Pot Goes Legit: What the End of Prohibition Looks like in Colorado

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"What we need," said Norton Arbelaez, a thirty something attorney and businessman in a suit and tie, "is a vertically integrated, closed-loop regulatory framework." The bureaucrats, politicians, and entrepreneurs crowding the conference room took notes, watched his PowerPoint slides, and furrowed their brows. This was the fourth meeting of a working group set up by a task force appointed by the governor of Colorado, and if you happened to wander by you would think it sounded as dull as the average subcommittee session anywhere.

Until you discerned the subject of the meeting. "We will be, and are, the cannabis industry in Colorado," Arbelaez proclaimed. "It is our necks that are on the line."

Last November, 75 years after Congress enacted national marijuana prohibition, voters in Colorado and Washington decided to opt out. After Coloradans approved Amendment 64, which legalized the production, possession, and distribution of marijuana for recreational use, Gov. John Hickenlooper appointed the Amendment 64 Implementation Task Force to advise state legislators on how to regulate the nascent cannabis industry, which for years had served patients under Colorado's medical marijuana law but now was authorized to supply any adult 21 or older. And as in all sorts of industries, the incumbents were trying to write the rules in their favor.

"We need to maintain the edifice of what continues to work in Colorado," said Arbelaez, who co-owns two medical marijuana dispensaries in Denver and serves on the board of the Medical Marijuana Industry Group. Among other things, he said, that means retaining a rule that requires pot retailers to grow at least 70 percent of what they sell while selling no more than 30 percent of what they grow to other outlets. Arbelaez argued that the 70/30 rule, designed to prevent recreational consumers from obtaining medical marijuana, would help stop diversion of recreational marijuana to minors or to other states and thereby discourage federal interference.

The other members of the working group seemed unpersuaded. Liquor stores do not make the distilled spirits they stock, and pharmacies do not produce the drugs they sell. Why should pot stores have to grow their own marijuana?

"I am still left scratching my head about vertical integration and why it's so important," said Denver City Councilman Chris Nevitt. "The 70 percent rule is endlessly complicated and confusing." Nevitt alluded to the financial interests at stake: When the rule took effect in 2011, more than a decade after Colorado voters approved the medical use of marijuana, dispensaries had to invest in growing space and equipment, and they were forced into sometimes awkward business partnerships with growers. "I totally understand the anxiety of an industry that has made all of these investments," Nevitt said. "But I am still scratching my head."

Jessica LeRoux, owner of Twirling Hippy Confections, a Denver business that supplies cannabis-infused chocolates and cheesecakes to medical marijuana centers (MMCs) across the state, concurred. "The 70/30 rule does not work," LeRoux stated flady. "This is not vertical integration. This is vertical protectionism."

But most MMC owners in the room seemed to support the 70/30 rule. "The current medical marijuana system works for us," said Erica Freeman of Choice Organics in Fort Collins. "Changing the rules again will force new mergers," warned Tad Bowler of Rocky Road Remedies in Steamboat Springs. "The small centers won't be able to compete." Michael Elliott, executive director of the Medical Marijuana Industry Group, declared "we are united" in supporting the 70/30 rule.

A straw poll of the working group revealed that its members were overwhelmingly opposed to requiring vertical integration, instead favoring a more flexible approach that would allow retailers to grow whatever percentage of their inventory they wanted, including zero. …