Legal Adult-Use Marijuana in California – The Next Step Towards a Change in Federal Law

Young cannabis plants, marijuanaWhile I am sure we are all fed up with the current presidential election cycle, the upcoming vote in California to approve recreational marijuana has the potential to be a watershed moment for the national marijuana industry and warrants discussion.  In addition to California, Massachusetts and Maine both have legalization initiatives on the ballot next month that seem likely to pass. Arizona and Nevada are also voting on recreational marijuana, with polls showing Nevada voters evenly split.

What does this mean?

Market participants are flocking to California in the anticipation of a medical and adult-use marijuana market of $22 Billion in just a few years.  The vested interest of these businesses and the state of California will likely demonstrate to our federal legislators that federal laws need to be changed to accommodate the will of the people.

A successful vote in California, along with Massachusetts, Maine and possibly Nevada, will likely signal the true beginning to the end of federal prohibition of marijuana.  Ending federal prohibition will still take a herculean effort from industry participants to help craft an appropriate solution that not only addresses industry concerns but the public, health and safety of our communities in a thoughtful manner.

From my perspective, first on the list should be modifying 280E of the IRS tax code to allow for state-legal marijuana business to take business expenses as a deduction.  This will free up capital for the industry and allow the industry to be on equal footing with all other legit business in America.

The Little Guy

Jeff Tyler put together a great segment for yesterday’s Marketplace podcast concerning the growing size (and sophistication) of the marijuana industry. This is one of many recent stories from larger media outlets that, like the industry itself, is moving away from the novelty of marijuana and treating it like any other business segment. You can listen to it here.

As mentioned in the Marketplace piece, there is more and more talk in the industry about how the little guy is doomed. That local growers and providers will eventually be overtaken by corporate marijuana.  I don’t think this is inevitable.  The little guy can survive, and even thrive, in a mature and corporatized marijuana industry. . . if we get federal regulation right.

Getting federal regulation right for the marijuana industry is to follow in the footsteps of alcohol.  There is (surprising to many) very little regulation concerning alcohol at the federal level, leaving the states and local municipalities to primarily regulate brewers, distillers, distributors, liquor store and bars.  Some states are more permissive than others, and county or local laws vary within each state.  The result is a mess of regulations across the country.  That mess can be frustrating, but it hasn’t stopped national and international beverage companies from being highly successful.  It has, however, helped the craft brewing industry get and keep its foot in the door at local levels.  Conveniently for the little guy, mirroring the alcohol regulatory scheme is one of the most politically feasible paths forward at the federal level.

Don’t get me wrong, we represent organizations that are aiming to be one of the few marijuana mega-operators (and some of them will undoubtedly make it).  But we also represent sophisticated entities that provide ancillary services to licensed operators. Maintaining a disbursed and vibrant group of local licensed operators is beneficial for the long term health of the marijuana business ecosystem.  Fortunately, the current mess of state regulations will be helpful in maintaining that diversity should the federal government take a minimalist approach with regard to the marijuana industry.

DEA Takes Steps to Increase the Number of Marijuana Cultivators to Manufacture Marijuana To Supply Researchers in the U.S.

On August 12, 2016, the DEA published a policy in the federal register (81 Fed. Reg. 53846) designed to increase the number of entities registered under the CSA to grow marijuana to supply legitimate researchers in the United States.  The DEA has concluded that the best way to satisfy the current researcher demand for a variety of strains of marijuana and cannabinoid extracts is to increase the number of federally authorized marijuana growers.  While the new policy does not entirely make clear what entities may apply to become federally authorized marijuana growers, it seems that “commercial enterprises” may apply.  Specifically, the policy states that “under the historical system, there was no clear legal pathway for commercial enterprises to produce marijuana for product development.  In contrast, under the new approach… persons may become registered with DEA to grow marijuana not only to supply federally funded or other academic researchers, but also for strictly commercial endeavors funded by the private sector and aimed at drug product development.”

The DEA will evaluate each application to determine:  (1) whether adding such applicant to the list of registered growers is necessary to provide an adequate and uninterrupted supply of marijuana to researchers in the United States; and (2) whether the proposed registration would be consistent with the public interest.  Among the factors to be considered are whether the applicant has previous experience handling controlled substances in a lawful manner and whether the applicant has engaged in illegal activity involving controlled substances.

What does this mean?

Importantly, the DEA has concluded that in lieu of requiring the growers to operate under a contract with NIDA, a registered grower will be permitted to operate independently, provided the grower agrees (through a written memorandum of agreement with DEA) that it will only distribute marijuana with prior, written approval from DEA.  This is still unproven and there is no certainty that the private sector will be able to take advantage of this.

Organic Certification of Industrial Hemp Production Allowed by USDA

The USDA retracted its previous policy today and has permitted the organic certification of industrial hemp by certified agents accredited by the NOP, if produced in accordance with USDA organic regulations.  For imported hemp, existing regulations and guidelines continue to govern whether products may be certified as organic.

What does this mean?

Industrial hemp cultivated under Section 7606 of the Agricultural Act of 2014 (Farm Bill) that authorizes institutions of higher education and state departments of agriculture to establish industrial hemp research pilot programs in states where the production of industrial hemp is legal can now be certified organic.  This is a positive step for the industry and it is further evidence that industrial hemp will hopefully be legalized in the near future.

Industrial Hemp – Statement of Principles from USDA

The US Department of Agriculture provided statements of principals on industrial hemp, in consultation with the DEA and the FDA, to inform the public how Federal law applies to activities associated with industrial hemp that is grown in accordance with the Agricultural Act of 2014.  Generally, the statement of principles are consistent with my previous posts about the inability to generally commercialize industrial hemp grown in the US in compliance with Federal law.  I have excerpted a few statements that industrial hemp businesses should pay close attention to, with a few comments from me in italics:

  • For purposes of marketing research by institutions of higher education or State departments of agriculture (including distribution of marketing materials), but not for the purpose of general commercial activity, industrial hemp products may be sold in a State with an agricultural pilot program or among States with agricultural pilot programs but may not be sold in States where such sale is prohibited. Industrial hemp plants and seeds may not be transported across State lines.While this provides some latitude to make certain sales of “industrial hemp products” for purposes of marketing research, it is explicitly clear that general commercialization in all 50 states is NOT permitted and the commercialization of industrial hemp products not in connection with market research is prohibited.  Further, it is also clear that the sale of plants or seeds across state lines if forbidden.
  • Section 7606 specifically authorized certain entities to “grow or cultivate” industrial hemp but did not eliminate the requirement under the Controlled Substances Import and Export Act that the importation of viable cannabis seeds must be carried out by persons registered with the DEA to do so. In addition, any USDA phytosanitary requirements that normally would apply to the importation of plant material will apply to the importation of industrial hemp seed.This should not be a surprise.  The CSA continues to control and germinated seeds are prohibited from being imported unless registered with the DEA to do so.
  • The Federal Government does not construe section 7606 to alter the requirements of the Controlled Substances Act (CSA) that apply to the manufacture, distribution, and dispensing of drug products containing controlled substances. Manufacturers, distributors, dispensers of drug products derived from cannabis plants, as well as those conducting research with such drug products, must continue to adhere to the CSA requirements.This appears to be directed at the extraction market for CBD and other cannabidiols.

Husch Blackwell Places 150 Lawyers in 2017 Best Lawyers in America

The Best Lawyers in America has listed 150 Husch Blackwell lawyers in its 2017 directory, breaking the firm’s old record of 109 set last year. The firm also has 13 attorneys listed as “Lawyers of the Year.”

The directory was first published in 1983 and is based on a national survey involving more than seven million detailed evaluations of lawyers by other lawyers.

The full list of Husch Blackwell’s 2017 Best Lawyers honorees are found here.  Included in this list is Cannabis attorney Steve Levine.

Ninth Circuit ruling upholds Congress de-funding of DOJ enforcement actions against state-legal medical marijuana businesses

A favorable ruling from the Ninth Circuit in United States v. McIntosh is a reassuring win for the medical marijuana industry.  This federal case concluded that § 542 of the Consolidated Appropriations Act prohibits DOJ from spending money on actions that prevent medical marijuana states giving practical effect to their state laws that authorize the use, distribution, possession, or cultivation of medical marijuana.

What does this mean?

It’s a nice reassurance for medical marijuana businesses, their employees and patients acting in compliance with state rules. It is also likely to dissuade the DOJ from taking similar actions in the near future and provides a valuable precedent to certain defendants so long as the current prohibition on DOJ enforcement spending remains in effect. However, Congress can change the spending prohibition at any time.

The footnote of the case reaffirms that marijuana is still federally illegal and does not provide immunity from prosecution for federal marijuana offenses.   The footnote is below:

[Footnote 5: The prior observation should also serve as a warning. To be clear, § 542 does not provide immunity from prosecution for federal marijuana offenses. The CSA prohibits the manufacture, distribution, and possession of marijuana. Anyone in any state who possesses, distributes, or manufactures marijuana for medical or recreational purposes (or attempts or conspires to do so) is committing a federal crime. The federal government can prosecute such offenses for up to five years after they occur.

Congress currently restricts the government from spending certain funds to prosecute certain individuals. But Congress could restore funding tomorrow, a year from now, or four years from now, and the government could then prosecute individuals who committed offenses while the government lacked funding. Moreover, a new president will be elected soon, and a new administration could shift enforcement priorities to place greater emphasis on prosecuting marijuana offenses.

Nor does does any state law “legalize” possession, distribution, or manufacture of marijuana. Under the Supremacy Clause of the Constitution, state laws cannot permit what federal law prohibits. Thus, while the CSA remains in effect, states cannot actually authorize the manufacture, distribution, or possession of marijuana. Such activity remains prohibited by federal law.]

Finally, this ruling also only covers “medical marijuana” and not “recreational marijuana.”  As I have stated before, this does not prevent the DOJ from using funds for enforcement actions against recreational marijuana businesses.

Marijuana will not be rescheduled in 2016

The U.S. Drug Enforcement Administration filed documents with the Federal Register on Thursday outlining its denial of petitions to reschedule marijuana.  The DEA stated that marijuana has no known medical use and that the decision was based heavily on the evaluations of the U.S. Food and Drug Administration and the Department of Health and Human Services.  This determination should not be interpreted as the DEA now going after state-legal marijuana business, rather DEA enforcement action will remain focused on heroin, fentanyl, meth, cocaine.  Ultimately, the DEA’s decision is a neutral to the marijuana industry.


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.