Cannabis Production

So you’ve set your sights on joining the next generation of Oregon cannabis producers. Congratulations! You’ve identified talented growers, you’ve resolved the intractable indoor vs. outdoor cannabis growing dilemma, you’ve saved up some money, and now you are eager to get your cannabis operation up and running.

But what’s next? Your first question is a classic: Where will I grow?

When you apply for an Oregon Liquor Control Commission license, you will need to prove you have a deed or lease to an eligible property. A letter of intent to lease or to purchase will also suffice, but the OLCC will not actually issue the license until you close the lease or sale. You should work with a realtor with experience in the cannabis industry to identify a few possible locations. As you begin your search, remember the following:

Not all counties and cities are alikeOn the most basic level, you need to be aware of the various cities or counties that have banned recreational producers outright. The OLCC maintains a list of these hostile local governments and you may be sad to hear that Grass Valley, Oregon is still off-limits!

Even the cannabis friendly local governments vary significantly in their local requirements, with some counties going to great efforts to be cannabis friendly, and others putting up an unfortunate amount of red tape. An exhaustive county-by-county or city-by-city analysis is beyond the scope of this post and we recommend you speak with cannabis entrepreneurs and professionals who have worked with your top choices for county or city to get a sense of potential local government roadblocks.

Distribution Channels. Though rural land is likely cheaper, your best markets will likely be in the cities. It is never too early to begin cultivating relationships with wholesalers, processors and even retailers to help bridge this gap. Proximity to testing labs is also a plus.

Perform Your Due DiligenceOnce you find a location in a friendly area with room for your operation, you need to ensure that the property complies with all state, county, and municipal requirements and regulations. This can be done by thoroughly reviewing county codes, city comprehensive plans, land use regulations, relevant zoning ordinances, and CC&Rs and, in some cases, talking with the appropriate government officials. You also need to be sure your property has access to adequate water as you will be required to show proof of “water rights,” and adequate power.

Failing to do due diligence on a property can have disastrous consequences. We recently had a cannabis client come to my law firm ready to close on a perfect piece of real estate in a location with a cannabis-friendly local government. This company had even paid for certain improvements to the property, and it was just days away from closing on the property transaction. Fortunately, as soon as we were provided the counties’ records on the property, we noted a provision from the 1980s that prohibited their business. We identified this issue just in time to prevent the purchase and free up our client to move on to greener pastures.

Once you’ve acquired rights to your perfect cannabis property, you are ready to apply for a Land Use Compatibility Statement (LUCS) from the local jurisdiction and to begin preparing the property for the OLCC licensing/inspection process. Check back soon for part 2 of this series.

How to choose your cannabis business lawyerThis blog and our Facebook page (which is nearing 175,000 likes) have given our law firm a national and even a global reach. On top of this, our cannabis attorneys have spoken on cutting edge cannabis legal issues in around half of our states. But we do not have a national cannabis practice. No firm does. To practice law in any given state, the lawyer should be licensed in that state. And though our lawyers are frequently retained by lawyers in states in which we are not licensed, the bulk of our cannabis work is in California, Oregon and Washington, where we have our offices and multiple lawyers with a host of specialized cannabis law expertise.

Yet cannabis businesses constantly contact us for legal help in states where we do not usually practice. We are not the right law firm for a cannabis dispensary in Maryland that needs a lawyer to tell it what must do to operate legally there. We are not the right law firm for a marijuana grower in Alaska that wants to make sure it is complying with local zoning laws. We are not the right law firm for a group that wants legal help in structuring a cannabis investment fund for Nevada. And yet we constantly get calls like these due to the dearth of established cannabis business law firms in most newly legalized states.

When one of our existing clients is seeking the right law firm to represent them in states we don’t cover we help them track down the best firm for them. But when a non-client asks us what law firm they should use in one of those states, we are reluctant to provide names. So we instead usually ask them a few questions about their situation and then we suggest a few things they should consider in choosing the best law firm for their company. This post is intended to answer the question of how to choose the right cannabis law firm for your cannabis business. How should you go about choosing a cannabis business lawyer who is both a good business lawyer and the right lawyer for you?

1. Unless you are a really big company for whom money is almost no object, we recommend you avoid “nationwide” legal behemoths with 100+ attorneys. These firms typically have all sorts of minimum fee requirements and all sorts of hourly billing requirements for their attorneys and these things conspire to drive their legal bills into the stratosphere. Why pay for nationwide legal coverage if you have no plans to operate in Massachusetts, Michigan, Texas and Alaska? But if you know that you will be taking your business into both Michigan and Ohio, it might be a good idea to retain a law firm that covers both states.

2. We recommend you avoid solo practitioners and micro-firms (5 or fewer attorneys) as your only source for all your legal advice because they cannot sufficiently cover and address all of the things required to represent a cannabis business, including the following:

  • Corporate law
  • Contract law
  • Intellectual property law
  • State licensing
  • Local zoning issues
  • Real estate law
  • Intellectual property law
  • Government relations
  • Administrative law
  • Compliance law
  • Employment law
  • Litigation
  • Insurance

3. Avoid law firms that do only cannabis law. How good can a law firm be if it does only one thing and that thing only recently came into existence? If they are now nothing but cannabis law, what were they doing before cannabis became legal? How much experience do they really have with representing companies on complicated business transactions or bet your company litigation matters?

4. Avoid law firms essentially made up of lobbyists and/or criminal defense lawyers. Lobbying lawyers are great for lobbying and criminal lawyers are great if you are facing jail time. But if cannabis is legal in your state and you are looking for a law firm to represent you on your cannabis business or your cannabis litigation matters, you need a law firm with experience handling business and civil (not criminal) litigation matters. You need lawyers who above all else know business law and work exclusively in that realm and lobbyists and criminal lawyers need not apply. Whenever we say this, we get a slew of complaints from lobbyists and criminal lawyers who are trying to make the transition to doing business law.

5. Closely review the credentials of the lawyers at the law firms you are considering. Did they go to top tier law schools? Do they have lawyers from a variety of law schools, not just those local to the law firm? Do their lawyers get plum speaking engagements on cutting edge legal issues? Do their lawyers speak before other lawyers (sorry, but speaking at cannabis conventions and teaching at cannabis “schools” should not count for anything but a demerit)? Do their lawyers speak and write on legal issues relevant to your cannabis business? How do their lawyers rank on various lawyer ranking sites? These sites are not definitive, but they can be a good indicator of the law firm’s reputation among the legal community.

6. Speaking of the legal community, if you know and trust any lawyers in the community in which you are seeking cannabis law help, ask them what lawyer they suggest you use.

7. Make sure you like your lawyer. We know most people don’t “like” lawyers, but because the lawyer you choose now may be your lawyer ten years from now, you really should choose someone who is a good fit for you. This means that before choosing the person or law firm that will be representing your business you should be sure you are comfortable communicating with them. If your gut is telling you not to hire a particular lawyer or law firm, you shouldn’t. If their views on cannabis make you uncomfortable because they are too “corporate” or too zealous or too much or too little anything for you on something important to you, move on. The attorney-client relationship should be built on trust and compatibility, and this is even more important when wading into the murky waters of legalized marijuana.

Choose wisely.

Cannabis Marijuana legalization

Imagine that. An American politician speaking clearly and reasonably and sensibly about cannabis, or about anything for that matter.

Representative Curbelo makes a very good point. From both a business and a legal standpoint, it makes no sense to prohibit legal marijuana businesses from doing business properly and at the same time denying them the same tax deductions as other businesses.

It is unfair and wrong and it must and will change.

 

Cannabis litigationCalifornia is in the process of transitioning from its gray market of medical cannabis collectives to a full-blown, heavily regulated regime under the Medical Cannabis Regulation and Safety Act (“MCRSA“). At the end of April, California dropped more than 200 pages of regulation for retailers, distributors, transporters, manufacturers, and cultivators, and it’s now taking public comment on the initial rules. Note that our firm will be hosting a free webinar on June 1 to discuss how applicants can secure licenses under the new regime. Though these rules will no doubt change before (and even after) they are finalized, what won’t change are NIMBYs  who don’t want cannabis businesses near them.

When cannabis businesses come into a community, there can and often will be all kinds of local impact and chaos. We’ve written in the past about various NIMBY lawsuits and how quickly local governments can flip when it comes to non-conforming uses and land use disputes, and that will be the case in California as well, just as it has been the case in all regulated cannabis states.

The entry of the cannabis industry to a state means an influx of entrepreneurs and, with them, an increase in rents in the areas in which they locate. And always there are the angry neighbors who don’t want to smell cannabis harvests every six weeks or so. Most cities and counties zone for growers and manufacturers to be on the outskirts of town or in industrial or agricultural zones and retailers to be in commercial or industrial areas. Occasionally, cities and counties will allow cannabis home farms, but that’s more the exception than the rule.

One of the first notable land use disputes since passage of the MCRSA took place in Santa Rosa, though it’s surely not going to be the last. Most importantly, there is much to be learned from that case. The city of Santa Rosa has welcomed California’s to-be regulated cannabis economy by allowing cultivators and manufacturers to operate in industrial zones. But at least one land developer cried wolf because the city is allowing medium-scale cultivation to move in next door to a long-time planned (but not yet built) residential development.

In February of this year, Fleuron, Inc. applied to and secured approval from the city (through a use permit) to build a 10,000 plus-square-foot cannabis cultivation and processing facility in an industrial zone (on Maxwell Court), part of which was supposed to transition into a residential area. A land developer, who pursued development of apartments for the past 13 years next to where Fleuron wants to build, opposed and appealed the city’s decision and went on record stating that “[i]t is impossible for housing to be built in an area with cannabis uses.” This developer also cited a variety of alleged issues attendant to cannabis grows, like nuisance, public safety, environmental and economic issues. Another nearby apartment land developer said that his investors are “nervous” at the prospect of having a marijuana cultivation site as a neighbor. And a nearby auto-body shop claims to have seen a recent 15% increase in rent attributable to cannabis operators coming in.

Just this week, the city council unanimously rejected the land developer’s appeal against the issuance of Fleuron’s use permit. The city’s mayor even stated that, right now, cannabis seems more “viable as a business than housing.” And council members touted Fleuron’s ownership as “well-regarded, professional businessmen following the rules Santa Rosa established.” Chalk this up as a clear victory for the cannabis industry. But there will no doubt be many more such fights as neighbors in the past have brought nuisance lawsuitsRICO actions, and lawsuits claiming bad odors. Our cannabis lawyers are aware of cases brought against cannabis businesses for creating “marred mountain views,” for making horse riding “less pleasant” during cannabis harvest time, and for loss of business at a hotel where guests allegedly cancelled their reservations upon finding out they were located next to a cannabis business that had not yet even opened.

Though many (most?) NIMBY lawsuits against cannabis businesses have little basis in reality or fact, this does not seem to stop determined NIMBYs from suing neighboring cannabis businesses to try to stop them from ever getting off the ground. NIMBYs are a fact of life in the cannabis industry (our cannabis litigation lawyers have defended enough of these to know this), but smart planning, transparency, and running a compliant business are usually enough to beat them.

We’ve written previously on options cannabis companies have when seeking financing. Since passage of Proposition 64, investor activity has noticeably picked up in California. It’s not surprising, as California is both the largest projected cannabis marketplace as well as home to roughly half of the country’s venture capital investors.

Cannabis Financing 101
Cannabis Financing 101

How are these investments structured? Below is a list of the more common types of cannabis investments we’re seeing, mostly in California, but in Washington State and in Oregon as well, in rough order of popularity:

Equity Financings. Our firm is doing “priced rounds” in the form of Series A equity financings with multiple investors, as well as individual investors purchasing minority ownership interests in LLCs. Cannabis companies are generally (but not always) preferring to have all investors within California so that they can do an intrastate offering for securities purposes.

Debt Financings. Companies with a track record of success are often preferring debt, as are investors that prefer not to have the exposure that comes with equity ownership. However, uncertainty on licensure processes and the timing when companies can fully operate has made payment schedules particularly risky for companies counting on revenues to pay back loans.

Convertible Notes. Convertible debt is traditionally used pre-Series A when a company is developing a product and still determining the size of the opportunity. A Convertible Note corrects for the difficulty in determining valuation at such an early stage by kicking the valuation can down the road to the Series A, but ensuring the investor gets at least as much value (and almost always more value) for their invested dollar, compared to the Series A investor. Typically notes have low interest rates, as investors are seeking equity upon conversion rather than by repayment.

For cannabis companies in California, convertible notes are taking on a new purpose: extending the question of valuation until 2018, when more will be known about the state’s cannabis regulatory regime. Conversion that is not automatic, but rather the option of the investor, also gives the investor an “out” should the investor not like the political climate around cannabis in 2018.

A slight variation on a convertible note is a “debtquity” arrangement where an investor provides a line of credit with a sliding scale of equity issuance based on the amount of capital accessed.

Alternative Financing Arrangements. Cannabis companies are proposing some non-traditional financing structures, such as investment via equipment leases, consulting arrangements, turn-key real estate, or investor-funded capital improvements. These are often a product of investor preferences or investor residency restrictions. Though these alternative financing arrangments are sometimes trickier for the lawyers to structure than a traditional investment, they often make for a good vehicle to provide cannabis companies with key resources needed at an early stage.

 

 

I recently had the pleasure of attending the Cultivation Classic 2017, the “world’s only cannabis competition exclusively for ethically-grown product free of pesticides, defining craft and celebrating community.” Producers from around Oregon, including several of our clients, came together in a friendly competition to celebrate Oregon’s unique cannabis culture and ethos. Alongside the competition, the organizers put together a series of panels discussing a range of social, political, and legal issues facing the Oregon cannabis industry. The first panel featured the launch of a new industry group devoted to defining and supporting Oregon’s craft cannabis community.

This Craft Cannabis Alliance is an association of cannabis and cannabis-related businesses dedicated to creating an Oregon craft cannabis industry to rival Oregon’s renowned craft beer industry. Alliance Executive Director Adam Smith, a founder of Students for Sensible Drug Policy, took the stage to explain what “craft” means to these industry leaders:

Pictured left to right: Adam Smith, Cannabis Craft Alliance; Ashley Preece, Ethical Cannabis Alliance; Jodi Haines, Alter Farms
Pictured left to right: Adam Smith, Craft Cannabis Alliance; Ashley Preece, Ethical Cannabis Alliance; Jodi Haines, Alter Farms

These industry leaders are working to ensure that sustainable, ethical craft cannabis growers retain a seat at the table as Oregon’s cannabis industry matures. Gabriel Cross, CEO of Odyssey Distribution, LLC, expressed a sentiment shared by many of his fellow founding members.

“As a values-driven company, how we do things is as important to us as the bottom line. The CCA shares many of our values, and more importantly will bring together values-driven cannabis companies under one roof. We have a rare opportunity right now to define how an entire industry operates.”

One of the thorniest issues the CCA will face is the task of defining what “local control” means within the context of Oregon’s craft cannabis culture. Long-time readers of this blog will recall that Oregon originally implemented strict and confusing control and ownership residency requirements on recreational cannabis businesses. This created a host of problems, and the Oregon legislature responded by swinging the pendulum in the other direction, opening Oregon’s cannabis industry to unrestricted foreign investment and control. Over the coming months, the CCA will be working to find a balance its members believe will allow Oregonians to share in the profits of the state’s newest state-sanctioned “crop” without choking off the supply of vital capital that residents from other states can bring.

Oregon Cannabis SeminarOn June 9, my Portland colleague Will Patterson and I will present at an all-day continuing legal education (CLE) event called The Business of Marijuana in Oregon. This will be my third year presenting at the event and my second year as chair. The roster of speakers lined up for this CLE is better than any year to date, and everyone, including non-lawyers, would be well served to attend. For a full event description, including topics, speakers and registration links, click here.

Looking back over the past few years, it is amazing to see how much things have changed in Oregon cannabis. At this point, the OLCC’s recreational marijuana program has begun to hit its stride, with over 2,500 applicants now on file with the state. We are proud to call many of these Oregon producers, processors, wholesalers and retailers our clients, alongside the many investors and ancillary service providers we represent.

Sometimes, it is said that pioneers get slaughtered and settlers get rich. Now that the Oregon regulatory groundwork has largely stabilized, we have begun to see a second wave of entrepreneurs move in on the local industry. Many of these entrepreneurs bring skills, capital and experience from other regulated markets, while others are new to the space. Over the next year or so, with the increase in market entrants, we expect to see a fair amount of market consolidation throughout the Oregon cannabis industry.

Oregon attorneys and business owners alike need to be familiar with the unique regulatory concepts and industry dynamics that will be discussed on June 9, in order to best serve the Oregon cannabis industry. These concepts include state administrative governance and pending legislation, developments in the highly dynamic federal sphere, and practical approaches to working with and in the cannabis industry.

We hope you will join us on June 9 for an eight-hour survey of Oregon cannabis that is both broad and deep. And if you are a Harris Bricken client or a friend of the firm, please click here to request a promotional discount code, which can be applied to either the webcast, or to in-person attendance.

See you soon.

Last week, Canna Law Blog’s Hilary Bricken and Matt Maurer of Canada Cannabis Legal put on a webinar on the laws that impact  the cannabis businesses in the United States and Canada. This webinar covered the medical and recreational cannabis markets of the United States and Canada, investment considerations, cross-border legal issues, and opportunities for companies and individuals looking to invest in the US or Canada cannabis industries. For those of you not able to attend this event live, we provide you with the recorded version below.

Enjoy!

California cannabis priority licensingAs part of our series on the initial rules implementing California’s Medical Cannabis Regulation and Safety Act (“MCRSA”), this post will break down the issue of “priority” in licensing – meaning, whose state medical cannabis license applications will be processed first once the licensing window opens early next year. Under the MCRSA, and pursuant to AB 266, at Article 4, Section 19321:

“In issuing licenses, the licensing authority shall prioritize any facility or entity that can demonstrate to the authority’s satisfaction that it was in operation and in good standing with the local jurisdiction by January 1, 2016.”

This language left us with a couple of questions, including how to define “operation” and “in good standing with the local jurisdiction.” But the Bureau of Marijuana Control provided answers to these questions in the proposed text of the regulations applicable to all medical marijuana license applicants and licensees. In keeping with, and expanding upon, the above statement from the MCRSA, the proposed rules state:

“Priority review of the application shall be given to applicants that were in operation and in good standing with the local jurisdiction by January 1, 2016, and whose business ownership or premises are currently the same as they were on January 1, 2016. Priority applications shall be processed for review in the order in which they are received.”

The rules define “operation” as the date on which the applicant began actively conducting the same commercial cannabis activity as the license type for which the applicant is applying. And for purposes of the rule, “actively conducting” means “engaging in the transportation, distribution, testing, or sale of medical cannabis goods as authorized by the local jurisdiction.” So if you merely had an entity formed by January 1, 2016, or were operating in contravention of local law, you will not qualify for priority review under the proposed rules.

To prove the date on which an applicant began actively conducting commercial cannabis activity, the applicant must attest to the date under penalty of perjury, and must provide evidence of the date operations began, which may include:

  1. Articles of incorporation;
  2. Certificate of stock;
  3. Articles of organization;
  4. Certificate of limited partnership;
  5. Statement of partnership authority;
  6. Tax form;
  7. Local license, permit, or other written authorization;
  8. Receipts; or
  9. Any other business record.

The proposed rules also provide clarification as to what an applicant will need to provide to show “good standing” with their local jurisdiction. Proof of good standing must be evidenced by a document issued or signed by the local jurisdiction that contains the following:

  1. Name of the applicant;
  2. Address of the premises to be licensed;
  3. License type that the applicant is applying to the bureau for;
  4. Name of the local jurisdiction;
  5. Name of the local jurisdiction office that issued the license, permit, or other authorization for the applicant to conduct commercial cannabis activity in the jurisdiction as required by Business and Professions Code section 19320;
  6. Name and contact information for the person authorized by the local jurisdiction to sign on its behalf;
  7. Signature of the person authorized to sign on behalf of the local jurisdiction; and
  8. A statement to the effect of: “The above named party has been issued a license, permit, or other authorization from this jurisdiction to conduct commercial cannabis activity. The above named party began operation and was in good standing in this jurisdiction on or before January 1, 2016.”

Of course, the proposed rules wouldn’t be complete without at least some ambiguity. The rules not only state that an applicant must have been operating and in good standing with the local jurisdiction prior to January 1, 2016, but also that the applicant’s “business ownership or premises are currently the same as they were on January 1, 2016.” We are still seeking clarification from the BMCR on this one, as it is unclear whether the entity structure and ownership must be exactly the same, whether a board member of a non-profit mutual benefit corporation could apply on behalf of that company, whether ownership doesn’t matter so long as the premises are currently the same as they were on January 1, 2016, etc. This provision leaves room for interpretation, and we anticipate having a better idea of what this requirement will entail by the time the rules are finalized.

Even though there is some ambiguity in the proposed rules, if you think you may qualify for priority review in licensing, now is the time for you to begin gathering your documentation to prove the date on which you began operating, as well as proof that you were in compliance with local law.

Cannabis attorneysMarijuana is a valuable asset and insurance can be a necessary tool in protecting that investment. We have written about how marijuana inventory can be covered under a general liability insurance policy. However, not all courts are willing to hold that an insurance policy covers cannabis.

In USAA v. Tracy (D. Haw. Mar. 16, 2012), a US District court in Hawaii ruled that a homeowner’s insurance policy does not cover medical marijuana. On May 18, 2010, USAA Casualty Insurance Company issued Barbara Tracy a homeowners’ insurance policy. Tracy was a medical marijuana patient who was permitted under Hawaiian state law to possess and grow marijuana. A thief stole 12 of Ms. Tracy’s marijuana plants, valued at $45,600, from Tracy’s property and she submitted a claim to USAA. USAA made an initial payment on the claim but Tracy argued that the amount was insufficient. USAA informed Tracy it would not make any further payment on the policy. Tracy sued USAA for breach of contract, seeking additional funds for the stolen cannabis plants. USAA moved for summary judgment to have Tracy’s claim dismissed, arguing that her marijuana was not covered under her policy.

USAA’s policy covered theft of “trees, shrubs, and other plants” and Tracy argued that this should include her marijuana plants. USAA first contended that Tracy did not have an insurable interest in medical marijuana. Hawaiian Law defines an insurable interest to be any “lawful and substantial economic interest in the safety or preservation of the subject of the insurance free from loss, destruction, or pecuniary damage.” USAA argued that an interest in medical marijuana is not “lawful” because Hawaii’s medical marijuana law “does not legalize the medical use of marijuana, but provides an affirmative defense to marijuana-related state law crimes for the medical use of marijuana.” USAA also pointed to the fact that Hawaii’s medical marijuana law states that “this part shall not be construed to require insurance coverage for the medical use of marijuana.” The court rejected both arguments by determining that Hawaii does permit the use of medical marijuana, making it lawful, and that although Hawaii’s medical marijuana law did not require insurance coverage, it does not prohibit insurance coverage. The court determined that Tracy did have an insurable interest in marijuana as legally compliant medical marijuana user.

However, the court was persuaded by USAA’s second argument that it could not purchase medical marijuana using insurance proceeds as that would violate federal law. The court cited to cases that established that Hawaiian courts can refuse to enforce contracts that violate federal law. The court ruled Tracy’s possession and use of marijuana violated federal law because it directly conflicted with the federal Controlled Substances Act, even though she was compliant with state law.  The court concluded that the insurance policy purportedly covering her marijuana plants was an illegal contract that could not be enforced and that USAA had no obligation to provide her insurance proceeds for the plants. As a result, it granted USAA summary judgment, holding that it did not owe Ms. Tracy anything more.

For more on insurance and marijuana, please see the following: