Cannabis LawyersI met last week with John Hudak, Deputy Director and Senior Fellow at the Brookings Institute for a wide-ranging conversation on all things cannabis. Hudak has established himself as a major voice on cannabis policy issues. He regularly writes for Brookings, covering issues like the perceived threat of “big” marijuana, Nevada’s legalization efforts, and the DEA’s recent decision to expand cannabis research. Hudak is often asked by reporters to weigh in on major marijuana stories, recently providing perspective to the New York Times.

The Brookings Institute is one of the oldest and most highly regarded think tanks in Washington DC. Think tanks produce research for lawmakers and regulators to, among other things, help them write and analyze rules and laws. Brookings researches topics including economics, governance, foreign policy, and global development. In the last few years, Brookings has provided significant research on cannabis legalization, led by Hudak.

It makes sense for Brookings to research and write about marijuana laws since each state that legalizes medical or recreational marijuana needs guidance on creating workable legislation and rules for implementing legalization. State regulators can and do use research from institutions like Brookings to help guide them through the legalization process and beyond.

That one of Washington D.C.’s oldest and most respected think tanks is spending so much time and energy on cannabis legalization illustrates how far the cannabis industry has come in this country. A few years ago, marijuana legalization was seen as a “fringe issue” with but small pockets of support around the country. Fast forward to 2016 and marijuana is now taking center stage as multiple states are looking at legalizing recreational or medical marijuana or decriminalizing the plant. A recent Gallup poll shows that roughly 33 million Americans use cannabis. Hillary Clinton’s campaign has promised to reschedule marijuana if she is elected President. America’s voters care about cannabis.

Though nationwide legalization still appears to be years away, the marijuana movement is growing up. Initially, this movement was widely perceived as supported by those under 30 looking to get high legally, it now includes doctors, lawyers, policy wonks, and Members of Congress. Legalization supporters are learning to play the bureaucratic games lawmakers understand. The Brookings Institute provides advocates with respected research they can use to build their case for legalization.

Hudak told me about one particular quote that conveyed how far the movement had come. In 2014, Brookings analyzed Colorado’s marijuana regulators. Jacob Sullum, writing for Reason.com wrote an article about Brookings’ report and closed with the following line:

To me, the really exciting aspect of all this regulatory information is that Colorado has succeeded in making marijuana boring by making it legal.

Cannabis has been prohibited for almost 80 years. I can hardly wait until cannabis has been legal for so long that it has become boring everywhere.

Cannabis Trademarks

For the past few years, the United States Patent and Trademark Office (USPTO) has repeatedly expressed concern over eliminating what it deems “deadwood” from the federal trademark registry. “Deadwood” consists of trademark registrations that are not actually in use for the goods or services named in the registration. Under U.S. trademark law, all registrations must be renewed between the fifth and sixth year anniversaries of registration by filing an affidavit pursuant to Section 8 of the Trademark Act declaring that the mark is still in use in commerce, or by filing a declaration of permissible non-use under Section 71. If either of these filings is not made, the registration will be cancelled.

In June of this year, the USPTO announced that it would be creating new rules requiring additional documentation under Section 8 and Section 71 of the Trademark Act to prove the registrant is actually using its mark in commerce for all of the goods or services specified. These new rules will require submitting information, exhibits, affidavits or declarations, and any other additional specimens of use as may be “reasonably necessary” for the USPTO’s examining attorney to ensure that the mark in question is in use on all of the goods or services claimed in the application. The claim and justification here is that there are too many unused registered trademarks, and that unless we clean up the clutter on the registry, trademark clearance will become more and more burdensome for applicants and for examining attorneys.

So how do these changes potentially impact cannabis businesses? As we’ve discussed before, federal trademark protection is unavailable to marks used on federally illegal goods and services, including cannabis. However, one brand protection strategy we’ve recommended is to obtain registration for ancillary goods or services that do not violate the Controlled Substances Act (CSA). For example, if you manufacture a cannabis-infused beverage AND you produce and sell a non-infused version of that beverage, it may be possible to secure a federal trademark registration that covers your non-infused beverages. We have many clients that have been successful using this strategy, although we’ve noticed more push back from the USPTO with respect to these applications in recent months.

Ultimately, the key to registering ancillary goods to protect a mark also used on cannabis-related products is that you must actually use the mark on those ancillary goods. A few token sales, without ongoing use of the mark on those goods, would be exactly the issue the USPTO is looking to address by clearing out “deadwood.” If you are not able to meet the requirements for a Section 8 affidavit or a Section 71 declaration, your mark will be cancelled. We’ve seen a rush by cannabis businesses to register their marks for whatever they can get, but it’s important to carefully consider what goods and services you will actually be providing to avoid the risk of losing your registration altogether. There is oftentimes little point in spending time and money to get a trademark now if you are just going to lose it eventually anyway.

The IP Kat (a fantastic and entertaining source for intellectual property news), wrote a couple of weeks ago about the USPTO’s move to clear “deadwood” from the register, and made a great point: “[W]hen the claim is made that deadwood and resulting clutter on the registry place an increasingly heavy burden on clearance, what is really being said is that the mark under consideration is straddling the divide between being descriptive and suggestive.” The post also notes that the real issue at play is that too many descriptive/suggestive marks are being accepted without having proven secondary meaning. Which raises another issue we’re seeing with proposed cannabis trademarks: most of them are descriptive.

We’ve written about choosing a brand that won’t get you sued, but it’s also important to choose a brand that is eligible for trademark protection. The relative strength or weakness of a mark will fall somewhere on the following spectrum:

  • Fanciful Marks: These marks consist of a combination of letters with no meaning; they are invented words. Some examples of famous fanciful marks are EXXON and KODAK.
  • Arbitrary Marks: These marks are composed of a word or words that have a common meaning, but have no relation to the goods or services to which the mark is applied. Perhaps the most famous example of an arbitrary mark is APPLE, used on computers.
  • Suggestive Marks: Suggestive marks hint at or suggest the nature of a product without specifically describing the product. An example of this type of mark is AIRBUS for airplanes.
  • Descriptive Marks: These marks are comprised of words that actually describe the goods or services provided; descriptive marks are too weak to function as a trademark and cannot be registered. Note that it is possible to register a descriptive mark if it has obtained secondary meaning due to use in commerce for some years – in the nascent cannabis industry, however, it is unlikely many marks would meet these requirements.
  • Generic Words: These words and phrases are so inherently descriptive of a product or service as to be incapable of functioning as a trademark; they are the common names of the product or service in question, and cannot be registered.

Fanciful and arbitrary marks afford the highest level of trademark protection. Often the line between suggestive and descriptive marks is blurry, making suggestive marks, though capable of registration, much weaker. In developing a brand, avoid the use of descriptive or generic marks altogether.

The takeaway here is two-fold. First, make sure that if your cannabis company is looking to register a federal trademark for ancillary goods or services, your company actually intends to sell those ancillary goods on an ongoing basis. Second, carefully consider the strength of your mark before investing heavily into brand development.

CROPLike many commercial crops, cannabis cultivation can be water intensive. Increased production in pot-friendly states has been flagged by many as a water and electricity usage issue, especially in light of oft-strained natural resources. For this reason, some of the Western states have begun to regulate cannabis businesses’ water and power usage. In the case of Oregon, environmental impact has been a key consideration for some time.

Last year, the Oregon legislature passed HB 3400, an omnibus bill legalizing recreational marijuana. In that historic law, the legislature called for a task force to assess water and electricity use by cannabis cultivators. The aptly named Cannabis Environmental Best Practices Task Force has been busy, meeting five times between April and August of 2016. Recently, it published its Working Document, which will soon be finalized into a proper report and submitted to the legislature. Oregon hopes these findings will serve as a model to other states with similar concerns.

Those who testified at the Task Force meetings represent a wide range of parties vested in Oregon cannabis, including growers, private sector service providers, and public utilities. Based on their testimony and other research, the Task Force identified best practices for cannabis cultivation, and identified ways stakeholders can encourage responsible cultivation practices for new industry entrants. According to the Task Force, Oregon should follow four distinct priorities to address the environmental impact of cannabis producers:

  1. Support access to education and technical assistance related to cultivation practices;
  2. Support the creation of voluntary third party certification programs;
  3. Encourage research into cannabis issues, including environmental best practices, health, and other aspects of the cannabis sector; and
  4. Investigate water regulations for small-scale producers.

This guidance demonstrates progressive, institutional concern with creating a sustainable medical and recreational cannabis industry. It seems likely that the state will adopt these recommendations. As to the cannabis cultivators themselves, they would be wise to proactively comply with any “best practices” identified by the Task Force and adopted by the legislature. Not only is that the right thing to do, but gaining certification as an environmentally friendly operator may boost the bottom line.

For existing cannabis producers in Oregon, the new guidance does not change the requirement to acquire and maintain required water rights. Nor does it eliminate the need to submit an Electricity and Water Use Estimate form upon license application. Instead, the guidance simply focuses on the manner in which cannabis growers can shrink their collective environmental footprint.

Looking ahead, increased regulation of water usage for cannabis cultivation is inevitable as water-starved states like California vote on recreational pot this year. Oregon’s move – explicitly billed as a model for other states – sets a positive standard for states that will encounter these issues in the coming months and years. It is our hope that these recommendations see wide acceptance and smooth implementation, and lead the conversation on the environmental impacts of cannabis production nationwide.

California cannabis lawyers
Los Angeles County? Better have a Plan B.

Until recently, the “Wild West” of U.S. cannabis lacked robust statewide regulations which left California cannabis companies subject to unclear rules and risk of federal shutdowns. The Medical Marijuana Regulation and Safety Act (MMRSA) created these regulations, but ultimately left control in the hands of local cities and counties.

At last count, California has 58 counties and 482 incorporated cities across the state, each with the option to create its own rules or ban marijuana altogether. In this California Cannabis Countdown series, we plan to cover who is banning, who is waiting, and who is embracing the change to legalize marijuana — permits, regulations, taxes and all. For each city and county, we’ll discuss its location, history with cannabis, current law, and proposed law to give you a clearer picture of where to locate your cannabis business, how to keep it legal, and what you will and won’t be allowed to do. Our last California Cannabis Countdown post was on the City of Los Angeles, and before that, the City of Desert Hot SpringsSonoma County, the City of Sacramento, the City of BerkeleyCalaveras CountyMonterey County and the City of Emeryville.

Welcome to the California Cannabis Countdown.

Continue Reading The California Cannabis Countdown: Los Angeles County

Michigan cannabisThis is proving to be a big year for cannabis. As a result, we are ranking the fifty states from worst to best on how they treat cannabis and those who consume it. Each of our State of Cannabis posts will analyze one state and our final post will crown the best state for cannabis. As is always the case, but particularly so with this series, we welcome your comments. We have finally crossed the half-way point. The states featured going forward generally have mixed laws when it comes to cannabis. Some good, some bad, and some ugly. Today we turn to number 18: Michigan.

Our previous rankings are as follows: 19. New Hampshire; 20. Ohio; 21. New Jersey; 22. Illinois; 23. Minnesota; 24. New York; 25. Wisconsin; 26. Arizona; 27. West Virginia; 28. Indiana; 29. North Carolina; 30. Utah;  31. South Carolina; 32. Tennessee; 33. North Dakota; 34.Georgia; 35. Louisiana; 36. Mississippi; 37. Nebraska; 38. Missouri; 39. Florida; 40. Arkansas; 41. Montana; 42. Iowa; 43. Virginia; 44. Wyoming; 45. Texas;  46. Kansas;  47. Alabama;  48. Idaho; 49. Oklahoma;  50. South Dakota.

Michigan

Criminal Penalties. The possession of any amount of marijuana can earn up to 1 year in prison and a maximum fine of $2,000. The use of marijuana can earn up to 90 days in prison and a maximum fine of $100. A person who faces a possession or use charge may earn a conditional discharge, provided that he or she has no prior offenses.

The exchange of marijuana without remuneration (i.e., a gift) earns up to 1 year in prison and a maximum fine of $1,000. The sale of under  5 kilograms earns up to 4 years in prison and a maximum fine of $20,000. The sale of between 5-45 kilograms earns up to 7 years in prison and a maximum fine of $500,000. The sale of over 45 kilograms earns up to 15 years in prison and a maximum fine of $10,000,000.

Medical Marijuana. In 2008, voters passed the Michigan Medical Marijuana Act (MMMA), legalizing medical marijuana. The act was ambiguous and complicated. In a case reviewing the act, Michigan Court of Appeals Judge Peter J. O’Connell acknowledged this and made the following warning:

Reading this act is similar to participating in the Triwizard Tournament described in J.K. Rowling’s Harry Potter and the Goblet of Fire: the maze that is this statute is so complex that the final result will only be known once the Supreme Court has had an opportunity to review and remove the haze from this act.

Several attempted legislative fixes and court challenges failed to clarify the law (Michigan Radio, the local NPR affiliate, provides a helpful timeline). In 2013 the Michigan Supreme Court issued an opinion clarifying the MMMA. In State of Michigan v. McQueen, the court ruled that the MMMA did not permit marijuana dispensaries and prohibited unrestricted retail sales of marijuana. As a result, Michigan closed medical marijuana dispensaries. A recent opinion from a Michigan Court of Appeals has affirmed that patients are limited in how they can obtain medical cannabis. Patients can grow their own marijuana or obtain it from a caregiver who can provide marijuana for no more than five patients. Patients who choose to grow their own cannabis must keep no more than 12 marijuana plants in a locked facility, not viewable by the public. If grown outdoors, the plants must remain in a fenced structure that restricts the public’s access to and view of the plants.

Patients must obtain a registration card after receiving a recommendation from a physician for a qualifying condition. The MMMA named several qualifying conditions, including cancer, HIV/AIDS, and Alzheimer’s disease. Patients may also use medical marijuana to treat chronic and debilitating medical conditions not named in the statute if the condition or treatment for the condition causes two of the following side effects: cachexia or wasting syndrome, severe and chronic pain, severe nausea, seizures, or severe and persistent muscle spasms. Michigan will recognize medical marijuana authorizations from other states, provided that the other states also recognize Michigan cannabis authorizations.

Recreational Marijuana. Legalization proponents in Michigan are currently in a legal battle attempting to place a legalization initiative on the 2016 ballot. There is a challenge as to whether some signatures used to qualify the initiative for the ballot were over 180 days old, rendering them invalid. At this time, the fate of the legalization ballot is still unknown.

Bottomline. The criminal laws in Michigan are fairly middling. The penalties are in line with laws across the country. It is unfortunate that Michigan still criminalizes the use of marijuana. Michigan’s medical marijuana laws are a mess. Depending on how you feel about regulations, this could be deemed a positive or a negative. The state does not have dispensaries but does allow for homegrows. Some may view Michigan’s uncertainty as an opportunity to grow marijuana without interference from regulatory bodies. Others may see the lack of clarity as a reason to worry. It can be hard to predict the legality of a certain action when the rules are so unclear. Finally, although it may not happen in 2016, Michigan appears to be moving towards full legalization. Overall, Michigan marijuana is probably the most confusing state but still not too bad.

 

Locked Door

Dr. Gupta’s quote is a timely one, as just last week the DEA decided not to reschedule marijuana, or in Dr. Gupta’s words, to keep that door locked. Meanwhile, the demand for change continues to rise, as several communities such as those in Nashville and Johnstown are moving toward decriminalization just this week, and the majority of California voters are on board to legalize in California this November.

What’s more, the Ninth Circuit Court of Appeals ruled this week that despite the DEA’s decision not to reschedule cannabis, the Department of Justice cannot raid medical marijuana businesses in legalized states under Ninth Circuit jurisdiction (Alaska, Arizona, California, Hawaii, Montana, Nevada, Oregon, and Washington). The desired change welling up from the people will eventually lead to full legalization nationwide and will eventually force the DEA to deschedule altogether.

The door has got to be unlocked someday. We’re well past due.

Cannabis bankingAn Ohio state Senator recently made some noise by proposing a closed loop payment system for marijuana businesses. The story gained some traction and has been reported on as a potential solution to the marijuana industry’s banking woes. The proposed system would involve a stored value account that various marijuana businesses and consumers would have with the state of Ohio. Customers would transfer money into the account and pay with a card or app, similar to Paypal or Google Wallet. All payments among cannabis retailers, producers, and testing labs would take place within the closed loop stored value payment model. To make payments outside of that small group, for example to pay employees or the cable bill, the state of Ohio would write checks directly and deduct the balance from the online account. While this system sounds promising, and it definitely brings some benefits, it also has a number of drawbacks and doesn’t resolve most of the problems that lack of banking access brings to the cannabis industry.

Having a business bank account provides two main services in any industry: secure storage of capital and access to standard payment systems. These really are two separate and distinct issues. Secure storage of capital is nice to have, especially for businesses that have high working capital needs. Maintaining large amounts of cash is difficult, risky, and expensive. Bank accounts come with federal deposit insurance, but insuring the safety of large stores of cash is incredibly expensive.

It’s worth noting that the banking problem is not the same in every state. Washington and Colorado have a growing number of banks and credit unions that are willing to serve the industry, so much that the vast majority of marijuana businesses in both states have standard bank accounts. Even marijuana businesses in California tend to have bank accounts, even though the state’s cannabis laws may not rise to the regulatory level that the Department of Justice wants.

The payment issues, however, are the primary problems where solutions are needed in those states that have cannabis business regulations but don’t have broad access to banking. Businesses need a way to pay their employees, pay their state and federal income and payroll taxes, and pay their bills to all the standard service providers. Attempting any of those payments using cash is logistically challenging at best and downright impossible at worst.

Back to the Ohio proposal. The benefit is that it solves the payment among industry members that are in the closed loop system entirely. It even partially solves the problem for those outside the industry, as employees and other outsiders would receive checks issued by the state.

On the other hand, there are big drawbacks. First, it will be expensive for the state to set up. Efficient stored payment systems come with real up-front costs to the system manager. The likely way that the state will be able to pay for the system would be to mandate its use across the industry and charge subscription fees or transaction fees. Even if banking became more broadly available in Ohio, the state would want to maintain the model long enough to receive sufficient fees to pay the on-boarding expenses. Timing of payments made to those outside of the closed loop is an issue too. The state of Ohio would not simply cut a check in any amount to anyone that a member of the closed loop system demanded. There would have to be some level of vetting at the state level. And that vetting would be a massive slowdown in how quickly payments are processed. The potential payment lag would make it tougher to do actual business with those outside of the industry.

For outsiders to the industry, though, the transparency of it all would also be off-putting. Private marijuana businesses are getting used to a level of transparency that other industries would be shocked by. It is easy to find broken down sales data for businesses throughout the marijuana industry, whereas that same information would be highly proprietary in other industries. But even in Colorado and Washington, it is possible to maintain some secrecy on how much money you are paying to your landlord, business consultant, and other outside payees. Those same payees may not be so willing to participate if they knew that the state of Ohio would know exactly how much they are getting and on what schedule. Depending on the state’s public records laws, there may be no way to keep all of that information from going fully public.

And the fact that the outside payments are made from the state of Ohio still wouldn’t make it fully legal for those outside the industry to receive the payments. They would still know that the source of funds is sales of cannabis. The calculus under federal anti-money laundering laws wouldn’t change.

So yes, we applaud creative solutions to the challenges brought by cannabis’s federal illegality, and the proposal in Ohio does solve some issues that lack of access to banking brings to the industry, but it brings a whole host of issues as well. A better solution is probably for Ohio’s Division of Financial Institutions, within the state Department of Commerce, to make clear to the various state-chartered banks and credit unions that it will work with them to provide services to marijuana businesses. Even though the larger institutions aren’t willing to risk providing services to the industry, the smaller institutions probably will be willing to take that risk, as long as they feel that the state is backing them up.

Florida cannabisFrom its inception, medical marijuana has been a tortured subject in Florida. Though the legislature passed the 2014 Compassionate Medical Cannabis Act (which allows for non-smokeable low-THC, high-CBD marijuana), the Compassionate Use Program it supports has been nothing short of a total circus. Not only does Florida’s Compassionate Use Program limit who can access marijuana for medical use, Florida physicians have been slow to recommend cannabis to their patients for fear of the Federal Government taking away their license. The Program permits only five nurseries in the entire state (each of which have to have been in existence for no less than 30 years!) to provide all of the state’s cannabis. Many claim the Program is wholly corrupt, and there have been multiple legal challenges from nurseries that didn’t secure a Dispensing Organization authorization from the Florida Department of Health.

This March, there was some loosening of Florida’s cannabis regime when its legislature passed HB 307, which expands the state’s Right to Try Act to include medical marijuana. The highlights of HB 307 include the following:

  • Terminally ill qualified patients, defined as those with conditions that, “without the administration of life-sustaining procedures, will result in death within one year if the condition runs its normal course,” may access marijuana with more than .8% THC.
  • Once the state has 250,000 active qualified patients in the compassionate use registry, the state can approve three more Dispensing Organizations that must include “a farmer who is part of the Black Farmers and Agriculturists Association and is a member of the black farmers’ litigation group.”
  • More regulatory standards for Dispensing Organizations, including, increased transportation, security, and packaging and labeling requirements, as well as quality assurance and pesticide testing standards.
  • Local governments can decide for themselves whether to ban or regulate Dispensing Organizations.
  • Authorization for each of the five initially-approved Dispensing Organizations to operate as a dispensing organization if they post a $5 million performance bond and meet the requirements of and requests cultivation authorization, and expend at least $100,000 to fulfill its obligation as a dispensing organization.

At the end of July, the state’s first dispensary, Trulieve, opened in Tallahassee. Trulieve also made the state’s first patient home delivery. Though Florida’s Program remains too restrictive to allow access to cannabis for many qualified patients, Florida is slowly but surely moving forward with medical marijuana.

Now, cue Amendment 2, which represents Florida’s voter initiative for a more expansive medical marijuana program. Amendment 2 is up for vote in November and it it passes it will give existing Dispensing Organizations a big head start over new competition.

In “Florida Medical Marijuana: What You Need to Know to Have a Cannabis Business Later,” I wrote about what you can and should do now to set yourself up for success when Florida adopts a more comprehensive MMJ program. Though it is looking like Amendment 2 will pas,s the opposition to Amendment 2 is starting to make its presence known (though it doesn’t compare to the first time around when opponents of the original Amendment 2 called edibles the new “date rape drug“). So far, the “No On 2” campaign released an ad claiming budtenders are “dope dealers with storefronts,” a Publix heiress donated significant money to defeat the initiative, and the Florida Medical Association formally opposed the measure at a medical conference sponsored by Big-Pharma.

Despite the mounting opposition, this second bite at the apple for Amendment 2 feels much different than the first time. The state itself hasn’t challenged the amendment and the opposition’s increasing desperation is coming off as even more superficial and unsubstantiated than the last time. Times have definitely changed and so long as fly-by-night “pot colleges” and airport seminars, and self-proclaimed “medical marijuana business lawyers” and “consultants” promising gobs of cash with reckless abandon manage not to offend too many Florida voters this time around, we’ll likely see Amendment 2 pass in November.

So if you are interested in participating in Florida’s cannabis industry, now is the time to start your engines.

CannabisJust yesterday, on the heels of the DEA’s decision not to reschedule cannabis, the Ninth Circuit Court of Appeals threw a bone to medical marijuana patients and caregivers in the case of United States v. McIntosh. The Ninth Circuit Court of Appeals is just one level below the U.S. Supreme Court, and its rulings constitute federal law for the following states within its jurisdiction:

  • Alaska
  • Arizona
  • California
  • Hawaii
  • Idaho
  • Montana
  • Nevada
  • Oregon
  • Washington

In this case, the widely influential Ninth Circuit ruled in favor of MMJ providers who disputed the Department of Justice’s enforcement of the federal Controlled Substances Act against them in their respective states (all of which have legalized MMJ) in the face of Congressional spending bills meant to de-fund such actions. In doing so, the court reaffirmed Congress’s intent to halt federal enforcement measures against medical marijuana providers in states that have legalized and regulated MMJ. Since 2014, Congress has continued to prohibit the DOJ from using appropriated funds to pursue federal enforcement actions against state-compliant medical marijuana providers and businesses. This ruling represents the highest judicial approval of that legislation as an effective means of curbing federal crackdowns on state-legal medical marijuana programs.

The court did, however, articulate the following two important points that significantly limit the benefit of this ruling for many members of the cannabis industry (especially for those on the recreational side):

  1. The court’s ruling applies only to medical marijuana. No federal appellate-level court has directly endorsed, tacitly or otherwise, state-legal recreational cannabis markets. This implicates much of the cannabis community, especially as medical programs are set to yield to or merge into recreational programs in a number of states that have adopted cannabis reform.
  2. The court ordered that the consolidated cases be remanded to the lower courts to investigate whether the appellants were, in fact, in full compliance with their states’ laws regarding medical cannabis. This should give medical marijuana suppliers, many of whom are already wary of IRS rule 280E, plenty of reason to fully comply with all state laws and regulations regarding medical marijuana.

Despite its limitations, U.S. v. McIntosh is a favorable ruling for the cannabis industry, both medical and recreational. Quite simply, DOJ’s enforcement of the federal Controlled Substances Act cannot occur without the necessary funds to do so and, in making its ruling, the Ninth Circuit Court of Appeals has affirmed Congress’s intent to prohibit executive agencies from using appropriated funds for exactly that purpose.

This ruling is a decidedly insufficient remedy for cannabis prohibition, but it does reduce the risk of federal raids for medical cannabis businesses in those states within the Ninth Circuit’s purview (which is all of the states listed above except Idaho). The ruling also shows that even our country’s highest courts will not just rubber stamp everything the federal government does against cannabis.

InvestorsIn Oregon, Washington, California and elsewhere, we have structured a good number of deals involving cannabis investors as of late. Several of these deals have stretched into the seven figures. In some deals we represent the investor(s); in others we represent the business. This blog post will cover five important considerations for cannabis businesses looking to raise money for such deals.

Before we dive in, it is worth noting that there are three primary reasons for the recent influx in cannabis investment. First, the market for state legal marijuana is expected to reach $7.1 billion this year. Second, there are only a limited number of jurisdictions with viable cannabis markets, and fewer still that allow for out of state investment. And third, due to the very recent emergence of the cannabis industry, nearly all pot businesses can be classified as start-ups. As a rule, start-ups are always looking for money.

Marijuana businesses have a limited opportunity to impress investors, especially when the investor is a perfect stranger. For that reason alone, it is critical for a cannabis business to consider and refine its approach before making a pitch, and for the business to remain flexible and responsive throughout the courtship process. Here are five things every cannabis business should consider when it comes to raising money.

  1. Do your research.

Because marijuana markets are highly regulated, states funnel cannabis businesses into fixed classes of licensure. This means that unless you are a vendor or ancillary service provider to the industry, it is highly unlikely your business idea is unique. Still, you need to distinguish yourself from whatever else is out there. If an investor asks how your marijuana production or processing company, for example, is different than anyone else, you should be able to explain exactly why. Be ready to discuss the competition objectively, and explain how you plan to dust them (realistically).

  1. Be utterly transparent and have all your material ready.

Investors are always looking for ways to buy into companies on the cheap, or simply not to invest. Still, you will gain credibility by addressing your weaknesses when asked. (Yes, you have them.) You should also develop a plan to fill gaps and to acquire necessary knowledge and resources. Pretending to know an answer when you don’t will never serve you, and failing to disclose key information will only create headaches (and maybe even lawsuits) down the line.

As far as written materials go, do not approach investors until your business information is organized into a pitch deck you have vetted and proofed, and until you have appropriate legal disclosures in hand. Those documents must be prepared by professionals and they should include, at a minimum, disclaimers, risk factors and a high level term sheet.

  1. Believe in yourself, but listen to ideas.

From an investor perspective, many people pitching start-up businesses, particularly in cannabis, appear starry-eyed and unrealistic. Over the past few years, we have seen claims ranging from the conservative to the wildly irresponsible. Make no mistake: it is important to believe in your vision. However, it is also important not to appear so oversubscribed that you would resist input or coaching. Very few investors will be content to sit idly by while a business dispatches their hard-earned capital on a “trust me” basis. Instead, investors want assurance that a prominent feature of your start-up is creative, flexible leadership that will ensure success, even when outside forces interfere.

  1. Keep your eyes on the prize.

The successful pot businesses we work with have the ability to raise money while not losing focus on their core business – producing or selling cannabis. In the very big picture, this means remembering that the more capital you raise, the more diluted your ownership portion becomes (and the less control you have). On a day-to-day level, if all you do is work on raising money, business lines will dry up. Every start-up business needs constant attention – especially in the cannabis industry where the rules are always in flux. Fundraising can devolve into a distraction if not approached thoughtfully.

  1. Follow up and be realistic.

Most deals we structure happen pretty quickly, and most of our clients who have acquired investors find that interest will be apparent, at least to some degree, from the outset. Still, investors often apply leverage to acquire better terms, and we encourage clients to follow up on good leads. Walking the line between following up and becoming a nag is often a delicate exercise, but feeding potential investors news and exciting business developments is always a good idea. Most importantly, it may help you close the deal.