1.) Consider the Regulations. Parties routinely come to an agreement on the commercial terms of a deal without considering the impact of the regulations. Failure to consider the state licensing body’s rules may result in a delay or invalidation of a transaction, but can also be a bigger headache for sellers, who may be left to clean up the regulatory mess left by buyers. For example, Ohio rules prohibit medical-marijuana dispensary companies from selling their operations until they have been open for at least a year, and structures that skirt this prohibition are heavily scrutinized.

2.) Location, location, location. Parties often gloss over the venue and choice-of-law provisions in contracts, which are normally tucked away into the boilerplate at the back of contracts. This means that they overlook the fact that marijuana is still federally illegal and therefore a federal court may not be a suitable battleground for disputes over the enforceability of contracts for transfer in ownership. This risk might be mitigated with careful drafting of dispute and venue provisions. For the time being, parties engaging in contracts involving marijuana ventures should agree to state law and a state court venue, in a state of competent jurisdiction where cannabis activity is legal. A Seattle federal judge has recently refused to enforce a commercial contract regarding the transfer of ownership interest in marijuana cultivator. The court refused to enforce the agreement on the basis that the Controlled Substances Act bars the enforcement of a contract regarding ownership of a marijuana venture. Ironically, the court sits in Washington state, where recreational cannabis is legal. So, the outcome may have been different had this case been in front of a state tribunal.

3.) Licenses cannot be sold. Most state regulatory regimes are clear: licenses may not be sold or transferred. Transactions attempting to sell or transfer only the licenses, without the rest of the business, may result in the termination of the license. Therefore, be prepared to buy the entire company. This of course raises additional business, ownership, and other legal due diligence risks for a potential buyer. Because transactions in the cannabis space often center on a company’s licenses, the opportunity for mistakes are more abundant.

4.) Cash is King? Many cannabis businesses are primarily cash operations due to a lack of access to federally regulated banking institutions and deposit services. Prior to any change in ownership transaction, a prospective buyer should perform diligence on the cash logs of a target company to confirm the strength of that company’s cash controls. Also verify other cash positions of the target company. Related diligence questions include: What banking arrangements, if any, does the company have in place? Has the company paid all of its local, state, and federal taxes? Could there be a large tax liability?

5.) Don’t make a move before consulting with counsel.  Legalized cannabis is a rapidly expanding and every-changing industry in the United States: a growing list of jurisdictions now regulate the medical and recreational use of cannabis. Effective business operations in this industry require careful navigation of the complex local, state, and federal regulatory landscape to avoid unnecessary burdens and disappointing outcomes.