Colorado General Assembly Makes it Easier for Out-of-State Investors to Provide Capital for Marijuana Businesses

On June 10, 2016, Governor Hickenlooper signed bill 16-040 which removes the Colorado two year residency requirement to obtain a marijuana business owner license, ultimately easing the burden for prospective out-of-state investors to become owners. The Colorado General Assembly’s intent in creating this bill was to provide marijuana businesses with the economic capabilities to grow their operations and remain competitive in the marijuana marketplace. Below is a quick review of Colorado’s history of licensing requirements for marijuana business owners, and a summary of the licensing requirements after the enactment of this new law.

Changes to the Requirements for Owners of a Licensed Marijuana Business

Colorado’s marijuana laws have been notoriously opposed to allowing out-of-state residents to own Colorado marijuana businesses. Until recently, Colorado required prospective marijuana business owners to be a two year resident of Colorado prior to their license application. Ultimately, prospective out-of-state investors, who did not meet this requirement and could not own a stake in the business, were deterred from investing. Over time, the Colorado General Assembly has become more tolerant of out-of-state investors, evidenced by the creation of a new class of ownership called Permitted Economic Interest (“PEI”). The PEI allowed out-of-state investors a formalized process for investing in cannabis businesses—— through convertible notes or options to purchase equity of a licensed marijuana business—— while still requiring Colorado residency for two years for marijuana business ownership.

However, prospective out-of-state investors are no longer required to be Colorado residents for two years before applying for a marijuana business owner license. The Colorado General Assembly, with the enactment of this new bill 16-040, has created a new distinction of ownership: Direct Beneficial Interest Owner.  A Direct Beneficial Interest Owner is an individual or closely held business entity that owns equity shares of stock in a marijuana business. The requirements for an individual are: Colorado residency for one year prior to the date of the license application; or United States citizenship prior to the date of the license application. Before applying for this new type of ownership, prospective out-of-state investors must first request a finding of suitability from the State Licensing Authority, . If the investor receives a suitability confirmation then he or she may apply to become a Direct Beneficial Interest Owner. For a closely held business entity, the new law requires that it must consist entirely of United States citizens prior to the date on the license application.

This new bill places certain restrictions on marijuana businesses in relation to Direct Beneficial Interest Owners. Marijuana businesses can be comprised of an unlimited number of Direct Beneficial Interest Owners who have been Colorado residents for at least one year prior to the license application. But, marijuana businesses comprised of one or more than one Direct Beneficial Interest Owner Direct Beneficial Interest Owners, who lack one year of Colorado residency prior to the date on the license application, must have at least one officer who meets the requirement of Colorado residency for one year. Further, bill 16-040 restricts marijuana businesses from being made up of more than fifteen Direct Beneficial Interest Owners, when the business consists of one or more Direct Beneficial Interest Owners who do not meet the requirement of Colorado residency for one year. These limits aren’t set in stone going forward as the MED may increase the number of allowable Direct Beneficial Interest Owners above fifteen if the increase is supported by: developments in state and federal financial regulations, market conditions, and the business’s ability to access legitimate sources of capital.

Marijuana businesses may also include Qualified Institutional Investors who own 30% or less of the business, Bill 16-040 defines an institutional investor as:

  • A Bank
  • An Insurance Company
  • An Investment Company
  • An Investment Adviser
  • Collective Trust Funds
  • An Employee Benefit Plan or Pension Fund
  • A State or Federal Government Pension Plan
  • Any other entity identified by the MED

However, the MED has the right to conduct an initial background check on any prospective investor.

What does this mean?

Colorado has clearly made the right step in permitting outside investment into the state regulated marijuana industry.  While the regulations implementing them are yet to be adopted (i.e. does an institutional investor or its owners/officers/directors need to be background checked, fingerprinted, etc.) there is a path for out of state investors as well as regulated funds or banks to be able to participate.  As always, the devil will be in the details and we will not know how this will be implemented until the regulations are finalized and adopted later this year.

Cultivation loses license in Denver – is this a trend?

The City of Denver licensing director, Stacie Loucks, agreed with a hearing’s officer’s findings that a cultivation’s odors and other effects conflict with the neighborhood plan for Elyria-Swansea and denied the renewal of a cultivation license.  This is an unprecedented action taken and surely the owner of the cultivation will appeal this decision to the district courts.

What does this mean?

It should be noted that one of the neighborhood advocates supporting a rejection of the license was affiliated with the nearby National Western Stock Show.  The National Western Stock Show generates substantial revenue to the City and is an active participant in local government.   Further, this particular cultivation is within neighborhood boundaries (unlike the numerous other cultivations on industrial-zoned land where cultivation is automatically allowed) and subject to this type of scrutiny upon renewals.

The City of Denver is looking to tighten the reins on the local industry with respect to managing the number of licensees and when appropriate, using its power to reduce the number of licensees through similar actions.  However, it is my view that this will not be trend as there were very specific circumstances that resulted in this particular license denial.

The take-a-way for other licensees is to make sure you are respectful of your neighbors and actively work with them to ensure they have your back to avoid a similar situation. Winning the support of neighborhood organizations, business districts and the individuals in and around your premises is key for the continued growth of our industry and especially important if you operate in a saturated neighborhood.

SOTU – Obama’s new war on drugs. Hint, it’s not cannabis…

Young cannabis plants, marijuanaLast night during the State of the Union, President Obama cited areas where Democrats and Republicans may be able to work together, including criminal justice reform and prescription drug abuse.  Prescription drug overdoses, which now kill 44 people each day, have turned into an epidemic on a national scale.

Obama’s speech to a Republican-controlled Congress to work out a bi-partisan approach to prescription drug abuse demonstrates a sense of urgency that our politicians at the federal level need to do more to address this issue.

Cannabis on the other-hand, widely considered much safer than opioids, is still a Class I substance under the Controlled Substance Act (CSA) and federally illegal.  However, there is scientific evidence that cannabis has benefits for treating certain instances of:

  • Neuropathic pain
  • Glaucoma
  • MS spasticity and central pain
  • Chemotherapy induced nausea and vomiting

In many cases cannabis, or yet-to-be-developed cannabinoid-based pharmaceuticals, could potentially be a safer alternative than opioids.

While I applaud President Obama’s stance on prescription drug abuse, I think it is time that this administration also take a stance on the benefits of cannabis by supporting the declassification of cannabis from the CSA and allowing individuals States to implement there own state-legal cannabis laws without concern of federal law conflict.  Such a step would not only provide some much needed clarity for non-medical cannabis businesses (such as industrial hemp), but would also accelerate the progress of cannabis medical studies and the development of treatments – treatments that could prove to be be safer alternatives to current opioid applications.

2016 Federal Budget Approved – State MMJ Programs and Industrial Hemp Provided Protection

President Obama approved the 2016 federal budget and it contained a prohibition that none of the funds made available to the Department of Justice may be used, with respect to any of the States that have state-legal medical marijuana programs, to prevent any of them from implementing their own laws that authorize the use, distribution, possession, or cultivation of medical marijuana.

In addition, the 2016 federal budget also prohibits the use of any funds made available to any agency that might be used in contravention of the Agricultural Act of 2014 or prohibit the transportation, processing, sale, or use of industrial hemp that is grown or cultivated in accordance with the Agricultural Act of 2014, within or outside the state in which industrial hemp is grown or cultivated.

What does this mean to you?

Medical Marijuana – Similar to the 2015 Federal Budget, this prohibition only covers “medical marijuana” and not “recreational marijuana.”  As I have stated before, this does not prevent the Department of Justice from using funds to prevent recreational marijuana programs from implementing laws.  While this is a continued step in the right direction, the prohibition does not extend to state-legal recreational marijuana.

Industrial Hemp – This is also a positive step for the industrial hemp industry for those operating under the Agricultural Act of 2014.  This will allow the continued cultivation of industrial hemp for purposes of research conducted under an agricultural pilot program or other agricultural or academic research.  However, this does not allow industrial hemp to be sold for commercial purposes.  For a State like Colorado, that allows the commercialization of industrial hemp.  You should contact your legal counsel to discuss the implications prior to selling any products.

US Government Files Brief For SCOTUS to Refuse Colorado Marijuana Lawsuit

The US Government has urged SCOTUS to pass on hearing the dispute among Nebraska, Oklahoma and Colorado over Colorado’s law legalizing the recreational use of marijuana.  In a brief filed late Wednesday night, U.S. Solicitor General Donald Verrilli Jr., stated that Nebraska and Oklahoma have not sufficiently alleged that Colorado has inflicted direct injury to the citizens of those respective states to warrant the exercise of original jurisdiction over the case.

This is a win for the cannabis industry.  At the direction of the Obama administration, U.S. Solicitor General Donald Verrilli Jr. clearly states that SCOTUS should not weigh-in on this issue.  While I believe that the arguments from Nebraska and Oklahoma are weak, this is a positive step to dissuade SCOTUS from acting as the final law maker on this issue.  This is a job for the legislature.

Cannabis Law Now Seminar: Spotlight on Section 280E Tax Deductions

Young cannabis plants, marijuanaOn Tuesday, November 3, 2015, Husch Blackwell will host a seminar on Section 280E tax deductions and best practices for cannabis businesses. Section 280E forbids businesses from deducting otherwise ordinary business expenses (advertising expenses, insurance, employee wages, etc.) from gross income associated with the “trafficking” of Schedule I or II substances. The IRS has subsequently applied Section 280E to state-legal cannabis businesses, since cannabis is still a Schedule I substance under the Controlled Substances Act.

The program will include a brief legal review and practical tips on what cannabis companies do to mitigate tax liability. Failure to be up to date on best practices can create risk and result in penalties and other consequences that can impact your bottom line. This program, geared toward cannabis business owners, will provide tools to help prevent problems for your business.

Date, Time and Location

Tuesday, November 3, 2015

4:00 pm – registration, 4:15 pm – program, 4:45 pm networking reception

Husch Blackwell, Wells Fargo Building, 1700 Lincoln Street, Suite 4700, Denver, CO 80203

Presenters

Steve Levine, partner and cannabis attorney, Husch Blackwell

Brett Harris, president, founder and head consigliere, Consigliere Inc.

Who Should Attend

Cannabis business owners, compliance managers, officers, directors, entrepreneurs, investors and landlords. If you’re interested in more information, please contact Steve Levine or REGISTER HERE.

DEA Polices on Medical Marijuana “Defies Language and Logic” as Ruled by Federal Court in California

This ruling is a definitive win for medical marijuana business that are operating consistent with state regulations.  The Rohrabacher-Farr amendment to last year’s spending bill lists the states that have medical marijuana laws, and mandates that the DOJ is barred from using federal funds to “prevent such State from implementing their own State laws that authorize the use, distribution, possession, or cultivation of medical marijuana.”

“The DEA, however, didn’t see it that way. In a leaked memo, the Justice Department contended that the amendment only prevents actions against actual states — not against the individuals or businesses or business that actually carry out marijuana laws. In their interpretation, the bill still allowed them to pursue criminal and civil actions against medical marijuana businesses and the patients who patronized them.”

The ruling could discourage the Department of Justice from creative interpretations of the Rohrabacher-Farr amendment going forward, which should let medical marijuana businesses and their patients in 23 states breathe a sigh of relief.”

The Washington Post

What does this mean for you?
I view this as a big step forward for state-legal medical cannabis businesses.  Note that the Rohrabacher-Farr amendment only covers “medical marijuana” and not recreational marijuana.  However, striking down any creative interpretations of the Rohrabacher-Farr amendment will pave the way for the new bills introduced by the Senate and House that account for recreational marijuana.  While not yet law, these bills are a positive step towards a regulated cannabis market.

Cannabis Derivative Market Value to Grow Over $20.7 Billion by 2020

BIS Research has published the North American Cannabis Market – Analysis and Forecast Through 2015-2025 estimating “the cannabis derivative market value to grow over $20.7 billion by 2020 at an estimated CAGR of 29.80% from 2014 to 2020.”

So what does this mean?

There is an old adage that it wasn’t the gold miners that made it big in the Gold Rush, it was people selling the picks and shovels.  As thousands of people rush to be the next big marijuana cultivation/retail/infused product mega-millionaire with a reality TV show, only a select few will be successful… most have or will fail.

However, unlike a state-locked marijuana cultivation/retail/infused product company that cannot sell its products across state lines, ancillary businesses that service such companies are subject to less regulatory scrutiny and are able to launch national product lines and services across state lines.

Our cannabis team has successfully represented such ancillary businesses in the cannabis industry with corporate structuring, raising capital, IP protection and developing functional businesses that can service or provide products to a highly regulated industry.

California Finally Develops Regulations for Medical Marijuana

California has had laws on its books since 1996 allowing marijuana use for medical reasons, however, it has failed to adopt any regulations for the state and local licensing of marijuana cultivations and dispensaries.  After seeing states like Colorado and Washington reap millions in taxes, California has finally developed new regulations.  Today, California law makers reached an agreement with Gov. Jerry Brown to issue licenses for medical cannabis dispensaries and cultivators.  California will create a new Bureau of Medical Marijuana Regulation (BMMR) within the state Department of Consumer Affairs that would oversee a multiagency licensing and regulatory effort.

This is an essential step for California to take if advocates in the industry hope to end prohibition statewide in the next presidential election by legalizing adult-use as Colorado, Washington, Oregon and Alaska have already done.

Pesticides Continue to be a Problem for the Marijuana Industry

Not only do marijuana centers in Colorado need to be worried about MED inspection of pesticides used in cultivation, but they should be on the look-out for investigative exposes being conducted by journalists. The Denver Post has alleged that MED prohibited pesticides are still being found in marijuana products sold in Denver.

For those of us in the cannabis industry, pesticides have been a point of consternation. Enforcement has been inconsistent and there is no guidance provided by the EPA as to allowable levels of pesticides because cannabis remains federally illegal – even though many of these pesticides are used on a variety of crops grown and consumed in the United States.

In Colorado, marijuana centers must continue to be diligent about the types of pesticides they are using or face regulatory scrutiny and public shaming. Marijuana centers should think about having their attorney’s control the compliance review to ensure that the results of such checks are protected by the attorney-client privilege.

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