social media influence cannabis brandingIt’s becoming more and more common for companies in all industries to use social media “influencers” to promote their goods and services online. Influencer advertising in the cannabis industry is a particularly risky idea because paid advertisers need to comply with all cannabis marketing and advertising rules.

It goes without saying that social media influencers probably don’t spend a great amount of time learning complicated cannabis regulations and Federal Trade Commission (“FTC”) guidelines, so without solid contracts in place that dictate what an influencer can say and how they can say it, cannabis companies could risk penalties, false advertisement lawsuits, or even losing their expensive and hard-earned licenses.

For starters, the FTC issued guidelines for using endorsements or testimonials in advertising. The guidelines are complicated, but some of the key points are that (1) testimonials and endorsements can’t be false or misleading, and if they are, the advertiser (the cannabis company) can itself be responsible; and (2) in most cases, the nature of the paid relationship between endorser and advertiser needs to be disclosed. The gist is that companies can’t just pay people to pretend that they are unaffiliated third parties to hype up their products. The relationship typically needs to be disclosed.

Even if an influencer does disclose the nature of the relationship, licensees could be sued for false advertising under state or federal law—by consumers, competitors, or even the government. Penalties in false advertising lawsuits can be massive.

Cannabis companies also face a host of particularized regulatory advertising and marketing prohibitions and restrictions, in each state of operation. Most cannabis licensing authorities will explicitly state that the acts of an agent of a licensee (the influencer) are imputed to the licensee. In English, that means that if your cannabis company hires an influencer who advertises unlawfully, you’re on the hook.

Cannabis companies obviously can’t advertise things that they are not allowed to do, so anyone advertising for them must follow all actual laws when advertising. The problem though is that it’s not always clear what companies can and can’t say in advertising. Each state may have different requirements, which are not always easy to figure out even for companies who are professionally acquainted with the regulations.

In the event that an influencer does break the rules, there’s not much a cannabis company can do, which is why it’s so important to educate them. It’s also important to keep in mind that online advertising is inherently public. Advertisement rule violations are much more apparent to the regulators than many other violations, because they are disseminated to the public at large in media that can last forever.

All of this means that cannabis companies who want to work with influencers must use detailed contracts, training, and/or guidelines to educate their influencers. And this is not something that cannabis companies should gloss over in a two-page contract. Generic provisions that require all parties to follow all applicable legal requirements may be sufficient in some contexts, but again, influencers are probably not aware of the specifics in cannabis regulations. And again, if they advertise improperly, that can spell trouble for the licensee.

cannabis patent litigation ucannAs promised, here’s an update on the first ever cannabis patent infringement case, which we’ve previously written about here and here.  Since it’s been a little while – plaintiff United Cannabis Corporation (“UCANN”) owns the “911 Patent,” which generally covers liquid cannabinol formulations of a purified CBD and/or THC greater than 95%. Last July, UCANN sued defendant Pure Hemp Collective, Inc. (“Pure Hemp”), alleging that Pure Hemp had infringed on the 911 Patent. UCANN is hoping to secure a permanent injunction against Pure Hemp from infringing on its patent, as well as damages and attorneys’ fees.

As we noted in our last update, Pure Hemp previously filed a motion for partial summary judgment back in November, which if granted, would have ruled some of UCANN’s patent claims invalid. The premise of Pure Hemp’s motion was that UCANN’s claims aren’t actually patentable and such “substantially pure liquid CBD products are ubiquitous” in the marketplace. The defendant’s attempt to invalidate some of the claims was based on an interpretation of Supreme Court cases about “products of nature” being unpatentable. This led the Court to the “Alice” Patentability Test, which requires the Court to go through the below analysis:

  1. Are the claims at issue directed to a patent-ineligible concept (i.e., laws of nature, natural phenomena, abstract ideas)?
    1. No: inquiry ends, the claims may be patentable!
    2. Yes: go to question 2.
  2. Do the claims in question nonetheless offer “an inventive concept – i.e., an element or combination of elements that is sufficient to ensure that the patent in practice amounts to significantly more than a patent upon the ineligible concept itself”?

At this early stage, if a court gets to the second question, it’s faced with a “fact question” that requires extensive evidence to be resolved. If there’s a genuine dispute of material fact, the Court won’t be inclined to grant the motion.

Unfortunately for Pure Hemp, U.S. District Judge William Martinez didn’t buy their argument. In his 16-page Order denying Pure Hemp’s motion on April 17, 2019, Judge Martinez acknowledged that there were certain ambiguities in the case law regarding patentability, but ultimately wrote he was “convinced under the current state of the case law that the challenged claims of the 911 Patent are not directed at unpatentable subject matter.” Judge Martinez went on to explain why the 911 Patent passed step one of the Alice Patentability Test:

Pure Hemp has failed to establish beyond genuine dispute that a liquefied version of cannabinoids and related chemicals at the concentrations specified in the 911 Patent is anything like a natural phenomenon. … But, as far as the Alice inquiry goes, the 911 Patent is not “directed to” an unpatentable law of nature, a natural phenomenon, or an abstract idea. It is instead “directed to” a non-naturally occurring delivery method of naturally occurring chemicals in (as far as the record reveals) non-naturally occurring proportions and concentrations. Because the 911 Patent does not fail at step one of the Alice inquiry, the Court need not address step two.”

Now that Pure Hemp’s motion is denied, the case will proceed as normal toward a jury trial. It’s likely that there will be more motion practice, and we’ll keep posting regular updates on this case as we receive them.

As everyone knows by now the 2018 Farm Bill legalized hemp production by de-scheduling the crop under the Controlled Substance Act.  We’ve written extensively about federal hemp rules and regulations as well as those in California, Oregon and Washington. We’ve also addressed hemp in terms of  USDA Organic Certification, international trade issues, and the FDA stance on hemp derived CBD in cosmetics. We’ve also offered a free webinar on West Coast Hemp CBD. We’re on it.

In light of the breaking news that California has opened up for commercial hemp cultivation and that the Oregon growing season had just begun, this post concerns the more granular topic of agricultural production contracts – i.e. the contracts at the start of the supply chain between farmers and consumers.

What is an Agricultural Production Contract (“APC”)?

Broadly speaking an APC is an agreement between producers and contractors for a specific agricultural commodity. These contracts typically specify the production practices to be used, identify the party responsible for supplying the required resources for production, and specify the quantity, quality, and method of payment for the commodity. APCs are used by farmers, ranchers, and agribusinesses to manage risk and control expenditures. Payment is typically predetermined and outlined in the contract.

An APC is one of several ways in which the marketplace handles the purchase and sale of agricultural commodities. Others include cash forward contracts, which concern the sale of a fixed amount of the commodity at a set price for future delivery; marketing agreements, in which a member of a cooperative agrees to sell some or all of a commodity produced through the organization, and futures contracts, in which the sale and purchase of a standardized quantify of a commodity is negotiated for future delivery on a regulated commodity exchange. An APC by contrast means the sale or production of a specified commodity or commodities by the grower to an identified party under an agreement signed in advance.

hemp agricultural production contract
Lock in your APC and focus on the hemp.

The APC contract model has associated benefits and risks. An APC may help agricultural companies (i) control quality by providing for control over the production methods, (ii) manage supply, and (iii) protect a company’s intellectual property and control the unauthorized reproduction or sale of a crop. An APC may benefit the grower by (i) reducing financial risk by making the contractor responsible for the costs of production, (ii) providing access to capital financing, and (iii) permitting access to new technology or markets.

An agricultural production contract is a complex creature typically governed by state law including the Uniform Commercial Code. Legislators in several states have proposed, and in some cases enacted, laws concerning the terms of agricultural production contracts. In 1990, Minnesota became the first state to enact such laws. Other states, including California, Oregon, Washington, have enacted various statutes that relate to payments, liens, bailments, and duration of the contract.

Why Should I Care?

Because money. (As people say nowadays). The scope and scale of commercial hemp production is likely to dwarf the sort of farming operations that one sees in the recreational cannabis industry. So the dollar values and the corresponding risks are much higher for everyone involved.

Take, for example, a lawsuit filed not long ago in Oregon in which the plaintiff seeks to recover some $57 million from the defendants over an alleged breach of an agricultural production contract (a “Sharecrop Agreement” as defined the complaint). Under the agreement, the defendant agreed to plant, grow, dry, and harvest 13 acres of hemp at 1,450 plans for acre, for a total of 19,000 plants. The plaintiff agreed to pay all actual costs associated with the crop, which plaintiff would then sell, be reimbursed for expenses, with the remaining balance sold a particular price per pound divvied up between the plaintiff and the defendant. At the outset of the deal this may have looked good from the defendant’s perspective – since plaintiff was covering production costs and responsible for marketing and selling the crop. The defendant, however, promised that it would use “best farm practices” and promised to deliver a “top quality product with a minimum of 10% on average CBD oil content as determined by a random test collected by Farmer and Buyer.”  But then things went south, according to the plaintiff, when the defendant refused to hand pick the crop (is this what “best farm practices” means?) and failed to meet the 10% on average CBD oil content, and only allowed the plaintiff to pick up half of the 217,227 lbs of crop. The plaintiff claims that the first two allegations reduced the value of the crop and the last amounted to theft that altogether caused tens of millions in damages.

What Should I Do?

Hemp farmers and purchaser of industrial hemp should carefully consider the special issues that industrial hemp presents before entering into contract for hemp production. Here are some of the factors parties to an industrial hemp production contract should consider before signing on the dotted line:

  • Do state laws restrict or regulate the terms of agricultural production contracts?
  • What are the contractual and regulatory consequences for the farmer and buyer who do not quite follow the letter of the law governing agricultural production contracts?
  • What happens if the state licensing authority revokes the growers ability to sell, store, or transfer hemp?
  • What happens if the hemp does not satisfy pre-harvest THC testing?
  • What happens if the hemp does not satisfy post-harvest THC testing?
  • When will the testing for CBD or other components of hemp occur?
  • How is the hemp chain-of-custody maintained and documented, who is responsible for this, what are the repercussions if something goes awry?
  • What happens if the hemp is seized during transport?
  • Who bears the risk of the USDA deciding not to approve the state’s hemp production plan?
  • Are there / should there be limitations on change of ownership during the duration of the contract?
  • Who bears the risk of complying with state record keeping requirements?
  • Who is responsible for testing of hemp for human consumption or hemp items for other industries and to what standards?
  • What happens if the state allows commercial cultivation before or without submitting a plan to the USDA?

As with anything cannabis related (hemp or marijuana), your generic form agreements are not going to fit the bill here. In fact, such agreements often do more harm than good. This means that the next step is integrating the above considerations into your APC along with other particulars using language the courts will enforce – should that be necessary.

cannabis mergers and acquisitions marijuanaIt’s no secret that multiple state-by-state operators are building their cannabis empires through aggressive mergers and acquisitions (“M&A”). Last year, our cannabis business attorneys closed more than $100 million in cannabis company acquisitions, and that shows no signs of stopping in 2019. Cannabis M&A is not your run-of-the-mill business dealing though, and working from boilerplate, rote M&A documents is hugely dangerous. In addition, diligence is oftentimes like a regulatory spiderweb laden with liabilities that other businesses do not face. In addition, the barriers to entry in the cannabis industry are increasingly high, tedious, and protectionist, which can really torture business deals. So, if you find yourself turning into a larger multi-state operator though acquiring cannabis businesses, below are the top five things you need to know.

1. Barriers to Entry

Every state is different in how it treats would-be cannabis licensees. And the differences between states are compounded by whether the state is medicinal, adult-use, low-CBD/high-THC, or all of the above. This translates into not everyone being eligible to own cannabis businesses. And these barriers to entry may include some or all of the following: residency requirements, local control elements that vary by city and county, liquidity standards, background checks, and invasive disclosures of personal information and past conduct in business and industry. Any prospective cannabis business purchaser needs to ensure that they meet all requirements for incoming owners before even contemplating a business purchase and expending time and hours negotiating a deal that may be legally impossible. Note also that localities are increasingly implementing their own barriers to entry (like local residency, past white collar crimes and civil infractions that bar ownership, and license caps), so don’t ignore the applicable municipal code standards either.

2.  Closing Can Be Chaos.

Most if not all states will tell cannabis businesses to report to them when new owners or parties of interest come into the picture. Why? Because of the federal enforcement priorities stemming from the now rescinded Cole Memo, every state must know exactly who is in control of/financing its cannabis licensees. Turning to M&A, every acquisition agreement has pre- and post-closing conditions and cannabis is no different. However, depending on the state or even the city or county in which the cannabis business operates, and due to new owner reporting requirements, conditions to and after closing will vary wildly. Ultimately, they will depend on whether state and local regulators demand that incoming owners close on business interests first so that they may be vetted and checked in that capacity, or they will depend on whether regulators must first examine the purchase agreement, approve the new owners prior to closing, and only then the new owners can take over. This is a very good reason why a one-size fits all boilerplate acquisition agreement is not going to work for your cannabis acquisitions. So, be sure to check what the subject state/locals require when it comes to closing.

3.  Diligence may be a Mess. 

The regulatory histories of most cannabis businesses are likely going to be chalk-full of various entitlements that enable the business to operate. And where cannabis remains federally illegal, a good amount of cannabis businesses are still operating on an all-cash basis and all of them are dealing with 280E. The diligence on these businesses then is usually more intense than other businesses. Would-be buyers need to exercise extreme care when vetting a cannabis business to look for ticking time bombs that surround state licensing compliance, local licensing compliance (which will be different depending on the local government), tax reporting (federal, state, and local) and specifically compliance with 280E (which can be a disaster). See here and here for how a cannabis business should prepare itself to sell. Also, if you’re buying a cannabis business that was operative under older, less restrictive regulations, you may face a situation where there’s little to no diligence at all because no records were kept and everything was done in cash (see Los Angeles for example).

4.  Valuations are All Over the Place. 

Pretty much every cannabis market in the U.S. is still emerging because they’re silo’ed marketplaces designed by state governments that continue to change as industry issues arise. Plus, the oldest regulated cannabis markets are Washington and Colorado (they’re only around 6 years old), which still doesn’t give us a ton of market data or operational history to properly value the businesses therein or in other states. Without a doubt, just having a cannabis license is valuable, but when a business is pre-revenue with, let’s say, a build-out ahead of it to satisfy local laws with constantly evolving state and local cannabis regulations in what will be a potentially saturated market in a couple of years, it’s really hard to say what the right valuation is. That hasn’t stopped certain cannabis businesses selling for pretty large sums though just based on the momentum of legalization and the prospect of market demand.

5.  You’ve Probably Already Violated State and Local Law. 

I cannot tell you the number of acquisitions our firm has seen after-the-fact where the parties violated state and local law from the outset of the agreement. Many folks don’t realize that, on the whole, state cannabis licenses are not transferable, so they cannot be individually bought and sold. You actually have to buy the company that holds the licenses (and all of its assets and liabilities). In addition, in most if not all states, you can’t separate licenses out from a vertically integrated company in order to sell them. And on average you can’t sell local entitlements either without them becoming void. There are also typically strict timing requirements in reporting acquisitions to both state and local regulators and parties usually violate those out of the gate because they’re either not aware or they don’t think that the reporting requirement applies to them. And if you take control of a cannabis business and do not tell regulators, your license is going to be in hot water. Specifically regarding the locals, if you’re dealing with a development agreement or other specific entitlement, assignment isn’t going to be freely allowed. The majority of the time, to get by the locals you not only have to ask for permission, you may even have to have a hearing in front of the City Council or Planning Commission to take over the entitlement. In certain states, taking over a cannabis business may even require cessation of the business and a new license application while the new owners are checked out. For the unwary or reckless buyer who may not know or care about the intensity of the regulations faced by cannabis businesses, their entire acquisition agreement may be completely illegal and grounds for license cancellation.

It’s only a matter of time before regulators begin investigating the nature of cannabis acquisitions to ensure that the transaction complied with applicable regulations. So, err on the safe side and make sure you know the regulations and your eligibility so that due diligence is smooth and compliance is less painful, and so that you don’t waste time and money on an illegal transaction.

securities fraud cannabis eco science solutions
“Our synergies will create an important financial institution to serve a category that is in need of a fully integrated vertical product suite blah blah blah…”

Cannabis is hyped as a hot investment, and it can be, though it is not without risk as a recent CNN article points out. (See also links below).  Setting aside issues concerning the federal prohibition on marijuana, the cannabis industry’s path from the black market to legalization has been rife with hucksters and promises of easy money, and strewn with burned investors. Not surprisingly then, deals involving cannabis have received scrutiny from the SEC and given rise to civil lawsuits and criminal proceedings.

On such case is Bell on Behalf of Eco Sci. Sols., Inc. v. Taylor in which just last week (April 26), the federal district court of Hawaii denied the defendants’ motion to stay a civil securities fraud case pending resolution of a parallel criminal proceeding.

The case arose from several business transactions that involved Eco Science Solutions, Inc. (“ESSI”) between 2015 and 2018. The plaintiff (derivatively, on behalf of ESSI) alleged that one of the defendant’s, Giguere, was the mastermind of a pump and dump scheme where the defendants artificially inflated ESSI’s stock price through false representations and manipulative trading practices, then sold large quantities of the inflated stock to other investors. How so? The ruling explains that the the officers of ESSI caused it to enter into numerous deals with companies owned or controlled by Giguere or other defendants in exchange for transfers or sales of ESSI stock. Meanwhile, Giguere operated a stock promotion website, “,” which encouraged readers to purchase ESSI stock. The amended complaint alleges that defendants caused a loss of market capitalization of over $137 million as the stock price of ESSI went from $4.48 in early 2017 to $0.28 by June 2017.

The last of these suspect deals involved cannabis. In May 2017, ESSI announced it was acquiring Ga-Du Bank, Inc. (a Nevada corporation) through a stock-purchase agreement. In its press release, ESSI stated the acquisition would allow ESSI to provide “payment processing, cash management and financial services to its customers in the cannabis industry.” According to plaintiff, the charter and formation of Ga-Du was questionable and, as a result of the acquisition process, Ga-Du became a wholly owned subsidiary of ESSI. Ga-Du, it seems, was to provide foreign jurisdictions with legalized cannabis a banking mechanism (under the regulatory laws of the Uruguayan Central Bank) for their dealings with the U.S. cannabis industry.

A May 2017 press release for the ESSI/Ga-Du deal includes a lot of familiar buzzwords. The President of Ga-Du, John Lewis explained, “By combining Ga-Du Bank with Eco Science Solutions, we see how our synergies will create an important financial institution to serve a category that is in need of a fully integrated vertical product suite.” Said Jeff Taylor, CEO of ESSI, “It has been our vision from day one that, in order to fully service the cannabis industry and execute on our business plan, we needed to be creative in securing and offering a banking platform that further differentiates us from everyone in our category . . . The deal with Ga-Du Bank is a game-changer for not only ESSI, but everyone in the cannabis industry. This new division of our Company will put us years ahead of our goal to create a full-service marketplace among growers, suppliers, distributors, retailers and consumers.”

Sounds impressive right? (Taylor and Lewis are defendants in the civil case).

In June 2018, Giguere was indicted in a California federal court for federal securities fraud and conspiracy to commit securities fraud. The indictment was based, in part, on the same events and facts as the civil lawsuit described above. One month later, the SEC filed a civil action based on Giguere’s involvement with ESSI and other corporations. That action was stayed pending resolution of the criminal proceeding, for which trial is set in August 2019.

Before the Hawaii federal court was a motion to stay proceedings of the civil case pending resolution of the criminal case. The defendants argued that Giguere’s Fifth Amendment rights would substantially interfere with the discovery process as to all defendants.

The Court disagreed with the defendants in a short, well-reasoned opinion. Beginning from the premise that the Constitution does not ordinarily require a stay of civil proceedings pending the outcome of a criminal proceeding, the Court analyzed defendants’ motion under “the particular circumstances and competing interests” involved in the case including (1) the extent to which the defendant’s Fifth Amendment rights are implicated, (2) the interest of the plaintiffs in proceeding expeditiously, (3) the burden the proceedings may impose on the defendants, (4) the convenience of the court and the efficient use of judicial resources, (5) the interests of persons not parties to the civil litigation, and (6) the interest of the public in the pending civil and criminal litigation.

On the first element, the Court recognized that Giguere’s Fifth Amendment rights were clearly implicated in the parallel proceedings, noting this was particularly true because he had been indicted and a trial date had been set. But Giguere was only one of five individual defendants and the only defendant named or charged in the criminal proceeding – so these other defendants’ Fifth Amendment rights were of no moment. The Court concluded this factor weighed only slightly in favor of a stay.

On the second element, the Court easily concluded that the plaintiffs had an interest in proceeding with the litigation in order to preserve the integrity of testimony and evidence and to obtain adequate redress.

On the third element, the defendants argued that they could not adequately prepare their defenses without Giguere’s “unfettered” testimony, which would be unavailable if he summoned his Fifth Amendment rights. The Court disagreed, reasoning that this argument wrongly assumed that the other defendants were entitled to Giguere’s testimony in disproving their own individual liabilities. Put differently, said the Court, Giguere’s Fifth Amendment rights did not extend beyond himself. As for Giguere, the Court found significant that he previously argued against a stay in the SEC action and indicated he had the capacity to proceed with multiple simultaneous litigations.

The Court found the remaining elements weighed against a stay and the Court concluded that no substantial prejudice would result because, to the extent Giguere’s Fifth Amendment rights became implicated, his assertions could be more efficiently dealt with piecemeal rather than staying discovery as to all defendants and effectively halting the case.

What’s the lesson for investors in the cannabis industry whether that be marijuana, hemp, or CBD? Beware of buzzwords and do your homework. For more on cannabis securities and fraud issues, check out the following:

williamson act california cannabis
Like this, but with cannabis.

California legislators have so far proposed more than 40 new cannabis laws for the 2019 session, ranging from cannabis tax reductions to banking reforms to party buses. But one bill stands out as a potentially important change to cannabis and hemp cultivation throughout the state: SB-527 would add language to a California law known as the Williamson Act clarifying that cannabis and hemp cultivation count as “agricultural” or “compatible uses” under agricultural land conservation contracts made pursuant to the Williamson Act, thereby making cannabis and hemp cultivation presumptively permissible activities under such contracts.

The Williamson Act—officially known as the California Land Conservation Act of 1965—creates a framework by which a city or county can enter into a private contract with a landowner, whereby the local government agrees to provide a reduction in property taxes in exchange for the landowner agreeing to restrict development on and limit the use of his or her land to activities that are keeping or compatible with agricultural use of the land. In turn, the state historically would provide funding to the local government to make up for the resulting losses in property tax revenue, although those payments have ceased following the state’s budget fiasco in 2009. The law’s goal is to give local governments a streamlined tool for preserving agricultural land and open spaces.

While the Williamson Act currently does not specify what land uses qualify as “compatible” with agriculture, it gives local governments ample discretion in making that determination, and also provides some examples of development activities that presumptively qualify as agricultural-esque, such as “the erection, construction, alteration, or maintenance of gas, electric, water, communication, or agricultural laborer housing facilities.” Notwithstanding the passage of Prop. 64 in 2016 legalizing cannabis and establishing a seed-to-sale regulatory regime for commercial cannabis, Williamson Act contracts have in many localities remained a source of uncertainty and therefore an impediment on the proliferation of licensed cannabis cultivation. Relatedly, the existence of a Williamson Act contract has created a red flag for parties seeking to lease or purchase land for cannabis uses.

What SB-527 would essentially do is expand the enumerated examples of “compatible uses” to include “commercial cultivation of cannabis … or industrial hemp … either alone or in conjunction with other uses consistent with” the Williamson Act. What SB-527 would not do, however, is limit county and city governments’ ability to restrict or prohibit commercial cannabis and hemp; existing state cannabis laws preserve their ability to do so (although the extent of that authority when it comes to preventing cannabis delivery is currently up for debate), and of course local governments retain the ability to prohibit or regulate all commercial cannabis uses through zoning laws.

Rather, the net result of SB-527, if passed, is twofold: (1) it could increase the supply of potential cannabis and hemp farmland by removing uncertainty about use restrictions under existing and future lands encumbered by Williamson Act contracts; and (2) would force local governments to take an extra legislative step if they seek to prohibit cannabis or hemp uses on Williamson Act-enrolled lands, rather than simply relying on ambiguity in existing Williamson Act contracts.

The proposed changes to the Williamson Act could also be seen as a legislative clarification and codification of prior agency guidance: even prior to the passage of Prop. 64 in 2016, the California Department of Conservation—the agency charged with administering the Williamson Act at the state level—issued a statement that “nothing in the Williamson Act prohibits the growth of medical marijuana on land enrolled in the Williamson Act.” Indeed, SB-527 states that it is not actually changing existing law, but instead is merely declarative.

Interestingly, SB-527 does not differentiate between outdoor cultivation and indoor cultivation, so it is unclear whether construction of indoor or mixed light structures such as greenhouses would now qualify as agricultural “compatible uses” under the Williamson Act.

Time will tell whether SB-527 becomes law, but it does stand at least a fighting chance, having passed in committee 5-1 on the initial reading.

marijuana cannabis seminar oregonIn exactly two weeks, on May 17, 2019, our own Vince Sliwoski will co-chair an all-day continuing legal education (CLE) event in Portland called The Business of Marijuana in Oregon, along with Danica Hibpshman, Director of Statewide Licensing at the Oregon Liquor Control Commission (OLCC). The roster of speakers lined up for this CLE is better than any year to date (you won’t want to miss Nathalie Bougenies‘ presentation on hemp and CBD); and everyone, including non-lawyers, would be well served to attend. For a full event description, including topics, speakers and registration links, click here.

Looking back over the past four years, it is amazing to see how much things have changed in Oregon cannabis. At this point, the OLCC’s recreational marijuana program is fully built out and the Oregon Department of Agriculture (ODA) hemp program has taken off like a rocket. We are proud to call many of these Oregon producers, processors, wholesalers and retailers our clients, alongside the many investors and ancillary service providers we represent.

Sometimes, it is said that pioneers get slaughtered and settlers get rich. Now that the Oregon regulatory groundwork has stabilized, we have begun to see a second wave of entrepreneurs and investors move in on the local industry. Many of these new entrants bring skills, capital and experience from other regulated markets, while others are new to the space. Over the next year or so, we expect to see continued consolidation in the OLCC market, and further escalation in ODA hemp production, processing and sale.

Oregon attorneys and business owners alike need to be familiar with the unique regulatory concepts and industry dynamics that will be discussed on Thursday in order to best serve the Oregon cannabis industry. These concepts include state laws and administrative rules, developments in the highly dynamic federal sphere, and practical approaches to working with and in the cannabis industry. Attendees will hear from regulators, bankers and, of course, lawyers aplenty.

If you are in or around Portland, we hope you will join us on May 17 for an eight-hour survey of Oregon cannabis that is both broad and deep. And if you are a Harris Bricken client or a friend of the firm, please click here to request a promotional discount code, which can be applied to either the webcast, or to in-person attendance.

See you soon.

The deals in Oregon cannabis are getting very big and much of what we do these days involves mergers, acquisitions and cross border work. It’s amazing this happened so fast. Less than four years ago, as the OLCC began writing rules for the adult use marijuana industry, there was a distinct small business tenor to everything. At that time, our Portland office began forming the first of what eventually became a few hundred local cannabis companies. It was an exciting time, and a typical set-up looked something like this: two founders with limited capital, medical market bona fides and maybe credit card debt, would join forces with an investor and her few hundred grand. This crew would then form an LLC or corporation to grow weed on somebody’s property.

Today, many of those businesses have disappeared for one reason or another, others are humming along, and a few have really crushed it. Despite all of the consolidation in the OLCC world, though, the small deals and simple structures are making comeback. The only difference is that this time it’s on the hemp side. Oregon has seen a staggering increase in registered growers and acreage this planting season, owing to the new Farm Bill and the CBD craze. So we’ve been forming small LLCs and corporations again, alongside the seven figure deals– and just in time for planting season. Who would have thought?

One commonality among most of these transactions, large and small, is something called “securities.” Simply defined, a security is a negotiable financial instrument (company stock, certain debt instruments, investment contracts, etc.) offered or sold to an investor who lacks real authority to manage the investment. Many of those early Oregon marijuana companies and the new hemp companies have been trading in securities from the outset, even if unaware of this fact. Noncompliant companies have sometimes skated by, but given the liability exposure here–including lawyer liability for bad deals–it’s crucial to get the securities issuance right.

oregon cannabis securities
Probably best to find an exemption.

Federal and state securities laws are very complex, but they apply even to small businesses (including cannabis businesses) offering or selling a security to even just one person. Federal law requires that the issuer either: 1) register the offering and sale with the SEC (“go public”), or 2) conduct that offering and sale within a registration exemption. Fortunately, there are quite a few exemptions available, but you’ve got to hit the target square. And even when you don’t have to register, it’s a really bad idea not to make extensive disclosures to offerees and investors in conjunction with any solicitation.

Finally, in addition to federal securities laws, an Oregon cannabis business issuing securities must comply with Oregon blue sky laws and also the blue sky law of each state in which a purchaser is located. For this reason, our cannabis company clients often end up paying registration fees in other states. Those can add up pretty fast and there may be circumstances where it’s just not worthwhile.

All of that said, below are the Oregon small offering exemptions typically used for a new cannabis business, which do not require registration when done correctly.

Sales to Accredited Investors

An “accredited investor” is an investor with special status under financial regulation laws, generally due to high net worth. ORS 59.035(5) exempts transactions between start-ups and accredited investors from registration, so long as there is no public advertising or general solicitation in connection with the transaction. This is a self-executing exemption, which means that no state filing is necessary to take advantage of the exemption.

The “10 in 12” Exemption

ORS 59.035(12) exempts from Oregon registration requirements transactions that result in not more than 10 purchasers within Oregon during any consecutive 12 months. Note that accredited investors do not count as “purchasers” here. Repeat transactions with the same purchaser during a 12-month period also do not increase the number of purchasers (in other words, each purchaser is counted as one purchaser for the 12-month period). To use this exemption, no commission or other remuneration can be paid, and no public advertising or general solicitation can be used.

Federal Rule 506 (Regulation D) Offerings

If you’ve made it this far, I’m not going to thrill you with an outline of SEC Rule 506; instead, there is a good overview of allowed offerings here. Suffice it to say that in Oregon, for any Rule 506 offering, ORS 59.049(3) provides that the local start-up must, within 15 days after the first sale in the state, file a completed Form D (including the state signature page) with the Oregon Securities Division. There is also a $250 filing fee requirement.

The bottom line is that very often, new Oregon cannabis businesses raising money are subject to securities laws. That is true even if the business intends to break federal laws by trading in marijuana, and even if the business is taking on investment (equity, loan, whatever) from just one person. With a new wave of cannabis businesses coming online, it’s important to get it right. The alternative may be getting sued for securities violations–or even cannabis investment fraud–and that’s no fun at all.

california hempWe have been closely following California’s commercial hemp cultivation licensing law since it was proposed last year as Senate Bill 1409 (see herehere, and here). In March, I wrote about some of the roadblocks to implementing SB-1409’s commercial hemp cultivation programs, and the lengthy review process of the California Department of Food and Agriculture (“CDFA”) regulation which would allow hemp cultivators to register with their county agricultural commissioners.

The CDFA’s regulation was recently approved, and as of April 30, 2019, the CDFA posted applications for registration for commercial hemp cultivation and hemp seed breeders (see here and here respectively).  It looks like these respective apps will not be submitted to the CDFA directly, but will instead be provided to county agricultural commissioners in the county in which a cultivator or seed breeder wishes to cultivate hemp. Applicants for commercial cultivation must provide basic information about themselves, as well information about the cultivation site, the purpose of the site (cultivation v. storage), GPS coordinates and other information regarding the site, a boundary map, and certain information about seed cultivars. The seed breeder application is relatively similar.

Despite the fact that these applications are now live, it’s not completely clear how they will be implemented. There are a number of counties in California that restrict or prohibit hemp cultivation. The memo attached to the application itself identifies a number of counties with restrictions: Amador, Calaveras, Glenn, Humboldt, Lassen, Marin, Mariposa, Mendocino, Merced, Modoc, Mono, Monterey, Napa, Nevada, Orange, Placer, Sacramento, San Bernardino, San Joaquin, Santa Barbare, Shasta, Sierra, Siskiyou, Sonoma, Tehama, Trinity, Tulare, Tuolumne, Yolo, and Yuba. Since the application is so new, we haven’t evaluated which of these counties fully prohibit cultivation, but it’s a safe bet that if any of them do fully prohibit it, their agricultural commissioners are probably not going to accept these applications.

But what about counties that don’t say anything or only have some minor restrictions? It’s not clear yet whether counties will try to delay implementing hemp cultivation by claiming that they need to establish local protocol for registration. Ultimately, each county may do something different, and it will take time before we know what the full effect of the law is.

It’s also not clear how this will be impacted by the federal Agricultural Improvement Act of 2018 (or “2018 Farm Bill”). I summarized parts that law in my previous post linked above, but notably for this post, hemp produced per the former 2014 Farm Bill will be permissible. The 2014 Farm Bill doesn’t explicitly allow commercial cultivation, and so it’s not clear how this will play out. What is clear is that once the U.S. Department of Agriculture begins accepting state hemp-production plans for review per the 2018 Farm Bill, California will need to send its plan for review by the USDA. This could affect registered hemp cultivators, but as per usual, it’s not clear how that will happen just yet.

Stay tuned to the Canna Law Blog for more details on California hemp laws.

immigration cannabis marijuanaOn April 19, the U.S. Citizenship and Immigration Services (USCIS) announced that it would formally update its Policy Manual regarding how cannabis-related activity–even when it took place in states that have legalized the medical and recreational use of marijuana–would impact naturalization.

The Policy Manual is self-defined by the USCIS as its centralized online repository for immigration policies. It serves as a guide for immigration officers to follow when adjudicating applications and petitions.

Prohibited cannabis-related activity, as we explained previously, includes possession, prior use, as well as employment or investment in cannabis industry, each of which is deemed a violation of the federal Controlled Substances Act (CSA). In all, it’s a very broad array of exclusionary activity.

Lifetime bans on Canadians have increased public awareness that foreign nationals can be deemed inadmissible and refused entry into the U.S. based on their involvement in cannabis-related activity. It is not well-known, however, that such prohibitions may also affect lawful permanent residents of the U.S. (i.e. green card holders). The USCIS’s announcement on Friday, clarifying that cannabis-related activity (including activity that is legal under state law) creates a conditional bar on one’s eligibility to naturalize, is aimed at clarifying this misconception.

Naturalization is the process by which a green card holder can become a U.S. citizen upon meeting five core requirements: (1) be a green card holder for the statutory period (at least five years at the time of filing the naturalization application, or at least three years if the green card holder has been married to the same U.S. citizen spouse during that entire time); (2) be physically present in the U.S. for at least half of the applicable statutory period; (3) be continuously domiciled in the U.S. during the applicable statutory period; (4) possess “good moral character” (GMC); and, (5) demonstrate a willingness to actively support the Constitution of the U.S.

Of those prerequisites, the focus of this post is the GMC requirement. In order to demonstrate GMC, the applicant must demonstrate a lack of involvement in a series of unlawful activities ranging from felonies to a failure to register for Selective Service.

Murder and other felonies result in a permanent bar to naturalization, meaning that the applicant will forever fail the GMC requirement regardless of how far back in the past the criminal conduct took place.

Apart from felonies, the Policy Manual, in Part F, Chapter 5, includes a laundry list of criminal activities that result in a conditional bar to citizenship, meaning that such conduct within the statutory period will prevent an applicant from naturalizing. Cannabis-related activity is among those crimes.

It is important to note that the Policy Manual specifies that an applicant may be conditionally-barred from establishing GMC not just because of “a conviction” for a cannabis-related offense, but also for:

  • An “admission” to having committed such an offense;
  • An “admission to committing acts that constitute the essential elements of a violation of any controlled substance law”;
  • A “conviction or admission that the applicant has been a trafficker in a controlled substance, or benefited financially from a spouse or parent’s trafficking”; and even
  • “Possession of controlled substance related paraphernalia”.

Somewhere, Jeff Sessions is smiling. Failure to establish GMC for any of the above could not only result in a denial of the naturalization application, but also jeopardize the applicant’s ability to preserve the green card, and result in removal from the U.S.

The recent update to the Policy Manual also spells out the conditional bar to GMC applies even where the offense may have taken place in a state that has laws permitting “medical” or “recreational” use of marijuana because of its classification as a ‘Schedule I’ drug under the CSA. The updated Policy Manual language is crystal clear:

Such an offense under federal law may include, but is not limited to, possession, manufacture or production, or distribution or dispensing of marijuana. For example, possession of marijuana for recreational or medical purposes or employment in the marijuana industry may constitute conduct that violates federal controlled substance laws. Depending on the specific facts of the case, these activities, whether established by a conviction or an admission by the applicant, may preclude a finding of GMC for the applicant during the statutory period….Note that even if an applicant does not have a conviction or make a valid admission to a marijuana-related offense, he or she may be unable to meet the burden of proof to show that he or she has not committed such an offense.

A conditional bar is difficult to overcome because it requires the applicant to show “extenuating circumstance” about why a particular unlawful act was committed. Such extenuating circumstances must have occurred before or at the time the unlawful act was committed. The Policy Manual explicitly instructs officers to disregard any evidence of an applicant’s subsequent reform, or to evaluate any positive factors about the applicant’s character when making a decision on a naturalization application.

With its April 19, 2019 Policy Manual update, the USCIS has shown its zealous commitment to interpreting marijuana use under the 1971 federal CSA in spite of the tide of marijuana legalization that has swept nearly half the states in our union. It’s unfortunate, but green card holders and other affected parties should be warned.