In addition to my work on corporate, finance, and transactional issues with marijuana-related businesses, I also work with my firm’s foreign direct investment group. We have been getting a lot more interest recently about foreign investment into the U.S. cannabis industry, so today’s post will be a brief primer on some of the legal issues involved in this tricky space. As would be expected, much of this interest is from Canada, Spain, Israel, The Netherlands and Germany, with a bit from Croatia, Chile and China as well.
What does foreign direct investment mean? In general, foreign direct investment (FDI) refers to any type of cross-border transaction where a company or investor from Country A invests money in a company located in Country B. It generally doesn’t refer to dumping money broadly into stocks and bonds — it is specifically about a concentrated single-enterprise investment.
FDI exists in several forms. Foreign investors can start a new company and can finance and build it from the ground up. They can participate in a joint venture with U.S. partners. They can wholly or partially acquire a U.S. business. They can also take a lighter touch, where they provide primarily branding and process support while having U.S. parties take on the bulk of the financial risk — the basic franchise model.
State Cannabis FDI Issues. In the marijuana industry, we have already seen large FDI projects in cannabis ancillary services. Foreign investors have opened up domestic companies for the manufacture and import of cultivation equipment like grow lights and hydroponic equipment, processing equipment like automated trimmers and extraction machines, and associated inputs including soil, fertilizer, vapor pen batteries and cartridges, and more. We have also seen large amounts of foreign money come in for cannabis real estate projects. In addition to buying the real estate, the foreign investors put money into greenhouses, grow lights, storage facilities, and more to offer turnkey cultivation and processing facilities for lease to local businesses. These companies are largely unregulated at the state level, and their foreign investment issues are similar to non-cannabis businesses, dealing with things like registering as U.S. taxpayers for partnership taxed businesses, complying with FIRPTA, and dealing with immigration issues.
For firms directly involved in the buying and selling of cannabis, state restrictions become more of a concern. States like Washington do not allow anyone who is not a state resident (much less not a U.S. resident) from having any profit interest in a marijuana business. Even Oregon, which has the most liberal ownership restrictions in the country for marijuana businesses, presents some unique issues. State regulations and state laws are written with U.S. residents in mind. Though Oregon does not require state or even U.S. residency to have an ownership interest in a marijuana business, it is unclear how Oregon would deal with foreign owners that need to get a criminal background check. Neither state officials nor the FBI are likely to have any real information on foreign nationals that haven’t had prior contact with the United States. Questions remain regarding how states would deal with foreign owners of marijuana businesses.
What about federal criminal law? The Federal Controlled Substances Act doesn’t differentiate between activities that are international, interstate, or fully intrastate in nature. Possessing, manufacturing, and distributing marijuana are illegal federally regardless of where the company’s owners live. Still, there are a couple of criminal statutes that add fuel to the fire when interstate and international commerce are involved. 18 U.S.C. § 1952, for example, criminalizes traveling or using the mail in interstate or foreign commerce with intent to distribute the proceeds of marijuana sales.
More questions arise when considering foreign ownership in the context of the Department of Justice marijuana enforcement memoranda that cannabis-legal states are working under. The main takeaway from the August 2013 Cole Memorandum was that if the states want to keep federal law enforcement away, they need to make sure their regulations prevent state license-holders from violating the various federal enforcement priorities. One of those priorities was that state regulations need to prevent “revenue from the sale of marijuana from going to criminal enterprises, gangs, and cartels.” If the state and federal criminal background check databases don’t have extensive coverage on foreign crimes, how can the state have faith that the foreign investors don’t fall into one of those categories? For now, with no broad pronouncements coming out, it appears that the federal government is taking a wait-and-see approach to foreign ownership of state cannabis businesses. It is up to state cannabis business participants and the states themselves to ensure that foreign owners do not violate federal enforcement priorities.