Canna Law Blog ™

Canna Law Blog

LEGAL SUPPORT FOR THE CANNABIS BUSINESS COMMUNITY SINCE 2010

Cannabis Business and Corporate Separateness, Part II

Posted in Business Basics, Legal Issues

In the first part of this post, we emphasized the importance of maintaining strict boundaries between your non-canna and you canna businesses, saying, “Basically, treat everything you do personally and everything your businesses do as if you were all strangers.” Today we reiterate that message, and describe in more detail how and where you might go wrong.

As we previously stated, the “personality” of a corporation allows companies to conduct its business separate and apart from that of its owners, while at the same time insulating those owners from company obligations. But where can you go wrong? What might cause you personally (or your other, non-canna business) to be on the hook for your canna business’s debts or misdeeds?

In legalspeak, the answers to these questions are found in the doctrine of “corporate disregard,” also called “piercing the corporate veil.” This doctrine essentially describes the circumstances when a court might look beyond the corporate form and impose liability on a corporation’s owners and/or on a corporation’s sister companies.

Here are a few of the most common mistakes and misdeeds that result in a piercing of the corporate veil:

  • Commingling and financial mismanagement. This may take many forms. Perhaps you pay one company’s bills out of the other company’s bank account. Or maybe you have separate accounts for your multiple businesses, but operate mainly out of one account and make all your deposits into that single account. Maybe when one business is a little short of cash you transfer some funds from your personal account to the business to bridge the gap. If you do this more than once or twice without a proper paper trail, it begins to get difficult to tell what money belongs where, and a court then becomes justified in looking beyond the debtor company’s coffers to pay claims.
  • Undercapitalization. This is similar to the last point. If you continually operate your business on the verge of insolvency, choosing to make risky investments or give lavish raises instead of ensuring your company maintains enough assets to pay its bills, once again, it may appear to a court you are abusing the privilege of limited liability through incorporation.
  • Corporation in name only. A corporation in name only situation may also involve commingling of funds or undercapitalization, but is sometimes more sophisticated. Say you own two companies, A and B. If Company B operates only for the benefit of Company A, by holding funds and making loans to A but conducts no business of its own, this may lead a court to look to A to make good on B’s promises and obligations. Such circumstances may arise from your own carelessness too: if you use your companies’ names or titles, email addresses, phone numbers, business cards, etc. interchangeably with each other or with your personal information, it begins to look as though you don’t care whether they are separate. If your companies are interchangeable with one another, or with you individually, there’s no longer a reason to keep their liabilities separate either.
  • Alter ego. Alter ego is closely related to many of the situations above, but often comes about when a parent corporation closely controls the activities of its subsidiaries such that the corporate boundaries erode away. This may happen when all or most of the ownership interest is held by the parent, when there is significant overlap between management or board members, or when principals dip into company coffers whenever it suits them. When there is such strong “unity of interest,” expect unity of liability as well.
  • Promoter liability. If you are in the early stages of developing a business you should also be aware of the doctrine of “promoter liability.” A promoter is most often the entrepreneur, who, in the course of developing his new business, gets ahead of herself and signs a contract or lease in the company name before setting up a proper corporation or limited liability company. If the contracting partner is unaware that the business doesn’t yet technically exist, he may be able to go after the owner personally if problems arise later.

The lines between these various doctrines are often blurry, but the lesson itself should be clear: maintain clear boundaries  between youand your companies, and between your companies themselves. Document and create paper trails. Keep finances separate. Set up your company before you start throwing its name around. You must constantly be aware of how you present yourself and your businesses to the outside world.

All of these lessons apply to any kind of business, but you should be especially mindful and careful in maintaining corporate separateness when operating in the cannabis industry. Cannabis can still be controversial, and it is still illegal under federal law. You do not want to give a debtor or a hard-nosed judge any excuse to impose the debts or obligations of your cannabis business beyond that single entity.

Las Vegas Medical Marijuana Dispensaries: Neon Lights Not Required

Posted in Licensing, Medical Cannabis, Nevada

 

Most who live outside of Nevada do not know that businesses located on Las Vegas Boulevard between Washington and Sahara avenues are required to have neon or animated signs. What’s the only industry seemingly exempt from this requirement on the Boulevard? Medical marijuana.

Las Vegas’s Scenic Byway Plan mandates that all establishments on that part of the Boulevard have signs with 75% neon to “preserve the road’s storied history as a glowing desert landmark.” These neon signs have become so iconic and endemic to Vegas culture, that the City can actually request Federal grants to pay for new neon signs to “enhance the street’s glowing aesthetic.”

But Sin City is not going to require Boulevard dispensaries have neon or animated signs in part because Las Vegas’s own land use code states that a dispensary’s sign cannot exceed 30 square feet and must be “internally illuminated, with the use of neon prohibited.” The City’s reasoning for the neon-opt-out is that pharmacies don’t do day-glo signage and, if we are to take medical marijuana seriously, dispensaries should also be ditching the neon. Instead, dispensaries must maintain a “professional” and “medical” appearance, rather than a “Las Vegas appearance,” as one planning consultant described it to the Las Vegas Review-Journal.

Interestingly enough, a Walgreens pharmacy on the Boulevard near the new SLS Las Vegas was not exempt from the neon sign directive and that Walgreens will have a sign at least 75% neon, leading some to assert that the City is giving an unfair advantage to medical marijuana businesspeople by exempting them from the expensive neon signage requirements.

But exempting medical marijuana dispensaries from the neon sign requirement does make sense if we are going to treat cannabis as a legitimate medicine, not as a tourist attraction. All this does beg the question as to whether Las Vegas will maintain this exemption if the State legalizes adult use marijuana in 2016. Something tells us as cannabis business lawyers that if Nevada does legalize adult use marijuana (and we think it will in relatively short order), some of the biggest neon signs near the Strip will eventually put a whole new spin on cannabis, right between animated ads for Cirque du Soleil shows and all-you-can-eat-buffets.

Hollywood Embraces Recreational Marijuana (Well, Duh)

Posted in California, District of Columbia, Federal law and policy, Recreational Marijuana

Though D.C. may inevitably be the linchpin to our legalizing marijuana nationwide, the recent outpouring of Hollywood celebrities showing their love for the green revolution is certainly not going to hurt. As creative (mostly liberal) artists, it’s no surprise that top-notch actors, filmmakers, and comedians are pro-marijuana. What is a slight (and welcome) surprise is how so many in Hollywood have recently taken to publicly coming out in favor of marijuana at high profile events.

Specifically, at this year’s Emmy Awards, marijuana was all the rage:

Talk show host Jimmy Kimmel, singer Adam Levine, actress Amy Poehler, and Emmys host Seth Meyers were just a few of the celebrities to show their approval for the use of recreational marijuana. Comedian Sarah Silverman went as far as to pull out her “liquid pot” vaporizer pen on the red carpet while sharing the contents of her purse. Liquid THC pens are becoming a hot commodity among pot-enthusiasts and may even be included in the official 2015 Oscars gift bag, Fox News reported.

You know marijuana has arrived when the gift bags at the Emmys contain marijuana-infused-vape pens.

Social acceptance, and especially influential social acceptance, of marijuana is paramount to legalization. Though most States prohibit using marijuana in public and require that marijuana businesses obscure the public’s view into its facilities, we are beginning to see key changes in social behavior that show marijuana is slowly losing its stigma.

Whether it’s Barack Obama’s admission from the Oval Office that he “inhaled,” because “that was the point,” or marijuana-friendly nights at the symphony, or stars on the red carpet donning their favorite vaporizer, the social openness beginning to surround cannabis promotes its overall acceptance and eventual legalization.

They Said it On Marijuana, Quotable Saturday, Part XXVII

Posted in General

Uruguay is the first country to fully legalize both the production and sale of marijuana.  And, in a recent interview with The Economist, Uruguay’s President, José Mujica, gives us our quote (or series of quotes) for this Saturday’s “They Said it On Marijuana.”

In a Q & A type interview, President Mujica shared the following views on Uruguay’s legalization efforts:

The Economist: The issue of the legalisation of drugs is one that The Economist has campaigned on for 25 years. So we agree with your initiative to legalise marijuana. For you, was this more of an issue of security or of individual liberties? Or both things? Do you think the law will stick?

President Mujica: Look, it began essentially as a security issue. We have spent many years repressing and spending money to fight drug-trafficking. We have had glorious successes, but trafficking continues to increase. In other words, this policy has failed for many decades. And it’s common sense that if you want to change you cannot keep on doing the same thing: you have to try other ways. We came to the conclusion that this is an addiction, you have to treat it on the one hand through the police, but then you have to treat it as an illness. You can’t treat an illness in [conditions of] illegality. In Uruguay there must be 150,000 sporadic consumers, but they are clandestine. We oblige them to be clandestine. When we can treat them it’s already late, it’s often irreversible; and moreover frequently they have committed related crimes to get money. It is pure loss for society.

What are we proposing? We are proposing a market logic: if we can’t beat them through policing, we are going to try to steal the market from them so that this ceases to be a business. But we’re not trying to foster an addiction. We have no truck with the idea that planting marijuana is good and that it’s less harmful than cigarettes and all of these things that are said. No, no, I believe that no addiction is good… This is the question, to be able to limit [consumers] to a certain quantity, and when they go over that to consider them as having an illness and treat them.”

Though we do not agree with every word President Mujica (who donates 90% of his salary to charity, BTW) says about legalization, we definitely agree with his goals of wresting marijuana from the black market and regulating it for the benefit and safety of society. Perhaps someday our own Federal government will see the light and follow Uruguay in ending the domestic and international (failed) wars on marijuana.

Illinois Cannabis FAQs: Answers for Growers from the State

Posted in Illinois, Intellectual Property/Branding, Licensing, Medical Cannabis

As promised, today we discuss highlights from the Illinois Department of Agriculture’s recently posted FAQs for medical cannabis cultivation center applicants. Interestingly, Ag’s list of FAQs are much shorter than DFPR’s, despite the grower application process being somewhat more complicated, rigorous, and expensive. Perhaps that confirms what we have been seeing — that many cultivation center applicants will be coming from out of state since Illinois has no residency requirement.The main points of interest are:

  • Growing not yet legal. Despite the Compassionate Use of Medical Cannabis Pilot Program Act’s having gone into effect on January 1 this year, growing MMJ is not yet “legal” in Illinois and likely won’t be before early 2015. This is because no growing facilities have yet been licensed by the state. So even if you are completely convinced you will win a license to grow in the upcoming application process, resist the temptation to get a head start on your grow op. If you were to be discovered by the authorities, you would no doubt be disqualified from receiving a license to grow legally in the future.
  • No home grows. This point (like the one before it) is nothing new, but bears repeating. The Act does not authorize patients (even if lawful MMJ card carriers) to grow their own herb.
  • Application fee. As with dispensaries, your application must be accompanied by the application fee (for growers, $25,000) in the form of a certified check or money order.
  • Blind application review. The Department of Agriculture clarified that the application review process will be conducted with de-identified application materials, which makes sense considering Illinois’ intention to award licenses to the best qualified applicants. It is probably safe to assume the process will be the same with regard to dispensaries.
  • No intra-grower business. In response to a question asking whether cultivation centers may sell excess cannabis to other cultivators, the Department answered that no, growers may only sell to dispensaries. This seems like an unnecessary restriction, especially considering the Department’s requirement that growers maintain an “uninterrupted” supply to dispensary customers.
  • Zoning. Like dispensary applicants, a potential grower must only indicate the status of its zoning request — it need not yet be complete at the time of application.
  • Labeling and Branding. A question was posed regarding whether a cultivation center may print other information on its pre-packaged product, such as the name of the dispensary that will be selling the product. The Department of Agriculture responded that so long as product is not packaged to resemble non-medical foods or candy and it makes the consumer aware that it contains a medical product, the Department “has no objection” to a cultivator putting additional information about the dispensary on the label. Hear that dispensaries? This means now is the time to start considering branding and licensing agreements you might possibly need between you and your grower and to start registering your trademarks so as to protect your brand. With such an agreement in place, you can begin to grow a brand and create recognition, while protecting your interests as well.

It is unclear whether the Department of Agriculture will be updating its FAQs as is DFPR, but if it does, we will be sharing them along with our thoughts.

UPDATE: Experience Requirements for Illinois MMJ Applicants Clarified

Posted in Illinois, Licensing, Medical Cannabis

Yesterday in our post “Illinois MMJ FAQs: Answers for Dispensaries from the State,” we noted the alarm bells that went off in our heads over this answer: “At least one principal officer must demonstrate experience and qualifications in business management and at least one principal officer must demonstrate experience in the medical cannabis industry.” As we stated yesterday, we had not previously understood either the Illinois Act or the regulations to impose such a requirement — rather, applicants were instructed to explain any such business management or cannabis industry experience they might have.

We submitted a written question seeking clarification of this issue to FPR.MedicalCannabis@illinois.gov, the address provided in the FAQs. Though we’ve not yet seen an individualized response back from DFPR, the FAQs (available here) were updated today to state: “At least one principal officer must demonstrate experience and qualifications in business management or experience in the medical cannabis industry.” Like we thought, DFPR is looking for applicants to have either business management experience or canna industry experience, but it does not necessarily expect both. We suspect that more than a few applicants will breathe a sigh of relief as a result of this clarification.

The other bit of good news we glean from this update is that DFPR is responsive to questions and concerns from applicants, and is addressing them in a surprisingly timely manner.

Oregon and Washington: A Tale of Two Recreational Marijuana Laws

Posted in Legal Issues, Licensing, Medical Cannabis, Oregon, Recreational Marijuana

Last week, I participated in The Oregonian’s Speaker Series (at The Bing Lounge in Portland) discussing what Oregon can learn from Washington’s marijuana legalization regime. A fitting time to dish on such a topic since the polls are indicating that Oregonians are ready to legalize recreational marijuana this fall via Initiative 91.

The intent and purpose of I-91 is to legalize, treat, and regulate marijuana like alcohol. Under I-91, Oregon’s Liquor Control Commission will oversee the State’s recreational marijuana program. And though the initiative shares some similarities with Washington’s recreational use regime, there are some notable (positive) differences between I-91 and I-502 (Washington’s recreational marijuana initiative), including the                following:

1. Oregon will not have a residency requirement. Though Washington mandates a 90-day residency period for all I-502 licensees and their financiers, I-91 does not contain a residency requirement. This means Oregon’s recreational market is going to be open to out-of-staters. Oregon will thus benefit from the experience, knowledge, and innovation that out-of-staters can provide.

2. Oregon will permit retail delivery. I-502 prohibits such delivery and this has caused significant consternation among marijuana entrepreneurs and customers in Washington. Oregon’s allowing deliveries will obviously be particularly good for those who are home-bound.

3. Oregon Cities and counties cannot ban I-91 facilities outright, but they can put such proposed bans to a vote of the people. I-502 didn’t speak to the ability of cities and counties to ban State-licensed marijuana businesses and litigation has ensued to determine whether in fact cities and counties have this right.

4. Oregon will be leaving its current medical marijuana program intact. I-502 did not even mention medical marijuana and Washington’s medical marijuana facilities now actually compete with I-502 licensed businesses. Washington State’s Liquor Control Board ultimately recommended that the State roll Washington’s medical marijuana program into I-502 so that patients could only access I-502 licensed storefronts (rather than medical marijuana dispensaries). The Washington State Legislature nearly eradicated medical marijuana last session, but in the end has not moved on this issue.

5. Oregon will allow vertical integration. I-502 bars vertical integration of I-502 companies. This means that a  cannabis producer/processor cannot also be a retailer and vice-versa. This will not be the case in Oregon and this will give businesses more flexibility over pricing and a greater ability to control the dissemination of their products and brands.

6. Oregon will not cap the number of retail licenses overall, and individual companies can apply for multiple licenses. Washington has strict licensing caps such that there can (currently) be no more than 334 licensed retailers and any one applicant could not apply for more than three producer/processor licenses or more than three retail licenses. In Washington, if you applied to be a retailer, you could not also apply to be a producer/processor and vice-versa. In February 2014, the Liquor Control Board also reduced the number of licenses a producer can possess from three to one.

7. Oregon’s DUI laws will remain the same. I-502 mandates that drivers found to have more than .5 nanograms of active THC in their blood stream have committed a per se DUI violation. In Oregon, under I-91, the DUI laws regarding “driving high” remain the same and no nanogram threshold of THC of any kind is imposed. I-91 does provide though that the Oregon Liquor Control Commission is free to study the issue and to research the available data and make recommendations to the legislature regarding future changes to the DUI laws.

8. Oregon will apply “privilege” taxes only to growers. Under Washington State’s I-502, a 25% excise tax applies to the sale of every gram of marijuana between licensees, all the way down to consumers. Under Oregon’s I-91, only growers will pay the following taxes: $35 per ounce on all marijuana flowers; $10 per ounce on all marijuana leaves; and $5 per immature marijuana plant.

There will definitely be differences between Oregon and Washington when it comes to recreational marijuana, but one thing is for sure, Oregon is going to be the next great opportunity for recreational marijuana after I-91 passes this fall.

Illinois MMJ FAQs: Answers for Dispensaries from the State

Posted in Illinois, Licensing, Medical Cannabis

This week’s announcement from the state of Illinois confirming the application window for prospective dispensary and cultivation businesses was accompanied by two sets of FAQs from the Illinois Department of Agriculture and the Illinois Department of Financial and Professional Regulation. These FAQs were compiled following the series of town hall meetings held around the state by the three state agencies that will be regulating Illinois’ medical cannabis regime.

Below are some of the highlights from the DFPR queries, and our reactions.

  • Number of Applicants and Identity of License Winners. It may seem like a moot point that once applications are in, the state will release the number of applications submitted in each dispensing or cultivating district and the identity of the winning applicants. But this is actually valuable information, because it will inform any future decision the Illinois General Assembly may make about the potential for further application periods and/or licenses, continued involvement by out-of-staters, limits on the number of licenses to be held by single individuals or entities, etc. As it stands now, no additional applications will be accepted after the September 8-22 window (unless a district has no qualified applicants) — additional licenses would have to be authorized by the Assembly.
  • Application Fee. Better pay attention to this one. Your application fee ($5,000 for dispensaries, $25,000 for cultivation centers), must be submitted via certified check or money order. No cash. No credit cards. And your fee cannot be submitted after the application window closes — everything must be submitted on time, including the fee. The fee AND your application must be hand delivered.
  • Criminal History. The requirement that principal officers be free of “disqualifying convictions” is nothing new. However it is worth repeating the state’s advice to disclose all possible criminal history. Those individuals will be subject to background checks anyway, and you shouldn’t risk disqualification of your entire application trying to cover up a prior indiscretion. It should go without saying that if any of your officers have an excluded offense on their criminal history (or even suspect they might), get them out of your business now.
  • Changes. If any facts or circumstances pertinent to your application arise or become known to you while your application is pending, advise DFPR in writing. This might include changes to your ownership or management structure, updated zoning status, etc. In most instances, we would advise you to also disclose any negative developments as well — if DFPR finds out on its own, nondisclosure could doom your application.
  • Bonus points. Though the draft dispensary application released a few weeks ago provided a breakdown of points to be awarded to various sections of the application (e.g., business plan, security), it was not explained how the bonus points provision is triggered. The FAQ, however, tell us that the 100 points available for items such as a research plan, environmental plan, etc. only become available if you meet the minimum criteria for the mandatory parts of the application. Make sure your bases are covered before you try scoring extras.
  • Livescan. Fingerprinting and authorization for the mandatory background checks must be dated within 30 days of your application date. Since there are fewer than 30 days left to apply, do your fingerprint scan NOW.
  • Security. This should be a no-brainer, but since you will want to squeeze out all the points you can, follow DFPR’s suggestion that you provide “the best possible plans” — don’t just do the bare minimum.
  • Zoning. Zoning requirements have been the source of confusion. Here DFPR tries to clear the air a bit by explaining that “The Division expects that applicants will be in varying stages of zoning compliance process.” In other words, you don’t have to be “done” with your zoning when you file your application. Still, we strongly believe that at the time you apply you should be fairly certain your dispensary is in a canna-friendly municipality and in a spot that meets zoning restrictions.
  • Publicly Owned Property. DFPR clarified that a dispensary may be located on public property. Obviously you must still be sure you are in a non-residential zone with no nearby schools or daycare facilities.
  • MMJ Experience. In response to a question asking whether all principal officers must have experience in business management or in the medical cannabis industry, DFPR stated that “at least one principal officer must demonstrate experience and qualifications in business management and at least one principal officer must demonstrate experience in the medical cannabis industry.” Well, this came as news to us. DFPR regs require an applicant to submit the resumes of principal officers, noting “whether that person has an academic degree, certification or relevant experience with a medical cannabis business or in a related industry.” Asking whether a person has such a background is not the same thing as requiring it, and given that no one within Illinois has such experience since the program is just launching, the FAQ response seems to create a requirement that applicants bring on at least one out-of-state principal. This inconsistency has us puzzled, so we have contacted DFPR. We will certainly update readers with what we learn.

You’ll want to revisit the FAQ page from time to time as DFPR says it will be updating the information there as potential applicants and citizens continue to ask questions. Later this week we will review FAQs posed to the Department of Agriculture concerning cultivation centers.

 

Breaking News: Illinois Medical Marijuana Applications Start September 8

Posted in General

Yesterday the relevant state agencies in charge of implementing Illinois’ Compassionate Use of Medical Cannabis Pilot Program announced that applications for dispensaries and cultivation centers will be accepted September 8 through September 22. These dates had been rumored, but are now official. The same statement also announced that applications are to be submitted in hard copy, with a USB flash drive copy as well. Online applications will NOT be accepted. The final versions of the dispensary and cultivation center applications are to be made available by this Friday.  

The Department of Financial and Professional Regulation (overseeing dispensaries) and Department of Agriculture (overseeing cultivators) also released a set of FAQs discussed at the recent town hall meetings. Check back later today for our take on and highlights from those FAQs.

Cannabis Regulators: Who Watches The Watchers?

Posted in Business Basics, Legal Issues, Licensing

Owners of highly-regulated businesses know all too well that their regulators are human. We practice marijuana business law in a number of different states, all of which are highly regulated by one or more state agencies. And those agencies, and the people within them, make mistakes from time to time that directly impact our cannabis clients. Sometimes the errors are simple, like a lost document that we then need to resubmit, causing only a few days delay. Other times, the agency error’s consequences  are more severe. In one case, a state agency three times approved one of our marijuana license applicant’s physical location, only to then be revoke the approval after discovering that the location was too close to a recreation center — a center for which we had specifically requested approval multiple times. The applicant had to move, after having already spent tens of thousands of dollars on build-out, most of which is unrecoverable.

This is where things can get frustrating and increasingly tricky. Licensing and regulatory agencies do not always fix their mistakes in a way that is fairest to the victims of those mistakes. Also, the same people that made the mistakes often continue to review the applications or monitor the businesses.

So you are left with a choice. Do you sue the agency that caused your business to lose $30,000 through no fault of your own? If you do this during the licensing process, you could be putting your entire license at risk. Remember our original premise — regulators are human. Agencies hate being sued as much as anyone. They are not above the defensiveness, stubbornness, and spite that litigation brings out in defendants everywhere. Getting an agency to issue you a license to produce or sell marijuana after you have sued that same agency may be a risky proposition.

Still, agencies usually do not have the right to negligently cause limitless damage to your cannabis business without you also having a right to some sort of remedy. If your company loses $30,000, you want to be able to get that back if you can. But instead of suing in these situations, it is often better to try to resolve the situation at a relatively informal level with the regulatory body. This is where experienced cannabis lawyers come in handy; they have spent so much time working with the regulators that they often can accomplish things just by knowing who to ask and what to request. If the informal method fails to lead results, going through a formal appeal process within the agency is usually the best next step.

Thankfully, agency errors are relatively rare and when they do occur, regulators generally try to remedy them in a way that does not unnecessarily harm the parties they are regulating.  However, when agencies take wrongful actions that harm you, it is important to protect your rights in a way that best positions you to move your business forward.