Photo of Robert McVay

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

Cannabis business disputesThe cannabis litigation lawyers at my firm have litigated many partnership lawsuits involving cannabis businesses where better planning could have avoided the dispute. Business owners will always disagree with one another, but good partnership agreements, LLC operating agreements, and shareholder agreements figure out ways to get past disputes without going to trial. Litigation is expensive and stressful and doesn’t leave either side feeling great. In a business ownership dispute we are working on now, in addition to legal fees, both sides are hiring their own forensic accountants to come up with a company valuation more favorable to their side, and this is before a complaint has even been filed. Costs add up fast. Partnership disputes have a lot in common with divorces disputes, where logic and reason often give way to emotion, and the parties seek to punish each other more than they try to come to a reasonable settlement. The best time to plan for disputes is before your company has any revenue, any investment, any debt, or any obligations. In this post and subsequent posts in this series, I’ll discuss negotiable provisions in partnership agreements that business owners should make sure to address as early in their business’s life cycle as they can.

Today’s post will talk about individuals getting ownership for services and what happens when a company needs to raise more capital.

Ownership Interest in Exchange for Service

This is a common arrangement, but companies often get themselves into hot water by not thinking through the implications. If an individual is going to receive a significant percentage of equity in a company without putting in a proportional value of cash or property, company owners need to think long and hard about the implications. The question that all too often goes unasked is what happens if the partner receiving the equity in exchange for services stops working for the company or fails to perform those services well? If the partnership group doesn’t put thought into how it structures the grant of ownership in exchange for services, it can find itself having signed away a large chunk of equity in their cannabis business without any recourse if the service-for-equity owner stops working.

There are a couple of solutions to this. One common fix is for the equity interest to vest over time. Every month or quarter or year in which a partner contributes services corresponds to a partial grant of the equity interest. With a vesting schedule of three to five years, the company knows it will either be getting good value for the services or it will be able to terminate the services and cut off any further vesting. But another problem shows up even if the services are terminated — you have a voting owner of the company who likely holds some ill will against the other partners. This is where another clause in the operating agreement can help – company buyout right triggered by termination of the partner’s services. The company will still have to pay out for the equity vested to date by the services provider, but it has a clean way of removing that person from the company, likely avoiding additional clashes.

Additional Financial Contributions

It’s hard to estimate how much capital a company is going to need. Many of our cannabis producer clients found out mid-stream that they were having a tough time selling their dried marijuana flower, so they pivoted and moved into the oil extraction business. But the capital equipment needed for that and the construction costs to set up the lab can be expensive, and when those expenses are not planned for additional capital is needed.

One of the main differences between LLCs and corporations is that default corporate law makes it easier to bring in new capital in exchange for equity than default LLC law does. In corporate law, the board of directors generally has the authority to issue new shares in exchange for capital. And if the current shareholders don’t have a negotiated right of first refusal, the directors are free to look to whomever they want, whether that person is a current shareholder or not. Compare to LLCs, where the default law tends to say that unless the operating agreement says otherwise, the members of the company must unanimously approve of any new members. LLC agreements, then, should have clear clauses on what happens when the company needs more money. If only one member is willing to put that money in, do they get additional interest that dilutes the other members? If the company doesn’t want a dilutive issuance but wants a member to loan money to the company, does that member get priority payback on the loan debt? And if no one in the company is willing to pay money, can they still vote against allowing a new member into the company in exchange for capital? Because if they can refuse to put in more money themselves and can keep the company from raising money from an outsider, they have the power to tank the company. Any negotiated partnership agreement needs to address this issue.

Canada cannabisIt has been a while since we looked at how our good neighbors to the north have been doing with their legalization effort. Uruguay is still the only country to implement a nation-wide legalization system including legalized sales, but it has run into some implementation problems because of lack of access to the American financial system. Canada has a stronger domestic financial industry than Uruguay and both the Bank of Montreal and Toronto –Dominion Bank, among others, appear to have more tolerance for the marijuana industry. But as has been reported over the last couple of weeks, things have not been simple in Canada, where the government has announced that it plans to legalize marijuana by July 2018.

In the United States, most state legalization measures have occurred through ballot measures as opposed to through legislative processes. That approach comes with both pros and cons. On one hand, a ballot measure process can occur relatively quickly. An initiative is drafted by a campaign using whatever stakeholders the campaign wants to assist in drafting, the campaign goes out to get sufficient signatures to put the initiative on a ballot, people campaign for and against the measure, and the people all vote on the measure on a pre-determined date. Once you get past the initial drafting stage, there isn’t much in the way of horse-trading. The measure is what it is. The legislative process, on the other hand, is a never-ending process of starts and stops. Legislation can be drafted, amended, put forth for debate, and withdrawn countless times before it ever gets voted on.

Many stakeholders in Canada have been voicing their concerns about Canada’s proposed legislation. As it stands, the law would give significant authority to individual provinces to develop and implement distribution networks. But many of the provinces have viewed that grant of authority primarily as an additional cost burden. So, Prime Minister Trudeau’s government moved to increase local revenues by adding a 10 percent excise tax. Though this isn’t enough to stop the Premiers from Manitoba, Quebec, and Nova Scotia from grousing that the revenues won’t be very high, it is a push in their direction.

One interesting wrinkle in Canada is the level of potential government involvement in cannabis sales. Ontario, Alberta, and Quebec are all looking at publicly participating directly in the retail system. Ontario plans to open 40 stores through its Liquor Control Board by next summer. This hasn’t been met with enthusiasm by local consumers, who fear government involvement will lead to inferior product on store shelves. Other commentators and industry watchers fear public cannabis monopolies in Alberta and Ontario will open the door to continued illegal market activity.

But as we have seen across the United States, opening a legal marketplace takes a long time and it seems unlikely that by July 2018 Canada will be bustling with open marijuana retail stores packed with product, whether government-owned or privately owned. It looks like the liberal government is moving forward with full steam, but there will continue to be fits and starts along the way before the Canadian market is close to being settled. But on the bright side, even if local retail marijuana isn’t available, Canada Post, the Canadian version of the U.S. Post Office, is going to start delivering recreational marijuana through the mail as soon as legalization moves forward. Maybe physical retail marijuana’s main fear shouldn’t be government regulation — it should be mail-based competition.

Digital cannabis paymentsMost marijuana businesses still lack access to financial services. The repeating story can sound like a broken record, but that is because it bears repeating. Congress would be acting in everyone’s best interests if it finally decided to protect financial institutions and allow them to provide financial services to marijuana businesses without risk of federal prosecution. Even people like Jeff Sessions who prefer the marijuana black market to a legal, regulated market cannot come up with coherent arguments as to how anything is helped by having state-regulated businesses unable to open bank accounts.

Instead of hoping that its financial institutions take the risk of jumping into the cannabis market, Hawaii has pushed forward with a different solution. On September 12, Hawaii Governor David Ige announced that Hawaii dispensaries would run all transactions through an application called CanPay. CanPay will work like many other mobile payment systems inside and outside the marijuana industry. Customers sign up and connect their bank account with the CanPay app, and they then use the app to make mobile payments at a Hawaii cannabis dispensary.

Though CanPay will run the payments, it will not provide direct banking services. A program like CanPay can work as a money transmitter, but mobile solutions do not work well in providing the global payment services businesses need — payments to contractors, employees, vendors, service accounts, government tax agencies, etc. Instead of relying on local banks, Hawaii’s marijuana dispensaries will begin using Partner Colorado Credit Union through its branded division called Safe Harbor Private Banking.

Some general comments first. Hawaii’s small size provides it the opportunity to attempt this one size fits all approach. Only two cannabis dispensaries have opened and are operating in the state, with six more in different stages of development. A state the size of California cannot involve itself so directly in the financial planning of its various licensed marijuana businesses. And it makes complete sense that Safe Harbor Private Banking would insist that Hawaii adopt some sort of cashless payment system. Publicly available information doesn’t clarify whether there exists any financial connection between CanPay and SafeHarbor, but even if they are completely separate, Hawaii’s unique circumstance would necessitate a cashless solution. Credit unions in Oregon and in Washington State are largely limited by their cash pickup network. Because traditional credit and debit networks still spurn marijuana customers, even cannabis businesses that have banking tend to take the majority of their payments in cash. Their financial institutions set up regular cash pickups and armored cars deliver that cash to a vault the financial institution controls. A credit union based out of Colorado likely does not maintain a branch or even a cash holding facility in Hawaii — hence the need for cashless payments.

But this system still carries significant risks. Most of the Hawaii customers that use CanPay to make payments for their cannabis will have local bank accounts in Hawaii. If those Hawaii banks see many of their customers having money automatically pulled into a CanPay account, they will know those payments are connected to buying marijuana. If those Hawaii banks disfavor marijuana or choose to defer to federal law, they could threaten their banking customers’ with account shutdowns for making payments to CanPay. CanPay could also face problems with its own accounts. Mobile payment systems work through a type of escrow account where the money goes from a customer to CanPay, CanPay removes its fee and then deposits the funds into the merchant account as quickly as possible. CanPay needs its own banking access for the system to work. If CanPay’s bank gets cold feet, the whole payment system could collapse.

Despite these risks and despite the concerns we always have in monopoly situations where there isn’t competition in markets (both payment solutions and banking services in the present case), something is better than nothing. Hawaii faces some unique risks, but its size allows it to take bold, direct actions that simply aren’t feasible in most other states. We should applaud Hawaii’s government for helping facilitate solutions to the cannabis banking problem. We’ll know things are going well there if local Hawaii banks and credit unions start getting involved in the market and challenge the role that a mainland credit union is playing in Hawaii.

cannabis asset forfeituresThe current U.S. House of Representatives has made its share of poor decisions regarding drug policy and crime policy, especially when those policies align with the political dreams of Jeff Sessions. Easy example — they continue to stand in the way of legislation that would make us all safer, including legislation that would protect banks that want to serve marijuana businesses. But every now and then, the House doesn’t stand in the way of clearly reasonable policy. Last week, during its ongoing budgeting and spending process, the House approved an amendment to its appropriations bill that would stop the Department of Justice from expanding its civil asset forfeiture program. Amendment 126 would stop Jeff Sessions from rolling back Obama-era asset forfeiture reforms that barred the DOJ from adopting local civil asset forfeiture cases.

Civil asset forfeiture generally is the law that allows law enforcement to take assets used in conjunction with certain crimes. On one hand, it makes a lot of sense. Police are not courting controversy when they charge someone with a crime and take their meth lab. Where asset forfeiture becomes pernicious is when it isn’t used as an after-the-fact penalty in a criminal case. Asset forfeiture actions do not require anyone actually be charged with a crime, and law enforcement can gain significant leverage by seizing real property, cash, and other assets in situations where it isn’t clear that a crime has been committed. The value of a forfeited asset does not automatically go into the general public treasury either — it often goes straight to the police department seizing it, creating financial incentives for law enforcement to expand the reach of asset forfeiture.

In 2015, Attorney General Eric Holder announced a new policy regarding federal asset forfeiture. In short, there are both state laws and federal laws governing civil asset forfeiture. When state laws were too restrictive, state and local law enforcement agencies relied on a federal “Equitable Sharing Program” in which local law enforcement would identify something it wanted to be seized and would then transfer the matter to the Federal DOJ who would adopt it. The DOJ would then have jurisdiction and would move forward with the seizure that local law enforcement either did not have the resources to pursue or could not pursue under its state laws. Then, the DOJ would take its 20% commission and give 80% of the seized property to local law enforcement. Even if state law mandates seized assets go to the general fund, Equitable Sharing allowed the DOJ to make the payments directly to the local departments. The 2015 Holder policy ended that unless there was a clear public safety threat supported by warrants and criminal charges.

In July, Jeff Sessions announced that the Department of Justice would roll back these reforms and reinstate Equitable Sharing, further encouraging local law enforcement to engage in asset forfeitures.

Equitable Sharing poses a real threat to cannabis businesses. In states where marijuana is not yet legal, it continues to incentivize law enforcement to stand on the side of illegality, blurring the lines between public safety advocacy and advocacy for their own pecuniary gain. Even if we only look at states where marijuana is legal, Equitable Sharing is by its nature an incentive structure to get local police departments to play a role in federal law enforcement. As we have described in the past. The DEA does not have enough human resources to directly enforce marijuana laws in any major way. But under an Equitable Sharing policy, a police department in a rural part of a state could conceivably identify a number of local marijuana businesses and use Equitable Sharing to have the federal government conduct the seizures. That may not comport with current federal enforcement policy as described in the Cole Memo, but Jeff Sessions has often shown an eagerness to read the Cole Memo narrowly.

So it was great to hear that Amendment 126 passed in the House of Representatives. It is not law yet. After the House and the Senate pass their own appropriations bills, they go to conference and negotiate a single bill. If Amendment 126 survives conference, it will go back to the House and the Senate before being put in front of President Trump to sign. Even if the President doesn’t like the amendment, he is not going to veto an appropriations bill because of it, so what comes out of conference will almost certainly end up being law. Conference presents especially high stakes this year, as the Senate version also contains a restriction on federal enforcement of medical marijuana laws that have been in place since 2014 that the House blocked. Call your members of Congress and advocate on both of these issues — they’re important.

How to structure your cannabis empire
How to structure your cannabis empire

Market consolidation in the cannabis industry was always going to happen, and it is already starting to happen. States like Washington and California have or will have limits on the number of marijuana-licensed businesses that individuals can own, but those limits are likely to erode over time. The market simply puts too much value on the efficiencies that come with consolidation — more consistent retail and product experiences, lower prices, etc. There are negatives that come with market consolidation, especially if markets move past standard consolidation to anti-competitive consolidation. Market efficiency is good, but oligopolies are bad. For government regulators, the value in market consolidation is that companies that earn more money have more resources to put into compliance — enforcement is likely to be easier. But market consolidation also makes it easier for businesses to coalesce and participate politically, and business political power can come at the expense of regulatory political power. For a thoroughly enjoyable Ted Talk on “Big Marijuana,” I cannot recommend highly enough this talk given by Hilary Bricken, our lead cannabis business attorney in Los Angeles.

But we are still in the early stages and the possible negatives of market consolidation still appear to be a long way into the future. Acquisition and merger activity continues to be hot in the cannabis industry, as is organic growth and expansion. If you are one of those growing businesses, there are a ton of ways to put it all together. You can have a single corporation that holds everything. You can have a corporate holding company with multiple wholly-owned subsidiaries. Or you can have a number of parallel entities with common ownership but without a direct corporate relationship to one another. Here are a few considerations to keep in mind when putting it all together.

  1. Liability structuring: There are two schools of thought on how many entities to have for a business that has multiple locations and holdings. On the one hand, having multiple corporate entities is great for limiting liability. If you own five retail stores and have each of them in separate legal entities and one of them gets sued, the worst-case scenario is you totally lose one store and have to shut it down. If they are all owned in one large entity, all of the assets are at risk. On the other hand, properly managing many different companies can be a governance and accounting nightmare. The efficiency gains of internally consolidating as many things into single entities can be worth it regardless of the additional liability exposure.
  2. Investment: A cannabis business’s valuable assets can generally fit into the following categories: trademarks and other intellectual property; real and personal property and other physical assets, inventory, cash receivables and ongoing profit interest. When that business goes out to raise capital, a fundamental question to ask is whether the investor is buying into the whole pie, or if the return on investment is targeted. With a multi-entity structure, an investor can invest in Facility A, while having no stake in Facility B or IP Holding company C. But be warned — different ownership structures in related companies come with serious risks of conflicting interests for the management of those companies, and the business must adopt cross-company conflicts policies.
  3. Employees: Multi-company structures often involve employees providing services to multiple entities. This is especially true for internal marketing employees, bookkeepers, and anyone else involved in business strategy. But it can also be the case where employees at one entity are asked to cover a shift at a different location. This can be a major headache if the business doesn’t have clear employment policy. There are three main options. First, the companies can all maintain clear separation and treat the employee as separately employed by each company. This isn’t really a good plan, however, because for many government purposes, like the Family and Medical Leave Act, the Affordable Care Act, and overtime rules, the business entities will likely be treated as an integrated employer anyway. Another option is to use “paymaster” rules, where a single entity within the chain can pay the employees and be reimbursed by the other entities. Finally, an affiliated entity within the business structure can serve as a professional employer organization and be licensed to formally provide paid employment services to the various entities within the business empire.
  4. Company Separation: No matter how closely aligned, different legal entities should not commingle their funds. Work done by third parties should be invoiced to the recipient of that work, and transactions within the business empire need to be invoiced and paid at reasonable market rates. Without following clear structures and formalities, there could be tremendous tax and liability consequences — the liability shield that exists between entities can be pierced if the companies don’t act as if they are truly separate.

As cannabis businesses grow, the time and money spent on internal compliance and good governance processes needs to grow as well. Policies and procedures that work for a single location company don’t work when that company outgrows its original home and multiplies.

Cannabis business lawyers
Why so few cannabis warehouses?

Among several changes to marijuana laws that SB 5131 enacted in July, Washington’s license cap on retailers moved from three licenses to five licenses. The Washington State Liquor and Cannabis Board at first wanted to delay implementation of the new license allotment to 2018, but has now consented to begin processing license acquisition applications immediately. This isn’t for new license issuance — that window is still closed. But existing retailers that own three licenses can now acquire two more.

As market consolidation occurs in Washington’s retail cannabis space, our cannabis business lawyers have been working with retailers on the problem of inventory management in the marijuana space. Inventory issues represent a misunderstood but glaring headache for marijuana businesses across the state.

Any time a retail operation has more than one location, that operation wants to run its inventory processes as efficiently as possible. Many multi-location retail operations in other industries utilize centralized warehousing as a key cog in their inventory management systems. Having a single regional warehouse able to directly supply many retail stores has significant benefits. First, the per square foot price of storage at a warehouse location is significantly cheaper than at a high-traffic retail area. Additionally, if a retailer controls the warehouse, it effectively separates itself from the friction point of dealing directly with suppliers. All outside vendors can deliver to the warehouse and the warehouse can distribute the goods to the individual retail stores at a time and method convenient for the retail stores — delivery becomes less of a hassle and negotiation.

But, as always, this is significantly more challenging in the cannabis space. The state’s tied-house rules and tiered licensing severely limit the movement of marijuana product and who can control it at any stage in that process. A single retail license works for a single retail location   — a licensed retailer cannot maintain a separate warehouse and a retail store with a license. Every retail location must negotiate and organize shipments from licensed processors that, because of the tiered licensing rules, are third parties. If I own five retail locations and I want to stock them all with a specific product, I must organize five different shipments of that product.

There are two different fixes to this predicament. One is to take advantage of WAC 314-55-079(8), which states: “A marijuana retailer may transport product to other locations operated by the licensee or to return product to a marijuana processor . . . .” So if I own four retail locations, I have a little bit of flexibility. I could maintain a networked internal distribution model, where each location transports to each other location when necessary. Or, I could use one location as my de facto warehouse. If I have three retail stores in the city and one out in the county, I could expand the county’s inventory space, direct all deliveries there, and manage distribution from that central location.

There’s a catch, of course. This rule only applies if all the retail stores are owned by a single entity — a real liability concern. Most companies with multiple retail cannabis locations that each carry their own liability insurance hold the locations in separate business entities. This limitation of liability strategy is a core component of U.S. corporate law. If there is a massive tort or contract claim against a single retail location held in its own entity, the plaintiffs have access to every asset and insurance policy of that specific entity, but they don’t have any claim to the parent company or to other affiliated retail entities. Managing liability exposure through different business entities can represent the difference between a disastrous occurrence killing your profits for a year and killing your business forever. Retailers in that context must undertake a cost benefit analysis by figuring out whether the liability risk is worth the gain from increased inventory management efficiency?

The other solution is to negotiate a form of symbiotic relationship with a licensed processor. As stated, before, tied-house rules limit the ability of retailers and processors to engage in many business arrangements. Retailers cannot borrow money from, get discounts from, or receive gifts from licensed processors. They cannot enter any binding agreement where the purchase of one product is contingent upon the purchase of another product.

However, the rules don’t prohibit communication between cannabis retailers and processors and they don’t prohibit processors from making purchases based on the needs of retailers with which they do business. In theory, then, a processor could know the demand schedule of a retail group with whom it does business and act as an intermediary purchaser for that retail group. The retail group would probably end up paying a higher price for the product, as it would be adding an additional middle-man to the transaction, but this model pulls in some of the benefits of centralized warehousing. This system does present some risk to both parties, though, as their ability to enter contingent contracts is severely limited. A processor making a bulk purchase it assumes the retailer is going to buy may find itself in deep financial straits if the retailer chooses to buy elsewhere.

There are a few rule changes that could make things easier for retailers here in Washington State, but the WSLCB’s goal isn’t necessarily to make things easy for marijuana retailers. Outside of increased lobbying, cannabis business owners will need to continue doing the best they can within the system we have.

Cannabis business mergerWith Washington’s recent moves to allow owners of marijuana retailers to have ownership interests in up to five licensed retail stores and to also allow owners of licensed producers to have an interest in up to three licenses, the acquisition market in Washington remains extremely active. Similarly, Nevada and California are both experiencing significant movement in acquisition markets — this always happens before and after a market inflection point. Big rule changes, new licenses being issued, and first business dates all spark the market for large scale business transactions. Increasingly in the cannabis market, we are seeing more deals structured as equity-only deals — deals involving no cash.

Two main components arise in structuring a merger or acquisition: the intended organizational structure at the end of the deal and the method of payment for owners of the selling business. The entities could merge, where the companies are combined and only one survives. The selling business could sell its assets, where it disposes of its tangible and intangible assets to the buyer and then cashes out its owners and dissolves. Or both business entities could remain intact, and the buyer takes over ownership of the selling company, making it buyer’s subsidiary. The payment side generally comprises some combination of assumption of the selling company’s debt, cash, promissory notes payable to owners of the selling company, and stock (or membership interest in an LLC).

Stock deals make for an interesting calculation, and the value of the stock, and the stability of that value, depend on a number of factors. If a publicly traded company listed on the New York Stock Exchange or Nasdaq wants to acquire a company using its stock, selling shareholders receive value that is virtually as good as cash. They could keep the stock in the buying entity, or they could immediately sell it in the public market for its cash value. The situation differs for stocks sold over the counter and stocks in private companies. For over the counter stocks (penny stocks), price volatility jumps around so much that selling shareholders may or may not be getting the value they expected. And these companies bear the risk of regulators freezing their public sales, as penny stock markets are still rife with fraud. See The Six Top Marijuana Scams to Avoid. Selling shareholders may think they are getting something of value, but that value can tank quickly. See Marijuana Stock Fraud and Outsider Negligence.

For privately-held acquiring companies, cash and stock differ starkly. The regulated nature of most marijuana business markets only enhances that difference. In a privately held company, whether it’s a corporation or an LLC, the company operating agreement generally restricts or outright disallows selling shares to a third party without approval of company management. If shareholders of a selling company want short-term liquidity, the privately held company must allow for that. And though some companies have scheduled liquidity events for their owners through some variation of redemption of shares, most acquiring companies limit minority owners to getting profit distributions and hoping the buyer company either sells itself to another third party or eventually goes public. At the size of deals our cannabis business lawyers are seeing most often, the “going public” possibility is more pie in the sky than reality.

And just because a company is doing well financially does not mean it will distribute profits or issue dividends to its owners. Managers of growing companies generally want to use that cash for business expansion, reinvestment, or as a potential source for future business acquisitions. When a company owner issues a dividend or distribution, that owner is essentially saying it can’t think of anything better to do in the money. In Washington, at least, owners often horde cash for a rainy-day fund, as the regulations make it so challenging to get short-term capital in case of emergencies.

That said, for those looking at a long-term play, receiving stock in a cannabis acquisition may well be worth it. Marijuana licenses are valuable and smart owners with good brands can often squeeze more profit out of a license than its prior owners could. If the numbers add up, getting a small piece of a larger pie — a pie that you anticipate will continue growing at a good pace — can end up earning a lot more money in the long run than a simple cash deal could have earned. It’s just a question of how much risk the sellers are willing to take.

When Bernie Sanders announced he was in favor of removing marijuana from any schedule in the Controlled Substances Act, it was a big deal. He was the first serious presidential candidate in either a general election or a primary to take such a forward-looking stance, and it at least temporarily brought the issue of cannabis legalization to the front of voters’ minds. In the general election, of course, neither Hillary Clinton nor Donald Trump supported legalization. Clinton’s position was to do more research and otherwise leave it to the states, while Trump waffled between supporting medical marijuana, to leaving it to the states, to outright hostility.

When 2020 rolls around, however, it is becoming increasingly likely that whomever the Democrats nominate will be vocally in favor of legalization. Less than a year into President Trump’s term, Democratic senators are already moving to position themselves as the party’s next nominee. And, as reported in Politico, those candidates are increasingly moving in the direction of legalization. Senator Kamala Harris of California, a former prosecutor and state Attorney General, has voiced support for decriminalization. Senator Kirsten Gillibrand of New York has vocally supported various medical marijuana bills in the past few years. Finally, Senator Cory Booker of New Jersey has gone so far as to introduce a bill fully legalizing marijuana at the federal level. Booker’s bill would deschedule marijuana, retroactively expunge the criminal records of those convicted of federal marijuana possession or use charges, and withhold federal law enforcement dollars from states with arrest rates and incarceration rates for marijuana crimes that skew heavily against poor people and racial minorities. Unfortunately, Booker’s bill has no chance of passing or even being debated while Republicans hold the House, the Senate, and the White House. But it does draw a clear line in the sand for all would-be 2020 contenders on the Democratic side.

The real story here is that the Democratic Party is getting to the point where it must support legalization to stay relevant. There seem to be three types of Democratic politician right now: Sanders-style social-democrats, Clinton-style Baby Boomer liberals, and Booker/Harris/Gillibrand style young liberals. There are a few centrist/conservative Democrats still out there (e.g. Joe Manchin of West Virginia), but most of the rest of the party falls largely into one of the other alignments. The difference between the Clinton group and the Booker group isn’t based so much on policy as it is on candidate age and priorities. Baby Boomers (people born between the mid-1940s and the early 1960s) were the generation most influenced and susceptible to the War on Drugs. For as long as the Boomers have made up the core of the Democratic party, the party has been unwilling to move strongly in support of marijuana legalization. But we are now seeing a shift in the political landscape. White working class voters were up for grabs in the past, but that demographic seems to be moving toward the Republican party in droves. For Democrats to survive, they need to pull stronger numbers from their core demographics, including minorities disproportionately affected by the War on Drugs and millennials who never understand why marijuana was demonized, groups that overwhelmingly support cannabis legalization.

President Trump has always been shifty on policy, but his ardently anti-cannabis Attorney General, Jeff Sessions, presents an easy foil for pro-legalization Democrats to compare themselves to. Other than exceptions like Rand Paul and Dana Rohrabacher, the Republican party remains generally anti-marijuana. And marijuana legalization is the kind of simple, understandable policy that Democratic politicians should point to as positive differentiators from their competitors. If Republicans start to see their stance against marijuana as a political liability, they too will start shifting in large numbers. Looking forward to 2018 and 2020, it is becoming increasingly clear that cannabis legalization will be both good policy and good politics.

Cannabis lawyersPresident Trump spent some time attacking Jeff Sessions on Twitter in July. There are plenty of reasons why that was a bad thing. You don’t want the leader of the executive branch attacking the chief law enforcement officer in the nation for failing to stand in the way of an investigation into that leader. But if you temporarily ignore the threats to democracy, it was pretty fun watching Sessions get metaphorically slapped around. Mr. “Good people don’t smoke marijuana” was only able to come back with a lame comment that Trump’s behavior was “kind of hurtful” while still calling him a “strong leader.” Show some backbone.

Despite the attacks, it looks like Sessions is sticking around, which means we have to continue guessing how his Department of Justice is going to treat marijuana. On that front, there is some bad news and some potentially good news.

On the negative front, the Huffington Post uncovered a letter Sessions sent to Washington Governor Jay Inslee on July 24. In that letter, which was in response to various requests to Sessions from Inslee and others that Sessions reaffirm the validity of the Cole Memo, Sessions does not deviate from the Cole Memo. Instead, he cherry picks data and presents statistics in a way that negatively reflects on Washington’s marijuana regulatory system. The vast majority of his criticisms are unfair or are outright misleading.

This post isn’t a good place to refute each of his arguments, but here are some of the highlights. He states that Washington’s medical marijuana system is considered “grey” due to a lack of regulation. But his information dates back to 2014 — Washington folded medical marijuana into its regulated system in 2015. He claims that 90% of the “public safety violations” that occur in Washington involve minors. But this is because Washington groups its violations into four categories, and all violations involving minors are in the “public safety” category. Other violations that are more common are in other categories. Additionally, a percentage without any reference to the whole is meaningless — referring to the 90% without reference to the whole is purposefully misleading. Finally, he stupidly claims Washington State isn’t well regulated because the leading regulatory violation is “failure to utilize and/or maintain traceability.” If the state is policing traceability so much that it is consistently nailing businesses for any deviation from the law, that is the definition of robustly regulating an industry. Regulatory enforcement isn’t evidence of a lack of regulation — it is the opposite.

My firm’s cannabis lawyers have since 2010 represented clients all over the country, and from this I can tell you that Washington State tends to have the toughest regulations and the strictest enforcement. The idea that Washington isn’t robustly regulating the cannabis industry is laughable. If Jeff Sessions wants to attack the principles of the Cole Memo, he should just do it instead of hiding behind weak accusations that Washington is violating its tenets.

But this is where the potential good news comes in, or at least a reason why Sessions is trying to couch his arguments within the terms of the Cole Memo. Sitting on Sessions’s desk right now is a report from his own Task Force on Crime Reduction and Public Safety. The Department of Justice hasn’t released that report, but the Associated Press got a copy of it, and contrary to expectations, the Task Force does not recommend any changes to current DOJ policy in the Cole Memo. That makes sense of course. Even if you hate marijuana, the Department of Justice doesn’t have an unlimited budget. Every penny and every man-hour dedicated to marijuana is taken away from opioids, terrorism, violent crime, etc. If the states are not acting as partners in federal law enforcement, why would the feds use resources to target marijuana businesses and their customers in those states?

But no matter what policy the Department of Justice ends up pursuing, Sessions will never back down on the marijuana rhetoric. “Drugs are bad” are ingrained in his identity, as they have been in every hippie-hating conservative politician since Nixon. Marijuana usage, homosexuality, and alternative lifestyles that are indicative of someone being an “other” are anathema to the Sessions dream of Americana. But as demographics and polling show us, there are a lot more of us than there are of him.

Cannabis financing
Cannabis financing. Cash is good.

Washington State marijuana businesses face heavy regulations regarding business financing. One of the unique aspects of Washington’s cannabis business regulations is its level of control over every dollar contributed to a licensed cannabis company. Prior to receiving a license, a marijuana company must declare all capital it will receive, whether in the form of equity or in the form of debt. There is no de minimis exception, so if someone is putting a thousand dollars into a million dollar company, that thousand dollars and whomever contributed it must go through the state’s pre-clearance process. Once a company is licensed as a Washington cannabis business, any additional contributions or loans to that business must be approved by the Washington State Liquor and Cannabis Board (LCB) before they can be paid to the company, including additional loans or contributions from individuals who were previously approved. The one exception to this rule is that loans from chartered financial institutions do not need LCB approval.

This creates a major problem when cannabis licensees get into financial danger, which can happen for any business. Sometimes, money problems arise with very little notice. Whether due to a failed crop, unexpected bills, an employee emergency, or something else, cash crunches happen. Even for cannabis businesses with access to banking, it is rare for them to have access to an unsecured line of credit similar to what other non-cannabis businesses can get. When a cannabis business runs into a cash crunch, it has to figure out how to keep things afloat while figuring out how to infuse capital without violating Washington regulations. If a business is lucky, its current owners have sufficient personal capital to make additional contributions, because the LCB clearance process is shorter for individuals already in the system. If a business is unlucky and it has to bring in outside capital, it is looking at what can be a months long approval process before any of that capital can be paid in. Those months can mean the death of a business.

All of this leads to a common outcome — cash contributions to businesses without LCB clearance in violation of LCB regulations. When the worst thing the LCB can do is cancel a business’s license, you can understand why someone would be willing to violate those regulations when the alternative is worse. Many marijuana business owners have more tied up in their business than just the business assets — they signed personal guarantees with landlords and other vendors that will survive business failure. If you are in that scenario, it is hardly illogical to bring on an outside financier outside the rules and hope you don’t get caught.

But regulations that put business owners into this type of quandary are the type that should be revisited and revised. There are plenty of simple fixes to avoid or at least mitigate the current challenges struggling cannabis businesses face. For example, the LCB could change the structure of approval for interest rate lending to make it more of a notice requirement — save the hard approval process for equity owners and profit-sharers.

Unless and until the LCB takes another look at this issue, the best advice we can give is to shore up your capital reserves. If you are just starting out in the cannabis industry, contribute more capital than you need to your cannabis business and let your unused capital sit in the bank as a rainy day fund. If you are making sales, put a portion of that money to the side and don’t use it for either reinvestment or profit distributions. The more cash you have on hand to deal with unexpected challenges, the greater your chances of surviving those challenges long enough to go through the LCB’s regulatory process of getting new lending or capital contributions approved.