From a spectrum of probabilities, the curious investor may have a unique starting point to determine the true potential of the recreational cannabis market. Finding the proper path would reduce the investment risk and offer a once-in-a-life-time opportunity for significant financial success. A mistake in the assessment promises unequivocal failure.
Only by applying history can a pathway be established to track the future course of recreational cannabis. Prohibition, known as the “noble experiment” is the best example of demonstration how politics and human nature conspired to convolute the moral fiber of the United States. From 1929 to 1933 anything “alcohol” was illegal, believing that stopping consumption would eradicate crime and corruption with the intended consequence of reducing the tax burden of building more prisons and poorhouse. Didn’t happen.
What about solving social needs, improve the health and welfare of America? No! Not even close. Psychological ticks of national politics and behavioral tendencies of human nature combined to end the honorable insanity.
Alcohol had a contradictory place in society before Prohibition. Since the nineteenth century alcohol consumption was tolerated until industrialization demanded workers to slave 18 hours a day and be fully alert. Drunkenness became defined as a menace to industrial efficiency. Instead of the major industrialists reducing hours worked and increased wages they poured big money into outlawing alcohol. Their first salvo was newspaper propaganda highlighting personal, social and moral issues, whether true or not. Grassroot groups were funded to promote temperance and evolved into abolitionist that pressed for total Prohibition of alcohol beverages. By the 1880s society believed that just the mere presence of alcohol amounted to an incurable sickness. The American Society for Promotion of Temperance and the American Temperance Society were the leading advocates. The nation was spinning under the noise to cause the highest court in the land to uphold enforcement of a newly enacted state Prohibition laws to exclude compensation to brewers who used their property and equipment to produce alcoholic beverages. 1/ A major victory for Prohibitionists and material loss to brewers.
1/ Hanson, David J. Alcohol Education, Westport, CT: Praeger, 1996; Tyack, David B., and James, Thomas. Moral majorities and the curriculum: Historical perspective on the legalization of virtue. Teachers College Record, 1985, 86, 513-537.
In 1888 the United States Supreme Court added to the confusion when it ruled “beer sent into the State of Iowa in sealed kegs cannot be seized without violating the Constitution. 2/
2/ Cherrington, Ernest H. The Evolution of Prohibition in the United States. Westerville, Ohio: American Issues Press, 1920, p. 237.
Attorney General of the United States recently threated that marijuana will be seized if the commodity crosses state lines.
Honorable Jeff Sessions, Attorney General of the United States recently threated that marijuana will be seized if the commodity crosses state lines. If, for example, marijuana legally grown in California cannot be shipped to Massachusetts (also legal to possess recreational marijuana) can be seized under federal sanctions because it traveled over or above non-legal states. The 1888 U.S. Supreme Court ruling is still on the books and remains effective. Therefore, if the “package” is cannabis and sealed, the federal government would be violating the Constitution if seized.
In 1901 Congress “reset the playing field” by enacting the Anti-Canteen Law that prohibited the sale or possession of beer, wine or any intoxicating liquors by any person in any post exchange or canteen or on any transport or on any premises used for military purposes by the United States. Attached to the last page of a U.S. Army appropriations bill, the Anti-Canteen Law was the singular event to insure the National Prohibition Act of 1919 and the implementation of the Eighteenth Amendment would happen.
With a Republican congress, the government past the Webb-Kenyon Act of 1913 barred shipments of alcoholic beverages into a state if the law of that state prohibited it. Thus, state-wide Prohibition was achieved on a federal basis. As the new Prohibition laws filtered through the systems one blaring issue was evident -- What to do about lost revenue receipts from taxing alcoholic beverages and their associated activities?
1919, the last year before federal Prohibition, the federal government had gross receipts of $55.4 billion, 54% of which were related directly and indirectly to alcohol production, manufacturing, transportation, and consumption. An example of the simple truth was New York States: 75% of its gross receipts was alcohol connected. Indeed, the tax on liquor provided nearly two-thirds of the entire internal revenue of the United States.
Before Prohibition can become law, the government needed the means to replace lost revenue. The answer was the Sixteenth Amendment, which in February 1913 created the legal authority for federal income tax. Seven years later, the Eighteenth Amendment declared the production, transportation, and sale of alcohol was illegal. All the states ratified the Amendment except Illinois, Rhode Island, and Indiana.
The Volstead Act enforced the Amendment and excluded from Prohibition were medical and religious purposes. The unintended consequences were far costlier than the benefits, which underscored that the Constitution should not be used for experimentation.
Within six months after the Volstead Act became law, a sharp decline in the amusement and entertainment industries profits were evident. Without legal liquid sales, restaurants and alcohol beverage establishments lost income and forced to close. The closing of breweries, distilleries and saloons and related trades created major unemployment and major reduction of property values.
Prohibition cost the federal government a total of $15 billion in lost tax revenue, which cost over $500 million to enforce. Additionally, 25% to 35% of total assets values of the United States were lost and did not recover until 1945 (the final years of World War II).
Moreover, the trade in bootlegging made criminals millionaires and created serious consequences for public health from the poor quality of illegal alcohol on the black market and influx of volume to health centers. The legal system collapsed – jails overflowed and crime as a whole increased substantially.
Prohibition failed. Only the poor and less connected suffered. Instead of fostering temperance, more and more people were drinking and consuming greater quantities. New York City alone had over thirty-five thousand drinking spots, doubling the number of saloons and illegal joints in the pre-Prohibition era.
The “cocktail party” was invented with the social custom of having three drinks before dinner. The practice is still in vogue. Once a sporadic, usually a public affair, today “drinking” has been embraced into daily life as the social marker of pleasure and accomplishment.
On December 6, 1932 the federal government submitted a draft to the states of the Twenty-First Amendment for possible ratification to repeal the Eighteenth Amendment. The necessary 36 states did just that on December 5, 1933, ending National Prohibition with a twist --- many states continued to permit local options concerning the legal sale of alcoholic beverages. A few states kept alcohol out altogether and the last to drop Prohibition was Mississippi in 1966.
A look at what happened in post-1933 may correlate what the federal government does if recreational cannabis is sanctioned.
The “Three Tier Rule” was established, which required that (1) alcohol producers sell only to licensed wholesales, (2) who could only sell to licensed retailers and (3) ownership had to be kept separate between all three tiers. Thus, no one could be both a producer and a wholesaler, a producer and relater, or a wholesaler and a retailer. To keep the Three Tier Rule as a federal violation if compromised, the Federal Alcohol Administration Act of 1936 was enacted, which allowed regulation of the alcoholic beverage industry. The law on its face was unconstitutional and quickly challenged. In State Board of Equalization v. Young’s Market Co. 299 U.S. 59 (1936), the U.S. Supreme Court held that the Twenty-First Amendment gave states an absolute exception to the Commerce Clause in the control and regulation of alcohol beverages. This ruling remains the law of the land that prevents the intervention of federal authority, laws regulations and rules from interfering the Commerce Clause of the Constitution. In the context of state cannabis laws sanction by the states that approved production, possession, and use of recreational cannabis is not a federal prerogative or can be sanctioned by Congress as a criminal act.
The federal government didn’t get into the act (except levying an excise tax on spirits) until Congress passed the Comprehensive Alcohol Abuse and Alcoholism Prevention, Treatment, and Rehabilitation Act of 1970, and established the National Institute of Alcohol Abuse and Alcoholism (NIAAA). This excuse of the bill did nothing to treat the issue except to increase the federal excise tax as justification to fund NIAAA. The excise tax was so high that moonshiners could make and sell alcohol at half the amount of tax alone and make a profit 200 times greater than a regulated seller.
By today’s numbers, total alcoholic beverage sales in the United States for calendar years 2017 was $295.3 billion. During the same period, the federal government collected $12.3 billion from federal excise taxes. The collective states as a whole took-in even more. The bottom-line: alcoholic beverage creates big money for the government and adds millions of jobs. If Prohibition weren’t repeals, the United States would be a lesser nation, possibility the status of a “banana republic.”
Important Supreme Court ruling that has a direct correlation to cannabis activities.
Granholm v. Heald, 544 U.S. 460 (2005) held laws in New York States and Michigan that permitted in-state wineries to transport wine to consumers but prohibited out-of-state wineries from going so are unconstitutional. As the ruling relates to cannabis: cannabis can be transported without federal or state penalties from legal state-sanctioned producers and manufacturers over state-lines to other recreational cannabis states.
Unintended need to allow legal recreational cannabis to be a nationally accepted commodity.
An intentionally poorly circulated study by leading economists backed up by comprehensive and irrefutably data confirmed that dry counties had more methamphetamine lab seized per 100,000 residents each year that do wet countries. The findings suggest that meth production is more common in areas where alcohol sales are banned. The conclusion: “Local alcohol bans increase the cost of obtaining alcohol, which reduces the relative price of illicit drugs” and that “Additionally, these restrictions
A study by economists found that dry counties have more methamphetamine lab seizures per 100,000 residents each year than do wet counties, suggesting that meth production is more common in areas where alcohol sales are banned. They reported that “Local alcohol bans increase the costs of obtaining alcohol, which reduces the relative price of illicit drugs” and that “Additionally, these restrictions flatten the punishment gradient encouraging individuals who obtain alcohol illegally to also obtain illicit drugs.” 3/
3/ Lubensdorf, Ben. Local Alcohol-Prohibition Law May Lead to Less Liquor, But More Meth, Economists Say. Wall Street Journal website, January 4, 2015.
The federal government is using its best efforts to permanently delay the progressive development of recreational cannabis.
As the current environment dictates, the federal government is using its best efforts to permanently delay the progressive development of recreational cannabis. Indeed, tomorrow cannot be found until the attitude in Washington changes. As Shakespeare pinned, “It is not the stars to hold our destiny but in ourselves.”
Entering these treacherous waters to determine cannabis investment possibilities requires more than intuition. Prudent efforts, especially in history, the law and human nature, are prerequisites. With the support our proprietary computer enhanced Subjective Probability Model, the calculations are within a “de-risk tolerance” range of 7 (with 10 being no risk).
HISTORY: Marijuana had been around since the Stone Age – used as herbal medicine, recreational purposes and as commercial produce for textiles and rope. Attitudes changed in the 20th century as a blatant means to irradiate immigrant Mexicans from invading the United States. The federal government made use and possession of marijuana a crime. Since Mexicans were the primary users, they were rounded up like cattle and shipped back to their homeland; most without due process. The “cover” was the Great Depression of the 1930s. Massive unemployment, the lingering odor of Prohibition that viewed all intoxicants as “evil”, and the Mexican hordes, marijuana was the perfect vehicle. The Marijuana Tax Act of 1937 was born as the first federal law to criminalize the lowly weed.
MARIJUANA TAX ACT
The Marijuana Tax Act of 1937 was the first federal U.S. law to criminalize marijuana nationwide. The Act imposed an excise tax on the sale, possession or transfer of all hemp products, effectively criminalizing all but industrial uses of the plant.
The Controlled Substances Act of 1970, signed into law by President Richard Nixon, repealed the Marijuana Tax Act and listed marijuana as a Schedule I drug—along with heroin, LDS, and ecstasy — with no medical uses and a high potential for abuse.
In 1972, a report from the National Commission on Marijuana and Drug Abuse (also known as the Shafer Commission) released a report titled “Marijuana: A Signal of Misunderstanding.” The report recommended “partial Prohibition” and lower penalties for possession of small amounts of marijuana. Nixon and other government officials, however, ignored the report’s findings.
California became the first state to legalize marijuana for medicinal use by people with severe or chronic illnesses under the Compassionate Use Act of 1996. Washington D.C., 29 states and the U.S. territories of Guam and Puerto Rico allow the use of cannabis for limited medical purposes.
As of January 2018, nine states and Washington, D.C., have legalized marijuana for recreational use. Colorado and Washington became the first states to do so in 2012. Adults also can light up without a doctor’s prescription in Alaska, California, Maine, Massachusetts, Nevada, Vermont, and Oregon.
Subjective Probability Model SPM designates the levels of long-term risks associated with various cannabis-based ventures.
Our proprietary computer enhanced Subjective Probability Model, which calculations 315 different variables has determined the likely long-term risk of cannabis investments. The best sequel reveals the highest “de-risk tolerance” was 7 (with 10 being no risk). Thus, at 7 the likelihood of success is 70%.
Indeed, earning a living by investing in a startup is a risky business. Few people appreciate the degree of risk. Using SPM calculations, 94% of all startups fail because primary statistics are misunderstood or not used at all. To win you need to think smarter and work harder.
SPM and the Five Factor Rule:
Rule One: Identify a product or service people want. Doing something no one wants guarantees failure. The recreational cannabis industry in all aspects is uniquely positioned to focus on what people want. American consumers spend at least $50 billion a year in 2017 on marijuana. By contrast, in the same year, legal marijuana sales total less than $7 billion, according to data compiled by BDS Analytics, a company that specializes in data on the cannabis market. Most primary and secondary statistics point to a clear pathway to success. The only “fly in the ointment” is federal regulations and their corresponding attitudes.
Rule Two: Sweat the details. Your vision alone is worthless. A new business is organic, issues, roles, and responsibilities overlap to demand the entrepreneur remains flexible and “hands-on”. The execution of the business model and scalability is the driving engine of the business and requires major attention. But don’t be preoccupied by the periphery of emails, phone call and meeting. Use your quality time on the “production floor” and execute the business process.
Rule Three: Scalability means “don’t run out of cash”. All entrepreneurs desire and investors demand is rapid growth. Usually, the entrepreneur runs out of cash when the business doesn’t grow fast enough. Scalability means more growth and more growth. A startup cannot function in a single-digit growth environment after one year because it means growth will not happen. Conversely, a sure sign of success is rapid growth. By growing fast, a new business will remain ahead of the competition, rarely loses customers or personnel or even passion.