marijuana event california
Like this, but with cannabis.

In order for a business to succeed, it has to create a connection with customers. This is especially true if the product sold is one that customers consume. Think about the importance of tasting rooms for wineries, or of tap rooms for breweries (especially craft brewers). These venues allow customers to connect with a product in a social setting, giving those businesses a valuable marketing platform.

When the California state legislature passed the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA), it granted local jurisdictions authority to regulate on-site marijuana consumption for retailers and microbusinesses, and temporary cannabis events. The focus of this post is on temporary events, but first, a quick refresher on the microbusiness license type is in order. A microbusiness is a cannabis licensee that must engage in at least three of the following commercial cannabis activities:

  • Cultivation (up to 10,000 square feet);
  • Manufacturing (Type 6 only);
  • Distribution; or
  • Retail.

All three (or four) of the commercial cannabis activities need to take place on the same premises. If a microbusiness chooses to cultivate, manufacture, and conduct sales, it would give that business a great opportunity to directly connect with its customers and tell a story. This is even truer if the local jurisdiction allows for on-site consumption. (For additional information on the microbusiness license type, see my thoughts here for Leafly Magazine.)

Now, back to temporary cannabis events. The Bureau of Cannabis Control (BCC) is the agency in charge of regulating and issuing temporary cannabis event licenses. If done right, participating in a cannabis event is another great way to connect and build up your consumer base and brand. There are a number of regulations that cover what is allowed at temporary cannabis events. Here are just a couple of highlights:

  • A temporary cannabis event license can only be issued to a cannabis event organizer.
  • A cannabis event organizer licensee is not authorized or licensed to cultivate, distribute, manufacture, or retail cannabis or cannabis products without first obtaining the appropriate licenses or authorizations to engage in such commercial cannabis activities.
  • No temporary cannabis event license will be issued for more than 4 days. Temporary cannabis event licenses will not be issued separately for consecutive days for the same event.
  • An application for a temporary cannabis event license shall be submitted to the BCC no less than 60 days before the first day of the cannabis event.
  • Cannabis sales at the event can only be conducted by a licensed cannabis retailer or microbusiness license holder.
  • Cannabis goods sold on site must be transported to the site by a licensed cannabis distributor.
  • Cannabis consumption is allowed but access to the consumption area shall be restricted to persons 21 years of age or older.
  • All cannabis goods at a cannabis event shall be in compliance with the state’s testing, labeling, packaging, and track and trace requirements.
  • Sale or consumption of alcohol or tobacco shall not be allowed on the premises.

What I didn’t mention is where these cannabis special events can take place. Under MAUCRSA, cannabis special events can only take place at a county fair or district agricultural association event. Restricting cannabis events to these locales eliminates California’s largest cities from hosting them. State Assemblyman Bill Quirk is seeking to rectify this through Assembly Bill 2020 (AB 2020). This bill was introduced last week and its most important provision can be found in Section 26200 (a)(1)(e), which provides:

“This division does not prohibit the issuance of a state temporary event license to a licensee authorizing onsite cannabis sales to, and consumption by, persons 21 years of age or older at a county fair or fair event, district agricultural association event, or at another venue expressly approved by a local jurisdiction for the purpose of holding temporary events of this nature, provided that the activities, at a minimum, comply with the requirements of paragraphs (1) to (3), inclusive, of subdivision (g), that all participants are licensed under this division, and that the activities are otherwise consistent with regulations promulgated and adopted by the bureau governing state temporary event licenses. These temporary event licenses shall only be issued in local jurisdictions that authorize such events.”

The goal of AB 2020 is to give ALL local jurisdictions the flexibility to determine when, where, or if they want to hold a cannabis special event within their borders. One of the first supporters of AB 2020 is the city of Oakland, which has shown an interest in adding cannabis sales at its Art and Soul Festival. If Oakland is able to add cannabis to an already popular festival – which might prove difficult, since Art and Soul is an all ages event – other cities are sure to follow.

AB 2020 is eligible to be heard in committee next month. We will be sure to keep you posted on its progress.

California Cannabis hearings
Attend your local california cannabis hearings

One of the first questions clients usually ask our California cannabis lawyers is “where can I operate or expand my cannabis business?” That is because even though Californians voted for the Adult Use of Marijuana Act (a/k/a AUMA or Prop 64) California counties and cities are free to enact their own restrictions on cannabis businesses operating within their jurisdiction.

If you’ve been reading our California Cannabis Countdown series you know that to get a California State cannabis license you first need a license from your local city or county. Further complicating things is that prior to enactment of the Medical Cannabis Regulation and Safety Act of 2015 (MCRSA), many cannabis businesses were operating in an unregulated gray market or with tacit approval from their local government because few jurisdictions had their own medical cannabis ordinances and permitting processes in place. When the MCRSA and AUMA passed, most local jurisdictions created their own licensing processes so as to be able to receive a portion of California’s cannabis licensing fees and taxes.

Last week I spoke to the Marin County Bar Association on cannabis ordinances in Marin County and its municipalities. Except for Fairfax, the rest of Marin is generally not friendly towards medical cannabis. If you’re asking why I’m not talking about adult-use cannabis it’s because you’ve got to crawl before you can walk and Marin’s still figuring out how to crawl when it comes to cannabis. Both Marin County and its cities are still contemplating whether to allow medical cannabis; adult use cannabis is most likely quite some time away.

When a California city or county is trying to decide whether to allow cannabis businesses within their jurisdiction, the first thing they do is hold public hearings, with notice of the hearing made online or in the local paper. If your local government has a relevant listserv, I recommend you sign up as that’s the easiest way to stay informed. Our California cannabis attorneys regularly attend public hearings to advocate for our clients and for the cannabis industry and here is our top five list of what you should do if you would like to see your jurisdiction adopt reasonable/favorable cannabis regulations:

  1. Show up. You know the old saying about how 80% of life is showing up? Well, if you want your local jurisdiction to adopt reasonable cannabis regulations you need to show up to these hearings and voice your support – in large numbers.
  2. Be reasonable. Talk to your neighbors and local businesses. Maybe you’ll find out that a dispensary will be heavily opposed but the community is open to manufacturing, testing, and deliveries.
  3. Know your facts. Your local councilman or supervisor probably has a full-time job; most are volunteers with family obligations and work deadlines. They don’t have time to delve into the weeds (pun intended) of the cannabis industry. They want to be informed so let them know what they can expect in tax revenue. How about crime statistics in similar localities? What percentage of local residents voted for Prop 64? They probably don’t have this information so provide it to them. Help them so they can help you.
  4. Parking and traffic. Besides parking garage owners, no one likes a shortage of public parking. If you’re hoping your jurisdiction adopts a dispensary ordinance make sure you address parking and traffic.
  5. SHOW UP! I mention it twice because it’s that important. Time and time again, we’ve seen local legislators get cold feet because naysayers show up to public hearings in full force while proponents stay at home. You need to be there to balance the scales.

The California state agencies that will issue licenses (Bureau of Cannabis Control, Department of Food and Agriculture, and Department of Public Health) can only do so if your local jurisdiction allows it. Don’t take for granted that your local legislators will allow cannabis businesses in your town. Activism has been a hallmark of the cannabis industry for a long time and if you want to see cannabis businesses (either medical or adult-use) in your jurisdiction of choice, it could very well be up to you to help achieve that.

False advertising claims against cannabis businesses will be coming soon to a court near you. Art by AccordingtoSheBlum (www.accordingtosheblum.deviantart.com)
False advertising claims against cannabis businesses will be coming soon to a court near you. Art by AccordingtoSheBlum (www.accordingtosheblum.deviantart.com)

In Miller/Coors Sings the Blues over Craft Beer Lawsuit, All About Advertising Law discusses a recent deceptive advertising lawsuit against Miller/Coors. The lawsuit alleges Miller/Coors seeks to mislead the public into believing that its Blue Moon beer is a “craft” beer, in part through its intentional omission of the Miller/Coors name from product labels. The article discusses how the “alcohol industry has been a prime target” for such lawsuits, noting cases against Tito’s Handmade Vodka, Maker’s Mark, Jim Beam and Templeton Rye.

The cannabis industry is next.

Cannabis companies and their brands are coming under the same sort of competitive pressures faced by the alcohol industry. In newly legalized states, companies are fighting to establish cannabis brands they hope will dominate the industry for years to come. Perhaps most importantly, the brand you build up now in states like Washington and Oregon could — if you play your cards correctly — propel your business (and the brand reputation you have already developed) into states like New York, Texas, Illinois, Ohio, and California when they fully legalize.

On the flip side, however, mistakes you make now could jeopardize your future branding efforts or even knock you entirely out of the business.

We have already seen instances of companies suing cannabis companies for brand abuse. Hershey’s, for example, initiated multiple lawsuits against companies that branded cannabis-infused chocolate products with names such as “Mr. Dankbar,” “Reefer’s Peanut Butter Cups,” “Hasheath,” and “Ganja Joy,” all meant to parody their non-cannabis Hershey’s counterpart. This type of branding constitutes trademark infringement, as well as tarnishment of the more famous marks.

Unsurprisingly, given the infancy of the legal cannabis industry, we have yet to see any examples of cannabis-related advertising lawsuits. Marijuana businesses, however, are a prime target for these types of lawsuits. It’s only a matter of time and the following are some examples where we see eventual lawsuits.

We are aware of a number of cannabis businesses that tout their cannabis as “organic.” But as we noted in Organic Marijuana: Not Exactly, this presents a big issue:

“There is just one problem with this [listing your cannabis as ‘organic’]. One big problem. Doing so is illegal under federal law. I repeat, it is illegal under federal law to label or describe marijuana as organic.”

Labeling a product as “organic” generally requires a specific certification, and that certification is regulated by the U.S. Department of Agriculture. Congress set forth general organic principles in the Organic Foods Production Act, and the USDA defines specific organic standards. Though alternative certifications exist for marijuana and marijuana products, none are approved or regulated by the USDA, and they therefore do not create an official organic certification.

Any marijuana company that claims its cannabis is organic is opening itself up to a deceptive advertising lawsuit.

We also have real concerns about marijuana businesses that make excessive or inaccurate claims about their marijuana. A marijuana producer that claims its particular strain cures cancer could easily be sued when that claim falls short. A dispensary that wrongly advises a customer that a particular strain is great for sleeping (when it actually is not) could be sued for deception. It goes on and on.

Right now, with our industry in its legal infancy and with few super wealthy cannabis companies, the odds of such lawsuits are still relatively low – though considerably higher than zero. But that is going to change, and for any cannabis business with growth aspirations, now would be the best time for you to review what you are saying, confirm it all as accurate, and map out internal rules and regulations going forward. If you are a producer, you should be talking with the dispensaries that sell your products to make sure that they are not making any promises that you or your products cannot keep, because if they are and something goes wrong, you will almost certainly be a named defendant right with them.

As the cannabis industry grows and gains legitimacy, cannabis business owners will increasingly need to play by the same rules as all other legal businesses. When it comes to branding and marketing, this means that you too need to be certain not to make false or misleading statements in your advertising or on your packaging, and be certain that your brand does not infringe on the trademarks of another company.

cbd utah multilevel marketing

Utah is a unique state for a variety of reasons, but recently it gained additional notoriety because the “world leader in essential oils” (based on global revenue), Young Living Essential Oils, announced it acquired Colorado-based Nature’s Ultra. Nature’s Ultra owns more than 1,500 acres of hemp farms in Colorado and produces “natural, organic, vegan approved, and gluten free” CBD oil with 0.0% THC. 0.0% THC is the key. Why? That is hard to explain without providing a little background about the “clean living” culture in Utah, the MLM (multi-level marketing) essential oil companies that call Utah home, and their drive for producing unadulterated essential oil products to compete with each other in the global marketplace.

Young Living’s acquisition of Nature’s Ultra is a big deal for Young Livng’s more than six million worldwide distributors. It is also a big deal for doTERRA, which is Young Living’s direct competitor (archrival is not an understatement) in this niche nutraceutical market, which also has more than three million distributors worldwide. To put it simply, in the world of essential oils, these market leaders vie for dominance as the company that can produce the purest, basest “essence” of oil from a living plant source. All plant sources are nearly sacred to these companies. Their oils comes from a variety of sources: the peel of a citrus fruit like lemon or orange, the leaves of an herb like peppermint or oregano, or from other parts of a plant like bark (cinnamon) or resin (frankincense). And in the case of Young Living, its CBD oil now comes from hemp plants.

Young Living and doTERRA have battled for more than a decade for market dominance. Young Living has the longer history. It was formed in 1993, and doTERRA’s owners are an offshoot of Young Living, comprised of former Young Living employees who formed doTERRA in 2008. The two companies’ global headquarters are only ten miles apart in Utah County. Each company has taken distinct but similar marketing positions. Young Living touts its products as meeting its “stringent Seed to Seal® Standards”, while doTERRA points to its CPTG® (certified pure therapeutic grade®) standard. There is currently no accepted objective industry standard. Both companies use products sourced from around the world. Both decry the other’s essential oils as less pure than the other. They are not the only essential oil companies in the world, but they are two massive forces in Utah and beyond.

But Young Living and doTERRA are not just essential oil companies. They are MLMs, each with an army of evangelist independent distributors (not employees!) who use their company’s products, train their own downline distributors, and are fiercely loyal to their brand. Utah is the unofficial MLM mecca of the world. Over 15 MLMs have global headquarters in Utah County (yes, just in Utah County). Utah MLMs are actively working to rebrand themselves because the term MLM has, after 30 years, become unpopular in Utah (or in the local vernacular, it has become a hiss and a byword). I recently learned from two midlevel executives at a Utah MLM company that MLMs no longer refer to their industry as MLM; they are now “direct-selling companies.” To me, it sounds a little like po-TAY-to vs. po-TAH-to, but as a student of marketing and branding, I understand the drive to continue to innovate, even if that innovation is a lateral move rather than a forward or upward move.

What does all of this mean for the world of direct-selling essential oils, especially CBD oil? It means that Young Living is about to deploy its massive army of worldwide distributors into our households and onto our social media streams to teach us the virtues of CBD oil. And it means doTERRA’s equally large army of distributors will likely follow suit. And CBD oil-derived products will be appearing with regularity in products available from other Utah MLMs like NuSkin, USANA, Nature’s Sunshine, Neways, and LifeVantage. This will have not just national but international implications because these companies operate in dozens of countries throughout the world through their distributors.

Utah has emerged as a dark horse in the business world for several reasons, but I cannot go into all of them in this post. As we reported last year, Utah joined the ranks of states in voter-approved (and legislature modified) legislation authorizing medical marijuana (but cannabis sounds better for historic and linguistic reasons). This stunned many outsiders (including some of my blogging colleagues) who are only tangentially familiar with Utah’s infamous notoriety as a state with a majority populace that is adverse not only to illegal drugs but also alcohol, tobacco, tea, and coffee use. But to many Utahns (and quasi-Utahns like me who have family roots in Utah or attended school in Utah), the move to legalize medicinal marijuana (not for smoking, only for ingestion, vaping, and topical application) fits perfectly within the general population’s mantra of seeking out the best things, researching to understand them, and taking the positive while abstaining from the negative (which is why smoking medical cannabis is banned). In sum, if there are positive applications of marijuana, like the production of CBD with less than 0.3% THC or – better yet – with 0.0% THC, then the majority of Utahns are more likely to embrace those “healthy” applications. Utahns are, like most humans, compassionate and almost assiduously seek to relieve the suffering of others by whatever means they can. First it will come through 0.0% CBD oil; second through medical marijuana used in its near-purest form for greatest effect and less chance of it being used merely for recreational purposes.

So Young Living’s acquisition of Nature’s Ultra is a logical step in its business model, and it is also a logical step for a company headquartered in Utah. Thanks to the passage of the 2018 Farm Bill, hemp and hemp-derived CBD oil can now generally be transferred across state lines (caveat, caveat, caveat). Colorado had a years-long head start ahead of Utah, so rather than try to make the Utah desert bloom with hemp plants, Young Living has taken a logical shortcut in this recent acquisition. The question remains of what steps doTERRA will take to match strides with Young Living. doTERRA’s distributors have naturally been inquiring when doTERRA will launch CBD oil so that those distributors can market the next best thing to their downline distributors and customers. But doTERRA has no publicized interest in CBD oil. Why not? That is a topic for a future post. In the meantime, the doTERRA distributors will have to source their CBD oil from their competitors.

Banking, intellectual property, food and beverage (and cosmetics), international trade, domestic trade, state laws, ag production contracts, etc., etc. When it comes to industrial hemp, the 2018 Farm Bill upended all of these things. Our cannabis business lawyers have been busy advising a large number of new hemp and hemp-CBD businesses getting in on the fray, as well as some large and well-established companies exploring options in the space. All told, the amount of private capital flowing into hemp and hemp-CBD is extraordinary. And public money is on the way.

Prior totsx tsxv hemp cbd public federal legalization of hemp last December, a few pioneering hemp companies had gone public. These companies acquired listings on secondary Canadian exchanges like the CSE, which is an alternative stock exchange with simplified reporting requirements and reduced barriers to listing. That exchange takes U.S. marijuana companies, too, and there are quite a few of them these days. The CSE caters to micro cap and emerging companies and it does not have the restrictive policies of the old-guard TSX (and TSXV) which is the primary Canadian exchange (and the eighth largest in the world, by market cap). Unlike the CSE, the TSX / TSXV does not allow for the listing of companies invested in activities which violate U.S. law with respect to cannabis.

Still, a lot of companies would like to be listed on the TSX / TSXV. While the listing requirements are intensive by comparison, issuer opportunities are more expansive on everything from international institutional investment to specialized indices to overall visibility. Given all of that, it was interesting last month when we got word from a multi-national Canadian law firm we work with that TMX Group had advised its lawyers that the TSX / TSXV is open to the listing of US hemp and CBD Issuers that operate in states where such operations are legal.

The TSX / TSXV is apparently taking the position that this is not a change in policy, as an issuer must still satisfy the exchange that the issuer complies with all applicable laws in the jurisdictions in which it operates. However, the exchange is now generally satisfied that Hemp / CBD activities are now legal in the US at the federal level in light of the 2018 Farm Bill. It seems unlikely that the TSX / TSXV will issue a formal notice on this development (given its position that it has not changed its policy), but we think the exchange got it right this time.

So what does this mean for U.S. hemp companies? More possibilities. More reach. More access to institutional capital. More legitimacy. More visibility. We may also start seeing certain companies divest themselves from marijuana entirely in favor of hemp, and we may see a rash of uplisting in the near future. As far as major U.S. exchanges, like the NYSE and Nasdaq, we may see some northern influence with respect to those exchanges’ policies on the acceptance of hemp-only and CBD-only listings. To date, those exchanges have only agreed to list Canadian cannabis producers, but with native companies like Walgreens moving into the CBD space, it’s only a matter of time until we see a U.S. hemp-co listing.

The U.S. exchanges should be put to a decision very soon, but for now the TSX / TSXV joins the CSE as wide open for U.S. hemp and CBD companies operating as per the 2018 Farm Bill.

cannabis marijuana robot automate drone

Everyone seems to agree that few of us are safe from the impending roboacolypse. Not the farmers, not the restaurant workers, not even the fashion models or (gasp!) the lawyers.

What about those employed in the cannabis industry? Not according to a recent article on Seedo, “an Israeli and Maryland based startup that claims to be able to quadruple the yield of traditional cannabis grows using climate-controlled chambers run by robots.”  According to a news release dated March 19, 2019, Seedo has partnered with Kibbutz Dan in Northern Israel to establish the first fully automated, commercial-scale, pesticide-free containerized cannabis farm in Israel. You can watch the video here.

Seedo claims that its airtight, stackable containers will take the guesswork out of the cultivation process, optimize land-use, and reduce the environmental footprint of the farming operations. Oh – and each container can produce at least 326 pounds of dry cannabis bud per year.

Meanwhile an April 2019 cover story by Marijuana Business Magazine that surveys salaries across the cannabis industry indirectly highlights the benefits of moving to automation. The article notes that at nearly every level of the cannabis industry people tend to earn more than their mainstream counterparts and that for most companies, payroll is the biggest expense.

We would add that payroll aside, employees are often the greatest source of risk for cannabis businesses which are generally held strictly liable for the actions of their employees. This means one bad hire can put at risk an investment millions of dollars. We see this all the time with so-called “consultants,” who offer grand visions of easy money but just as often walk away leaving a business in shambles and carrying a briefcase (or two) full of cash. We also see this in situations where owners and employees are doing their best, but a mistake is made and the regulatory agency steams ahead with license revocation proceedings.

Are robots the answer? Maybe not yet, but in this tightly regulated industry where a mistake (honest or not) can result in license revocation, we should expect cannabis businesses to take advantage of any technology that promises to mitigate risk.

fourth circuit marijuana illegal search
Nice work by the court!

The Fourth Circuit Court of Appeals ruled last week that finding marijuana stems in a trash bag does not permit the police to search the house for evidence of a crime. From a legal standpoint this case has interesting implications on when, where, and what police can search. From a more practical perspective, it shows the courts, along with the majority of America, are accepting that marijuana is not a dangerous substance.

The case, United State v. Tyrone Lyles, saw Mr. Lyles accused of possessing firearms as a convicted felon. The police of Prince George County (in Maryland, right outside of Washington, D.C.) were investigating Mr. Lyles in an unrelated case. They searched four trash bags on a curb near his house and found three marijuana stems. Based on the marijuana stems, the police obtained a search warrant for Mr. Lyle’s house. In the application for the search warrant the police stated they had found the marijuana stems, rolling papers and based on this believed that there were “controlled dangerous substances, Marijuana, and handguns being stored, used and/or sold” at Mr. Lyles home.

Based on this information, the police were granted a broad warrant and allowed to search Mr. Lyles home in total. The police, during the search, found four handguns, ammunition, marijuana, and drug paraphernalia, in Mr. Lyle’s house. Mr. Lyle asked that the evidence found in his home be suppressed because there was not sufficient evidence to search his home based on the discovery of three marijuana stems in his trash.

The Fourth Circuit agreed. The court, in its decision, first reiterated the fact that police have the right to search trash that that has been left at the curb and that evidence found in trash can be used to support a warrant to search other premises. The Fourth Circuit recognized, that while the police can search trash, that there is limitations to what can be presumed from the discovery of the evidence in the trash. Focusing on the facts from Mr. Lyles’s case, the Fourth Circuit determined there was simply too little marijuana found in the trash to presume that Mr. Lyle had more marijuana in his home. The Fourth Circuit agreed with Mr. Lyles that the tiny quantity of discarded residue gave no indication of how long ago marijuana may have been consumed in Mr. Lyle’s home.

So what does this mean? The police used marijuana as an excuse to search Mr. Lyle’s house for evidence of crimes related to marijuana, money laundering, and hand guns. The Fourth Circuit essentially said the police cannot presume that someone has committed crimes related to controlled substances or to other crimes when a small amount of the substance has been found in the trash. This is important because in other cases, the Fourth Circuit has determined that evidence of a controlled substance in someone’s trash is sufficient for a warrant to search that person’s house. Perhaps the distinction here is that such a small amount was found, or perhaps it is evidence that the federal courts are no longer considering marijuana a dangerous drug that is evidence of other crimes (what if they had found a small amount of heroin?).

It will be interesting to see if any of the other federal circuits follow the Fourth Circuit’s helpful precedent, or if prosecutors decide to appeal this decision to the Supreme Court.

cannabis business contractsYou can spend a lot of money on lawyers, accountants and consultants when starting a cannabis business. There is so much ground to cover from concept to execution– especially in a complex and highly regulated industry. Related to this issue, we have written on this blog about finding a team, and we have talked about the importance of things like operating formally, staying away from generic agreements and avoiding the seemingly bottomless pit of industry scams and schemes.

Today’s blog post will cover which documents are really necessary when structuring a cannabis business, and what you may be able to do without— at least in the beginning. Note that these are general guidelines. They are not intended to serve as legal advice and every business should use its best judgment and consult with counsel on these items.

  1. Stuff you cannot do without

Articles of Incorporation or Organization

This is very basic, but you cannot have a company unless the entity has been duly registered with the relevant Secretary of State. These days, most filings in most states can be done online, although there are situations where online filings are a bad idea, like when you want to do anything nonstandard with your Articles of Incorporation (for a corporation) or Articles of Organization (for an LLC). Those situations arise somewhat frequently. For example, you may want specific indemnity provisions for your board of directors beyond what the statutes contemplate. Or you may need to outline the attributes of preferred stock your corporation plans to issue. Many state registration portals do not allow “check the box” options for this type of tailored structuring. Get a solid cannabis business lawyer to help.

Internal Governance Agreements

If you have registered a multi-member LLC, it is a bad idea to proceed without an operating agreement and without an initial set of consent resolutions. The operating agreement in particular is going to define the spectrum of voting and economic rights each member has in the company, as well as crucial operational concepts. These concepts include non-industry specific matters (what happens when the company requires more capital?) to cannabis-specific matters (what happens when a member endangers the company’s state-issued license?).

In a corporation, you are going to have a few more agreements to start. Of these, bylaws and initial consent resolutions cannot be skipped. You will also need a shareholder agreement in most instances, and you will need to issue shares to owners (certificated or uncertificated). Other items, like a voting agreement, proxy agreements, etc., may be less important for some companies and you can often skip these to start.

Lease Agreement

Even if one of the cannabis business owners also owns the real estate at issue, you are going to need an industry-specific lease. A well drafted lease will insulate the property and its owners from liability if the cannabis business fails, or finds itself in litigation. When your business is leasing from a perfect stranger, the lease becomes even more important to outline the basic terms of the landlord-tenant relationship, on everything from your rights to occupy the property, to your rights to make modifications required to obtain a license.

Employee Handbook

If you have even one employee in your new business, get a handbook together. These internal business documents serve as a key communication tool between a business and its employees. A good handbook will set forth guidelines and expectations for workers, and perhaps most importantly, it can give a broad array of legal protections to business owners, as we previously explained here.

Third-Party Agreements

If your brand new cannabis business is doing a business transaction with a third party (some frequent, early examples include loans and services agreements) make sure you have adequately papered those items. Not memorializing a business or financial relationship in writing is asking for trouble.

  1. Stuff you can probably skip (for now)

Employment Agreements

Today, all states recognize at-will employment, with various limitations. This means that a written employment agreement is not needed (or even desirable) for many types of employees. An exception may be where the employee is occupying a highly specialized or highly compensated position, or has rights to vest in ownership. But if all you are worried about is an employee having access to proprietary information, you can generally cover this in an employee handbook, or through a simple non-disclosure agreement.

Stock Purchase Agreement

Lots of cannabis businesses try to raise capital shortly after formation, or as they approach licensure. They do this by selling stock or another form of ownership in the company. In our experience, though, it’s often best to wait until the business understands exactly how much money it needs to raise, and from whom, before drafting a stock purchase agreement. In many cases funds are raised from just one or two targets, and it does not make sense to draft purchase agreements until terms have been negotiated, or even memorialized in a letter of intent or other term sheet with prospective purchasers.

Business Plan

It’s a great idea to have a business plan, but not to pay a lawyer or consultant thousands of dollars to draft this for you. There is enough publicly available information out there for anyone to put together his or her own marijuana business plan these days; and you will know more than anyone you could hire about your goals. Even if you are unsure about some of the concepts at first, doing the research needed to put this document together will go a long way in educating and setting yourself up for success.


It’s easy to get lost when starting a business, and to rack up costs on unnecessary items, or items that are less important in the near term. Focus on the basics to start, and enlist a knowledgeable cannabis business attorney to get you off the ground. The lawyer should be able to provide you estimates for basic services, and allow you to focus mostly on what matters most– running a successful cannabis industry business.

Definitely say “NO” to unregistered broker dealers.

Startups in the cannabis space have few options when looking to raise funds– almost all banks, venture capital (VC) firms, and other institutional funds are off limits. Suitable private investors are few and far between. This situation is unfortunately leading to a proliferation of unscrupulous individuals that offer their “services” or “connections” to help companies meet investors and bring in dollars, for a fee. We’ve referenced on a few occasions (see here and here) that these investment “finders”, as well as any type of commission on dollars raised or other transaction-based fee, is 100% illegal (unless they hold a FINRA license to serve as a securities broker, and as I’m seeing, nearly all do not). Engaging an “unlicensed broker-dealer” can have serious consequences for the company. Even a dollar raised in this way puts all other company funds and assets at risk.

The frequency with which these issues are raised by clients and others makes me believe that 1) some companies are engaging unlicensed brokers without thinking to run this by their attorney, and 2) some of these unlicensed brokers are aware they are breaking securities laws, while others are simply ignorant and trying to capitalize on their “connections”, not knowing their business model is illegal.

So clearly this topic deserves its own post and its own bolded and underlined warning: Don’t sign any engagement with an advisor / consultant / snake oil salesperson that offers to raise funds for your company, in exchange for a fee. If anyone approaches you, run it by your business attorney right away, and keep them involved throughout the process.

The Law:

Section 3(a)(4)(A) of the Securities Exchange Act of 1934 generally defines a “broker” as “any person engaged in the business of effecting transactions in securities for the account of others.” Pursuant to that law the SEC has laid put extensive regulations and guidance to further define “broker activities” and prohibited fee structures.

Assuming the individual is not a registered broker-dealer (which you can confirm on the FINRA site here) then here’s what you certainly cannot do:

  • Engage an advisor, agent, or anyone describe their role or duties in terms that touch broker activities. At the most basic level, you should avoid any engagement that calls out “introducing” or “finding” or “bringing in” investors. If an engagement calls out “fundraising advice” or “investor relations” as a euphemism for broker activities, you’re walking a fine line. Best to reword your engagement and make no references to broker activities.
  • Tie any compensation to funds raised. This includes the obvious “transaction-based” fee of a percentage of funds raised, or fees scaled to milestones. This includes “fees” paid as equity grants. It also includes any fee contingent on a fundraising round – such as a retainer charged when funds arrive.

As a startup you often feel stretched thin, and in need of any help you can get. But in this case, this is not the help you want. Accepting any funds raised through an unregistered broker-dealer, or another performing broker activities for a fee, is worse than not having funds at all. The risk is then to the entire company, and in turn all the investors and employees current and future. Don’t do it!

Crafting laws and regulations is more art than science. The authors of initiatives, legislators, and administrative agencies who create and implement rules to legalize medical and recreational marijuana are bound to get some things wrong. This may be due to political pressures, competing interests, and the simple fact that marijuana is prohibited under federal law.

Now that so many states have legalized, we figured a good way to determine what was working and what was not, would be to ask individuals those living in those states. So we did just that on our lively Facebook page by asking for our readers’ feedback. The responses were interesting and all over the board.

marijuana cannabis surveyMany of our readers expressed a concern that California has been over-regulating cannabis since voters approved legalizing recreational marijuana in 2016. (We wrote about this issue recently here.) Complaints were focused on the increased price of cannabis products since legalization went into effect on January 1. There were also complaints about how medical patients no longer had access to products that were available prior to the state’s new and expansive cannabis regulations.

In a similar fashion, many commentators claimed that Washington‘s regulatory framework was overly burdensome, though there were not nearly as many complaints about the price of cannabis which has dropped significantly since Washington retail stores first opened in 2014.  Washingtonians did take issue with the state being the only state that legalized recreational cannabis without allowing for home cultivation. Washington regulators have also faced criticism for the slow implementation of the state’s new traceability system.

Generally, people commented positively on Colorado and Oregon, citing the ability to home grow and good access to dispensaries. Some commentators complained about inconsistent enforcement in certain counties, claiming that police in some areas seemed to continually take issue with marijuana despite legalization. Hopefully, this issue subsides.

We did not get much feedback on other adult use states. One Facebook user was happy with Nevada but hoped that the state would have more options with regards to available strains. Alaska‘s program was criticized for problems with lab testing and the unfulfilled expectation that Alaskans would have social use cannabis clubs. One user from Massachusettes complained that legalization was progressing too slowly. And we did not receive any feedback on Maine or Washington D.C., unfortunately.

Some common complaints regarding states that only permitted medical marijuana were that it was too expensive to obtain an authorization card, and that the state burdened patients by the ways which patients could consume cannabis products. For example, New York allows medical cannabis but does not allow for smokeable forms of cannabis. Others argued that the cost of medical marijuana was too high or that states did not have enough products to satisfy the needs of patients.

Finally, in states that have either no legal marijuana program or medical programs that are limited only to CBD, the criticism was fairly straightforward: prohibition is not working! However, many commentators were hopeful that their state would legalize in the near future or that federal cannabis prohibition would end soon. Here’s hoping.