Cannabis Business LawyersOur cannabis business lawyers are always getting pitched on “creative solutions” to the cannabis industry’s banking problem. Because marijuana is still federally illegal, most banks will not provide financial services to marijuana businesses, even though FinCEN issued guidelines to allow financial institutions to provide bank accounts to the state-legal pot businesses. Many tout Bitcoin as the solution.

Bitcoin is viewed as the world’s first completely decentralized currency. Unlike the Dollar, the Euro, the Yuan, etc., no central government manages or backs Bitcoin. It is also called a “cryptocurrency” — a digital currency that uses encrypted services to generate units of the currency and to transfer funds.  You can read primers on it here and here. Using a Bitcoin wallet enables customers and businesses to engage in transactions without using paper currency and without going through an intermediary institution like a bank. Its chief appeal to the marijuana industry is that allows for currency transfers with little to no need for a bank. There are though significant issues involved with using Bitcoin in the marijuana industry and law enforcement associates Bitcoin with the illegal narcotics trade (see the Silk Road).

At the beginning of January, Washington State Senator Ann Rivers (who was instrumental in securing passage of SB 5052, which essentially wound down Washington’s existing medical marijuana cooperative system) proposed a bill to ban Bitcoin in Washington State’s marijuana marketplace. Senator Rivers says that her proposed bill to ban Bitcoin was brought to her by “an organization” looking to preserve “the transparency that we have in our legalized marijuana system in our state.” The eight-page SB 5264 adds to the definitions section of RCW 69.50.101 (Washington’s Controlled Substances Act) the term “virtual currency,” and then proceeds to ban it for marijuana sales. Under the bill, “virtual currency” would be defined as follows:

a digital representation of value used as a medium of exchange, a unit of account, or a store of value, but does not have legal tender status as recognized by the United States government. “Virtual currency” does not include the software or protocols governing the transfer of the digital representation of value or other uses of virtual distributed ledger systems to verify ownership or authenticity in a digital capacity when the virtual currency is not used as a medium of exchange.

The bill then states that “[a] marijuana producer, marijuana processor, or retail outlet must not pay with or accept virtual currency for the purchase or sale of marijuana or any marijuana product.”

The Bitcoin ban bill was debated at length in Olympia and Senator Rivers’ cited to the Cole Memo prohibiting the “shrouding” of anyone who participates in Washington’s marijuana industry as its justification. Senator Rivers contends that BitCoin can’t meet the 2014 FinCEN transparency guidelines. Tom Parker and Kenneth Berke of PayQwick also testified that Bitcoin does not satisfy FinCEN transparency guidelines and allowing it for Washington State marijuana businesses will invite federal enforcement and thereby harm the cannabis industry as a whole. On the other side of the argument, Ryan Hamlin and Jon Baugher of POSaBIT testified that BitCoin is perfectly traceable, auditable, verifiable, and transparent, and that the state needs to better understand BitCoin transactions before it bans its use in the marijuana industry. James Paribello, legislative liaison for the Washington State Liquor and Cannabis Board, testified that the Board essentially has no opinion on the use of BitCoin or its proposed ban, so long as the Department of Financial Institutions allows it, which it currently does.

Given the uncertainty of the state-legal marijuana industry under Trump and Sessions and the precarious staying power of the Cole Memo and the FinCEN guidelines, Bitcoin may just be too risky for Washington State’s marijuana industry. But if the state can get educated about and comfortable with BitCoin, virtual currency may be here to stay in the Evergreen State’s marijuana industry.

Stay tuned.

Cannabis lawyersIt is easy to burn through money when starting a business. Expenses like market research and professional fees can kick in almost immediately, and capital expenditures like inventory, property and tools are unavoidable beyond the early stage. In addition to these traditional start-up costs, the state-legal cannabis industry brings regulatory add-ons, like licensing and permit fees, and, in some jurisdictions, requirements for plans by architects and engineers. Like any business, starting a pot business can be expensive. Only more.

In our Washington, Oregon and California offices, our cannabis business lawyers speak daily with entrepreneurs in the early stages of cannabis business planning. Given the recent advent of state-legal marijuana, even our most “seasoned” industry clients and those with industry cachet have operated above board for only a couple of years. Because the regulated cannabis industry is a start-up industry, everyone needs to monitor costs closely. Those costs include professional fees.

At the onset of business planning, it is tempting to engage a range of professionals to handle any foreseeable matter. Like any industry, the cannabis industry has its experts: lawyers, accountants, realtors, vendors and any variety of “consultants.” Many of these individuals can be helpful along the way, if used correctly. The key is knowing when, whether and how to engage each provider in the life cycle of your cannabis business.

Lawyer. Potential clients are surprised when we sometimes send them away. In Oregon, for example, licenses are tied to locations, and unless there is an urgent need for legal services (i.e., the business is being capitalized), we often suggest that would-be clients return after they have sourced a target property. At that point, we can hone in on zoning issues as well as the lease or sale transaction, while structuring the business to boot. Otherwise, with no location in mind, there is a tendency to run up fees unnecessarily, and before the point where a lawyer is truly required.

Accountant. In the cannabis industry, it is critical to have an accountant (as well as a lawyer) who understands the quagmire of IRC 280E. An accountant versed in the cannabis industry will be able to assess the pros and cons of various tax elections in the context of a tax code tilted against pot businesses, and offer ongoing planning advice. Like cannabis business law, cannabis accounting is highly specialized, but the right CPA can make all the difference.

Realtor. Many aspiring pot businesses attempt to find a realtor. Unlike lawyers or accountants, realtors generally do not work for an hourly fee; they typically get paid when a deal closes. In the marijuana industry, realtors are not enthusiastic about pounding the pavement for smaller placements, like a dispensary lease. The commission simply isn’t there. But, if you are looking at a larger transaction—and specifically to buy a building or a piece of property—a good realtor can be a real asset.

Vendors. Most cannabis businesses enlist a couple vendors at the onset of operations. The two most commonly retained vendors are insurance providers and security operators. Regarding insurance, cannabis businesses need the same products as other small businesses. This tends to include property insurance and workers’ compensation, in a highly specialized field. As to security, the cannabis industry is unfortunately still a cash game for the most part. Not only are security providers required for property set up and installation, but they are often hired to transport cash during business operations.

Consultants. There are innumerable cannabis consulting firms nationwide, but many of them do not add value. For this reason, we have cautioned (on more than one occasion) to be wary of expensive consultants, particularly at the outset of business operations. Most of what a consultant can provide can also be obtained for free, from other industry sources. Anything worth paying for can almost always be got somewhere else.

Cannabis real estate lawyersSince licenses to grow, process, or sell cannabis are usually tied to a specific real property location, it is not surprising that cannabis businesses often need real estate help. The following are some basic points we try to convey to our cannabis clients about real estate in a cannabis context.

1. Location. Location. Location. Choosing the right location is important for any business, but this is especially true for a cannabis business. Finding a suitable and state-and-local-law-compliant location for a marijuana business can be difficult. Most states, cities, and counties limit where marijuana businesses can physically operate. States and cities often require cannabis businesses be at least 1,000 feet away from schools and parks because federal criminal law sentencing guidelines tack on extra sentencing time for cultivating, processing, or distributing cannabis within 1,000 feet of a school or park. Local zoning laws can also significantly restrict location options and these can vary greatly from local government to local government. Regulations that limit the number of cannabis stores or grow sites allowed in a given county are also common, as are moratoriums and outright bans.

2. Find a Landlord With Whom You Can Work. Most commercial landlords will not rent out their space to a cannabis business. Because cannabis remains illegal under federal law, landlords can face arrest for violating the federal Controlled Substances Act or, more realistically, losing their property via a civil asset forfeiture. Look what happened to the landlord in the Harborside case. The landlord-tenant relationship can be strained if the landlord is not informed of the nature of the tenant’s business and the risk associated.

3. Make Sure Your Lease Works for the Cannabis Industry. “Boilerplate” lease agreements do not work for cannabis businesses. For example, the typical Commercial Broker’s Association lease states that any illegal activity on the property will constitute a lease default. We usually write our commercial marijuana leases to forbid only those actions that violate state law and federal law with the exception of the federal Controlled Substances Act. Commercial leases also typically contain a provision governing the activities permitted on the leased property. If the tenant is a marijuana retailer, the permitted use provision should explicitly permit the “retail sale of marijuana.” Leaving the permitted use provision vague only increases the chances of the cannabis business tenant being found in breach of the lease for having conducted an activity not permitted on the property.

4. Know Your Property. Our cannabis real estate lawyers are far too frequently brought in on long simmering real estate deals only to have to tell both sides that there will need to be major changes in the deal points for the deal to work at all. Before getting too far down the negotiating path, it is wise to at least secure a real property report. These reports will show ownership history, encumbrances (such as mortgages) on the land, and any easements or other restrictions on property use. For example, if there is an unpaid mortgage on the land, the holder of that mortgage can foreclose on the property, even though the current owner was not the one who entered into the transaction. Even a tenant who is not purchasing the property should be informed of the property’s history and the risks associated with that property.

For more on cannabis and real estate, check out the following:

Help WantedTwo weeks ago, we wrote that the Oregon legislative session would begin this Wednesday, and that 28 proposed cannabis bills graced the legislature’s website. Since that time, we caught wind of SB 301, a tidy little bill that would abolish the right of Oregon employers to fire their “at will” employees for off-duty cannabis use. To our knowledge, Oregon would be the first such state to take this step.

SB 301 is short, sweet and even subtle, as it refrains from mentioning the words “cannabis” or “marijuana” altogether. Instead, it amends an existing statute that prohibits an employer from mandating “that any employee or prospective employee refrain from using lawful tobacco products during non-working hours.” (Our emphasis.) Proposed SB 301 removes the “lawful tobacco products” language, and replaces it with language covering any “substance that is lawful to use under the laws of this state.” Of course, that includes pot.

Like most laws, proposed SB 301 does contain a couple of exceptions. In the first, an employer could require an employee to abstain off-hours when the restriction relates to “a bona fide occupational qualification” (think: safety). In the second exception, employers would still be free to can their employees for “the performance of work while impaired.” Obviously, this could apply to someone who dabs and then walks into work; but it could apply equally to someone who shows up high on prescription drugs, or drunk, or even hung over.

In the case of cannabis, we have written many times—here and elsewhere—about the court-tested right of employers to fire their hapless employees for off-duty use. We have also wondered aloud: why do employers even care? As it stands, Oregon is one of many states that has grappled with these issues: in a well known 2010 case, Emerald Steel v. BOLI, the Oregon State Supreme Court held that even disabled, medical marijuana card holders are not protected from the cudgel of an employer’s zero-tolerance drug policy. Other state courts have ruled similarly.

With SB 301, the Oregon legislature is doing what its citizens should expect: it is considering the effects of state-legal cannabis on peripheral laws, while looking after the civil rights of its citizens. We hope SB 301 passes in something like its present form, and we expect similar changes in other jurisdictions in the coming months and years. If an employee performs her job safely and well, off-duty cannabis use is irrelevant.

 

 

 

 

Cannabis regulatory lawyersOur cannabis regulatory lawyers are in the midst of a few different administrative cases right now dealing with violations of marijuana regulations. In Washington State, the Liquor and Cannabis Board treats its regulatory mandates as “strict liability” rules. This means the onus is on the cannabis business to comply, and a business that violates a regulatory mandate is liable even if it did absolutely everything it could have done to prevent the violation. This sort of strict liability for violating cannabis-focused regulations is fairly common across the country and is just another example of how cannabis businesses even in cannabis-legal states are treated differently from other businesses.

The theory behind strict liability for regulatory violations is that businesses are best positioned to make sure violations do not occur. Businesses need to pony up as many resources as it takes to prevent violations. This strict liability is opposed to a negligence standard, where if the business is found to have acted with reasonable care to comply with the rules, it would not be found liable.

The problem with strict liability, however, is that it can be unfair to businesses that try to have reasonable compliance programs but still slip up. There is no way to prevent employees from flouting the rules from time to time. It happens at every regulated business throughout the country. Employees often see compliance measures as a hindrance to getting their jobs done, and they look for workarounds. But in a strict liability system, a business whose employee violates a compliance program is treated the same as a business that didn’t have any compliance program at all. There is a certain unfairness to that.

The goal of any regulatory agency should be for businesses to have maximum compliance, and the best way to do that is to encourage self-policing. This is why most federal agencies have dedicated programs for regulatory compliance, self-policing, and self-reporting, where penalties against businesses are greatly reduced or even waived if the business follows certain compliance steps.

Washington State voters mandated the State implement this sort of favoritism for liquor merchants “that try” when it passed Initiative 1183, privatizing liquor sales. Under that program, Washington liquor sellers that implement specific best practices to avoid selling liquor to minors will face reduced and deferred penalties if they accidentally make such a sale. Regulatory partnerships like this benefit businesses by giving them guidelines on how to operate and they also benefit the public as a whole as they will lead to fewer overall sales to minors because businesses are so incentivized to implement effective programs.

For marijuana in Washington, the best that cannabis businesses can rely on are that the regulations allow the Liquor and Cannabis Board to reduce penalties if a cannabis business with violations can demonstrate that its business policies and/or practices will reduce the risk of future violations. And though mitigation like this is helpful, it is not the same as a standardized compliance program responsible companies can join to get across the board penalty mitigation.

Marijuana businesses should band together to demand such a “voluntary” compliance program. As everyone knows, regulatory costs for cannabis businesses are high, and even the most compliant cannabis company will have employee slip-ups or regulatory misunderstandings from time to time. The competitive aspect is also key; so long as cannabis compliance program guidelines are not set across the board, businesses will try to comply with the rules at the lowest cost, to the detriment of the compliance programs. Setting up minimum compliance guidelines will allow participating cannabis businesses to know their competitors are either on the same playing field as they are, or that they are risking harsher penalties for not being part of the voluntary compliance program. It’s a win-win for compliant cannabis businesses and for the state. Yet no matter what sort of state-law program to which your cannabis business is subject, it pays to constantly self-audit your company to work towards full compliance. See Understanding and Managing Cannabis Legal Compliance and Cannabis Compliance Audits.

What are you seeing out there? What are your thoughts on all of this?

Cannabis Business LawyersAs cannabis business attorneys, we tend to have a good pulse on what is going on in the cannabis industry and especially on the false claims people make about the cannabis industry. I’ve previously written about the top ten industry red flags and the top ten industry red herrings. In this post, I discuss the top six bogus claims we keep hearing about the marijuana industry:

  1. President-elect Donald Trump and appointee U.S. Attorney General Jeff Sessions will not impair state-legal marijuana. Nobody can know or even predict what this new administration will do with state-legal marijuana. President-elect Trump has been all over the place on cannabis and who’s to say whether he will remain consistent on states’ rights when it comes to marijuana (despite his campaign rhetoric)? What we do know is that so long as Congress continues to renew the medical marijuana protections in the appropriations riders, state law-compliant MMJ operators are unlikely to be shut down by the Department of Justice. Unfortunately, the same cannot be said of recreational marijuana businesses. Both a lot and a little has been made out of Jeff Sessions‘ confirmation hearing, but the bottom line is that he really didn’t say much one way or the other that helps to discern what will happen with cannabis in the next four years. In the end, it’s anyone’s guess as to what Trump and Sessions have in store for state-legal marijuana.
  2. CBD-Oil is legal everywhere in the U.S. Many “CBD” companies tout this claim and many consumers believe it to be true. CBD is not legal everywhere. The DEA considers CBD with active THC to violate the federal Controlled Substances Act and it recently made this clear when it announced that it considers CBD derived from hemp to be illegal and made clear that it will be stepping up enforcement actions against online and interstate CBD sales. We’ve previously written on how the FDA goes after anyone making medical claims for CBD, whether for humans or pets.
  3. Florida medical marijuana is going to be huge. I have been getting a steady stream of calls and emails from folks wanting a Florida medical marijuana license or to start preparing for registration to start a Florida cannabis business under Amendment 2. Far too many of these people see Florida as an opportunity for nearly guaranteed riches. The problem is that Florida cannabis is already dominated by seven Charlotte’s Web nurseries and this will not change unless Florida opens its medical marijuana marketplace to others. Not only that, even if Florida allows new applicants for cannabis licenses, its application process will surely be expensive, lengthy, and full of red tape. So though Florida’s cannabis industry will eventually be huge, in the meantime, patience is called for and you should avoid any and all “how to get rich quick on Florida cannabis” seminars and pot “colleges.” In the meantime, here’s our primer on some of what you can and should do now to prepare for Florida licensing/registration.
  4. I’m just a landlord to a marijuana business so I cannot be criminally liableUnfortunately for landlords, they can face criminal prosecution for aiding, abetting and conspiracy under federal law and also asset forfeiture. Just look at what happened to the landlord in the Harborside case if you still believe otherwise — thankfully, that case was eventually dismissed. If you are a landlord to a cannabis business, you should get educated on your criminal liability and on federal and state forfeiture laws. Most importantly, your lease agreement should be drafted to ensure your tenant behaves.
  5. Yesterday, I was a criminal defense attorney. Today, I’m a marijuana securities and business lawyer. We hear of this sort of claim constantly and guess what, 99 times out of 100, you would be better off using a business lawyer with no cannabis experience than a criminal cannabis lawyer who now claims to know complex business and securities laws overnight. The sad truth is that criminal cannabis lawyers in states that have legalized cannabis are finding themselves without clients and they are having to scramble to re-brand themselves as cannabis business lawyers. But branding and reality are two very different things, and firms with actual expertise in both business law and marijuana regulatory law are far too often called on to clean up expensive messes left by these unqualified lawyers. For tips on how to choose an experienced cannabis business attorney, go here.
  6. The cannabis industry is worth billions so I need to invest now, now, now. I never tire of writing about the hustlers and hucksters who insist investors immediately dump gobs of money into the marijuana industry. I received an email just last week with the following advertisement:

 

The $100 billion marijuana industry is dominated by penny stocks. With legalization sweeping the country, these penny stocks have already begun skyrocketing in price. Take action TODAY, and you have a once-in-a-generation opportunity to turn a tiny $50 investment into an absolute fortune.

Federal illegality makes it difficult to secure a bank account and the IRS continues to tax the industry to death under 280e. Cannabis investors can face criminal liability (just like landlords) and they can find themselves subject to asset forfeiture for financially supporting illegal entities and activities. Due to the newness of this industry, fraud is not uncommon. Investment in the ancillary, support sectors (like tech or real estate development) is a bit more straightforward and a bit less risky, but all investors in cannabis need to be vigilant, especially until we get a better feel for what the Trump administration has in store for us. For more on marijuana stock fraud and scams, see here and here.

So the next time you hear anyone make a too-good-to-be-true statement about the cannabis industry, at least be sure to check it out before buying in.

Cannabis estate planningLike many business owners, those who find success in the cannabis industry often want to leave their assets to friends and family at death. Unlike many other business owners, however, successful cannabis business owners’ largest assets are likely to be tied to what the federal government considers an illegal criminal enterprise. Whether you wish to bequeath a large grow operation, an ownership interest in a dispensary, or even a small personal stash, transfers of cannabis-related assets at death present unique challenges for individuals and estate planning professionals. No matter the situation, the basic question remains the same: What happens to my weed when I die?

Law professor Gerry W. Beyer of Texas Tech and Brooke Dacus published a law review article last year that sought to answer this question. It is an essential read for anyone in the cannabis industry considering how to arrange their affairs and the distribution of cannabis-linked assets at death. As is the case with many issues surrounding state-legal cannabis, a critical issue is the differential treatment of marijuana under state and federal law. Even in the realm of state law, however, the use of cannabis – even as part of a state-legal medical marijuana program – can raise issues related to one’s capacity to execute a will or even receive distributions from certain trusts. Beyer and Dacus do an excellent job awill actually be seized, it is impossible to know if that will be the case when it is time for a will to be administered.

What is more, a beneficiary may be criminally liable for possessing illegal materials like cannabis by function of the administration of the will itself. Beyer and Dacus draw a poignant analogy to a case where a beneficiary was found guilty of illegally possessing a firearm by a felon after having been given his father’s antique war-era gun at his father’s death and then keeping that gun unloaded in a closet. The court held that the heir’s possession of the firearm in a space the heir controlled was enough to violate the law. Beyer and Dacus also ask whether and to what extent an executor can administer an estate without exposing themselves to criminal liability. At least one federal court case cited by Beyer and Dacus suggests courts will not permit an executor to administer a will that includes cannabis, leaving the door open to penalties or perhaps even prison for someone who does so. It is important to note that cannabis and cannabis-related assets are subject to estate tax regardless of their legality.

Still other issues cloud the presumptive validity of a will executed by a testator who frequently uses cannabis or is under the influence of cannabis at the time of will execution. Though past habitual “drug use” has been found to interfere with testamentary capacity in some instances, Beyer and Dacus suggest most wills will be valid when an individual who uses cannabis is in fact in a state of mind to make estate planning decisions. Nonetheless, cannabis users and business owners should at least consider taking extra steps to demonstrate their testamentary capacity, such as by using a video explaining their intent, for example.

The wave of cannabis reform in the United States has been a game changer in many arenas, including the seemingly mundane like estate planning. Yet law can often be slow to catch up. Cannabis is a multibillion dollar industry on the cusp of even greater expansion, and those who reap the spoils should consider how to best protect and share their success with future generations.

Who knows, maybe someday cannabis estate planning will be a legal speciality.

Cannabis mortgages and bank loansMy law firm represents a large number of cannabis operators in Oregon, Washington and California. Some of these operators own the land they trade on; others simply lease. Whenever we are lucky enough to meet the client before the onset of cannabis activity, our first question is often whether the target property is mortgaged, or if it is owned free and clear. If the property is mortgaged, we ask “by whom?” If the answer is “a bank,” we tend to say, “let’s talk about that for a minute.”

Your standard institutional mortgage contains language allowing the mortgagee/lender to call the loan if the property is being used to conduct “illegal activity.” Lenders won’t budge on that provision: it relates back to federal lending guidelines, and attempting to pare back that language is impossible. If a borrower acquires a bank loan with the secret intention of operating or leasing to a cannabis business, that borrower is running a risk of foreclosure, to say nothing of allegations of fraud.

When a bank discovers that cannabis is being grown, processed, held or sold on its mortgaged property, it has the option, under contract, to call the loan. This means the bank can declare the entire mortgage balance due and owing on the spot. In practice, if a loan is in good standing it won’t always get called; but if a bank learns that cannabis is being traded on the property, a real possibility exists that the mortgage will get called. And refinancing with the lender will be all but impossible.

Although banks typically do not troll their commercial loans looking for pot merchants, many loans require borrowers to inform lenders about tenants and new leases on the property. When a bank decides to call a loan due to cannabis activity, the bank may give the mortgagor a limited window of time to cure the defect (stop the cannabis activities), or to find alternative lending. Given the realities of business investment and operations, the strictures of leases and the high cost of private lending, this can cause tremendous headaches.

There is no work-around for the “illegal activities” issue in institutional lending, but that hasn’t stopped some folks from trying. Among other creative ideas, we recently saw one owner give a second, unrecorded mortgage to a cannabis operator as “insurance” against the first loan getting called. Not only would this approach fail to prevent the first mortgage from getting called, it would typically allow the first mortgagee to declare the balance of its loan payable immediately, as “due on sale.” Such an action could wipe out the junior, unrecorded mortgage interest in any subsequent foreclosure.

Finding a cannabis property is not always easy, but it’s important to understand how the property is financed (or otherwise encumbered) before you sign a lease or begin operations. If you intend to purchase a cannabis property and cannot pay cash, seller financing is a popular option we have written about elsewhere. Otherwise, it’s hard money or trying to fool the bank. Neither of those is a good business plan.

Cannabis litigation lawyerThough we are hoping 2017 will bring you nothing but prosperity when it comes to your cannabis business. But if you are headed to court in 2017 or even if you are just just sensing a company dispute stirring, the following five tips will help you avoid or mitigate the negative impact of a business dispute.

  1. Make your business relationships crystal clear from the start. The days of handshake deals regarding ownership in a cannabis business are over. You should do no deals of any real size without first getting everything in writing. Operating agreements, bylaws, and shareholder agreements exist to ensure that your company structure and the relationship between its owners is abundantly clear. When starting a company together, you and your fellow owners should have at least some understanding on how your company will be operated and on how such things like equity versus debt, voting rights, sweat equity, preferred returns, owner employment will be navigated. Most of the ownership disputes our cannabis litigation lawyers have handled have been because of badly done initial company contracts and filings.
  2. Perform due diligence on your partners. If you want to increase your odds of avoiding a dispute with your cannabis business partners, the most important thing you can do is to choose your partners wisely. What never ceases to surprise us is how often we are told by a party locked in a life or death ownership dispute regarding a cannabis business is that they barely knew their business partner before they started the business with them. If you are going to start a cannabis business (or any business for that matter), the first thing you should do is find out as much as you can about your putative partner’s financial and business history. You should do this before you sign away your soul and money to joining with this person on a business project. It’s neither rude nor unexpected to ask your potential partners for documentation showing their financial and criminal history–the state licensing regulators will ask for this information anyway. It is even more important to conduct thorough due diligence if you are buying into an existing cannabis business. At minimum, this due diligence should include investigating and analyzing the assets and liabilities of the company and its current owners. Your due diligence should also include confirming the appropriate standing of the company with state and local government regulators, and determining that the company and its principals understand how to comply with state and local laws as well as the Cole Memo. This is routine in every other industry and it must become routine in the cannabis industry as well.
  3. Get your own attorney from the start to protect yourself. More often than not, the company has an attorney looking out for the company’s interests. But it is important to realize that the company attorney is not your personal lawyer and that lawyer will almost certainly be conflicted out of any dispute between you and your business partners and/or investors. For this reason (and many others) you need your own lawyer providing you with your own counsel and protection regarding your role in the company and your ownership rights. This lawyer should also make sure that the written agreements work for you and not against you. This lawyer will also be an asset for you personally if any dispute arises. For more on how to avoid a dispute relating to your cannabis business, check out Five Tips on How to Avoid Cannabis Litigation and How to Avoid Costly Marijuana Business Disputes. For more on how to choose the right lawyer for your cannabis business check out How To Choose Your Cannabis Business Lawyer.
  4. Know your dispute resolution options. Well drafted corporate documents and contracts should cover most possible breakdowns in the business or the relationship and set out the options for handling internal strife. If there is a fight or a tie on a vote, what happens? How are problems resolved and when? Who makes what decisions and how? What about liquidating the business? What about selling an ownership interest and for how much? Can you sell just your membership interest or shares without going through a vote of the members? Can you keep running the business free of your partners if there’s a fight? What about dissolving the company and winding down? What happens if there is a contract breach? All of these things can and usually should be covered in your corporate governing documents or in any other contract you sign, and by doing so, you greatly minimize your likelihood of destructive problems down the road. Your company documents and contracts should also make clear exactly how disputes are going to be handled. Are you going to want your dispute made public in a court, or kept quiet in an arbitration or mediation? It is a lot easier to reach agreement on such things when you are starting your business or your relationship than when you are already in the midst of a hard fought dispute with costly lawyers.
  5. Make sure your lawyer knows what he or she is doing. When hiring a lawyer to help protect you when getting into a cannabis business, you should be sure to hire a law firm with lawyers who know both business law and cannabis law. And when confronted with a dispute involving your cannabis business, you need to be sure to hire a law firm with lawyers experienced in civil litigation (criminal litigation experience does not count here) and cannabis law, if possible. For more on choosing your cannabis lawyer, check out How To Choose Your Cannabis Business Lawyer.

Be careful out there, and have a happy 2017.

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.