs are kept out of the equation;
· Ensure that Marijuana is not being trafficked to other states.

The Brief, Inefficient Life of the 70/30 Rule

 In 2010, Colorado attempted to address concerns that legal medical marijuana dispensaries would obtain their cannabis from black market sources by implementing the so-called “70/30 Rule.” This rule specified that dispensaries in Colorado had to grow at least seventy percent (70%) of the marijuana they sold. 

While there are potential efficiencies in managing all links in the cannabis supply chain under a single roof (such as, you don't have to worry that your supplier will go belly up and default on its contract), many smaller dispensaries found it difficult to maintain sufficient inventory when they were required by law to grow 70% of their product.

12/27/13, employee L. Herzog trims away leaves from pot plants, harvesting the plant's buds to be packaged and sold at  Medicine Man  marijuana dispensary. | Photo: ASSOCIATED PRESS

12/27/13, employee L. Herzog trims away leaves from pot plants, harvesting the plant's buds to be packaged and sold at Medicine Man marijuana dispensary. | Photo: ASSOCIATED PRESS

With the advent of recreational marijuana markets, regulators initially subjected recreational dispensaries to the 70/30 rule as well.  However, this provision was eliminated in September of 2014, allowing dispensaries to operate without having to grow 70% of their inventory. 

This allows for greater specialization of the Colorado cannabis supply chain, as businesses can focus all of their efforts on a single aspect – salesmen no longer have to be part-time growers.

A High-Tech Solution

It’s important to note that regulators did not abandon the 70/30 Rule because they simply stopped worrying about infiltration of black market cannabis into the legal industry.  Rather, they realized that the 70/30 rule introduced artificial inefficiencies into the supply chain that were largely unworkable for smaller vendors.  If they could come up with alternative solutions that didn’t create such inefficiencies, then everyone involved would benefit.

Ultimately, Colorado state regulators came up with a clever, high-tech solution to this conundrum, a “seed-to-sale” RFID tracking system.  These tags contain the facility's retail or medical marijuana license number, a product serial number and a "secure ID" chip inside the tag -- all of which are trackable through an inventory database that both the state and the marijuana business can access.

The system also creates transport manifests so gangapenuers and state regulators alike will know if even a single package of Soul Diesel goes missing in transit.  With this level of transparency in the marijuana supply chain, regulators can be reasonably certain that all marijuana sold in Colorado dispensaries originated from legal, legitimate businesses.

But this is not just passive technology.  In additional to seed-to-sale tracking, state regulators have the ability with this tracking software to actually freeze the supply chain in real time.  If it appears that a portion of product being transported comes from illegal sources, regulators can prevent that marijuana from being authorized for final sale and local authorities can be alerted to investigate further.

The tracking system ends at the point of sale, it doesn’t follow the consumer out of the store (or at the consumer’s doorstep if cannabis home-delivery industry ever becomes legal in Colorado– yet another way a state’s regulatory structure shapes the supply chain). 

K. Kelly inside her medical cannabis cultivation facility in Denver, Colorado. Photograph: Matthew Staver/Washington Post

K. Kelly inside her medical cannabis cultivation facility in Denver, Colorado. Photograph: Matthew Staver/Washington Post

From Growers to Edibles: Other Regulatory Requirements

High tech tracking is just a single thread of the regulatory tapestry.  Under Colorado’s regulatory framework, growers are currently subject to another fractional regulation – an 85/15 Rule.  This rule provides that producers must demonstrate to state regulators that they are legally selling at least eighty-five percent (85%) of their product legally before getting permission to add additional plants to their operation.

And if you’re thinking about getting into the booming edibles industry, there are plenty of additional regulations to comply with.

For example, to prevent paranoid freakouts where people (like influential NYT columnists) become convinced that they had died Colorado is requiring that cannabis edibles be easy for consumers to divide into 10 milligram “servings” of THC.

Edibles are also required to undergo testing for food contaminants, such as E. coli and salmonella.  And if your edible product of choice is a granola or a soda, then you are going to be subject to additional packaging requirements as well because the active psychoactive ingredient can't be easily separated from the rest of the food/drink.

Awareness and Mastery of Regulatory Frameworks is Essential for Cannabusiness

So while the consumer probably doesn’t need to entertain any feelings of paranoia over the RFID system, those that are a part of the cannabis supply chain should absolutely exercise caution by carefully following regulatory policies. 

While the federal government has stated that it won’t move against recreation retail outlets in areas where it is legal, the U.S. Attorney General has stated that it will be specifically looking for dispensaries that are disregarding federal law, and will not hesitate to intervene if cannabusinesses cannot

  • · Keep marijuana away from kids;
  • · Ensure that criminal gangs are kept out of the equation;
  • · Ensure that Marijuana is not being trafficked to other states.

As such, participants in the Colorado cannabis supply chain need to remain mindful of how the complex web of state and federal regulations interact and take care to stay on the right side of the law.