After the success of cannabis initiatives in the 2020 elections, more and more law firms are fielding questions from their clients about potential transactions in the cannabis industry. In many cases, a non-cannabis attorney can handle the legal work associated with cannabis transactions. After all, most corporate lawyers work on transactions across a wide range of industries. Lawyers typically identify as a specialist in a type of transaction, such as IPOs or M&A, as opposed to being siloed based on industry. That’s because, in most cases, a stock purchase agreement for a SaaS business does not fundamentally differ from an agreement to buy a die casting business.
Cannabis, however, is a highly regulated industry with a patchwork of governing bodies. While the structure of acquisition agreements remains the same, there are traps for the unwary. It can be challenging for corporate counsel to identify when they need regulatory counsel. It is critical to bring in cannabis regulatory counsel for certain areas, while it isn’t necessary for other situations. This article lays out areas where it is best to consult cannabis regulatory counsel in advance.
Current Status of Cannabis Legalization
This is an incredibly fast-moving area and operates at both the federal and state levels. Everyone knows that cannabis remains illegal at the federal level, but it is crucial to understand the important nuances to appropriately counsel clients.
Risks of Cannabis Investing
There are several theoretical and practical risks in investing in cannabis. These risks are closely related to the status of federal and state-level legalization efforts. Cannabis companies may run into unique issues in banking, payment processing, insurance, advertising, and social media.
Many states have rules that specifically delineate how IP licensing works in the cannabis context. Additionally, state and federal cannabis trademarks face particular legal challenges.
Any commercial contract entered into by a licensed cannabis business may be subject to disclosure and regulatory review. How a non-licensed party is paid and how much control they have over the licensed entity may be strictly scrutinized. These situations will often vary by state.
Entity Formation & Structuring
IRS Tax Code 280e: Plant-touching cannabis companies are subject to unique tax rules; therefore, special attention must be paid to entity choice and structuring to lessen the tax burden.
Ownership Requirements: If a company will hold a cannabis license, there are suitability and sometimes residency requirements, as well as social equity considerations for its owners. Owners should also anticipate background checks and disclosure issues, which will vary state by state.
Real Estate Acquisitions: The absence of traditional lenders and a wary title industry creates significant hurdles for buyers and sellers of real estate associated with the licensed cultivation, processing, or sale of cannabis.
Commercial Leasing: Mortgagees generally prohibit licensed marijuana business operations from occurring on secured properties; therefore, both landlords and tenants should seek certain additional protections when leasing commercial properties.
Residential Leasing: In states that allow for homegrown cannabis, residential landlords should seek cannabis counsel and include clauses that provide clarity and protection for their home.
Land Use: Both state and local laws generally regulate the time, place, and manner of licensed businesses. Applicants should expect strong community pushback at local hearings and counter this pushback with supportive public policy arguments and statistics.
Deal Structuring and M&A
Regulatory Analysis of Ownership: Any transaction that involves the buying or selling of a cannabis license requires regulatory analysis. Changing the ownership of a license can require regulatory approval and may not be permitted in certain circumstances.
Adding Owners: Adding new owners to a license may require regulatory approval. You may also need to account for residency and other requirements. Investors should clearly understand what they are signing up for concerning regulatory interactions.
Disclosures: Cannabis companies are subject to unique risks that need to be correctly described.
Debt Considerations: There can be disclosure and other issues with respect to any loan to a cannabis company.
Banking: Obtaining standard banking services for a cannabis business can be challenging. Banks that work with the industry often have a due diligence process that should be approached thoughtfully.
Entering New States
From a cannabis perspective, each state should be considered a self-contained economy subject to its own specific rules and regulations. Each time a licensed cannabis company enters a new state, it will be subject to an entirely new regulatory regime. You will likely need assistance from counsel familiar with the specific state.
CBD & Hemp Components of Deals
CBD: Regulation of CBD for human consumption is a fast-moving and nuanced area of law at both the federal and state levels. Regulations also vary between states, creating difficulties for compliant labeling and national distribution of products, among other issues. With the FDA regularly targeting CBD companies for non-compliance, it is imperative to bring in cannabis counsel to provide insight on best practices.
Hemp: Hemp regulations are changing quickly and, while subject to federal regulation, may also vary between states. Transactions involving hemp licenses should also be vetted with regulatory counsel.