Legal marijuana in America is now estimated to be a $1.43 billion industry. And it's expected to grow to $2.34 billion in 2014. If those numbers hold, the 64 percent increase – a steeper trend line than global smartphone sales – would make pot one of the world's fastest-growing business sectors.
Signs of the new age abound. In Colorado, retail marijuana stores welcomed their first legal-age customers (21 and older) on January 1st. Washington state is expecting to license the first of its projected 334 pot shops by late spring. A Gallup poll taken last fall found that 58 percent of Americans supported legalization, a 10-point uptick from the year before. Alaska and Oregon will likely vote to go legal in 2014; California and five other states are expected to do the same in 2016. The legalizing states aren't going in half-assed, either. Officials tasked with ramping up a marijuana regulatory system are taking to it with a tradesman's pride. "We are going to implement Initiative 502," says Sharon Foster, the brassy chairwoman of the Washington State Liquor Control Board, at a public hearing last fall. "This state is not going to allow it to fail."
But these gains tend to obscure the dismal reality playing out in many other states. As Colorado and Washington license pot growers and sellers, cops elsewhere continue to carry out marijuana busts at a rate of one every 42 seconds. If you drop a gram of Sour Diesel on the sidewalk in Seattle, a police officer may help you sweep it up. Do that in New Orleans and you could face 20 years hard labor.
What we're witnessing now is a political movement giving birth to an economic awakening. The struggle to end the War on Drugs – at heart a movement to stop the mass incarceration of black men – is creating one of the greatest business opportunities of the 21st century.
At a recent drug-reform conference in Denver, Drug Policy Alliance executive director Ethan Nadelmann acknowledged the uncomfortable transition that's now occurring. Those who have suffered the most in the War on Drugs and those who have struggled against it, he noted, may not be among those who profit from its conclusion. "The capitalist forces at work in a prohibitionist market are violent and brutal," Nadelmann said, "but the capitalist forces at work in a legal market are even more brutal in some respects. We know that the people who may come to dominate this industry are not necessarily the people who are a part of this movement."
That may be a necessary price to pay. For the War on Drugs to end, Colorado or Washington must succeed. That will require risk-taking entrepreneurs, not movement leaders. If both states fail, it may be impossible for others to follow.
Fortunately, they're beta-testing two distinctive ways of regulating legal pot. For now, Colorado has a simple, vertically integrated medical-marijuana industry where retailers grow and process most of the pot they sell. Colorado will have a flexible limit on the amount of pot that may be grown. Washington, on the other hand, is breaking marijuana production into a three-tiered system that mimics the alcohol industry, where growers sell to processors, processors sell to retailers, and retailers sell to consumers, and the state strictly caps the amount of pot that can be grown.
There are other quirks. Colorado allows small-scale home cultivation. Washington does not. Colorado gave existing medical-marijuana (MMJ) operations first priority for adult-use licenses. Washington didn't, forcing MMJ owners into a license lottery with newcomers who've never grown or sold a single bud.
It doesn't much matter which system works, as long as one does. Then we'll be able to mark 2014 as the year control of marijuana passed from drug cartels and weed dealers to government inspectors and shopkeepers.
In the weeks and months before New Year's Day, a.k.a. Legal Day One, Colorado's marijuana industry was running like a well-oiled machine. To get a taste of the nation's first state-legal system, I spent a day last fall with Tripp Keber, the walking-and-talking embodiment of marijuana's future.
Keber is a balls-out, no-apologies, empire-building capitalist. In 2010, the 45-year-old former real-estate developer founded a company called Dixie Elixirs & Edibles. Dixie makes THC-infused soda, candies and baked goods and sells them to medical-marijuana dispensaries across Colorado. In just three years, Keber has built Dixie into one of the industry's leading brands and now has ownership stakes in 17 cannabis-related companies, including three MMJ America dispensaries that are about to become adult-use retail shops. As we roll through Denver in Keber's black Ford Expedition, he can't stop pitching his vision of the glories to come.
"In Colorado, 100,000 patients drove a $300 million medical-marijuana industry last year," he says. "Now think about the adult-use market. Studies show that about 10 percent of the public has a relationship with cannabis. Ten percent of Colorado's 5 million residents, that's half a million people. We get 60 million visitors every year. Even if only five percent of those tourists make a purchase, that's 3 million people a year." He lets the numbers sink in. "We're talking about hockey-stick growth," he says.
"Wall Street analysts believe there are going to be two or three billionaires minted in this industry in the next 10 years," he says. "I'm not saying I'm going to be one of them, but this kind of opportunity comes around only once in a generation."
We pull into a light-industrial district in south Denver. "Smell that?" Keber says. "Cannabis." One of Keber's main grows is housed here in an unmarked 25,000-square-foot warehouse.
Inside, Jake Salazar, CEO of MMJ America, walks us through a sophisticated operation run by a dozen technicians, rooms blazing with computer-controlled light, temperature and circulation systems, every potted plant tagged with a unique UPC. "We're going at full capacity to get ready for January 1st," Salazar says. Craig Kloppenberg, the company's compliance officer, stops by to check the latest transport manifest. "Every bit of the plant is tracked through bar codes," he says. "We record wet weight, stems, leaves, buds and waste."
Without those bar codes, adult-use pot probably wouldn't exist. Four years ago, Colorado's medical-marijuana scene was a picture of mayhem. "With no state or city regulations, there was some pretty sketchy stuff going on," says Sam Kamin, a professor of law at the University of Denver who researches marijuana policy. Robberies and gunplay were not uncommon; DEA officials suspected that some shops were supplied by international drug cartels. Colorado cracked down in 2011 with rules that required dispensary owners to register with the state, pass criminal-background checks, pay taxes, install security systems, grow 70 percent of their own product and carefully track the inventory. State officials weren't worried about maximizing tax revenue. "It was all about making it easy for them to regulate the industry," says Henry Wykowski, a former federal prosecutor who now operates one of the cannabis industry's leading law firms. "Vertical integration eliminated the need to deal with multiple entities in the chain."
The new regulations purged the industry's bad actors, who couldn't pass the background checks, and small-timers, who couldn't afford to scale up. Only the strong and the clean survived. "When regulation came into play, we had everything together," Jan Cole tells me. Cole, 45, owns the Farm, a Boulder dispensary that's widely seen as a prototype high-end cannabis shop. Everything in the dispensary is upscale and female-friendly: polished wood floors, antique display cases and no bro-culture swag. "I knew the importance of a bookkeeper," she says, "and I've paid taxes on every gram I've ever sold." Even so, the transition wasn't easy – or cheap. "We had a number of lean months," she says.
Two years under these stricter regs has left Colorado with a well-audited MMJ industry. So when adult-use pot went legal, the first retail licenses went to dispensary owners already in the system. "It took months to get my medical-marijuana license," Keber says. "For our adult-use permits, I was in and out of the interview in about 30 minutes."
Near the end of our day together, Keber joins the Dixie Elixirs marketing team in the company's new manufacturing facility in east Denver, where marketing director Lindsay Jacobsen, 31, unveils four designs for Dixie's new aluminum soda bottles. Colorado's adult-use regs require opaque packaging, so the company's glass bottles will soon be phased out. "We're still playing with the color," says Jacobsen. "We're aiming for sophisticated but fun, without being too young."
Too young, of course, is the third rail for a company like Dixie Elixirs. When adult-use goes live on January 1st, the eyes of the world will be watching Colorado, and anything seen as marketing to kids could undermine the entire movement. "There are a lot of ways this could go wrong," Kamin later tells me. "A rise in DUIs, increased child access, diversion across state lines, and some criminal element slipping into the regulated side of the industry. It could be as simple as a tractor-trailer full of marijuana stopped a mile across the Utah border. That would not be good."
Jacobsen turns the conversation to the beverage's THC content: 75 milligrams. Colorado and Washington aren't just rolling out a regulated marijuana industry. They're opening two of the largest psychotropic-dosing experiments ever conducted. Both states have limited marijuana-infused food and beverages to 100 milligrams of THC per package. The number's roundness is a dead giveaway. When it comes to dosage and what adults can handle, nobody really knows. There seems to be a big difference between smoking, vaping, eating and drinking in terms of how much THC hits the bloodstream. But "the science isn't there yet" in terms of knowing what an appropriate limit might be, says Mark Kleiman, the UCLA public-policy professor who advised Washington's liquor control board on its marijuana regulations. It's not there, of course, because the government has made it virtually impossible to study marijuana. So we end up with a limit of 100 milligrams per packaged brownie.
A couple of weeks after shadowing Tripp Keber, I hop in the car with Pete O'Neil, an independent businessman looking to get into Washington state's pot game. O'Neil once ran a comedy club in Fort Lauderdale and a high-end pet-grooming salon in Manhattan. Now he's starting C & C Cannabis Company, a retail pot enterprise – the name's a nod to Cheech and Chong.
Even though the state isn't accepting license applications for another two weeks, O'Neil has already leased two storefronts outside Seattle. The state limits license holders to no more than three shops, to prevent market consolidation by a few big-money players. "They tell me I'm crazy to try for a license in the city, but I'm tempted to go for it," he says.
Even though Seattle supported more than 100 MMJ dispensaries in 2012, the liquor control board is licensing only 21 adult-use pot shops in Seattle – about the same number of state-run liquor stores that served the city prior to 2012, when the state got out of the booze business. So those licenses are looked upon as 21 golden tickets. But even Seattle City Attorney Pete Holmes has complained about the limit. "The demand is greater than 21 stores can handle," he said recently. "The idea behind legalization is to bring this into the regulated sphere. To do that we need to be able to tell consumers, 'We have a legal supply, that's where you should go.'"
To enter the license lottery, retail applicants had to show the liquor control board a commitment for a lease by December 20th. In the weeks prior, the streets of Seattle were crawling with pot entrepreneurs seeking rentable space. A storefront isn't legal unless it's at least 1,000 feet from a school or day care center. It's a gambler's roll. If you don't win a license, you could be stuck with lease payments and no store.
O'Neil has been tipped to an existing MMJ dispensary in north Seattle that was regulation-compliant. "He's asking $100,000," O'Neil tells me. "But why would a dispensary owner sell out now?"
Good question. The rest of the country may think that Washington state is relaxing its marijuana laws. In fact, it's tightening them. Washington never brought its MMJ industry under regulatory control like Colorado did. There's no registry, no security laws and no tax requirements. "The MMJ folks are having to go through the growing pains that Colorado already went through," says Alison Holcomb, criminal-justice director at the ACLU of Washington and author of Initiative 502, the ballot measure that cleared the way for legal pot in 2012. "Right now many of them have a business model that doesn't involve meeting regulatory requirements or, for some, even paying taxes. That provides a really nice profit margin. Now they're entering a system where competitors may have more business savvy, and they may not be as profitable."
Because the state views dispensary owners with some suspicion, the liquor control board isn't giving them first option on adult-use licenses. But, of course, even this is subject to uncertainty. In an interview last month, Washington State Liquor Control Board Chair Sharon Foster tells me that eight months of conversations with medical users had softened her stance. "I'm not nearly as cynical as I was" about abuses within the MMJ industry, she says. "I think research is going to prove the great importance of this little plant. We have to carve a place for that within the system." The state legislature, she says, may solve the issue later this year by passing a new law for MMJ patients. That law could allow medical users – who may need greater volumes and potency – special privileges within the adult-use industry.
There's no guarantee that existing dispensaries will survive, though, and some owners are selling out while the selling's good. At the north Seattle dispensary, the owner greets Pete O'Neil warmly.
"So you're looking for a 502, huh?" he says. O'Neil scopes the space. Upstairs is a one-room dispensary; downstairs are a handful of spindly pot plants.
"I'm asking $175,000," the owner says.
O'Neil pokers his expression. The price buys neither the building nor the land, only the right to take over a $2,800 monthly lease. "The listing said $100,000," says O'Neil.
The owner nods. "The guy down the road just sold his MMJ for $125,000. He's not even zoned 502 legal. So I figured . . ."
O'Neil passes on the deal. A few weeks later, he leases a storefront two blocks farther south, paying three times the market price to beat out two other marijuana concerns bidding on the space.
Real estate and regulations aren't the only worries for an entrepreneur like O'Neil. The price of pot will dictate profits. Top-quality weed currently retails for $250 to $300 an ounce. Over the long term, though, "that could drop by as much as 80 percent prior to taxation" if legalization takes hold, says Rob MacCoun, a professor at the Goldman School of Public Policy at UC Berkeley who studies marijuana laws and markets.
That's good for ending the black market, but low pot prices contain their own sets of worries, said marijuana-taxation expert Pat Oglesby, former chief counsel to the U.S. Senate Committee on Finance. "If it becomes producible at $20 a pound [less than $1.25 an ounce]," said Oglesby, "and you don't tax it pretty heavily, then you have to worry about the leakage rate [i.e., smuggling across state lines] and the political reaction of the soccer moms."
Cheap pot is bad for state coffers, too. Washington state's pot scheme contains the highest marijuana taxes ever submitted to the voting public. The state takes a 25 percent bite at each level of its three-tiered system, and has estimated it may rake in some $400 million a year.
The challenge state policymakers face is to facilitate what Kleiman calls "the Goldilocks price": a tax-influenced number that's low enough to starve the black market but high enough to discourage a spike in consumption. You don't have to beat the street price, just come close. "Most people want to abide by the law," says Holcomb. "If you give them a chance not to be a criminal, they won't be a criminal."
There's one other factor: Washington is capping its initial weed crop at 2 million square feet. That's 45 acres, only enough marijuana to satisfy about one-quarter of estimated statewide demand. (The idea is to avoid a surplus, which might encourage out-of-state smuggling.) Retailers can't import from out of state, so when the weed's gone, it's gone. Which means prices won't be coming down anytime soon.
The gains made in Colorado and Washington tend to obscure the dismal reality still playing out in many other states. In 2012, there were 749,825 marijuana arrests in America. We're not talking about dealers moving weight. In New York and Texas, the states with the most marijuana arrests, 97 percent of pot arrests in 2010 were for simple possession. Over the past decade, as police departments around the country adopted New York City's data-driven CompStat policing model, pot arrests based on stop-and-frisks became an easy way for precincts to pad their numbers. Queens College sociology professor Harry Levine brought the problem to light in 2009 when he discovered that during the previous year the NYPD made more pot arrests in 12 months than during 18 years under Michael Bloomberg's three mayoral predecessors. In an interview in The New Inquiry last year, Levine described the nation's arrest overreach as a scandal on the order of Love Canal and the Ford Pinto, "horrific situations, harming many people, that go on for years before being revealed."
Ezekiel Edwards, director of the ACLU Criminal Law Reform Project, spent nearly a year mining data on the racial makeup of marijuana arrests. The ACLU found that black people were 3.7 times more likely to be arrested for marijuana possession than white people. This at a time when white and black marijuana usage rates are virtually identical, about 12 to 14 percent.
That racial disparity has grown worse with time. Over the past decade, the white arrest rate for marijuana possession held steady, around 192 arrests per 100,000 white people. Meanwhile, the black arrest rate skyrocketed. In 2001, it stood at 537 arrests per 100,000 black people. By 2010, it had climbed to 716.
Going into the project, Edwards suspected the numbers might be bad. But not this bad. "We knew about racial disparities in New York," he tells me. "We didn't expect to find racial disparities everywhere, urban and rural, 49 of the 50 states." (Only Hawaii had a nearly even black-white arrest rate.) The war on marijuana, Edwards says, "has been a war on people of color."
To understand what those numbers mean on the ground, you only have to visit the American marijuana gulag that is the state of Louisiana. New Orleans, of course, famously welcomes and celebrates bacchanalian debauchery. But Louisiana lawmakers take a perverse pride in maintaining some of the harshest marijuana laws in the country. One joint can get you six months in the parish prison. Second offense: up to five years. Third: up to 20.
Bernard Noble is one of many caught in the trap. Noble, a 47-year-old truck driver, relocated his family from New Orleans to Kansas City after losing his house to Hurricane Katrina in 2005. In 2010, he returned to the Big Easy to visit his father. On October 27th, two cops spotted Noble riding a bicycle down South Miro Street. They ordered Noble to stop, and frisked him. They found a small bag containing less than three grams of marijuana.
An Orleans Parish jury convicted Noble of marijuana possession. Because he had prior felony possession convictions, Louisiana law called for a mandatory minimum sentence of 13 and a third years. "It doesn't matter how much or how little marijuana is involved," Donna Weidenhaft, Noble's public defender, tells me. "In Louisiana you can get twice as much prison time for marijuana possession as sexual battery."
But 13 years for three grams? That seemed insane. Moved by Noble's record as a providing father, the sentencing judge took pity and handed down only five years in prison. Only.
Outraged by the nickel, Orleans Parish DA Leon Cannizzaro Jr. appealed the ruling. Cannizzaro wanted the full 13 years. And after three appeals, he got it. Earlier this year the Louisiana State Supreme Court declared that a judge could waver from mandatory minimums only in exceptional cases. And Bernard Noble, the court ruled, was entirely unexceptional. "You might think this is a horror story, but not in Louisiana," says Gary Wainwright, a defense lawyer with two decades of experience in the Orleans Parish courthouse. "We've had people receive sentences of 'natural life' for marijuana here."
Louisiana imprisons more of its residents, per capita, than any other state. In many parts of the state, the parish (county) prison is the largest single employer. "You can't run a prison without inmates," says Wainwright, and the easiest way to keep the jails full is to arrest black men for pot possession.
Marijuana today is a craft-scale industry. It may not stay that way very long. Bigger players are waiting in the wings. In the past year, Allen St. Pierre, executive director of NORML, the nation's biggest marijuana-advocacy group, has met half a dozen times with representatives of the beer, wine and liquor industries. They've talked about the coming legalization of marijuana and what it will mean for the sector of what St. Pierre calls "problematic adult commerce." The NORML leader didn't ask for those meetings. The booze people came to him.
It's easy to assume that Big Tobacco and Big Alcohol are licking their chops at the emerging marijuana industry, waiting for their chance to scoop up a massive share of the market. In truth, it's not that simple. Tobacco, St. Pierre tells me, has production and distribution channels that could easily absorb cannabis. "But they don't have the Dionysian background," he says. "The alcohol guys, they're in the pleasure business. They know how that works."
Beer companies are the most likely first movers. Beer sales have been slipping in recent decades, as more Americans move up to wine or cocktails. Their customer seeks an inexpensive, low-level buzz. Here's one way to think about it: At the end of the week, the beer consumer has 20 bucks in his pocket. He can spend that all on beer, or maybe he buys a six-pack and a gram of pot. "I think they'll be happy to sell you both," says St. Pierre.
Alcohol companies also have excellent working relationships with state lawmakers and regulators. That's no small thing. Legalization rides on the growing belief that marijuana should be treated like alcohol, not like heroin or cocaine. For the feds to go along with these pilot projects, they need assurance that state officials can turn pot into a product as tightly regulated as beer or wine.
As it turned out, fate blessed the legalization movement with two governors prepared to offer that assurance. Gov. John Hickenlooper (D-Colo.) and Gov. Jay Inslee (D-Wash.) could have obstructed or delayed implementation of the adult-use laws. Both opposed it during the campaign. But once the voters spoke, both governors chose to heed the will of their citizens and carry out the laws. To do that, they would have to persuade U.S. Attorney General Eric Holder to allow their risky experiments to proceed.
Holder, like President Obama, was not a man inclined to give a stoner a break. For the past five years, the attorney general has left marijuana enforcement in the hands of local U.S. attorneys, who acted as drug czars in their own jurisdictions. Some dispensaries got raided, others didn't. If Holder didn't want legalization to proceed, he could dispatch the DEA and quash it overnight.
Starting in January 2013, state officials fed the Department of Justice a continuous stream of updates on the construction of their regulatory systems – things like security regulations, seed-to-sale tracking systems, background checks and leakage safeguards. The success of Colorado's 2011 MMJ regulations was a key selling point. Message: We can handle this.
In March, Sen. Patrick Leahy (D-Vt.) offered Holder political cover. "If you're going to be – because of budget cuts – prioritizing matters, I would suggest there are more serious things than minor possession of marijuana," he told the attorney general at a Senate hearing. Leahy also teamed with Tea Party darling Rand Paul (R-Ky.) to introduce legislation calling for reform of federal mandatory-minimum sentences in drug cases. The Leahy-Paul bill represented a signal moment in the beginning of the end of the War on Drugs: the alliance of drug-reform Democrats with libertarian Republicans.
Holder saw an opening and took it. He and Obama are well-aware of the toll the War on Drugs has taken on black communities. In a little-noticed mid-August memo, Holder ordered federal prosecutors to back off on mandatory minimums in low-level drug cases.
That was a good sign. But Holder remained mum about state-legal pot. Through back-channel talks with the office of John Walsh, U.S. attorney for the District of Colorado, Hickenlooper's staff had an idea of what federal officials were most concerned about (leakage into other states and the 1,000-foot rule, mainly). Neither governor had any indication of Holder's leanings. But they had hope. "During various meetings with federal officials, we were never told, 'Forget it, you're nuts,'" recalls David Postman, Inslee's communications director.
Finally, on August 29th, the attorney general placed a noon conference call to Hickenlooper and Inslee. In Denver and Olympia, a coterie of staffers gathered in the governors' offices. Holder came on the line and spoke about his decision: a green light. His office sent over a four-page memo prepared by Deputy Attorney General James Cole. The key passage: In states with "strong and effective regulatory and enforcement systems to control the cultivation, distribution, sale and possession of marijuana," federal officials would largely allow state and local law enforcement to address marijuana-related activity.
The operative term was "control." For the past 76 years, that word had been "prohibited." The feds didn't abandon their authority over marijuana. The Cole memo said that for now, federal law enforcement agencies would step back and let state and local officials proceed with their pilot project in cannabis control.
The staffers in the two governors' offices held their breath as Inslee and Hickenlooper thanked the attorney general. Then they hung up. There were no great hurrahs or backslaps in Denver or Olympia. Just relief that nearly a year's worth of work had not been in vain, and a feeling of confidence that the system each state had designed was going to work.
Marijuana is legal in Colorado and Washington, at least until President Obama leaves office in January 2017. The two states have exactly three years to show the rest of the nation that a safe and sane post-prohibition world is possible.
This story is from the January 16th, 2014 issue of Rolling Stone.