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Last week, the DOJ sent a letter to trustees who handle consumer bankruptcy reminding them that marijuana is a federally illegal drug and warned them not to handle any money from the sale of marijuana-related property.  The letter goes on to state “Our goal is to ensure that trustees are not placed in the untenable position of violating federal law by liquidating, receiving proceeds from, or in any way administering marijuana assets.”

What does this mean?

Colorado courts have already dismissed numerous cases where the company was engaged in state-legal marijuana cultivation and sales, so this is nothing new.  However, this letter might be illustrative of Attorney General Sessions’ previous statements that the DOJ will increase legal scrutiny on marijuana.

While it is clear that marijuana business likely do not have federal bankruptcy protection based on the current law, there are state laws regarding the receivership and assignment for the benefit of creditors that can be utilized to assist a failing marijuana company deal with its debts.

Young cannabis plants, marijuanaAccording to a prominent cannabis advisory firm, the cannabis industry raised over a $1 Billion in investment dollars in 2016.  These investments included public companies on the TSXV (cultivation and extract company), NYSE (REIT) and NASDAQ (pharmaceutical company).

What does this mean?

Majority of large investments are going into real estate and pharmaceutical company – as these investments are not subject to the strict regulatory environment restricting ownership of companies that cultivate and sell cannabis.  Big money will continue to flow to “non-plant touching” business in 2017; however, I expect a fair amount of consolidation in the cultivation and retail sectors.

Young cannabis plants, marijuanaYesterday the DEA published a final rule providing for a new drug code for “Marihuana Extract” .  The DEA states that this will allow them to track quantities of “Marihuana Extract” separately from marijuana to aid in the compliance with relevant drug treaties.  This new rule is set to become effective on January 13, 2017.  The DEA’s new definition for “Marihuana Extract” includes: “an extract containing one or more cannabinoids that has been derived from any plant of the genus Cannabis, other than the separated resin (whether crude or purified) obtained from the plant.”

What does this mean?

Fundamentally this does not represent a change in federal law, as cannabinoids extracted from “marihuana” (as defined in the CSA) are federally illegal.  However, the plain language of the new definition does appear to expand the CSA’s reach to cover cannabinoids extracted from the genus Cannabis not just “marihuana”.  This means that cannabis businesses that have imported permissible parts of the plant Cannabis sativa L., are now also likely prohibited from extracting cannabinoids from such plant material.

NOTE:  Given the varied implications, my firm is further analyzing the implications to the cannabis and pharmaceutical industries.  We will provide an update when appropriate.

There has been a lot of speculation about what a Trump administration, and particularly a DOJ lead by Jeff Sessions, will mean for our burgeoning Marijuana industry. The short answer is nobody knows, and given the fact that the Trump team seems intent on using obfuscation as a strategy, I don’t think we will have any clarity on this issue any time in the near future.

The better question then becomes, what does the industry need to be prepared for? I’m working from the assumption that state-regulated marijuana is not coming to an abrupt end, but that we should expect greater attention from the DOJ in the coming years. Sloppy and apathetic operators will be most at risk. Though larger brands will also want to be wary of becoming a political trophy. Leases and other agreements need to better contemplate enforcement actions. Inventory tracking, pro-active employee and sales policies, and strict compliance with your state regulatory regime will be of paramount importance.

Our industry has seen an incredible increase in sophistication and maturity over the last 6 years. As of now, it looks like that pace will need to quicken if we want to continue to thrive.

Young cannabis plants, marijuanaCalifornia, Massachusetts, Nevada and Maine approved adult-use marijuana initiatives last night. Florida, North Dakota and Arkansas also approved medical marijuana initiatives. Unfortunately, Arizona failed to garner enough support to pass adult-use. Clearly, these votes are a watershed moment for cannabis reform in the United States. As I have stated before, California passing adult-use marijuana will likely signal the true beginning to the end of federal prohibition of marijuana. However, Donald Trump also pulled off a monumental victory for the GOP and won the White House which has created uncertainty for the industry.

What does this mean?

With the approval of adult-use marijuana in the states, the percentage of Americans living in states where marijuana use is legal for adults rose above 20 percent, from 5 percent. A recent Gallup Poll found nationwide support for legalization at 60%, the highest it likely has ever been. Florida passed its’ initiative by a 71% – Florida also voted for Trump.

As we all know, Trump is a wild card but he has not publicly taken any prohibitionist stance on cannabis. Trump recently was quoted as: “In terms of marijuana and legalization, I think that should be a state issue, state-by-state,” Trump told The Washington Post. “… Marijuana is such a big thing. I think medical should happen — right? Don’t we agree? I think so. And then I really believe we should leave it up to the states.” Continue Reading Marijuana Wins! But so does Trump…

Cannabis snippetAccording to a report from the Marijuana Policy Project, the state-legal medical and adult use marijuana industry in Colorado had a $2.4bn economic impact on the Colorado economy in 2015.  Most importantly, the marijuana industry is credited with funding approximately 18,000 direct and ancillary full-time jobs in 2015.  While this only represents a small percentage of Colorado’s overall GDP (approx. $300 billion), the size of this industry is substantial and the world is taking notice.

What does this mean?

The obvious answer is new jobs are being created and operating businesses are generating substantial revenue.  However, this news is not all positive.  As the size of the marijuana industry in Colorado continues to expand, so will the problems that the industry will face.  While business owners in the space are not billionaires or even millionaires as everyone thinks, that fact will not stop aggressive plaintiffs attorneys from identifying potential claims against industry participants.  Expect an increase of product liability claims, customer slip and fall claims, Americans with Disabilities Act (ADA) claims, shareholder lawsuits, etc.  Owners need to be prepared to ensure they are in a position to defend these lawsuit by making sure they are adequately insured and hire professionals to provide adequate advice on how to best mitigate these issues now.  Waiting for the lawsuit to come will be too late.

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.

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.

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.

 

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.