What is a Multi-State Operator?
Investors curious about the legal cannabis market have a little extra work to do when it comes to availing themselves of the facts: answering questions they may have such as ‘What is a multi-state operator?’ and ‘What exactly is the legal status of cannabis across the country?’
As it turns out, the answer to both of those questions is related. Due to the lack of federal legality of cannabis, the industry is limited in its national operations. State by state, medical or adult use becomes legalized, and state by state, license applications are opened up. However, interstate commerce is forbidden, meaning that cannabis products grown in one state cannot be sold in another state.
At the same time, though, branding is important, and the expectation is that at the very least, medical cannabis will become federally legal within the decade. So for cannabis businesses, establishing a brand that can apply to multiple individual states and later be expanded nationally, building on the success and name recognition of the brand, is a wise decision. How to operate national brands under a single brand name while still maintaining legally distinct entities from state to state so as to comply with federal law? The multi-state operator model is the best solution that the cannabis industry has devised thus far.
Challenges of Being a Multi-State Operator
- Complying with state regulations: with some MSOs stretching to abide by six or more different sets of state regulations, a lack of consistency can inhibit cannabis operators. Non cannabis-MSOs have the luxury of benefiting from economies of scale, but because of the nature of the products they trade in, cannabis MSOs cannot.
- Product consistency: because products cannot legally cross state lines, it’s difficult to manage production facilities across multiple states so that there’s consistency of product. This is especially true of unprocessed goods like marijuana flower where natural variation is to be expected. Environmental differences between, for example, California and Michigan will inevitably lead to variations in the product.
- Securing capital: MSOs typically go for vertical integration, but there can be issues with getting investor capital where it needs to go. Many MSOs will have multiple subsidiaries that hold the paperwork for each type of license the state they are operating in requires. When reorganization occurs, and coordination is necessary in order to secure the tax-free status of the transaction, the amount of moving parts that need to coincide can be prohibitive. In turn, this red tape can turn off certain cannabis investors.
MSOs Are Prospering During Tough Times
In spite of the numerous hurdle’s MSOs face, and the impact of the COVID-19 pandemic, cannabis retail in many areas is holding out well. While several have overextended and found themselves having to slash and burn operations to remain solvent, there are numerous operators that are staying afloat because of several factors:
- A capital & cash flow cushion of two years or more
- Dominant positions in local markets
- Efficient operations
- Pragmatic and realistic business expectations with a clear eye on future profitability
Cannabis Growth Fund is an actively managed mutual fund which keeps a close eye on cannabis industry news and trends and invests principally in cannabis stocks. If you are interested in an investment in cannabis but the micromanagement of multiple investment decisions is unappealing to you, you can turn to Cannabis Growth Fund.
Foothill Capital Management is the advisor of the Cannabis Growth Fund and is not affiliated with the distributor.
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