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Robert is a partner at Harris Bricken focusing on corporate, finance, and transactional matters for clients both inside and outside the cannabis industry.

Cannabis growsThe Seattle Times ran a story last week about the DEA continuing its marijuana eradication program even in states with legal marijuana like Washington. The DEA authorizes funding for state law enforcement to search for and eradicate marijuana, generally on public land.

Several of our clients asked us about this story, wanting to know if it meant the DEA was also taking action against state-legal marijuana businesses. Fortunately that is not the case. The DEA eradication program is specifically targeted at illegal operations on public lands. Federal law enforcement is going after cannabis grows it claims are operated by Mexican cartels. Regardless of who runs these cannabis grows, they are not compliant with state law. Under current federal enforcement policy, the federal government still has free reign to support law enforcement action against marijuana operations that are outside the bounds of a state-regulated system.

On one hand, this eradication program is in the best interests of compliant, tax-paying marijuana businesses as it eradicates competition from illegal cannabis. If we are going to have a Drug Enforcement Agency to which Congress appropriates funds, we would prefer it spend its time and money seeking to eradicate illegal marijuana grows than going after state-legal cannabis businesses. Even if the DEA is only scratching the surface with the total amount of marijuana it seizes, the mere threat of these eradication efforts forces illegal cannabis growers to try harder to hide their products, increasing their costs and forcing them to sell at a higher price. Anything that increases the legal market’s competitive edge against the illegal market has some benefit to our clients who pay taxes and registration fees and operate fully above board. Finally,  illegal, unregulated cultivation on public land, often in national parks or national forests, can have significant negative impacts on the environment.

Still, we have to ask if local marijuana eradication is the best way for the federal government to spend its money. In 2016, the DEA spent $760,000 in Washington, $200,000 in Oregon, and $4.3 million in California on eradication efforts. In Washington, because of the mountainous areas where illegal grows are found, the per plant eradication cost is $26.49. That’s a huge cost per plant when evidence has shown that these eradication efforts have not significantly reduced the total amount of illegal marijuana making its way to market.

Like a lot of other government programs, it seems that much of the reason for continuing with the cannabis eradication program is that the money is easy for Congress to spend and law enforcement jobs remain secure so long as they continue to receive this kind of money. If the federal government were serious about the ecological concerns of illegal marijuana growing, the eradication program would be run by the United States Forest Service or the Department of Interior or the EPA. Not by the state highway patrol with funding from the DEA.

One of the most pernicious challenges for marijuana decriminalization nationwide is the continued financial interest of those politically popular groups that generate revenue from illegality. Law enforcement and corrections officers represent a huge and organized political constituency, and though they don’t all speak with one voice (see Law Enforcement Against Prohibition), they tend to favor anti-cannabis programs that keep federal funds flowing their way because of the security it brings to the agencies as a whole and to the individual law enforcement officers. So long as marijuana remains illegal, we will throw money at quixotic eradication efforts.

In discussing this money tug, Lt. Chris Sweet of the Washington State Patrol told the Seattle Times that public perception that the money can be used for other programs like education and treatment is “definitely a big concern.” The pie is only so big, and those of us who think the money would be better spent on education or treatment need to make our voices heard too.

Cannabis ContractsOur cannabis clients often face the chicken and egg problem of trying to balance three or four decisions contingent on one another. A classic example is a new marijuana business licensee that wants the state agency to approve a certain location, wants a landlord to execute a lease for that location, and wants an investor to contribute capital to pay for equipment and build-out at that location. The state agency will only approve the location when it has a signed lease in front of it. The landlord will only execute the lease if a state license has already been approved and if the business is properly capitalized. The cannabis business does not want to be on the hook for executing the lease until it knows it has a good source of capital and that the land will be approved by the state for its cannabis business. And the investor will only put money into the cannabis business if there is confirmation the property works and the business has a lease.

Basically, everything is contingent on everything else. It can be a challenging situation for cannabis business owners, but there is a simple solution more companies should use — standard conditional agreements with agreed-upon closing periods. Anyone who has bought a home understands how closing works. You sign a purchase agreement, but you have 30 days to get inspections done to make sure the home has clear title and is adequately constructed. If there are any problems, you can walk away, less your earnest money.

The same structure can be used in startup cannabis business deals. So long as landlords get some earnest money up front, they are generally willing to execute commercial leases that allow tenant cancellation if the state does not approve the cannabis license or if the tenant discovers its cannabis business is not feasible at any point during the first few months of the lease. Similarly, cannabis investment contracts can and should be similarly conditioned. A loan agreement or an equity purchase agreement involving a cannabis business can have any time frame for closing, which can be defined as actually funding the investment or as the moment when the investor is fully obligated to pay the investment over time. Generally, the conditions will be that the company passes some standard due diligence, but it makes sense for the licensing and real estate portions to be added as additional closing conditions.

Using multiple conditional agreements, a cannabis business can ensure everything is aligned before obligations to pay money mature. And if things fall apart, the various conditions will not be met and everyone can walk away with minimum pain. When doing cannabis deals, it is important to think through the various facts that need to be in place before obligations start maturing. If you do this, you will be better able to walk the tight rope that heavily-regulated cannabis businesses on a timeline face during the cannabis licensing process.

Mike_Pence_&_Jeff_Sessions_(29299670541)My cannabis clients are all over the map with how they are reacting to Donald Trump’s election victory and his subsequent naming of Jeff Sessions as the presumptive nominee for Attorney General. Some of them are absolutely confident that marijuana legalization momentum cannot be slowed, much less halted. Others are much more cautious and are concerned that the political climate may have terrible effects on their cannabis businesses. The majority, however, are not really engaging directly with the issue. They are doing business as usual as they wait to see if major changes are in order on the federal policy side.

But even for those that aren’t sure yet what is going to happen, business is full of small gambles. We have clients right now that don’t know if they should move forward and buy another piece of equipment or expand into a larger facility because they don’t know if they will be able to get their money back. If Jeff Sessions is as scary to the cannabis industry as his prior public statements would support, then every dollar invested into a marijuana business right now is a dollar that may not be recouped. There is a real risk here.

But with that risk comes opportunity. One of the great fears for small marijuana entrepreneurs has been that large businesses will squeeze them out as soon as they get the chance. But big business will never make that move so long as the legal climate for marijuana remains as risky as it is. If Hillary Clinton had been elected, the long, slow march toward overall legalization may not have accelerated, but it also wasn’t going to slow down or stop. With Trump, I would be surprised to see any major moves into the marijuana industry by large businesses any time soon. Small businesses can be flexible in an uncertain landscape, but large businesses abhor uncertainty. They are simply too slow-moving and have too much internal inertia to be able to react well in a legal climate where it feels like policy changes by the week.

So, small businesses retain their advantage. This isn’t to say that marijuana businesses won’t or can’t grow. It is saying that, at least for the foreseeable future, most of the growth in marijuana businesses is likely to be organic — from businesses that started in the industry. The idea that Philip Morris or Pfizer or Monsanto are going to come in and throw money at the marijuana industry and run everyone else out of business is dead in the short term because those massive businesses have so much to lose. The Trump effect will keep them out, whereas they would probably have been more likely to get involved in different circumstances.

American-style capitalism has a way of quickly generating enterprises that fill whatever void is created by government policy, or lack thereof, and this holds true for cannabis as well. No matter what the administration does, cannabis businesses, both legal and illegal, will adapt. Any move that keeps big business away from marijuana will simply allow smaller state-legal actors and black market actors to play a stronger role. Federal cannabis policies moving forward will not determine whether there is a marijuana market — that is set in stone — but they will determine which players are most advantaged.

Cannabis real estate lawyersThe Denver Post ran a story Sunday on the high rents marijuana businesses have to deal with nationwide. In Portland, for example, rental property that typically goes for five dollars per square foot goes for three times that amount for cannabis businesses. Though rents for cannabis businesses in Washington and Colorado are stable, they are still well above the market rate. Real estate investors looking to lease to cannabis businesses are gambling that this trend will continue.

There are several things pushing up cannabis rents, many of which are discussed in the Denver Post article, all of which decrease the available supply of cannabis real estate. Any property with an existing deed of trust or mortgage held by a financial institution runs some extra risks. The vast majority of mortgages contain a clause mandating that the property only be used lawfully. If a property has a cannabis business use on it, the bank can call the loan in default and accelerate the principal so it’s all due immediately and giving the bank right to foreclose if the borrower cannot find alternative financing. Many cannabis businesses are at locations with mortgages now, and banks are tacitly accepting the businesses so long as the legal climate doesn’t change. If the legal climate does change and federal law enforcement becomes a real threat, the banks holding notes on cannabis properties could well use the legal changes as their opportunity to call their note in default, either getting their money back or allowing them to foreclose. Because of this threat from banks, most cannabis businesses prefer to lease property owned outright (without any bank note), and most landlords with financed property prefer to lend to businesses that are federally legal.

The hodge-podge of state and local cannabis regulations also tends to drive up the price of cannabis business real estate. State laws that limit how close cannabis businesses can be to a school, a park, a church, or another cannabis business also limits the number of properties available to cannabis businesses. When you add in local zoning codes that often push cannabis businesses to heavy industrial areas and building codes that often require cannabis production facilities to have full fire suppression and air quality systems in place, the list of available properties for the marijuana industry plummets even further. With so many marijuana businesses fighting for so few spaces, it is no wonder real estate prices skyrocket.

Finally, there is still a ton of money being invested into cannabis real estate from out of state and foreign investors. Many marijuana licensees lack sufficient capital to build out growing facilities, and they look to turn-key real estate opportunities, often with deferred rent, where they are expected to pay out the nose when they start making revenue. These higher-priced turn key facilities tend to increase the price ceiling even for landlords that only offer bare warehouse space. Hardly a day goes by where one of my firm’s cannabis business attorneys does not get a call from someone on the East Coast asking us about cannabis real estate opportunities in Washington, Oregon, or California. Even public companies are involved in the turnkey cannabis real estate market, including Innovative Industrial Properties, Inc., a cannabis related REIT that did an IPO on the NYSE just a few days ago.

So, is the upward trend in cannabis real estate likely to continue? Real estate investors are showing signs of skepticism. Innovative Industrial Properties didn’t have the strongest IPO, raising $67 million when it hoped for $175 million. The media has tended to blame President-elect Trump’s choice of Jeff Sessions to run the Justice Department, which is a real concern for everyone, but there may be other factors at work.

In Washington State, cannabis businesses that are renting warehouse space in heavily populated King and Pierce counties are facing fierce competition from outdoor growers from eastern Washington. Outdoor grown marijuana has long been perceived to be inferior to indoor-cultivated product, but outdoor growers are rapidly developing techniques to increase the quality and consistency of their products. The continued trend toward oils and other concentrates also puts downward pressure on the relative value of crafted indoor product.

Outdoor spaces, especially in rural counties, tend to be significantly cheaper than urban or suburban warehouse space. If more growers see those areas as real alternatives, warehouse prices may fall. And even if the Trump-Sessions administration makes policy choices that decreases the availability and increases the price of cannabis real estate, the long-term trend is still toward legality, with cannabis looking more like other businesses. As the cannabis industry “normalizes,” we should expect  lease rates for cannabis businesses to fall more in line with lease rates for other businesses. Real estate investors should be careful not to overpay based on their assuming the current cannabis leasing market will last forever.

What are you seeing out there? What are your thoughts on where cannabis real estate is heading?

Cannabis business lawyersWe’re in that time of year when at least some of the licensed cannabis producers in Washington tend struggle. A short-term glut of marijuana on the market makes it harder to stand out and make sales, and businesses that aren’t competitive on price or quality get left behind. I bring this up because it is also the time of year when financiers come to my firm’s cannabis business lawyers looking for a way out of deals they fear will never pay off.

“Financiers” in the Washington marijuana system generally refers to debt investors that get a set interest rate of return rather than a profit-interest in a business. Mark Cuban once said that only a moron would start a business on a loan, but the limitations on out-of-state equity ownership leave many newish cannabis businesses cash-strapped, so they turn to debt. We have also seen that many of the creditors involved in the local marijuana industry are not seasoned small-business investors. They are people looking to take advantage of an industry that seems to be printing money. Debt feels less risky than equity, so they throw some money into a cannabis business or two, believing they will be able to get 10%-20% interest annually.

Because so many of these investors are new to small business investing, many don’t protect themselves. Lenders have a lot of tools to make sure they get paid. Security interests in real, personal, and intangible property provide avenues for seizing assets. Marijuana inventory is complicated to secure, but most marijuana businesses have at least some high dollar capital equipment. Personal guarantees from major players put personal assets on the hook as well, and signed confessions of judgment make the process of obtaining a judgment on the debt significantly easier. Most loans do not involve all of these protections, but most smart lenders are not willing to provide completely unsecured capital to brand new businesses without any way to get a return if the business folds.

If you are one of those unsecured investors and the cannabis company to whom you loaned money defaults on your loan, what can you do? If you want any chance of recouping your investment, you really only have two options. First, you can renegotiate the debt. In most well-drafted promissory notes, an uncured event of default causes the debt to accelerate and mature. This means that if your cannabis borrower misses a payment and doesn’t make a late payment by the cure date, its entire debt becomes due. Once this happens, it is just a matter of negotiating an extension on the note. During that extension, you as the creditor have significant leverage to extract concessions from your cannabis borrower, such as personal guarantees, security interests, or even pledges of ownership interest in the cannabis company. The reason you as the creditor have leverage is because your only other viable option would be to obtain a judgment against the borrowing company and that judgment will likely be a nightmare for your borrower. If you are wiling to brave the legal fees and get a judgment against your borrower, you can then use that judgment to begin levying on the cannabis business’s assets as though you had a security interest in the property to begin with. In most states, once you get the judgment, at least some of what you spend collecting on it, including your attorneys’ fees, will be collectable as well.

Companies that owe debts to third parties and realize that they are about to go under sometimes look for ways to avoid paying the debt. This is a good time to bring up fraudulent transfers. As defined in most states, a fraudulent transfer occurs in a few different ways, the most common of which is when an insolvent debtor transfers property without receiving a reasonably equivalent value in the exchange. If an “insider” — someone connected to the company like a director or a director’s spouse — is involved in the transaction, showing fraudulent transfers becomes far easier. For example, if a debtor  company has a bunch of equipment and transfers it to the company owner’s brother, that is potentially a fraudulent transfer, and the property can be clawed back for creditors.

The stickiest situations come when there are multiple debts. A company is not necessarily breaking any laws if it chooses to pay one creditor before it pays other creditors. Unless the creditor is an “insider,” the company can generally choose which of its debts to pay unless it is in a formal bankruptcy (probably not available to marijuana businesses) or a state receivership proceeding. In certain circumstances, multiple debt investors have signed promissory notes in which the company promises not to pay the notes proportionally and not to provide any payment preference. If the debtor company does pay one holder disproportionately to the others in that circumstance, the creditor left-behind may be entitled to a clawback of the payment.

These collections matters don’t usually end with either side truly happy. Attorneys make some money, and investors can often recoup a portion of their investments, but debt litigation against a business is an unpleasant affair. If you are looking to lend to a cannabis company, make sure you know what your plan is if things turn south. It’s better to have a security interest up front than it is to fight the company and other creditors in court to get the right to levy.

It looks like President-elect Trump intends to name Senator Jeff Sessions as his new Attorney General. As I mentioned in the last post about Trump’s pot policy, Sessions has been hostile to marijuana for a long time. Here is a general flavor of Sessions talking about marijuana:

Not very encouraging. So where does that leave us? Just because Sessions doesn’t like marijuana does not automatically mean increased law enforcement action against it. Any federal attempt to roll back cannabis’s big gains would be incredibly unpopular politically, and it seems Sessions wants to focus on national security, terrorism, and immigration as his primary areas of focus. He may rant and rave against marijuana, but actions speak loudest, and taking action may be too costly.

Sessions is also limited in what he can do, so long as the federal spending bill says that the federal government cannot spend money to interfere with state medical marijuana laws.

Still, that means recreational laws and people that participate in recreational marijuana businesses must remain cautious. There is nothing stopping federal agents from raiding marijuana businesses, as possession, distribution, and manufacture of marijuana remain illegal under federal law. The Cole Memo isn’t going to stop them, and Sessions can withdraw that memo with the stroke of a pen. Logistically, there simply are not enough federal agents to enforce federal marijuana laws everywhere, but that won’t necessarily stop them from targeting big players.

If this issue is important to you, please call your state’s Senators, particularly if they serve on the Judiciary Committee, to let them know the cannabis issue is important to you. Sessions has to go through a confirmation process. Last time he tried this, in 1986, he was rejected for having made racist comments in his past. I doubt he will be rejected this time (there will be far less qualified nominees for other positions, and the Republican-controlled Senate won’t reject everybody). But political pressure on him to maintain his focus on real law enforcement and leave marijuana policy to the states can have a real impact.

As cannabis lawyers, we will obviously be watching what happens pretty closely but mostly continuing to move forward with business (in Washington, Oregon and California) as usual. Or as Hilary Bricken from my firm put it in an interview regarding what to expect with California cannabis:

Bricken says she and other lawyers with clients in the marijuana business are paying close attention to the trend in federal law, but they aren’t slowing down in anticipation of a new administration. “If the federal government goes around arresting attorneys, then we have a constitutional crisis on our hands. But for us, it’s business as usual until we get some dramatic turnaround.” And even in that event, she says, “I wouldn’t be afraid to take up the fight.”

Fingers crossed.

Trump on cannabisSince last Tuesday, we have seen a deluge of stories asking what federal pot policy is going to look like under President-Elect Trump. NBC, the Washington Post, CBS, and many others have weighed in. The short answer, so far, is that nobody knows. Trump himself has made statements on every side of this issue, much as he has on issues broadly. In the past, he has made arguments in favor of drug legalization. During the campaign, he bounced between positions where he was positive on medical marijuana, to saying that it was all a states’ rights issue, to saying that legal marijuana has caused a lot of problems in Colorado.

So Trump is, to some extent, a wildcard on cannabis. After meeting with President Obama in the White House, Trump came away thinking that there actually were some good parts of Obamacare that he wanted to keep, which is different from his campaign trail calls for its total repeal. Many say Trump often takes positions based on the last person to speak to him and the people that he has surrounded himself with to date are not legalization warriors in any sense.

The most important appointment President Trump will be making is the Attorney General, who is the head of the Department of Justice, the agency that enforces and prosecutes federal crime, including federal drug laws. The Cole Memo, which sets out the current federal policy of only enforcing federal criminal laws against cannabis in egregious circumstances, was issued by the Department of Justice and can be withdrawn by the Department of Justice. The status of the Cole Memo is the main battle line we are talking about right now. If Hillary Clinton had been elected, everyone assumes the Cole Memo would have remained in effect, and the main question would have been whether banking would be easier, or if federal tax policy would be less punitive toward marijuana businesses. With Trump’s election, safety from federal enforcement is the paramount concern.

So, let’s take a look at the names floated for Attorney General so far: Chris Christie, Rudy Giuliani, Jeff Sessions, and Pam Bondi.

Christie: Chris Christie is probably the most ardent opponent of marijuana legalization on the national stage. He has stated in very clear terms that he would enforce federal laws even in states that have fully legalized marijuana. The only time he has backed down on the issue was in September, when he signed a New Jersey bill adding PTSD to the list of ailments for which marijuana can be recommended. Otherwise, Christie has shown a keen interest in cracking down on marijuana. Christie’s chances of becoming Attorney General, however, are hampered by the “Bridgegate” scandal, and that he is now believed to have fallen out of Trump’s inner circle. Christie as attorney general is a scary proposition for anyone in the cannabis industry, but that is looking less likely.

Giuliani: During his 2008 campaign for president, Giuliani made statements that were as strongly anti-marijuana as Christie’s recent statements. He has made fewer public statements on it in recent years, but he is generally assumed to still be a drug warrior and strongly anti-cannabis. But just this morning, Giuliani said that he is not in the running for the Attorney General position and there are rumors now that he may be named as Secretary of State.

Sessions: Jeff Sessions has been a drug warrior for a long time. Among his other choice quotes on the issue, he once said that “good people don’t smoke marijuana.” He attacked President Obama after the President said that alcohol was likely more harmful than marijuana. Throughout his career he has not shown any movement on the issue, even toward medical marijuana.

Bondi: Pam Bondi is the Florida Attorney General who ran into scandal for accepting a $25,000 campaign donation from the Trump Foundation while Florida was considering joining a lawsuit against Trump University, which she eventually opted not to join. On the marijuana question, Bondi was actively against medical marijuana legalization in Florida, but she did not fight to keep the 2016 ballot initiative off the ballot. That acquiescence, however, was based more on an acceptance that there was no legal way to challenge it as opposed to a belief change on marijuana itself. Still, it is hard to imagine a state official feeling comfortable with federal law enforcement going after marijuana businesses and users in a state that just passed medical marijuana with a 70% plus majority.

Other Considerations: Even if Trump appoints an anti-marijuana zealot to the Attorney General post, it isn’t clear that will lead to major changes in federal cannabis policies. Public approval for legalizing marijuana (especially medical cannabis) is solidifying and growing. Marijuana laws were approved in eight out of the nine states on which it was on the ballot, including heavily republican states. See Marijuana Election Overview. A majority of the people in the United States now live in places that have decriminalized or legalized medical or recreational marijuana. If Trump’s Department of Justice were to start going after marijuana businesses in legal states, the backlash would likely be swift and furious, and it would threaten to overwhelm the rest of his agenda.

Further, Congress still has a role here. In the past few federal spending bills, Congress has ruled that the Department of Justice could not use federal money to interfere with state marijuana laws. The 9th Circuit has ruled that this budget rider prohibits the Department of Justice from spending money on cannabis prosecutions against defendants fully compliant with their state’s medical cannabis laws. This budget rider does not protect recreational cannabis businesses, but there is an added complication where Washington and Colorado have at least partially merged their medical and recreational marijuana programs. Even if the Department of Justice wants to crack down on marijuana businesses, it’s not clear it has the legal right to do so.

At this point, there are no clear answers. No matter what happens, it is vital that the legalization community stay involved and stay loud. Public opinion does matter, and public officials don’t like their agendas to be dragged down by single issues. Organized cannabis lobbying is more important than ever, so keep letting your elected officials know where you stand on cannabis.

California cannabisWhat a long, strange road the election has been. After a wild and unpredictable night, marijuana may not be the first thing the media discusses in the election’s wake. Still, it cannot be overstated how successful the evening was for marijuana legalization. Cannabis ballot measures won in eight out of its nine races. This is unprecedented, and it shows the extent to which cannabis legalization is a bipartisan issue.

The below is a state-by-state rundown of where things ended up. For a comprehensive report on California cannabis and on what it will take to participate in its new adult-use cannabis industry, go here. And for the same on Florida’s new medical cannabis industry, go here.

Arizona — Lost — Proposition 205, which sought to legalize marijuana for all adults and license its production and sale, did not pass. Prop. 205 was pretty similar to legalization initiatives seen elsewhere, like Washington, Colorado, and California. Despite backing by the Marijuana Policy Project, Arizona apparently is not quite ready to go further than medical marijuana, which narrowly passed there in 2010.

Arkansas — Passed — Arkansas passed Issue 6, which legalizes medical marijuana for certain debilitating conditions.

California — Passed — This is the big kahuna. California, home to 12% of all Americans, passed Prop. 64, legalizing marijuana for all adults. The state is already working on regulations for its medical marijuana market, and both the medical and recreational markets are expected to go online some time in 2018. But if there is a straw that breaks that camel’s back federally, this is it.

Florida — Passed — Florida’s Amendment 2 passed overwhelmingly. With more than 70% of the vote, Florida got past its challenging 60% barrier on all citizens initiatives. Now, Florida will build a real commercial medical marijuana regime on top of its currently extremely limited high CBD program. Florida’s measure is broader than most state medical marijuana laws, including conditions like PTSD and gives physicians significant leeway in determining what to treat with medical marijuana.

Maine — Passed — Question 1 in Maine, a recreational marijuana initiative, was opposed by many in Maine’s government and business establishment as well as many in the medical marijuana community. However, it passed and Maine is now on the road to joining the other fully-legal cannabis states. 

Massachusetts — Passed — Massachusetts passed Question 4, legalizing recreational marijuana. This is another business licensing and taxation initiative, which follows the same basic structure as the other major recreational laws in the United States. 

Montana — Passed — I-182 will expand Montana’s medical marijuana program, turning it into more of a standard medical marijuana program, including allowing physicians to prescribe for PTSD and chronic pain.

Nevada — Passed — This one was close, but Nevada passed Question 2, legalizing recreational marijuana. Nevada’s medical marijuana business regime always felt like a precursor to recreational legalization, and the early investors in Nevada’s licensed medical businesses are now poised to take advantage and transition into the recreational market.

North Dakota — Passed — This one is a little surprising, because there wasn’t much polling done in North Dakota. North Dakota has passed Measure 5, which is a limited measure legalizing marijuana for the treatment of specific conditions such as cancer, AIDS, and hepatitis C.

Overall, a very good night for cannabis, assuming that our new President does not seek to toughen federal laws regarding state-law cannabis.

Cannabis equityLast year, I wrote about equity compensation for cannabis employees from the perspective of companies. We have been dealing with more and more companies moving toward adding equity to their overall compensation scheme, so now is a good time to revisit it from the employee perspective.

At the outset, employees should be wary of companies that offer equity in lieu of any pay at all. Many companies assume that there are federal startup exemptions that allow them to compensate early stage employees solely in equity, but that’s not the case. Minimum wage and overtime laws still apply, and the value of stock and stock options is not included in determining whether an employee is receiving at least the minimum wage.

Beyond the minimum wage issue, there is the issue of value, which is different from valuation. Let’s say a company goes through a formal valuation process and is reasonably worth a million dollars. That does not mean a one percent stake in that company has a present value of $10,000. All new companies and an overwhelming majority of cannabis companies are closely held, meaning they are owned in full by a small group of owners. The shares or ownership interest of the company are not openly available in the public market, and they can’t be made available unless the company registers them under federal securities laws. So the present value of that one percent stake in a closely held cannabis business isn’t the same as the same stake would be in a publicly traded company.

Resale value isn’t the sole measure of worth of a minority ownership interest in a closely held business. There are also things like distribution rights and redemption rights. The devil is in the details here, however, and everything depends on the company’s governing documents. There is no general requirement that a limited liability company or corporation distribute profits to its owners. In fact, unless limited by the LLC operating agreement or the bylaws of the corporation, owners and officers can compensate themselves as salaried employees of the company, potentially eliminating any funds that would be available for distribution. Even in a company where that isn’t the case, officers often want to hold on to cash to use for reinvestment in the business, as opposed to distributions to owners. Though that may be good for increasing the value of the company overall, it doesn’t increase the value today of an ownership stake that can’t be sold.

Employees with equity stakes do have some legal protections, and they can negotiate for greater protections in the company’s governing documents. Many of the rights and protections mirror what any minority interest owner of a closely held company would benefit from. If, as described above, there is a worry that the company’s owners will drain cash by paying themselves lavish salaries, it is in the employees’ and other minority shareholders’ interests to require the company mandate no salaries or maximum salaries for owners and proportional distributions otherwise. That means that if the company is making money and the majority owners want to pull cash out of it, minority owners like employees would also get a proportional cash distribution.

Some shares or membership interests have redemption rights, which are limited rights to force the company to repurchase the shares of the company. If this were an immediate right to cash, it would defeat one of the purposes of equity compensation for the employer (pay less cash and more equity in the early stages while the company is cash-poor), but many companies have structures in place to offer repurchases of some or all of the shares that employees or other minority owners have, often over extended terms. An additional right that employees and other minority owners will hope for are so-called tag-along rights. These are rights that ensure that if majority owners sell a portion of the company to a third party, minority shareholders can participate in proportion to their ownership interest.

In general, an employee offered equity compensation in a cannabis business should understand the limitations that come with that. Marijuana is a heavily regulated industry, and resale options for equity ownership are limited by both securities law and by various state regulations on marijuana company ownership. If a company doesn’t intend to or isn’t able to spit out big cash distributions to its owners, employee equity holders need to realize that the value of their stakes may or may not end up being worth anything, and the timing on that is going to be unpredictable.

Marijuana energy efficiencyI met last week with someone in the energy efficiency industry who wanted to talk about different service offerings to marijuana companies. According to this person, even in a state like Washington, where energy is relatively cheap, the increased buildout costs of putting together an energy-efficient cultivation facility are quickly made back in reduced energy costs. Not coincidentally, EQ Research, a pro clean energy policy research company tied in with a law firm that works with the clean energy industry, recently released a report discussing just how much energy pot businesses are really using. When reports from interested parties like this come out, you know that the final answer is going to be that private actors should invest in clean energy and government actors should make that easier and incentivize it. This report is no different, but its results are still eye-opening.

In Colorado in 2014, marijuana cultivation facilities accounted for 200,000 MWh of energy usage — about 0.4% of all electricity used in the state. Forecasters in Colorado and Washington expect this energy usage to continue increasing, both in sheer volume and as a percentage of state-wide consumption. Energy consumption is driven by several factors, but the vast majority of energy is used by grow lights, HVAC systems, and venting/dehumidification systems. These systems are vital to indoor cultivation facilities, while fully or semi-outdoor facilities have significantly lower energy burdens.

Legally, there are a few different factors to look at when considering the causes and effects of high energy use by marijuana businesses. As always, federal illegality is the primary ingredient to marijuana’s unique position. Because of federal illegality, marijuana cannot cross state lines. States that want to legalize all need to license their own cultivators. This means that states like California and Oregon, which have climates that work for outdoor cannabis cultivation, are not able to supply Nevada, Colorado, Massachusetts, or other states that may not be natural fits for outdoor marijuana growing. In those states less hospitable to outdoor growing, virtually all legal cannabis cultivation must be indoors. Compare to the tobacco industry, where 80% of the tobacco in the United States is grown in North Carolina, Kentucky, and Georgia. The markets that can produce cannabis more efficiently are not able to supply markets that are less efficient.

Even if cannabis is all grown indoors, a more concentrated industry would be more likely to invest in energy efficiency improvements. Someone growing on 2,000 square feet will have a harder time justifying the expense of energy improvements than a company using ten times that amount. But even for large companies, a mixture of federal illegality, state restrictions, and general industry uncertainty makes it challenging to raise capital for energy efficiency projects.

Federal illegality also makes it challenging for marijuana businesses to benefit from state and federal energy efficiency programs. Private energy companies like Puget Sound Energy have offered large efficiency rebates in the marijuana space, but public utilities, fearful of jeopardizing their relationship with federal energy providers like the Bonneville Power Authority, still tend to shy away from providing incentives to cannabis growers.

For now, energy efficiency in the cannabis industry will likely be driven less by energy efficiency incentive programs and more by standard risk-reward investment decisions. Some communities are looking at negative incentives to the marijuana industry, including excise taxes on excess energy use, but these are not yet widespread. Cannabis companies will need to stay aware of development in energy markets, as utilities continue to increase prices for energy use during peak hours.