california marijuana cannabis invest own

Passage of California’s Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA“) has opened the doors to institutional investing in California cannabis companies. California’s lack of a residency requirement for investors and its relatively limited investor disclosure and background requirements have made it popular for institutional investors looking to invest in cannabis. In that sense, California is building out its program to mirror wide-open states like Oregon, and not protective states like Washington.

There are two main types of California cannabis applicants: owners and financial interest holders. To be legally considered an “owner” under California’s cannabis regulations, one does not actually need equity in the applicant’s cannabis business. “Owner” means any of the following:

  1. A person with an aggregate ownership interest of 20 percent or more in the person applying for a license or a licensee, unless the interest is solely a security, lien, encumbrance;
  2. the chief executive officer of a nonprofit or other entity;
  3. a member of the board of directors of a nonprofit; and
  4. and any individual who will be participating in the direction, control, or management of the person applying for a license.

An individual who directs, controls, or manages the business includes any of the following: a partner of a commercial cannabis business that is organized as a partnership; a member of a limited liability company of a commercial cannabis business that is organized as a limited liability company; and an officer or director of a commercial cannabis business that is organized as a corporation. These are all fairly standard definitions, as far as cannabis regulation goes.

Even if someone is not an “owner,” however, that person or company may still be deemed a financial interest holder (“FIH”). “Financial interest” is broadly defined to mean “an investment into a commercial cannabis business, a loan provided to a commercial cannabis business, or any other ‘equity interest’ in a commercial cannabis business.” California cannabis regulators consider the term “equity interest” to include less than a 20% ownership in the cannabis applicant and pretty much any profit-sharing arrangement or entitlement to profits from cannabis licensee, including IP licensing royalties and percentage rent arrangements. The following are not considered FIHs: banks and financial institutions; diversified mutual funds, blind trusts or similar instruments; holders of security interests, liens, or encumbrances on property that will be used by the commercial cannabis business; and individuals holding less than 5 percent of the total shares in a publicly traded company.

California requires FIHs be disclosed to and vetted by the state upon application for annual cannabis licenses. The license applicant must provide a complete list of all financing it receives. Specifically, the license application mandates that applicants include the name, birthdate, and government-issued identification type and number (i.e., driver’s license) for any individual with a financial interest in a commercial cannabis business. FIHs are not required to submit to criminal background checks but they will still undergo some vetting by state regulators.

Even with these new rules, most institutional investment in the cannabis space is still concentrated in “ancillary services“, i.e. services that support cannabis businesses but do not “touch the plant.” Examples include turnkey real estateequipment and materials leasing and salesintellectual property licensing, consulting services, and tech platforms. Many institutional investors still want to stay one or two steps removed from touch-the-plant cannabis businesses and do not like the idea of being listed in a state database as being an owner or FIH. However, given California’s wide-reaching definition of owner and FIH, even these companies and their investors can be deemed by the state to have a direct cannabis business interest. To avoid being considered owners or FIHs in California, ancillary service providers will need to avoid directly providing financing, using profit-sharing or similar performance-based payment schemes with cannabis businesses. They will also need to avoid managing, directing, or controlling the licensed entity.

Editor’s Note: A version of this post originally appeared in an Above the Law column, also by Hilary Bricken.

cannabis business marijuana
If only it were so easy.

There is a direct correlation between the complexity of a state marijuana business licensing system and the complexity of financial deals that industry participants undertake. Washington, Oregon and most of all, California, provide fertile grounds for increasingly complex deals. Outside of cannabis, my firm sees similarly complex transactions proposed in our international business practice, especially in our China law practice which is another body of law requiring specialized knowledge. Regardless of circumstance, though, it is vitally important that parties to a deal firmly understand how the deal shifts and manages risk.

Complex transactions can feel like a game of hot potato. Here is a relatively simple example that demonstrates some of the complexity I’m talking about: Sally signs a supply contract with a large processor to provide bulk raw material. Sally realizes that she can’t service this herself, so she asks Henry, who has a background in servicing large orders like this, to use his experience in coordinating and managing production to service the contract. Henry realizes that he needs significant capital to expand capacity and turns to outside investors. Those outside investors want security before they invest, so they ask for, among other things, a pledge from Sally of her contract rights to receive payment from the processor as collateral.

In a perfect world, Henry gets the investment and uses it to provide the raw material. Sally and Henry provide them to the processor and split the contract fees they receive, some of which go to pay back the investors. Everybody wins.

Sometimes deals like this do work for everyone. But there are so many different ways that they can go wrong. None of the parties should enter into the deal without understanding what the consequences would be of various potential failure risks. In the example deal, there are plenty of potential failure points:

  • Can Sally coordinate production to service the contract?
  • Can Henry actually produce?
  • If Sally and Henry can produce, can the processor actually pay?
  • What if state regulations change and disallow contracts like this midway through the production cycle after money has been spent?

All of the parties in the deal need to understand their exposure at each stage of the deal from beginning to end, in order to negotiate the arrangement but also to perform under the contracts. We have seen deals like this look like they are on a good path until, at the last possible moment, the processor decides that they can’t pay for the product.

But that’s the crux of almost any business arrangement. There is a moment where a party spends money with the anticipation of receiving that back with a return. Whether or not the return comes is a function of risk. Businesses that do best are those that can understand and quantify risks and that understand how best to shift risk and hedge against downside. Whether the hedging/shifting mechanism is through security agreements, outside insurance, or reliance on lawsuits, parties need to understand the costs and benefits of each in order to properly manage their risk position.

Risk isn’t necessarily bad. But if a party is taking on a significant portion of the risk in a deal and that risk isn’t properly hedged, that party should receive the lion’s share of the potential upside.

Equity incentives can help you motivate the team and grow fast.

It’s a good time to revisit the very basics of cannabis company structuring, particularly in light of two new developments in 2018: tax reform and California state-wide legalization. Thus, this is the second article in our three-part “Reviewing Corporate Law Basics” series. The first post discussed cannabis entity selection. Today’s posts moves past the initial formation phase, and covers equity incentives for startups.

In the startup world, employee equity is as ubiquitous as the logo t-shirt, the bean bag chair, and the ping pong table. The potential upside employees perceive in their equity incentives brings the talent in and keeps them engaged: Employees are both incentivized to increase the value of the company and stay at the company through their equity vesting schedule. In theory, everybody wins.

Cannabis startups, particularly those developing technologies and building capital-intensive businesses to scale, will increasingly find the need to offer employee equity to stay competitive. In making the decision on what types of equity incentives to offer, companies must consider their growth path and the effect on future financing options, their employee base’s preferences, their own capacity to manage an equity incentive plan (or hiring experienced counsel to do so), and, most importantly, the tax consequences for the company and its employees.

This post cannot exhaustively cover each of the below structures, but will provide the key advantages and disadvantages, to inform the business owner (or employee) faced with the choice:

  • Stock Options (ISOs and NSOs)
  • Restricted Stock with an 83(b) Election
  • Restricted Stock Units (RSUs)
  • Something Else – Profit Share, Target Bonus, Performance Incentives

Stock Options

Stock Options come first because this type of equity incentive sits foremost in the public consciousness: Many company founders want a “stock option plan” before they consider what that entails. However, most founders that evaluate all of the potential forms for employee equity incentives eventually choose not to go with stock options. In the end, whether its Incentive Stock Options (ISOs) or Nonqualified Stock Options (NSOs), the calculus generally boils down to the plans being complicated and unpredictable.

On the company side, the plans are complicated because management must regularly run 409A valuations to determine strike prices, then track all of the exercise dates and received paperwork (and the company’s ever-fluctuating number of shareholders), and then calculate the proper tax withholding for all options exercised based on the delta to the stock’s fair market value set by the 409A valuation.

On the employee side, stock options are complicated because the employee must decide whether or not to exercise the the options, and then pay out-of-pocket if choosing to do so. Options are also unpredictable in that a downtown in the company’s value could result in “underwater options”– employees stuck with tax consequences but with no chance of selling stock to cover the tax bill. While these issues have some solutions to reduce the pain to the company (third-party administrators of option plans are recommended), and while the underwater options issues is rare-but-very real (ask those that lived through the tech bubble bursting in 2000), there’s no escaping that stock option plans inherently complicated and unpredictable, and thus make sense for a small percentage of startups.

Restricted Stock with an 83(b) Election

I use the “…with an 83(b) Election” qualifier when discussing Restricted Stock Plans with clients, because filing an 83(b) election is critical to making Restricted Stock Grant work in an employee’s favor – and it’s an election the company had better inform its employees of, as missing the filing deadline is a mistake that can’t be undone.

So what is a Section 83(b) Election? Simply stated, it’s a “tax election” the employee taxpayer makes with the IRS, under IRC Section 83(b). The election must made within 30 days of the grant of restricted stock (simply by filling out and mailing the IRS a form). The election informs the IRS that the taxpayer elects to realize income as of the grant date, rather than on the grant date. This can be particularly advantageous for very early-stage companies, that can credibly state the value of their shares is minimal. Then, any future gain in value recognized upon selling the stock would be capital gain or loss. Further, if shares are held for more than 12 months, the employee may get long-term capital gain treatment.

Restricted Stock may become more difficult for later-stage companies, because even with an 83(b) election, paying tax on fair market value may be prohibitive for some employees. However, a company that’s later stage and better capitalized may be in a better position to offer an employee a bonus to make up for the tax burden, or can look to switch equity plans now that the company has more resources. But for early-stage companies Restricted Stock with an 83(b) Election is the right choice 90% of the time. The “Restricted” part is to be discussed with your securities counsel – all stock will carry certain securities legends, will initially be subject to a company’s right of repurchase (which lapses over the course of a vesting schedule), as well as other transfer restrictions to prevent sale on public markets and preserve the company’s closely-held status.

Restricted Stock Units (RSUs)

An RSU award is essentially a contract to award stock at a later date, or award an employee cash as value for stock. RSUs are not stock, and because they are not property, an 83(b) Election is inapplicable. They have risen in popularity among later-stage tech companies, primarily at the expense of stock options, because they are significantly more straightforward (particularly from the employee’s perspective). They give the employee what employees want– the ability to receive “stock” without having to pay to exercise or purchase it. Then, upon meeting vesting requirements, the employee either receives their specified shares of common stock, or cash equal to the value of a their common stock.

Many companies had come to disfavor RSUs in recent times, though. Employees with RSUs are not putting in any purchase or exercise price, the 409A valuation requirements are amplified, and the company must pay employees cash upon each vesting milestone (because the 83(b) is not available). Thus, until recently, the RSU only made sense for large, cash-rich “startups” (which at that point, were full-blown companies). However, a new tax election created in the Tax Cuts and Jobs Act (“TCJA”) may make the RSU more feasible for certain companies and employees: The 83(i) election allows an employee that owns 1 percent or less of a company to delay realizing income until there’s an exit (or for up to 5 years), so long as the company has a plan in place that awards some equity to 80 percent or more of the total employees in the company.

Other Incentive Plans

While equity incentives may seem overly complicated, with a well-drafted Employee Equity Incentive Plan and competent counsel, companies can and do manage all of the structures listed above. So maybe you can, too…. but do you need to? Equity incentives work best for startup companies that are building towards an exit: an acquisition, a merger, a public offering. Often these companies want to conserve as much cash as possible, to devote to product development, and offering employee equity allows the company to compete with larger companies for top talent. However, if your company anticipates fewer costs on its runway to profitable liftoff, and is built to operate profitably, then perhaps your business needs another form of employee incentives– a profit share, a target bonus for profit or revenue, or other performance bonuses. Although these aren’t as sexy as the “stock options”–and you may miss out on a few potential employees that have stars in their eyes–crafting an incentive plan that fits your business will ultimately help you attract and retain the right type of talent.

Finally, one thing should be noted: Regardless of the equity incentive plan your cannabis company chooses, you can still get the logo shirts, bean bag chairs, and ping pong table.

marijuana securities fundraising
Don’t let myths get in the way of solid financing.

With new startup companies that plan to raise funds, I’ll often have a sit-down meeting to discuss the fundraising process, the company’s growth path, and address any concerns of the startup founders regarding financing. At these meetings I’ve heard company founders say each of the following:

  • We’re all going to get diluted!
  • We’re going to lose control of the business!
  • We’re too busy to raise funds, so it makes sense to pay someone a “finder’s fee” to procure the investors.
  • Everyone loves our idea, so we’ll have the investors’ checks in hand next week.
  • Let’s just focus on the business, getting angel investment, and we’ll deal with all the corporate legal mumbo-jumbo later.

Trading stories with our corporate cannabis attorneys up and down the west coast, it seems like all of us have heard similar things. However, none of the above is based on reality or adviseable, and some of it is downright dangerous. So, let’s bust some myths around financing your cannabis startup.

  1. We’re all going to get diluted!

“Dilution” is super-scary word that rarely has the perceived affect, particularly in the context of equity financing. By-and-large equity financings are done in successive rounds, when the value of the company is increasing. Companies very rarely do a down-round (raising funds at a decreased valuation from the previous round) unless they are truly backed into a corner and in need of cash. Outside of these rare occurrences, a round of equity financing that significantly increases the valuation of the business may result in the “dilution” of owning a bit less of pie that has now become much bigger. Consider: would you rather own 10% of a $10 million dollar pie ($1 million), or 8% of a $25 Million pie ($2 million)? The answer is why a company would want to go from a $10 million Series A to a $25 million Series B. Ultimately, the focus should be on growth and total value of the expanding pie, not on the percentage assigned to one’s slice.

  1. We’re going to lose control of the business!

If the dilution concern bogeyman had a slightly more dramatic cousin, it would be the “investors are going to take over our company” concern. The popular conception of this phenomenon is likely owing to Aaron Sorkin’s creative genius in the film “The Social Network” – the glass conference room scene in which Eduardo Saverin, played by Andrew Garfield, was both diluted (your stocks are worth pennies now!) and unceremoniously kicked out of The Facebook through some sneaky lawyer tricks that not even his spidey-sense could detect. In reality, not only is Saverin a billionaire, but investors will only have the ability to “take over the company” if they are given that ability. That type of term is rarely hidden in a footnote or a tiny font. No company with sound counsel “suddenly” loses control of a business. If the company does five rounds of equity financing and investors come to cumulatively hold a majority of the equity, then yes, they could wrest control of the board and therefore the company. But this happens over the course of many years, and many decisions made by the company in many conference rooms. Not in a single, dramatic scene.

  1. We’re too busy to raise funds, so it makes sense to pay someone a “finder’s fee” to procure the investors.

Raising funds is not easy, and anyone claiming to be able to do it for you, particularly for a fee, should be viewed with extreme skepticism followed by an extreme review of their certifications to confirm that they are a “Registered Broker-Dealer” under the Exchange Act and with FINRA. See the SEC’s guidance here. The payment of a “finder’s fee” (even if you call it “consulting”) or any transaction-based fee to an unregistered broker-dealer may lead to severe penalties, and enough issues on the securities side that the company will be dead in the water.

  1. Everyone loves our idea, so we’ll have checks in hand next week.

Did we mention raising funds is not easy, particularly for companies in the cannabis space? Based on my anecdotal experience, the “conversion rate” from “we met an angel that’s interested, sounds like they want to write us a check right now” to the check’s actual arrival is well shy of 50%. Angel investors (good ones) don’t write checks on a whim, and responsible companies shouldn’t accept checks on a whim. Any investor who wants to write a check without seeing any documentation or doing other diligence on the company should be viewed with skepticism. Further, all investors need to be vetted and need to provide the company with information as to their accredited investor status. Angel rounds can be done fairly quickly and with minimal expense, but there is some process and the checks aren’t written after a single, informal chat.

  1. Let’s focus on the business, we’ll deal with the corporate legal mumbo-jumbo later.

Some elements of your corporate set-up can be delayed, and a competent business attorney should be able to identify those elements. But the critical “mumbo-jumbo” includes:

  1. Incorporating your company and adopting Bylaws
  2. Issuing your equity and making tax elections
  3. Protecting your intellectual property (IP)
  4. Securities compliance

Incorporating is quite obviously crucial (look out for my next post on entity selection for cannabis startups in California, in light of state-wide legalization and federal tax reform). But issuing the company’s initial equity is a single important task that accomplishes many smaller important tasks: not only does it force the founders to have necessary discussions regarding their roles, ownership stakes, equity vesting, and whether and how to reserve equity for employees. But it also achieves the necessary task of assigning all the IP of the founders to the company, and forces the company to act by board action (either at a meeting or by written consent). A discussion with your attorney regarding equity should also cover 83(b) tax elections, and address the company’s growth path and cover securities compliance for any future inbound investments, as well.

At that point, you’re done with the legal mumbo-jumbo (for now), and you can get back to making the company a smashing success— even if that means being “diluted” just a bit.

A growing number of startups in the cannabis space are engaging brokers and online platforms to assist in their fundraising. This makes sense: as we’ve written previously, most investors (particularly institutional capital) are staying on the sidelines and taking a wait-and-see approach to the cannabis industry. Thus, cannabis startups will always target a smaller, more dispersed, more specialized investor base, and going through experts is a logical way to reach them. Note that 506(c) is one of the relatively new options for company financing, implemented as part of the JOBS Act of 2012. It allows for companies to engage in a more public “general solicitation”—but with strings attached, as we’ll detail below.

From a securities law perspective, the engagement of a broker-dealer or online platform converts the offering exemption from the ever-popular 506(b) offering to a 506(c) offering – changing this one letter has a number of significant consequences:

1 – You must ensure that the broker-dealer is registered, or else.

Section 3(a)(4)(A) of the Securities Act generally defines a “broker” broadly as “any person engaged in the business of effecting transactions in securities for the account of others.” This broad definition includes any “finder,” “fundraising consultant,” or anyone else receiving any transaction-based bonus or commission in return for introducing or engaging an investor. You should always consult your securities counsel when a third party is assisting the company on fundraising. Once it is established whether broker-dealer registration is required, FINRA provides an online Broker-Dealer Check. The penalties for using an unregistered broker-dealer are extremely harsh, so it’s always wise to err on the side of caution.

2 – You are limited to accredited investors, and you must take additional steps to confirm an investor’s accredited status.

In a 506(b) offering companies have the flexibility to raise from an unlimited number of accredited investors, as well as up to 35 unaccredited investors. Only around 2% of the US population would meet the accredited investor conditions (in short: at least $1 million of assets not including one’s home, or a recurring annual income of at least $200,000 (or $300,000 if married)). The loss of the unaccredited investor option may eliminate some of the classic “friends and family” seed investors, that write smaller—but often critical—checks to keep the company afloat in the early going.

Further, raising under 506(c) puts a higher burden on the company to complete its own diligence to confirm an investor’s accredited status. Under 506(b) you can essentially take the investor’s word for it. The SEC has laid out the types of records one would examine under a “principles-based verification method” and they include the investor’s bank statements, brokerage statements and records of securities holdings, tax returns and tax assessments or appraisal reports prepared by third-parties. Looking at these records may not seem like such a big deal, but the hurdle of developing this method and implementing for each investor can be a significant undertaking for startup company.

3 – You can engage in a general solicitation under 506(c), but with greater visibility comes…greater visibility.

The advantage of expanding your potential investor base beyond those with whom you have a “substantial pre-existing relationship” (which is required under 506(b)) may seem to open a world of possibilities. But putting your company out in the open may have drawbacks: any proprietary info in your investor materials will get passed around, you may pick up shareholders that cause you problems down the line, you may attract attention from the not-in-my-backyard types, and some investors prefer their cannabis investments to keep a lower profile.

Finally, it bears repeating: seek an experienced corporate and securities attorney. With these choices you need principled and consistent counsel, because there is a final consideration: once you’ve engaged a broker-dealer or otherwise engaged in a general solicitation, you are committed for the entirety of your financing round. Any unaccredited “friends and family” are out—they can’t write checks under any circumstances—and you cannot revert to the more relaxed requirements of 506(b).

cannabis subordination loan
Best if landlord, tenant and lender talk out that cannabis loan ahead of time.

Commercial cannabis leases are different than other commercial leases in many important ways. In other respects, however, they can be quite similar. One item that tends to fall into the latter category is the creation of a landlord’s lien on the tenant’s personal property in the event of an uncured tenant default. For example, if a marijuana producer fails to pay rent, the landlord acquires an ownership interest in that producer’s lights, fans, security equipment, and even the cannabis itself. If the lease is drawn up correctly, the landlord would then be able to seize these assets and liquidate them, in accordance with state law.

When representing landlords, this type of provision makes it into every type of cannabis lease we draft. When representing tenants, we often try to narrow this right, especially in situations where the tenant may be taking on debt. Why? Because lenders often insist on priority rights in the event that a pot business cannot repay a loan. In many cases, the lender will come prepared with a “Waiver and Consent Agreement” or a “Subordination and Consent Agreement.” The tenant is tasked with acquiring its landlord’s signature on this contract, so that if there is a default under the lease, the landlord does not preempt the lender’s rights in the tenant’s property (which serves as collateral for the loan).

From the landlord’s perspective, subordinating its lien on the tenant’s personal property is preferred to a total waiver of the lien. The lender won’t care either way, so long as it receives a primary security interest in the cannabis and everything else. For that reason, most of the time the parties will end up with the landlord agreeing that its lien is subordinate to the lender’s right, but not totally extinguished (“waived”). That way, the landlord is assured that its tenant will receive the cash needed to operate, and will retain the right to hop in line behind the lender and lien on any assets, as needed.

Landlords should be aware that the waiver or subordination agreement will typically allow the lender to enter the leased premises and remove the trade fixtures and even the marijuana itself, subject to state rules. On this point, the landlord will want to require that the lender minimize disturbance with respect to any other tenants on site, and require that removal occur prior to the end of the lease term. Once the lender is in the space, the landlord will want to ensure that the lender is required to comply with state marijuana rules, provide evidence of insurance, and keep the premises open for inspection, among other items.

There are a host of other concerns that a boilerplate consent or subordination document will create in the context of a cannabis loan to a tenant operator. These range from specific items, like the landlord’s obligation to notify the lender of a tenant’s default, to general items, like restrictions on the ability of a landlord and tenant to amend the lease agreement. Depending on which chair you are in—landlord, tenant or lender—these items will have different repercussions and should be negotiated with that in mind.

Each party’s goal, as always, will be to minimize risk and to maximize the ability to make and receive payments, in accordance with state and local rules. If you understand the basics of cannabis leases, lender subordination agreements, and your state’s disclosure requirements for cannabis lenders, you should be able to propose a contract solution that works for everyone. That way, in the event of a default under a loan or lease, the parties won’t have to fight over what happens next.

marijuana investment venture capital
More room for cannabis-specific funds and investors.

Investor interest in the cannabis industry was at an all-time high in 2017 in anticipation of full legalization in California in 2018. The number and dollar figures of deals were up, and packed houses at our investment forums in San Francisco and Los Angeles served as anecdotal evidence of the same. The exponential expansion of available funds was set for 2018, when the institutional capital—venture capital (VC) and private equity funds—were preparing to allow future funds to invest in the cannabis industry. These funds would primarily invest in “ancillary businesses,” but the ripple effect of all that available capital in the industry would have meant more for direct operator cannabis businesses as well.

President Trump’s election did little to slow the enthusiasm throughout 2017, as investors took at face value the words of then-candidate Trump, who claimed to be “in favor of medical marijuana 100%” and to think adult-use “should be up to the states, absolutely.” Further, prior to Senate confirmation, his Attorney General, Jeff Sessions, apparently assured Senator Cory Gardner of Colorado, among others, that he would not interfere with the Cole Memorandum or states implementing their own regulatory systems for adult use cannabis.

The timing of the Sessions Memo—coming immediately after California’s legalization took effect—appears to be a demonstration of federal power to counteract California’s legalization efforts. Just as importantly, it’s an effort to prevent the vast expansion of capital that would flow into the industry. California is, after all, the venture capital capitol of the US, full of smart money willing to take reasonable, calculated risks.

However, so long as cannabis remains federally illegal under the Controlled Substances Act, and the Department of Justice (DOJ) remains ambiguous as to its prosecutorial priorities, institutional capital will stay out of the cannabis industry. Even with immense opportunities available, the possibility that marijuana holdings may threaten a fund’s overall portfolio and make their limited partners nervous means the potential rewards no longer justify the risks. Those analyzing investment trends have already noted that VC interest in cannabis isn’t living up to expectations in 2018. Given the lag in fund formation (because a fund’s limited partners would need to explicitly agree to allow investments in the cannabis industry), 2018 Q2 and Q3 would be the real indication of VC interest. But we in the industry already know the verdict: institutional funds of the Sand Hill Road variety, by and large, are staying out.

What this means for your business, if you’re raising funds in 2018:

  • Cannabis-specific funds (those able to raise funds) could be the big winners: they’ll have their pick of deals and can drive better terms.
  • Individual investors (high-net worth individuals) will continue to be the primary source of funds for direct operators in 2018.
  • A state-wide, comprehensive banking solution is not as close as we believed.
  • Multi-state expansion plans will be problematic—the Sessions Memo could have a detrimental effect on the legal defense in suits alleging Federal RICO violations.
  • Medical continues to be a safer option, for now. The Rohrabacher-Blumenauer Amendment provides a safe haven in California, where courts have ruled that it prohibits prosecution of medical cannabis businesses. Whether or not Rohrabacher-Blumenauer is extended (or expanded) will have a major impact on investment and business strategies in 2018.
  • Pressure for a legislative solutions towards legalization will continue, because: A) it’s popular among the electorate, B) local governments need the tax revenue, and C) these solutions normalize an industry that industry experts say will create more jobs in the US than the manufacturing industry by 2020. These political realities are turning cannabis agnostics into industry advocates – for example Senator Gardner, who has gone from an opponent of legalization five years ago to staking his political future on opposing Sessions’ attack on cannabis.

We are only one month into the new year, so expect plenty of twists and turns along the way. For now, though, it is undeniable that the recent DOJ reversal has impacted VC and private equity interest with respect to marijuana industry investment.