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From the Ground Up

Understanding the needs and risks of cannabis startups

February 11, 2020 Photo

Last month, we talked about the responsibility of cannabis businesses to comply with state and federal OSHA and health and safety laws. In this piece, we take a look at what it takes to jump into the cannabis industry and land on solid footing. Why? Insurers and litigators need to understand what it takes to start a cannabis operation in order to fully understand the risks and pitfalls of doing so, and provide insights in attracting insureds, writing policies, and handling claims. Without a solid understanding of the business, insurance claims and litigation professionals will have a difficult time providing the support that these future policyholders and claimants will need when a loss occurs.

In order to do that, let’s meet Rad Slough, president of Georgia-based Origin South, which is currently seeking a cannabis license in Georgia. Slough is also an investor of the only testing company in Maine (Nova Analytics), and he is working to develop similar cannabis/hemp testing and extraction companies in Georgia. Below, Slogh provides a unique perspective on starting up a cannabis business.

So You Think You Want to Start a Cannabis Business?

Marijuana, pot, and cannabis (but not hemp) are all the same substances under federal law—illegal. Yet there are great medical uses coming to light and a lot of money is changing hands with the recreational side on a state-by-state basis.

For this article, the term “marijuana” is used as a non-technical word for cannabis that has a THC level greater than .3 percent. Let’s jump beyond that and straight into understanding how cannabis startups can make better decisions in the marijuana business.

First, understand the rollercoaster ride that these startups will go through. They must be in a position to pull a lot of money together if they are going to apply for a license to grow product (testing and extraction will be discussed a later article). Generically, they will need $20 million as a good starting spot in most states. Some will have a lower start up and some much higher.

Next, cannabis startups must hire a good cannabis attorney, SEC attorney, and cannabis license writer. Cannabis startup owners will want to participate closely during the development and progression of the endeavor to make sure that they are successful. A cannabis attorney not only has to be current on all the rules and regulations, but also they also have to be good at employment law and contract writing.

Additionally, cannabis startups have to have a great plan and a detailed budget. Without this, they will neither be able to attract investors, nor will they know how much money they really need. They also have to pick investors very carefully, setting expectations and timeframes for realistic returns. Neither the cannabis startups nor their investors can have any legal conflicts as defined by individual state laws.

Startups also need to get their local politicians on their side. That may mean making campaign contributions or hiring an lobbyist who has experience, since they will have the necessary connections needed.

Lastly, cannabis startups often need to use the knowledge of a licensing writer to help them prepare a winning license application. That means keeping up with all required deadlines—the date that the application is due is when it is due. Being late means that the business won’t get considered. The license writer should also have a second much needed skill: helping cannabis startups write standard operating procedures (SOPs). This is essential, as cannabis startups cannot hope to run this type of business or facility without “rules” on how it operates. Areas of focus that require SOPs include security, cleanliness, fertilizer mixes, dirt mix, lighting requirements, watering requirements, and every mechanical system—they all need their own SOP.

Why are SOPs so important? Most indoor grows operate almost as a clean room. There cannot be any mold spores or contaminants from the outside entering the grow building. Cannabis startups have to educate each of their employees on the correct methodology for the safety of the grow. Otherwise, the consequences could be dire—the loss of every plant in the grow.

Lastly, cannabis startups cannot forget about the health and safety of their employees, either. Along with SOPs, they need to develop site-specific state, or federal OSHA-required health and safety programs and employee training.

So now that claims and litigation professionals know what it takes to start up a cannabis operation, be sure to watch for future columns in which we will address details and potential loss scenarios from the perspective of the inside and outside counsel positions; auditing the existing grow facility and extraction lab; premises liabilities; and employee training.

About The Authors
Jason Lang

Jason Lang of RHP Risk Management is a board-certified industrial hygienist (CIH) and certified safety professional (CSP) based in Chicago. He regularly works with local and national clients in the cannabis industry.  jlang@rhprisk.com

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