On April 17, 2016, Pennsylvania became the 24th state to legalize the use of marijuana for medicinal purposes when Pennsylvania Governor Tom Wolf signed into law Senate Bill 3, known as the “Medical Marijuana Act” (the “Act”). While the Act will become effective on May 17, 2016, its implementation will not be fully realized until various reports and regulations contemplated in the Act are developed. The Act will be administered by the Pennsylvania Department of Health (the “Department”).

The Act limits the use of medical marijuana to patients suffering from one of the 17 “Serious Medical Conditions” identified in the Act, which are: cancer; HIV/AIDS; amyotrophic lateral sclerosis; Parkinson’s disease; multiple sclerosis; epilepsy; inflammatory bowel disease; damage to the nervous tissue of the spinal cord with objective neurological indication of intractable spasticity; neuropathies; Huntington’s disease; Crohn’s disease; post-traumatic stress disorder; intractable seizures; glaucoma; sickle cell anemia; severe chronic or intractable pain of neuropathic origin or severe or intractable pain in which conventional therapeutic intervention and opiate therapy is contraindicated or ineffective; and autism.

The Act also restricts the forms in which medical marijuana may be dispensed to patients and caregivers to pill, oil, topical cream/ointment, vaporization, nebulization, tincture or liquid, and it makes smoking and incorporating into edible form unlawful.

Among the key components of the Act are:

  1. the requirements and restrictions applicable to medical practitioners interested in prescribing medical marijuana;
  2. the process by which patients and caregivers may obtain identification cards permitting them to acquire and possess medical cannabis;
  3. the information a “Medical Marijuana Organization” must supply to obtain a permit as either a “grower/processor” or “dispensary,” including criminal background, financial wherewithal and security, electronic inventory tracking and taxation compliance measures;
  4. the establishment of a 15-member Medical Marijuana Advisory Board that will examine and analyze the industry and make recommendations to the Department regarding the implementation of and changes to the Act; and
  5. criminal and civil penalties for violations of the Act.

The Act also provides for academic clinical research of medical marijuana. In addition, the Act provides that initially, the state will issue up to 25 grower/processor permits and up to 50 dispensary permits. Each dispensary may operate up to three locations, no person may be issued more than five individual dispensary permits or more than one individual grower/processor permit, and no more than five grower/processors may be issued dispensary permits. The fees for a grower/processor application, permit and annual renewal will cost $10,000, $200,000 and $10,000, while the fees for a dispensary application, permit and annual renewal will cost $5,000, $30,000 and $5,000. Significantly, the Act requires grower/processor applicants to demonstrate $2,000,000 in capital, $500,000 of which must be on deposit with a financial institution, and a dispensary applicant must demonstrate $150,000 in capital on deposit with a financial institution.

Notwithstanding the Act, the cultivation, processing, distribution, possession and use of medical marijuana in Pennsylvania remains a federal crime because marijuana continues to be listed as a Schedule 1 controlled substance under the Controlled Substances Act (“CSA”), 21 U.S.C. § 812(c). However, for now, the potential for federal criminal prosecution for conducting activities pursuant to the Act is attenuated because the U.S. Department of Justice has been adhering to policy statements and guidance directed to federal prosecutors—first issued in 2009 and reiterated in 2011, 2013 and 2014—suggesting that they not devote resources to prosecuting activities conducted pursuant to and seemingly in accordance with state cannabis legislation, and to defer to the states enforcement with respect to such activities.

It is important to note that due to the federal ban on marijuana, individuals and businesses conducting activities pursuant to state cannabis legislation face obstacles in other areas. For example, access to federally insured banks may be restricted, bankruptcy may not be an available out and business-related tax deductions may not be permissible. In addition, the insurance industry has not yet developed a range of cannabis industry-specific lines of insurance, and carriers may be reluctant to write policies for participants in the space.

In a report published by ArcView Market Research and New Frontier, titled The State of Legal Marijuana Markets, 4th Ed., the authors estimate sales in the U.S. legal marijuana market grew to $5.4 billion in 2015 and they project sales in this market to grow to $21.8 billion by 2020. The Act established in Pennsylvania an emerging market that may have the potential to generate significant revenue for the state and those interested in participating.

Not only will this market include the core cultivation, processing and dispensing businesses, but also, as seen in other states that have legalized cannabis use, the industry may generate a proliferation of “ancillary” businesses in Pennsylvania. Cannabis-focused startups in other states have included medical-technical, LED lighting, design and build, software and electronic tracking, security, apps, scientific research and marketing firms, among others.

As a result, the medical cannabis industry in Pennsylvania will likely involve multiple market sectors, such as healthcare, construction, real estate, information and technology, security, private equity and venture capital, and insurance, to name just a few.

Individuals and businesses considering whether to get into the Pennsylvania medical marijuana industry should be aware of the following:

  • The scheduling of marijuana under the CSA — as long as it remains a Schedule 1 drug there is the possibility of prosecution for federal crimes, including for aiding and abetting, and limited protection under other federal laws;
  • The significant capital and cash requirements for applying for and obtaining grower/processor and dispensary permits;
  • The locale of operating as a grower/processor or dispensary and applicable zoning restrictions;
  • The capital and know-how required to develop the space for cultivation, the methods for processing and the systems for dispensing; and
  • The measures that need to be developed and implemented for complying with the security, electronic tracking and taxation requirements the Act imposes.

While the potential returns from medical marijuana business may be enticing, participation in the industry is not without risk, especially given the federal prohibition of marijuana. Those risks combined with the startup costs and complex regulatory scheme the Act establishes indicate that individuals and business who are considering entering the market should obtain the advice of experienced legal counsel.