The underground ushered in a community dedicated to education, harm reduction, and expanding awareness of the use of psychedelics for therapeutic, spiritual, and recreational purposes, often operating with strong ethical principles despite legal risks. As psychedelics gain popularity and accessibility, however, risks associated with the underground are surfacing.

Some commentators believe that unregulated psychedelic products pose a significant risk to public health. A stark example is the recent outbreak of illnesses tied to Diamond Shruumz-brand so-called “mushroom” edibles, which resulted in over 180 reported cases of severe illness across 34 states, including 73 hospitalizations and three deaths. Although the investigation did not reveal a clear answer to what caused the illnesses, the FDA discovered synthetic and pharmaceutical substances in these products – not mushrooms at all.

Similarly, in November 2024, California authorities confiscated and destroyed over $3,000,000 worth of PolkaDot Mushroom Magic bars that were suspected to contain 4-Acetoxy-DET and 4-Hydroxy DET, citing consumer health risks as the basis for their actions.

Bad actors attempting to take advantage of renewed interest in psychedelics are causing intensified scrutiny, posing increasing risks for underground operators, including raids, product recalls, and reputational damage.

Bridging the Psychedelic Divide Between the Underground and Regulators

Much like cannabis, the improvident War on Drugs has left deep scars on the relationship between regulators and the psychedelic underground. This history has fostered skepticism toward regulatory bodies perceived as complicit in decades of prohibitionist policies.

While most psychedelics remain federally illegal, regulatory structures in emerging legal markets, such as those in Oregon and Colorado, prioritize clinic-based supervised use models. While these approaches aim to legitimize psychedelics, they risk sidelining core underground practices, such as spiritual use. The financial barriers to entering the above-ground market are also steep.

The underground has long demonstrated the potential for self-regulation through community-driven initiatives, exemplified by organizations like DanceSafe and Hyphae Labs, which thrive and innovate outside traditional regulatory frameworks. But relying solely on self-regulation overlooks the opportunity for broader public trust, safety assurances, and equitable access that a well-designed legal framework can provide.

To bridge the divide, regulators must formally recognize the contributions of the underground community, integrating its models of harm reduction and education into legislation. Democratizing access to funding and reducing barriers to entry for small operators can also foster a more inclusive legal market. For instance, providing grants for licensing fees and operational costs could alleviate financial burdens and incentivize participation from a diverse range of actors.

Of the current regulated models, Colorado may be the best fit for this transition.

Business Opportunities & Key Elements of Colorado’s Psychedelic Licensing System

Colorado’s Natural Medicine Health Act (NHMA) program offers flexibility and inclusivity through its innovative blend of personal-use decriminalization and state-regulated models. Compared to Oregon, where access is restricted to psilocybin available exclusively through costly treatments at state-designated service centers, Colorado’s personal-use model provides for ceremonial and recreational uses of several psychedelics outside of the regulated model.

Though the NHMA’s personal-use model provides for payment for bona fide therapy and harm reduction services, it does not permit the retail sale of psychedelics. The NMHA’s regulated model establishes a structured and regulated system for the therapeutic use of psilocybin and related natural medicines, providing a comprehensive framework focused on ensuring public safety, standardizing practices, and providing pathways for licensing facilitators, manufacturers, cultivators, and testing facilities.

Facilitators

The NMHA’s structured pathways for facilitators allow both experienced practitioners and newcomers to enter the market while maintaining high safety and operational standards. All applicants must complete detailed training and certification, including courses on ethics, Colorado’s regulations, and practical facilitation skills.

There are two types of full-scope licenses and two ancillary licenses. Full-scope licenses, which allow the holder to provide Natural Medicine Services independently, include the “Facilitator” and “Clinical Facilitator” licenses. The Facilitator license is available to individuals who meet the specified education and experience criteria. The Clinical Facilitator license is open to those who fulfill the same requirements as a Facilitator but also hold a secondary professional license in Colorado that authorizes them to diagnose and treat medical or behavioral/mental health conditions.

Additionally, two ancillary licenses are defined. The “Distinguished Educator” license is intended for individuals with extensive experience in providing Natural Medicine Services, enabling them to offer these services within a training program. The “Training” license, available to individuals who complete 150 hours of didactic education, allows the licensee to charge for Natural Medicine Services during a supervised consultation period. Neither the Distinguished Educator nor the Training license is considered full-scope, meaning licensees cannot provide Natural Medicine Services independently.

Cultivators, Manufacturers & Testing Facilities

Colorado presents a significant opportunity for cultivators and manufacturers from other states currently operating in the grey market to transition into a fully legal and regulated environment.  Licensing for cultivation, manufacturing, and testing of natural medicine in Colorado follows a tiered approach based on business models:

Cultivators can store up to 5 kilograms of dried whole mushrooms under the standard cultivation tier, while micro-cultivators are allowed up to 750 grams, suitable for small therapy practices or individual facilitators.

For manufacturing, a Natural Medicine Product Manufacturing license is required to produce any product other than whole, dried mushrooms, with manufacturers automatically permitted to produce capsules and tea bags. They can also obtain an Extraction Endorsement, which authorizes the production of chocolate, gummies, pressed tablets, and tinctures.