Photo of Vince Sliwoski

A well-rounded attorney with experience in areas such as music and trademark law, Vince heads up Harris Bricken's Portland office and is a leading practitioner in Oregon's ever-evolving cannabis industry.

business-1320058_960_720Last week, I wrote on Oregon cannabis company acquisitions, and the types of deal structures these transactions tend to follow. I mentioned that before a transaction is consummated, but after discussions have commenced, the purchasing entity will typically discuss its plans with counsel. The lawyer will then draft a letter of intent or a term sheet to present to the target company. If the target company accepts outright, the transaction will proceed. If the target company does not accept outright (more common), it will submit proposed revisions.

Term sheets take many forms, but in a basic sense a term sheet describes the terms of the acquisition at hand. Because each transaction is a snowflake, each term sheet is also unique and must be carefully considered and prepared. Sometimes, the parties will skip the term sheet and simply proceed to the transaction in an attempt at “efficiency.” We strongly advise against this: it invites a substantial risk of misunderstanding as to which documents will follow, and when, and may even cause confusion as to deal points themselves.

Here is a basic list of items for inclusion in any term sheet for an Oregon cannabis company acquisition:

Binding vs. non-binding provisions. As a general concept, a well written term sheet will be organized by binding and non-binding provisions. The binding provisions will include items like non-disclosure, exclusivity, jurisdiction, and choice of law. The non-binding provisions will include the unique deal point items, such as purchase price, payment terms and collateral agreements (e.g. consulting agreement, non-compete, lease or land sale contract, etc.). When a non-binding provision is misplaced into the “binding” category, or vice versa, both buyer and seller can expose themselves to serious legal risk.

Nature of acquisition. The term sheet should clearly lay out whether the transaction is an asset sale, stock sale or merger, and whether the purchase price will be paid via cash, debt, equity swap, or other method. This portion of the document should also detail whether the buyer will proceed in its own name, or through a newly created entity.

Liabilities. In nearly all acquisitions, the purchaser will assume certain liabilities of the seller. These liabilities may include everything under the sun related to seller, or liabilities may be limited to select items, like assignable contracts. If specific liabilities are known at term sheet preparation, they should be listed, perhaps on a separate schedule.

Indemnification. Limitations on both seller and buyer liability can be a heavily negotiated portion of any term sheet. The term sheet should deal with any potential claim that may arise out of the parties’ pending agreements. It should also address claims existing prior to the transaction, the possibility of breaches of representations and warranties, issues of title to assets, tax obligations, employee benefits, claims arising out of marijuana’s status as a controlled substance, etc.

Employment agreements. Every term sheet should deal with the seller’s employees. Will they stay, or will the seller be required to fire them? What happens with regular employees versus executives? When can employees be apprised of the transaction? Failure to address employment can cause serious headaches for both parties.

Conditions to closing (contingencies). This list may be long and varied, and include items from the acquisition of third-party financing, to approvals by the shareholders and/or directors of the purchasing and selling entity. The satisfactory completion of due diligence by the parties is always a crucial item, and in the cannabis context, licensing (see below) is a critical issue.

Marijuana licensing. Like other adult use states, Oregon requires its cannabis companies to maintain state licensure. In certain areas, a local license may also be required. The administrative protocol for changes in license ownership can be complex and time-consuming, and may take on a unique character, depending on the type of acquisition. The licensing update or transfer protocol must be carefully thought through and delineated in the term sheet.

If you made it this far, congratulations; but please note that the above list is not at all exhaustive. There are many nuances to a letter of intent or term sheet beyond the deal points highlighted here. Once a term sheet is negotiated and signed, the parties can move into the formal due diligence phase mentioned above, and ultimately, to closing.

Oregon cannabis In the past six months or so, we have begun to see an increase in consolidation throughout the Oregon marijuana industry. Large companies from other states are moving in, and Oregon companies are buying each other’s assets or stock and integrating to form verticals. In business parlance, we have entered the scaling portion of the inevitable consolidation curve. This development should make for a lively second half of 2017.

Generally speaking, there are three primary structures that acquisitions follow: (1) stock purchase; (2) asset purchase; and (3) merger. Each comes with a raft of legal and tax implications, and each is discussed very briefly below:

  1. Stock purchase. Stock purchases tend to be favored by sellers. In these transactions, the buyer purchases some or all of the seller’s shares (or, in the case of an LLC, its units or membership interests). Sometimes, a buyer will purchase only a majority of the shares, and later force a sale of the remaining shares by statutory short-form merger, or simply as permitted under internal company documents. Unlike a buyer in an asset sale, a buyer of stock is purchasing the target company’s assets and liabilities.
  1. Asset purchase. Asset purchase agreements tend to be favored by buyers. Under an asset purchase agreement, the buyer purchases the seller’s assets and assumes no liabilities, unless the parties agree otherwise. Assets can be both tangible (e.g., inventory and equipment) and intangible (e.g., intellectual property and goodwill), but generally do not include cash. Unlike with a stock purchase, an asset purchase allows the buyer to “step up” the company’s depreciable basis in its assets, within IRS guidelines. From a taxation perspective, that can be crucial.
  1. Merger. In a merger, two entities combine to form one upon the issuance of a “certificate of merger” by the State of Oregon. The surviving company (purchaser) assumes all liabilities and receives all assets of the disappearing company (seller). We have seen fewer mergers in the cannabis space than stock purchases or asset purchases; the exception would be “downstream” mergers where the holding company absorbs its wholly owned subsidiary.

Before a transaction can be consummated, but after discussions have commenced, the purchasing entity will typically discuss its plans with counsel. The attorney will then draft a term sheet or a letter of intent, to present to the target company. Once the parties have negotiated and executed that foundational document, the purchaser will be ready to undertake the time and expense of performing due diligence on the seller and any related parties.

If the due diligence checks out, the purchaser may form a wholly owned subsidiary to purchase the target business, and to further insulate itself from liabilities of the purchased entity. In Oregon cannabis, there are also critical state licensing strictures related to consolidation. Those conversations are important to facilitate early on: in this way, the purchaser will not find itself sitting on unproductive assets after putting a bow on the transaction.

Acquisitions can be an intense process, and the blizzard of documents and disclosures can feel dizzying at times. Ultimately, though, these transactions tend to be memorable experiences for clients and attorneys alike. And in certain instances, an acquisition is crucial for a company to achieve its ultimate goals.

Stay tuned for Part II of this series, where we will discuss the cannabis acquisition term sheet, a critical document in these transactions.

Oregon cannabis lawIn January, we put together a summary of 30 or so draft bills up for consideration in the 2017 Oregon legislative session. As predicted, many of these bills have fallen by the wayside; others have been revised or consolidated. As of today, Oregon has enacted four new laws related to marijuana, with three more bills pending. In addition, three draft bills wait in the wings, regarding industrial hemp.

Today, we are one month away from the state’s constitutional deadline for adjournment sine die, which is Monday, July 10. Everyone goes home at the end of that day, and if a bill hasn’t been approved by both chambers, we say “so long” until 2018.

Below is a summary of Oregon’s four new marijuana laws, its three proposed marijuana laws, and its three proposed hemp laws.

Oregon’s New Marijuana Laws

Senate Bill 1057

A few weeks back, we gave a comprehensive overview of Senate Bill 1057, the most impactful bill to date, and another large step in combining Oregon’s medical and recreational marijuana programs. The bill has since been signed into law by Governor Brown and because it was an “emergency” bill, it took effect on May 30.

Senate Bill 302

This bill quietly became law back on April 21. It removes provisions related to marijuana offenses from the state Uniform Controlled Substances Act. It also removes and/or reduces various criminal penalties related to marijuana crimes by unlicensed operators. The thrust of this bill was to treat marijuana crimes more like alcohol crimes, and it achieves that purpose. Because penalties for marijuana offenses were scattered throughout the Oregon statutes, this one has an enormous amount of tedious, conforming amendments, to something like 125 statutes.

Senate Bill 303

This law is similar in nature to SB 302, albeit much shorter, and it also took effect back on April 21. The takeaway here is the amendment, clarification, and reconciliation of statues related to minors possessing and purchasing both marijuana and alcohol. Pretty basic stuff.

Senate Bill 863

This one concerns consumer privacy, and it serves as a further attempt by Oregon to shield its citizens’ information from the federal government. The new law prohibits marijuana retailers from recording, retaining and transferring “information that may be used to identify a consumer.” This bill was short, sweet and non-controversial: it was signed into law by Governor Brown on April 17.

Oregon’s Proposed Marijuana Laws

House Bill 2197

This is a classic “gut and stuff” bill, which started out as a measure to promote cannabis research, but now, in its fourth proposed amendment (“Dash 4”), deals with intergovernmental taxation as to the state and Indian tribes. Specifically, it would allow the Oregon Department of Revenue to enter into agreements with the governing body of federally recognized Indian tribes (read: The Confederated Tribes of Warm Springs). Under those agreements, the state would make rebate payments to the tribes for the estimated tax on marijuana items sold by tribes. This one left the Joint Committee on June 5, and was referred to Ways and Means, which is what happens whenever a bill has a fiscal impact. It’s hard to say right now whether a version of this bill will become law, but it seems probable.

House Bill 2198

This bill would establish an Oregon Cannabis Commission, to report back to the legislature on the status and condition of the Oregon Medical Marijuana Program (which the legislature keeps curtailing). The idea here is to find a way to help medical marijuana patients who might otherwise be left behind. Among other things, this bill contains the controversial “20 pound amendment” which would allow designated medical growers to sell up to 20 pounds of excess flower annually into the OLCC market. Like HB 2198, this one also recently made it out of the Joint Committee, and was referred to Ways and Means.

Senate Bill 56

This is the 2017 Oregon cannabis “Christmas tree bill” and it was given a “do pass” recommendation on June 6 by the Joint Committee, following its 39th proposed amendment (“Dash 40”). It’s now in the Senate Committee. The myriad of changes are too lengthy to summarize here, but a few notable planks include: (1) a requirement for the immediate suspension of any marijuana licensee for diversion of product to the black market; and (2) an allowance for limited processing by small, licensed OLCC producers (<5,000 square feet of canopy; water or mechanical extraction only).

Oregon’s Proposed Industrial Hemp Laws

Senate Bill 1015

This bill would allow hemp licensees to deliver hemp to OLCC processors, for non-THC based processing (which will be welcome news to both hemp and marijuana licensees). This bill was passed by the Senate on June 7, and does not create a fiscal impact. This means it will avoid the quagmire of Ways and Means, and should become law.

House Bill 2371

This bill would tidy up the industrial hemp regulatory scheme generally, which is a slender program with many gaps. Among other things, it would create a pilot research program, create a seed certification program, and provide for accreditation of testing laboratories for industrial hemp commodities, as well as products that are ingested, inhaled or topically applied. This bill was referred to Ways and Means on April 26, but seems likely to pass.

House Bill 2372

This bill would create on Oregon Industrial Hemp Commission, and nothing more. Like HB 2371, it was referred to Ways and Means on April 26, but is non-controversial and also likely to pass.

Trial_by_Jury_UsherWe are business and corporate lawyers, not criminal lawyers. This means we know enough about the law to tell someone when he or she may need criminal defense services, but we do not provide those services. Still, the specter of federal criminal charges is ever-present in the cannabis industry. When cannabis clients ask us about theoretical legal risks, we advise them that both civil and criminal liability exposure exist, on a spectrum from asset forfeiture to actual imprisonment. And we advise them that if they were charged for a violation of the federal Controlled Substances Act (CSA), we would help them find them a criminal lawyer.

In Oregon, Washington and California, we represent large cannabis businesses and vanguard industry players. For this reason, ever since Donald Trump was elected—and especially once Jeff Sessions was appointed attorney general—the question of whether our clients could eventually need criminal lawyers became more likely than before. The theory among many lawyers and policy-makers, after all, is that if the federal government takes action, it would not start with state programs or even with individual users, but with marquee industry players.

It is well established under Supreme Court jurisprudence that the federal government can enforce the CSA against state-legal operators. It is also worth noting that the Rohrbacher-Blumenauer amendment only safeguards medical marijuana programs and participants. Therefore, if the feds sue an adult-use (“recreational”) operator and drag it into court, a jury would likely be instructed that if the operator traded in marijuana it had violated the CSA. And that is where things could get interesting.

Most people—and even many lawyers—are surprised to learn that juries are not required to follow the law. When a jury’s conscience takes over and tells it that someone does not deserve criminal punishment for his or her actions, regardless of the law, the jury can choose to acquit. In legal terms, this is known as “jury nullification“: a systemic public safeguard from government run amok. To the chagrin of prosecutors, when jury nullification occurs, the Fifth Amendment’s Double Jeopardy Clause also prevents the acquitted person from being re-tried for the same charge.

Jury nullification has been a thorn in the side of state and federal prosecutors from our country’s early days. It became common in trials under the immensely unpopular Fugitive Slave Act of 1850, which criminalized any action that interfered with the recovery of fugitive slaves by slave owners. It again became common in the 1920s, when the immensely unpopular Volstead Act criminalized alcohol possession, on the heels of the 18th Amendment. These examples beg a timely question: what other federal law has become immensely unpopular of late?

The possibility of jury nullification in a CSA case against a cannabis business is both fascinating and realistic. It is realistic not just because of the favorable polling for cannabis nationwide, but also because these juries would be empaneled in jurisdictions that voted to legalize pot in the first place. Imagine a hapless U.S. attorney being ordered to charge a popular cannabis farm in Humbolt County, California, which is America’s largest cannabis labor market. It would make for an interesting show, to say the least.

We tend to write more about law than policy on this blog, but the 29 states with medical marijuana programs, the 8 states with adult use programs, and the overlapping 46 states that allow some form of cannabis possession, are all acting at the direction of their citizens when it comes to marijuana, ignoring federal law. The Cole Memorandum, which has helped facilitate state-level legalization since 2013, likewise discounts federal law.

What’s to say a jury wouldn’t do the same? If you were on a jury would you convict for cannabis?

EDITOR’S NOTE: This article stems from a paper titled “Jury Nullification Risks for Federal Cannabis Enforcement: How History and Common Sense Protect the Recreational Marijuana Market.” The paper was written by Emily Baker, a third year student at Lewis & Clark Law School in Portland, Oregon.

Bye Bye
     “GOODBYE TO ALL THAT”

On Tuesday, Enrolled Senate Bill 1057 was signed by the President of the Oregon Senate and the Speaker of its House. The bill now sits on Governor Kate Brown’s desk, where it awaits signature. Anyone who has followed the Oregon cannabis story for the past few years knows Governor Kate Brown has never not signed a cannabis bill that made it to her desk — and, to be very clear, even if an Oregon bill goes unsigned and unvetoed for 30 days, it still becomes law. As to SB 1057, we fully expect its approval in the next 30 days, which is a big deal. That is because SB 1057 makes some sweeping changes, especially to Oregon’s medical marijuana program.

Below is a bullet point list of the bill’s key provisions, cribbed from one of the Staff Measure Summaries for the Joint Committee on Marijuana Regulation. I have highlighted provisions of emphasis in bold, and points of superior emphasis in bold + italics.

  • Allows Oregon Liquor Control Commission (OLCC) authority to prevent the illegal transfer or diversion of marijuana from OLCC licensees.
  • Allows an OLCC marijuana licensee to be designated by the OLCC as an exclusively medical licensee.
  • Increases the number of commissioners on the Oregon Liquor Control Commission from five to seven.
  • Specifies one of the additional commissioners must be from western Oregon and the other new commissioner from eastern Oregon.
  • Limits the number of commissioners from one political party to four.
  • Allows specified OLCC licensed marijuana producers an additional 10 percent of their existing canopy square footage to produce marijuana for medical use.
  • Requires marijuana producers who do utilize this additional canopy square footage to donate for free 75 percent of the marijuana produced, and allows the remaining 25 percent to be sold to OLCC licensed marijuana businesses.
  • Prohibits an OLCC regulatory specialist from carrying a gun, conducting inspections of primary residences not licensed by OLCC, or ensuring compliance with Oregon Medical Marijuana Program (OMMP) registrants.
  • Allows OLCC to issue a letter of reprimand or to proceed with an investigation of a former OLCC marijuana licensee.
  • Allows an OLCC marijuana licensee to transport marijuana items to, and exhibit at, trade shows or the 2017 Oregon State Fair under certain conditions.
  • Allows OLCC to require persons with a financial interest in a business with an OLCC marijuana license to submit specified information to the OLCC.
  • Adds an identification card from a federally recognized Indian tribe to the list of allowable documents verifying age when purchasing marijuana.
  • Requires marijuana produced and transferred within the OMMP system be tracked by the OLCC tracking system.
  • Specifies funding for the tracking system to be paid from the Oregon Marijuana Account prior to any other distribution.
  • Requires Oregon Health Authority (OHA) to impose an additional fee on marijuana grow sites, processing sites, and dispensaries to pay costs incurred by the tracking system.
  • Specifies timelines for tracking system phase in.
  • Directs OHA to create a database sharing OMMP registrant information with OLCC and the Department of Revenue.
  • Specifies information in the database is not eligible for public disclosure.
  • Moves marijuana labeling authority from the OHA to OLCC.
  • Clarifies that an OMMP cardholder may jointly possess six medical marijuana plants under OMMP in addition to four marijuana plants allowed under Measure 91.
  • Limits the allowable number of immature marijuana plants in possession of an OMMP cardholder to 12 unless their address is a registered medical marijuana grow site.
  • Limits the allowed number of immature medical marijuana plants at registered medical marijuana grow site to twice the number of allowed mature marijuana plants.
  • Allows the Oregon State Department of Agriculture to possess, test, and dispose of marijuana.

The fundamental current running through this bill is the continued transfer of Oregon medical marijuana to OLCC purview, something we have been writing about and predicting for quite a long time. (See our articles here, here, here, here and here.) In this legislative session, Oregon is making a conscious choice to regulate marijuana less like a public health issue (medicine) and more like a revenue commodity (alcohol). In speaking with OLCC and reviewing a few of the other bills in committee, we only expect this trend to continue. I note that this trend is happening not just in Oregon, but in Washington State too, and — like it or not — we expect most other states will follow this trend as well.

Because Oregon’s medical marijuana program continues to be a major source of grey and black market activity, the state is also making a concerted effort at controlling diversion through SB 1057. By requiring medical growers and processors to track their output in the OLCC system or forfeit their registrations, the state is attempting to put an end to 20 years of growers stacking patient cards for profit. As with moonshine stills in the 1930s, these growers will have to decide whether to: (1) meander into the bona fide regulatory fold; (2) continue making medicine for patients at a very small scale; or (3) recede to the illegal market and attempt to evade ramped-up enforcement.

As for compliance dates, each medical grow site, processing site and dispensary (if any OHA dispensaries still exist) must notify OHA prior to December 1, 2017 whether it has elected to remain in the medical program—subject to increased costs and OLCC tracking—or whether it will apply for an OLCC license outright. If the person or entity stays in the OHA program, seed-to-sale tracking must begin on or before July 1, 2018, or OHA will revoke the registration. There is some nuance to all of that (see bill Section 44) but that is the general concept.

Like the notion of taxing medical marijuana sales, eradicating the Oregon Medical Marijuana Program seems to be a third rail down in Salem. So expect the legislature to continue to chip away at the program with bills like SB 1057. At this point, entrepreneurs should be thinking about, and engaging in, the OLCC program exclusively. As we said in October, the OHA regime will soon recede to strictly limited, patient-caregiver relationships. The money there is gone.

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.

TIPSA couple of years ago, I wrote on this blog that we are never not litigating cannabis disputes. As a direct result, we have written dozens of articles on the subject. This year and next, as the adult use market expands into key states like California, the sheer number of cannabis businesses coming online will result in a further expansion of contested matters. We wish that were not the case, but we have been staffing up our Oregon, Washington and California office with litigators, partly in response to growing demand for cannabis dispute resolution services.

Some cannabis business disputes are short and sweet; others protracted and difficult. Common sense would dictate, and we have always found, that the more efficient and disciplined a litigant is, the better the result, from both a cost and results perspective. The most efficient litigants are those who work closely with counsel to take responsibility for their case, set a goal at the outset, and keep that goal in mind throughout the process.

Here are five tips for working with an attorney to resolve a cannabis business dispute.

Hire the right attorneyAs much as we hate to say it, it is easy to hire poorly in the context of cannabis disputes, for a couple of reasons. First, many lawyers who work in this industry come from a criminal law background and rode the wave into legalization. Much like a business attorney would struggle in drug court, attorneys who lack business law experience are ill equipped to handle corporate cannabis beefs. Second, many good business litigators are still unwilling to service the industry, given the status of federal law. And third, many business litigation firms that do wish to work with the industry are new to cannabis law and its steep learning curve. Most cannabis disputes have significant underpinnings of state and local administrative law and policy. These rules run into the several hundreds of pages, are constantly evolving, and generally are supplemented by unwritten agency policies. Even the brightest non-industry lawyers incur significant time and client expense just getting up to speed.

Be Organized. The most critical client-side component to any litigation is organization. When you hire a lawyer, assemble any and all relevant materials in one place (contracts, emails, voicemails, texts, etc.), and transmit these materials in aggregate to the attorney. Supplement them, if you can, by a chronology and/or written summary of your case. This will save the attorney significant time and energy in assembling the facts of your dispute, and will result in less back-and-forth from the attorney attempting to elicit information he or she may need for your case.

Put all of your cards on the table. Don’t shield any information from your attorney that you find embarrassing, or that you think is less compelling than other facts, or that you feel may damage your case. You should feel incentivized to pass along anything relevant, or even possibly relevant, for four primary reasons: (1) everything you pass along will be protected by the attorney-client privilege; (2) anything damaging will almost certainly come out at depositions or elsewhere in the discovery process, anyway, and is best dealt with beforehand; (3) when an attorney lines up the facts of your case with the legal elements of potential claims, minor facts, which you may not find compelling, tend to come out of the woodwork and play a significant role; and (4) trust us, we have seen worse.

Step back. Throughout the arc of any litigation, there will be a volley of correspondence, filings and other developments between the parties – shots across the bow. When a development occurs, you may feel a very strong urge to immediately pick up the phone and offer an extended hot take on the latest item. Most of the time, these conversations are less productive than if both litigant and attorney allow the new information to percolate in advance of a structured conversation. The one exception here is any development that truly requires immediate action, and those developments are rarer than many people think. We realize that stepping back is easier said than done, but taking a measured approach throughout the arc of a contest preserves energy and controls costs. Think of litigation as a marathon, not a sprint.

Be Realistic. As attorneys, we like to think we excel at getting efficient, advantageous results for our clients. And we generally do, within the realm of the possible. For example, we may be able to recover your costs or attorney fees in litigation, but only if you have a contractual or statutory basis for doing so. Similarly, we may be able to resolve a dispute with a strong letter or a well-written complaint, but only if the other side is acting rationally. Understanding the strengths and weaknesses of your position will lead to a realistic appreciation of the gamut of possible outcomes. At that point, you and your lawyer can maximize every tool at your disposal to pursue, and attain, the best possible result.

 

Marijuana lawIf you hadn’t noticed, the federal government was set to shut down on Friday due to lack of funding. Thankfully, our House and Senate representatives reached a tentative deal yesterday morning to avoid that. Better still, the budget deal extends the Rohrbacher-Farr Amendment provisions, which prohibit the U.S. Department of Justice from spending money to interfere with implementation of state medical marijuana laws. The legislation should pass later this week.

The new medical cannabis rider will likely be referred to as the Rohrbacher-Blumenauer amendment, or something similar, as Earl Blumenauer (D.-OR) has replaced outgoing house member Sam Farr as a co-sponsor of the rider. Here is the rider’s current proposed language:

SEC. 537. None of the funds made available in this Act to the Department of Justice may be used, with respect to any of the States of Alabama, Alaska, Arkansas, Arizona, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Illinois, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, and Wyoming, or with respect to the District of Columbia, Guam, or Puerto Rico, to prevent any of them from implementing their own laws that authorize the use, distribution, possession, or cultivation of medical marijuana.

By our count, that’s 44 states, plus D.C., Guam and Puerto Rico. For some reason, at least two states with new medical cannabis laws are left out. Those states include North Dakota, where voters approved a medical marijuana ballot initiative in November, and Indiana, whose governor signed a restrictive CBD medical cannabis bill into law late last week. Hopefully these omissions were just an oversight and North Dakota and Indiana make the final cut.

The FY2017 budget deal also extends protection of state industrial hemp programs from federal interference, and prevents Washington, D.C. from spending its own money to tax and regulate marijuana sales. An overview prepared by House Democratic Appropriations Committee members noted that the bill does not, however, include language protecting banks from penalties for working with state-legal marijuana businesses, which some in Congress had pushed for.

Like everything else in the spending bill, Section 537 is not a permanent solution of any sort – it merely kicks the can down the road until September 30, when FY2017 ends. Section 537 also is not the long-term fix medical (and adult use) cannabis businesses need, especially in the era of Jeff Sessions and a brutal executive branch.

Looking ahead, we do know from conversations with Rep. Blumenauer’s office that FY2018 legislation being drafted by lawmakers includes extension of the helpful Section 537 language. We also know that most of President Trump’s large proposed cuts take place in the FY2018 budget, and that his cuts do not include Rohrbacher-Blumenauer– at least for now.

But this is where it gets tricky. If medical marijuana safeguards are not present in the FY2018 House proposal, supporters will have to push for amendment on the House floor or in the Senate Appropriations Committee. That’s a tough slog, because House leadership has begun to restrict the scope of policy riders allowed to come to the floor. Last summer, for example, proposed amendments on banking services for marijuana businesses, and on Washington, D.C.’s ability to spend money regulating cannabis, were blocked from floor consideration altogether.

Note that over the past few years, Rohrbacher-Farr has withstood DOJ challenges and garnered a significant uptick in support. In 2014, the measure was approved in the House by a relatively narrow vote of 219-189. In 2015, the approval margin grew to 242-186. Since the last House floor vote, several more states have enacted medical or adult use cannabis laws, and a number of prohibitionists who opposed those measures have been replaced with freshman supporters.

Today, cannabis reformers are confident that if they can get an FY2018 amendment to a House vote, it will easily pass again. It also appears likely that advocates have the votes to pass a broader amendment protecting all state marijuana laws from federal interference — including those allowing recreational use. A measure along those lines came just nine votes short of passing on the House floor in 2015.

Why Congress won’t just change the law, rather than restricting its enforcement, is a question for another day. For now, though, medical marijuana businesses can breathe a bit more easily, at least until September 30.

Oregon cannabis attorneys lawyersWe often work with Oregon cannabis companies that undergo ownership changes either during the licensing process, or shortly after license issuance. In some cases, this happens by design: the company is structured to take on investors, and the offering process overlaps with the state license application. In other cases, an LLC member or a corporate shareholder may depart due to a buyout or disagreement. Whatever the situation, ownership transitions require careful consideration of the state of the license, or pending application.

As with all states that license pot businesses, Oregon has rules around required disclosures before the state will issue a license. The look-see process in Oregon is similar to that for liquor licensing — and both licenses are given by the Oregon Liquor Control Commission (OLCC). In short, Oregon wants to ensure: (1) it is not issuing cannabis licenses to undesirable parties; (2) it can follow the money a cannabis business will generate (or at least try to); and (3) it has satisfied the feds that the state is running a tight ship. The specific disclosure criteria apply not only to license issuance, but to changes, as well.

Compared to other states, Oregon is straightforward when it comes to changing the ownership structure of a cannabis licensee– at least in the minds of us attorneys, and at least under the most recently adopted version of the Oregon rules. Here are two key rules to note:

  • OAR 845-025-1160(4) provides that “[a] licensee that proposes to change its corporate structure, ownership structure or change who has a financial interest in the business must submit a form prescribed by the Commission… prior to making such a change.”
  • OAR 845-025-1160(4)(d) provides that “[i]f a licensee has a change in ownership that is 51% or greater, a new application must be submitted in accordance with OAR 845-025-1030.

Let’s take them one at a time. Read literally, OAR 845-025-1160(4) requires any licensed cannabis business to notify the OLCC before making an ownership change. This would include a business bringing on a minority investor, given the broad definition of “financial interest” elsewhere under the rules. That said, OLCC policy is not to read this rule as written in every case. Instead, if a licensed cannabis business wishes to add a party who does not rise to the level of an “applicant,” it may do so prior to alerting the OLCC. For guidance on who must be listed as an “applicant,” start here.

When the rules around “financial interests,” “applicants” and changes in ownership were revised again in January, we had several Oregon cannabis clients undergoing structural changes. Our lawyers worked with the OLCC to gain an understanding of the new rules and policies in the context of these changes, but we cannot say whether the agency’s policies will remain flexible on the timing of disclosure of non-applicant ownership changes. That is the story today, however, and we are pleased that the OLCC has taken this pragmatic approach.

With respect to OAR 845-025-1160(4)(d) and ownership shake-ups of 51% or more, there is no wiggle room in the “new application” criterion. We have written before that you cannot sell an Oregon license: instead, the OLCC works with the new applicant and the outgoing licensee concurrently. Assuming the incoming party is eligible for licensure, the OLCC arranges with the departing licensee to surrender its papers on the day the new license issues.

Ultimately, we do not recommend that an applicant or licensee make changes of any type to its ownership structure without first alerting the OLCC and we strongly recommend our clients run these changes by us first as well. This ensures the proper steps are taken so as to avoid violating some internal company agreement or governing law and it also ensures that the company paperwork is properly executed, whether it’s a buy-sell agreement, admission agreement, or other species of contract.

Finally, we recommend that thoughtful consideration be given to business structure and composition before applying for licensure. It may be tempting to acquire your cannabis business license as quickly as possible and then sort out your ownership issues on the back end, but this approach creates headaches that may be difficult or even impossible to cure. It’s good to understand Oregon’s change-in-ownership rules, but it’s better not to have to use them.

Buying and selling cannabis businesses We like to blog about buying and selling pot businesses. It’s a rich topic and the transactions can be memorable for both entrepreneurs and attorneys. In our recent posts, we have canvassed subjects from diligence items for buyers to checklist items for sellers. We also have covered important transactional topics such as how much your cannabis business may be worth and what you can actually sell. Today’s entry covers a structural part of many business sale agreements: the earn-out.

An earn-out is a contractual provision that entitles a seller to additional compensation in the future, if the business achieves stated financial goals. Earn-outs are used when the asking price for a business is more than a buyer is willing or able to pay up front. A well drawn earn-out can bridge the valuation gap between an optimistic seller (pretty much all of them) and a skeptical, cash-strapped, buyer (just some of them). It can also provide a buyer with additional financing. In an industry where hard money is the rule and bank loans are not available, that can be compelling.

The primary objective in an earn-out is to allow the buyer to make payments over time. The earn-out may also require the seller to step into a consulting role post-sale, and actually “earn” the post-transaction payments. In those cases, it is important to clearly outline the parties’ expectations. This scenario makes for a less clean break, but sometimes a seller has invaluable expertise and experience—particularly in a local marijuana market—that can be passed along with the sale.

In addition to seller support, there are many factors to consider in negotiating an earn-out agreement. Five important ones include: (1) the earn-out period; (2) payment structure; (3) payment schedule; (4) performance matrices; and (5) accounting standards. Earn-out payments may also be capped or uncapped, and the parties can stipulate that future events (like federal enforcement action, for example) will offset earn-out payments. Depending on the type and size of the deal, and the parties’ personalities, an earn-out can be simple or extremely complex.

If the goal is to keep things simple from both a payment and audit perspective, the parties will choose an easy-to-peg accounting and payment metric. For example, sellers often suggest an earn-out based on sales, because this line item is never disputed and the calculation is simple. A buyer, on the other hand, may push for an earn-out based on net income, as this metric accounts for all nuances of a business’ operations. A middle road would peg the earn-out at a multiple of EBITDA, usually over a certain number and in each relevant year. Ultimately, simpler calculations mean fewer disputes.

Given the nature of federal law, the earn-out metric for a pot business must also consider factors mainline businesses needn’t entertain. One of these is the oppressive effect of IRC 280E, the tax code provision that cuts into marijuana business profits. Another is licensing implications at play in the relevant state: readers of this blog know that states have strict rules on who can hold a financial interest in a pot business, and how that interest may be postured.

At the end of the day, many deals in the cannabis industry are structured to account for a lack of institutional financing. Like the marijuana sale-and-leaseback or the ubiquitous seller carry, an earn-out may be a way for a cash-light market entrant to gain a toehold in state-legal cannabis. We expect that earn-outs will remain an attractive option for the industry until things change at the federal level. Given the current shape of things, that could be a while.

Happy 4/20.