The ad proclaims “Life is Better With Legal Cannabis.” But for most of the readers who saw it in their morning paper, marijuana is not legal.

The ad from Canna Provisions gives the address, website and phone number of its store in Lee, Massachusetts. It ran on the bottom of the front page of the Aug. 30 Times-Union of Albany, New York. The paper is available on Berkshire County newsstand but decidedly not a Massachusetts publication.

The ad includes tiny, baseball box score-size type listing state-mandated disclaimers, concluding with, “This product may be illegal outside of MA.”

New York recently downgraded marijuana possession in small amounts from a misdemeanor to a violation, but it is still an arrestable offense punishable by fines.

The Massachusetts Cannabis Control Commission regulates advertising — no marijuana-leaf graphics, nothing related to sports, nothing to appeal to minors. But it doesn’t ban advertising out of state. The commission does require certain language, including the “This product may be illegal outside of MA” warning.

Canna Provisions opened a store in Lee, about 11 miles east of the New York state line, in June. The company began hiring last week for a store it plans to open this fall on Dwight Street in Holyoke, and it’s working on approvals for a marijuana growing operation in Lee. The company also has a proposal for a third shop, although it has not announced the location.

On a recent Sunday afternoon, four of the five cars in the parking lot of the Lee store had New York plates.

It’s a phenomenon not exclusive to Canna Provisions. Mayor David Narkewicz makes note of the out-of-state license plates he sees at the NETA in Northampton and what this out-of-town crowd might mean for city businesses that don’t sell marijuana.

When Canna Provisions starts doing business in Holyoke, co-founder Erik Williams said, it plans to advertise in Connecticut, another state where possession of small amounts of marijuana punishable by fines.

"Like the billboards we see every summer for the fireworks shops in New Hampshire," Williams said recently at a Canna Provisions job fair in Holyoke.

He spoke of cannabis tourism and how he has a vision for Holyoke as a sort of American Amsterdam where consumers can come and buy from a few marijuana retailers all set up in a central neighborhood around the canals.

Marijuana is illegal according to the federal government, even if now it seems the feds are taking a hands-off approach to states like Massachusetts that are legalizing it, said Julie E. Steiner, professor of law at Western New England School of Law in Springfield. Steiner is also a hired consultant for Mayor Domenic J. Sarno as the city of Springfield establishes its marijuana regulatory process.

"Interstate commerce, or any kind of advertisement that would promote interstate commerce, really flirts with federal intervention," Steiner said.

She said the law is only now catching up to the burgeoning adult-use marijuana industry. The Cannabis Control Commission hired enforcement personnel just this week.

“It’s the Wild West,” Steiner said. “We are hitting all kinds of issues about what is allowed and what’s not allowed.”

Especially sticky is the issue of marketing by a third party like a growers council or Weedmaps, a website for marijuana aficionados that also advertises on billboards.

“The regulations are very much geared to marijuana growers and retailers in Massachusetts,” Steiner said. “But what about other people?”

This advertisement for Canna Provisions in Lee, Massachusetts, appeared in the Aug. 30 Times-Union of Albany, New York. Marijuana possession is legal in the Bay State but not in the Empire State.

Marijuana retailer Theory Wellness in Great Barrington doesn’t advertise across state lines, said Marketing Director Thomas Winstanley, although the company isn’t shy about saying many of its customers are from New York.

“We do not run any paid advertising out of state. It is a gray area in the regulatory guidelines that we don’t want to meddle with,” Winstanley said.

But what happens when someone from outside the state comes into a Massachusetts marijuana shop as a customer?

The law doesn’t stop them from buying, only from transporting it across state lines. Smoking of any kind is banned in most public spaces and consumption is not allowed in stores, so someone from out of state would have to find a place in Massachusetts to legally smoke or consume the product.

Marijuana retailers know who is from outside Massachusetts. They are required check IDs to make sure every buyer is 21 or older.

“We treat all customers the same way. We answer any/all questions they have about what they want, how it will affect them — just about anything,” Winstanley said.

At Canna Provisions, Williams said the only time there is a problem is if a customer talks in the store about breaking the law. Like if the customer, unsolicited, says they plan to drive back to New York.

"We inform our customers about the law," he said.

And would they refuse service?

“If our customers persist in talking about breaking the law, then yes, we might do that,” he said.

Profits have been elusive for many companies in the cannabis industry. With federal law making it impossible for companies to expand their operations across the U.S without either acquiring a company in another state or setting up an entirely new operation, it's been very difficult for costs to stay at manageable levels. The one workaround, however, has been for companies like Charlotte's Web (OTC:CWBHF) that have chosen a different route: hemp.

Significant growth without significant losses

Hemp has been taking off in popularity since December, when the federal government passed the farm bill. That has led to a lot of growth for Charlotte's Web. The Colorado-based company sells CBD products, including gummies, oil capsules, and even has products for dogs. In addition to selling online, the company has expanded through agreements with retailers across the U.S. and its products are found in thousands of stores in states where hemp products are permitted. In the past four quarters, sales have totaled more than $85.9 million. That's 24% higher than 2018's revenue of $69.5 million and more than double the $40 million Charlotte's Web was able to generate in 2017. Amid all that growth, the company has been able to remain profitable.

In its last fiscal year, it posted a profit of $11.8 million, which was up from $7.5 million the year before. This year, it has continued to be profitable even while expanding very rapidly. In its most recent quarterly results, sales were up 45% year over year, and although profits of $2.2 million were down from the previous year, the company remained in the black. 

Retail has welcomed hemp with open arms

One area where Charlotte's Web has been a force has been in retail. Back in Q1, the company had already achieved significant growth, announcing that more than 6,000 retail locations were receiving the company's products as of May 8. The company had already added 2,300 new retailers in 2019, which was already more than it added during all of 2018. And as impressive as that has been, Charlotte's Web has continued to grow since then.

In Q2, the company announced that more than 8,000 retail locations were now carrying its products. Even large national retailers like CVS and Kroger have been stocking them. Retail sales have accounted for the majority (53%) of revenue, making it a great source of success for the company. E-commerce has generated the other 47% of sales. 

Had Charlotte's Web been selling marijuana products,  this wouldn't have been possible. The company wouldn't have been able to ship its products to retailers all across the country, and it certainly wouldn't have the strong retail presence that it has today. By forming these relationships with retailers, the company has a big advantage over other entrants that may be looking to sell competing hemp products.

Why does this matter to investors?

Investing in hemp is a much safer option for cannabis investors, who may be concerned about the lack of nationwide legality of marijuana in the U.S. and the impact it could have on the industry's growth. Although over the long term, the marijuana market may explode in size, that's still a long way from happening.

In the meantime, investors can look to companies like Charlotte's Web with more-sustainable businesses that can offer safer returns.

Debate on the legalization of marijuana will begin in the Senate next week, the leader of the Morena party in the upper house of Congress said on Friday.

Ricardo Monreal Ávila said that Senate committees will review proposals to legalize use of the drug and that legislation could be drafted by the third week of October.

Morena Senator and marijuana advocate Jesusa Rodríguez Martínez said that a total of 13 proposals will be reviewed in open sessions during which a range of views, including those of the general public, will be heard.

The Supreme Court published eight precedents in February on the recreational use of marijuana that determined that prohibition of the drug is constitutional.

Mexico United Against Crime, a group that opposes the prohibition of drugs, said the court has done its job and it is now up to lawmakers to legalize marijuana.

At a summit on the legalization and regulation of marijuana held in the Senate on Friday, Gil Kerlikowske, a former director of the United States Office of National Drug Control Policy, said that legalization must be backed by “robust regulation” to ensure that minors don’t have access to the drug.

He pointed to research that says that marijuana use can be especially harmful to the still-developing brains of young people.

“. . . We have to make sure that young people don’t use and are not exposed to this product,” Kerlikowske said.

The production, packaging and labeling of commercially available marijuana must be carefully regulated by any law that authorizes the recreational use of the drug, he said.

The former official, who was also commissioner of U.S. Customs and Border Protection during the administration of ex-president Barack Obama, recommended the imposition of taxes on marijuana and said that the revenue raised should be used for drug prevention and rehabilitation programs and to combat the black market for the drug.

In 11 U.S. states where recreational marijuana use is now legal, the illegal market for the drug hasn’t shrunk, Kerlikowske said.

“If you want a controlled environment for marijuana, you have to do everything possible to eliminate the black market . . .”

A dramatic rise of hemp planted this year has been seen around the world and in particular the US, with 46 states having licensed farms since the US Farm Bill was passed in December of 2018. The potential for the US market alone is astronomical ($8.5 billion USD), but there isn't enough processing equipment installed to handle 90% of this year's harvest. The fear is that $7.5 billion dollars of hemp will be rotting in farmer's fields this fall.

CBD is one of the fastest growing consumer product segments and this is evident with the 128,000 acres of hemp (equivalent to 100,000 football fields) planted in 2019 alone, according to an Aug. 22 article in "The Financial Times." That's a 300% increase from the previous year, and each acre of hemp can produce 165 pounds of CBD oil at a market value of roughly $66,000. That same acre of hemp used for fiber products only garners $850, a staggering value difference. Unfortunately there is less than 10% of equipment installed in the US that is required to process hemp into CBD oil before it spoils. This is a major pinch point for hemp farmers to turn their crop into cash.

Banks are so scared that the FDIC will penalize them for supporting anyone that has the word "cannabis" in their supply chain and, since hemp is a form of cannabis, banks won't make loans for processing equipment.

Roger Cockroft, CEO of Delta Separations, said, "CBD derived from hemp is a huge new growth industry for the US but this year, the industry's first fully legal year, is going to be a nightmare for many. Big banks ran scared and wouldn't support infrastructure investments because they heard the word 'cannabis' even though hemp is completely federally legal. With such a small processing capacity in the U.S., up to 90% of what's in the ground will most likely rot in the field when Crop-tober rolls around. That could mean loss of up-to $7.5 billion."