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Navigating the Cannabis Industry

Over the past decade, the United States has seen steady and growing acceptance of cannabis, but it is only in recent years that the cannabis industry has taken center stage as a viable business opportunity. As of November 2018, 45 states have legalized the use of CBD oil only, 33 states have legalized cannabis for medical usage only, and 10 states and The District of Columbia have legalized recreational usage of cannabis. Many states have created and passed different laws enabling people to start their own cannabis-related businesses—growing, manufacturing, distributing or retailing cannabis or cannabis-derived products. However, with the use, sale and distribution of cannabis remaining illegal at the federal level, a gray area exists and has left many areas of the law undefined. To truly be successful in this space, business owners need the right type of legal guidance.

Uncharted Territory

“With the onset of legalization, there is a rush of private interests looking to participate in and shape the market. At the same time, a growing number of state and municipal government bodies are creating the regulatory framework for marketplaces to exist in their geographical regions. Both sides need the support of competent counsel to be successful,” said Dean Rocco, co-chair of Wilson Elser’s international cannabis law practice group. The legal professionals who can help are those who have “an interest and desire to learn new laws, solve problems that have never existed before, engage directly and routinely with government agencies and reach out to other lawyers in the industry to figure things out together,” Dean explained further.

Legislation for cannabis is different in every state, thus presenting challenges for lawyers as they try to navigate and advise their clients on how to be compliant. One of the main issues that lawyers must confront is how to ethically and appropriately advise their clients when there is such a gray area between the state and federal regulations and legislation. “There are certain federal protections that aren’t available because it’s still a Schedule I Substance,” Dean said.

Unfortunately, not many law firms or lawyers are fully immersed in the space yet, but the opportunities are ripe for those who stay up-to-date on the regulations issued at the local and federal levels. “Understanding how regulatory processes work and understanding how regulatory agencies enforce their policies and code provides a big leg up,” said Richard Ormond, a partner and shareholder at Buchalter. “You need to look at it from a different perspective, which is that this is very new. The people entering are pioneers, and this industry is under tremendous scrutiny, so those people that choose to go into this industry have to be disciplined and must set the best example because if they don’t, it could potentially ruin the opportunities for everyone else.”

Anything but Smooth Sailing

The cannabis industry was worth $9 billion dollars in 2017 and is predicted to triple by 2021. And while it can be quite a profitable opportunity for the right business owner, “Getting a business started within this space is still difficult,” explained Vanita Spaulding, cannabis valuation practice leader at SingerLewak LLP. “You cannot always buy a piece of real estate or find a piece of real estate willing to rent to a cannabis business. You can’t transfer or sell cannabis across state lines, even if both states have legalized the sale of cannabis. This can hinder, for instance, a cannabis grow operation that has an excess supply of flower in one state, which lowers the selling price. If that grower could transport to a neighboring state with more demand than supply, a more profitable selling price could be maintained. It is also still very difficult to get a banking relationship because banks are federally regulated and insured so banks are very reluctant to do business.”

Richard Ormond cautions even the savviest businessman: “With big reward comes big risk. Landlords need to be cognizant not just of local compliance, but they need to be cognizant of state licensing issues and banking issues. Landlords may not be able to deposit the money that they collect from these tenants because it falls under the anti-money laundering statutes. Therefore, they run a big risk, and they have to disclose these sources of funds. If these sources of funds are from a tenant involved with cannabis, then they are obligated to inform their financial institution it is from that source; then those financial institutions must make a determination whether they will keep that deposit at the bank.”

Expert Navigation

With so much collateral impact, businesses entering the cannabis industry need to take many variables into consideration and should enlist the proper type of legal guidance.

Landlords should enlist the help of real estate lawyers who can help them navigate the challenges of renting their property to cannabis business owners. While landlords are not involved directly in the industry, they are seen as affiliated by the federal government and are thus breaking federal law. Though despite this illegality and risk of seizure, landlords see their investments as lucrative and are charging, in some instances, as much as three times the regular market rate, in a triple-net lease. Richard joked, calling this the “cannabis triple-triple—triple the rent with a triple-net lease.” “But in all seriousness, landlords need to be cognizant not just of local compliance but also of state licensing issues and banking issues,” Richard explained. “I warn every landlord that it is a big risk because their assets could be seized, so they must weigh the risk of that happening with the reward.”

Sellers, growers and distributors of cannabis need to work with an experienced corporate attorney who understands the process and formalities of starting a business—just like any start-up—from intellectual property to taxes to employment. It will serve these attorneys well to stay on top of the ever-changing regulations and nuances that currently make the cannabis industry unique. “Law firms like ours help cannabis businesses understand what the laws – both cannabis specific and otherwise – require and support their development as legal, fully licensed and fully recognized businesses at the local and state levels,” said Dean. “In California, cannabis businesses must maintain licenses at a local and state level, so there is a fair amount of work around compliance.” For businesses that struggle to get through these initial requirement steps, forming a partnership with a larger, established business may make more sense. In those situations, an M&A lawyer can be very beneficial.

Everyone engaging in the industry will experience banking issues as the revenue generated from the sale of cannabis is not FDIC insured and most major banking institutions will not accept deposits. The risk for banks of all sizes is often too high to justify taking on cannabis clients. The banks that have cannabis clients have to go through a complex and lengthy process to ensure the client is compliant with state laws and regulations. A lawyer who is well-versed in FDIC regulations will be very helpful to these businesses, as will someone familiar with tax law specific to Schedule I Substances and the individual state requirements for businesses making money in this space.

Lawyers interested in entering the industry should familiarize themselves with local, state and federal regulations before offering their services to cannabis-related businesses. The ever-changing nature of the business makes practicing law in this arena challenging. The best lawyers to assist cannabis businesses will be those that are willing to immerse themselves in the nuances and information.

 

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