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Beware of Rent Seekers

Regulation will shape who profits from cannabis.

From a policy perspective, cannabis regulation invites a lot of questions and only the first signs of answers. However, the way cannabis is grown, distributed, and sold will depend on the approach regulators take. Investors need to keep an eye on a developing regulatory system that will create many of the winners and losers in a post-legalization environment. Investors should be especially vigilant about tracking the way the nascent cannabis regulatory structure evolves to reward determined rent seekers—companies that seek to use regulation to set up private flow of profits.

The end of Prohibition and the resultant regulation of alcohol sales provides an important case study and offers clues as to how history may repeat itself. As with the end of Prohibition, an entirely new business might grow up profiting off regulators’ desires to monitor or curb the sale of legal cannabis. If regulators follow the alcohol blueprint, they risk inviting early players to squeeze into the industry and slam the door behind them, keeping others out with regulatory barriers.

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