Cannabis operators flock to Santa Rosa, Sonoma County in 2017

JAMES DUNN,

Until firestorms overtook the North Bay in October, cannabis had been the business story of 2017. Voters legalized adult-use cannabis in November 2016 and opened the door to new businesses that had the sanction of the state, though not the federal government. Cannabis already had a foothold in the North Bay, but Prop. 64’s passage launched a new industry that stirred considerable entrepreneurial energy.

Santa Rosa and unincorporated Sonoma County promised the most welcoming environment for cannabis-based business. The city of Santa Rosa received several dozen applications for indoor cultivation, processing, distribution and eventual sale. Industrial buildings that had sat vacant for years, such as a Giffen Ave. site in southwest Santa Rosa, offered plenty of indoor growing space, sufficient distance from schools and residences, and a degree of security. Though some neighbors resisted the push into cannabis, most acquiesced to the will of California voters.

Both county and city governments expect millions of dollars in new taxes from the cannabis industry, though it’s still too early to tell how much tax revenue will actually materialize. Small growers, especially, continue to worry about the threat of prosecution under federal law, where cannabis is illegal.

On Jan. 1, 2018, adult-use cannabis can be legally sold where a business owner has the needed permits.

Some cities, such as Petaluma, Rohnert Park and many towns in Marin County, banned cannabis businesses except for medicinal use. Even in these jurisdictions, residents may still grow up to six plants for their own use — recreational or medicinal — under Prop. 64. Possession of small amounts of cannabis is now legal.

Banking remains a problem for cannabis businesses because most banks, insured and regulated by federal agencies, can be subjected to additional audits or scrutiny if they accept large amounts of cash from retail cannabis operations. State treasurer John Chiang created a study group to examine banking options for cannabis businesses. The group projected that cannabis sales in North American could hit $20 billion by 2021, and some $7 billion within the first few years.

“The nascent industry faces an enormous challenge,” Chiang’s working group reported. “Production, distribution, sale and possession of cannabis remain illegal under federal law.”

“The clash between state and federal law threatens to cripple legal California cannabis businesses before they even get up and running,” said the report, issued in November 2017.

Chiang expects to steer state and local agencies to accept tax payments in cash. The state may create a portal of compliance and regulatory data and make it available to financial institutions. The group is studying a public bank or other state-backed financial institution to provide banking to cannabis-based businesses.

James Dunn covers technology, biotech, law, the food industry, and banking and finance. Reach him at: james.dunn@busjrnl.com or 707-521-4257