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California Governor Issues Exec Order on Vaping

By Linda C. Hurley, CPA

On September 16th, California Governor Gavin Newsome issued Executive Order N-18-9, the first state-wide effort to address emerging issues related to e-cigarette and cannabis vape use. The move by Gov. Newsom follows a report issued by the CDC earlier this month linking a number of deaths and other severe health concerns to vaping and electronic cigarette use.

Breaking down Gov. Newsom’s Executive Order

The California Executive Order opens with a bulleted list of facts and assumptions related to the growing use of vaping devices in California. Following are some of the more interesting points related to the cannabis industry (paraphrased from the executive order):

  • Vaping devices are the most commonly used tobacco product in California;
  • 80 percent of high school-aged tobacco users vape;
  • In 2018, 10.9% of high school students reported using e-cigarettes, and 14.7% reported using cannabis (ed: no detail provided on whether they vaped cannabis);
  • There are no manufacturing standards for non-cannabis vape products;
  • A clinical syndrome has emerged that connects respiratory failure to the use of illegally obtained cannabis products, cause of the syndrome remains unknown.
    The Executive Order goes on to list of Gov. Newsom’s multi-point plan to address the emerging vape issue. Key points include (paraphrased from executive order):
  • The California Department of Public Health (CDPH) is ordered to create recommendations for reducing the use of vape products by persons under the age of 21. Those recommendations should include health warnings for packaging and retail locations, increased enforcement of illegal vape sales, and establishing standards for measuring levels of nicotine and incorporating it into the calculation of taxes on vape products. Due 10/14/19
  • CDPH to allocate $20 million in funding to educational campaigns on the risks of vaping.
  • The California Department of Tax and Fee Administration (CDTFA) is ordered to provide recommendations for cracking down on the sale and use of illegal vaping products, particularly among under-age users. Due 10/29/19

The bad news for cannabis companies

In the weeks following the CDC report on the dangers of vaping, a media firestorm has emerged with more reports of vaping related deaths and illnesses. The negative media attention on vaping will almost certainly produce a public backlash, which could negatively affect sales numbers for e-cigarettes, and to a lesser extent for cannabis vaping products and oils. Further legislation is almost certainly in the works across the nation. Flavored e-cigarettes have already been banned (via Executive Order) in Michigan and similar measures are in the works for New York State and the city of Chicago.

As a result, sales forecasts and valuations for cannabis companies manufacturing or selling vape products, cartridges, and oils should account for a potential dip in public demand and limits on access in coming months.

The biggest concern for the cannabis industry is that cannabis vaping gets lumped in with the dangers of e-cigarette use, despite cannabis products having no nicotine or the other toxic chemicals associated with cigarette use. To date, none of the reported illnesses or deaths have been conclusively connected to legally produced cannabis vape products (although in one case of death in Oregon, a cannabis vape product is being investigated as a possible cause). The lingering issue is that “bad actor” illegal cannabis producers could be producing toxic, unregulated products that put the entire industry in the sights of lawmakers and regulators.

A nearly guaranteed outcome is that lawmakers and regulators will increase the oversight of legal cannabis producers. Further manufacturing, testing, packaging and marketing laws are likely to result, increasing the regulatory burden for cannabis companies based in California and throughout the US.

The “good” news for the cannabis industry

While the initial takeaway from laws and executive orders designed to curb vape-use have a number of negative business impacts on the cannabis industry, there is some silver lining for legally-operating and compliant cannabis businesses.

  • The Focus is on E-Cigarettes – As alluded to above, health officials, lawmakers and regulators are primarily focused on the widespread use of e-cigarettes, focusing especially on under-age use and the marketing of flavored oils (perceived as targeting young users).
  • Legally Compliant Cannabis Companies May Have Less to Worry About – Similar to the previous point, health officials and other investigators are focusing on illegally purchased vape products and e-cigarette products produced in a largely un-regulated environment. Cannabis companies fully compliant with state regulations, which include laws governing manufacturing, testing, packaging and selling cannabis products, are not currently the primary target of investigations. This could, in fact, present an opportunity for compliant companies to differentiate themselves and market the testing and quality control procedures their products undergo before hitting the market.
  • Vaping is Just One of Many Cannabis Consumption Methods – While vaping cannabis has becoming increasingly popular in recent years, a number of other consumption methods are also gaining widespread use. Edibles, tinctures, and topicals are fast-growing cannabis products finding defining new markets. Cannabis companies with diverse product lines may want to consider a strategic pivot away from vaping products in the interim and focus on less “stigmatized” products.

The science is still out

The ultimate take-away from the CDC’s report and subsequent investigations is that no direct causal relationships between vaping and potentially deadly respiratory illnesses have been proven. The CDC is advising the public against vaping until the science is clear and cracking down on illegally-produced and unregulated vaping products is a common sense step for public safety.

Cannabis companies and investors need not panic (yet) on the fate of cannabis vaping. We are certain to see changes in the coming months, especially in regard to regulations for manufacturing, marketing and selling vape products, but compliant companies have little to worry about in the near-term as long as they continue to update controls and follow regulations.