Opportunities and Obstacles

In addition to the creation of thousands of direct and ancillary jobs, the booming cannabis industry has opened the door for remarkable research, innovative technology, celebrity branding and the growing potential for these producers to attain nationwide consumer recognition. Although the trend towards legalization has been essential to the de-stigmatization of cannabis consumers and industry entrepreneurs, participation in intellectual property (IP) ventures is viewed as a less risky investment, in contrast to state licensed cannabis businesses that work directly with the plant.

IP in the cannabis space includes everything from cloning technologies and advanced extraction techniques, to celebrity endorsement lines of cannabis products. These types of businesses are attractive to investors who want to remain at arm’s-length from direct production and sale of cannabis or who want to avoid onerous and costly regulatory hurdles of obtaining, often competitive, producer or retailer licenses in regulating states. By licensing IP to producers and retailers, companies can get their product to market on a national scale much faster than opening a state sanctioned cannabis business.

“Although well intended for Cole memorandum compliance, Colorado could still accomplish the goal of ensuring only good actors benefit from the industry while reducing unnecessary regulatory hurdles currently required for approval of IP licensing agreements.”

Although less costly and potentially more lucrative, the IP approach does not come without obstacles. IP creation and protection in the cannabis space, especially in Colorado, cannot be obtained without careful navigation of the complex and constantly changing regulatory landscape surrounding the regulation of financial interests of cannabis businesses, and other associated issues.

Due to Colorado’s stringent ownership and disclosure requirements, an IP licensor seeking state approval must submit to Colorado Marijuana Enforcement Division an application including corporate ownership documents, comprehensive financial disclosures for each individual owner of its company regardless of size (depending on whether the royalty exceeds 30 percent of revenue), and a copy of its licensing agreement which is subject to specific state requirements and division approval. Further, these applications are discoverable as public record, which could be a deal breaker for many investors. IP licensors are also prohibited from exercising control over operations of the cannabis business unless they obtain an ownership interest, making it difficult for some businesses to ensure product production conforms to the licensor’s specifications.

The approval process for these agreements regularly takes months, and may require, at the division’s discretion, background checks of individual owners and potentially in-person interviews. Companies must be sure to stay up-to-date on frequent regulatory changes that may impact their business structure.

Strong IP protections help consumers make educated choices about the safety, quality and effectiveness of the products they purchase. Although well intended for Cole memorandum compliance, Colorado could still accomplish the goal of ensuring only good actors benefit from the industry while reducing unnecessary regulatory hurdles currently required for approval of IP licensing agreements.

Over-burdensome restrictions on IP licensors may contribute to the failure of local small businesses that need the licensing model to succeed, but watch investors scoff at the disclosure requirements and move on to less burdensome opportunities. Colorado and other restrictive states risk the benefit of being home to some of the best, most innovative companies in cannabis, and may potentially miss the opportunity to become the next “Silicon Valley of Cannabis” as friendlier, less-restrictive jurisdictions such as California and Canada attract new talent.