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Husch Blackwell is proud to support @TheNCIA Northern California #CannabisCaucus on Tuesday, October 9 in Santa Rosa, CA. NCIA’s Cannabis Caucus event series has quickly become the gold standard event for professionals serving the cannabis industry! Join the industry’s most influential leaders for an evening of hors d’oeurves, cocktails (cash bar) and the latest organizational and federal policy updates. A registration link can be found here. Please use promo code HUSCH75 for 75% off tickets to this event.

Husch Blackwell is a lead sponsor of the Northern California Quarterly Cannabis Caucuses – next of which is to be held on Tuesday, July 10 in San Francisco, CA at the Hilton Financial District. The 3rd Quarter Cannabis Caucus will bring together executive level industry professionals, policymakers, regulators, and movement leaders to network, learn about emerging topics in the industry, and plug into NCIA’s efforts to advance the industry nationally. A registration link can be found here. Please use promo code HUSCH75 for 75% off tickets to this event.

 

 Yesterday, details of the Fiscal Year 2018 Budget were released.  Congress has once again elected to prohibit the Department of Justice (“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.  Congress also continued existing provisions shielding state industrial hemp research programs from federal interference.  Adult-use was left off.

What does this mean?

It’s a nice reassurance for industrial hemp/medical marijuana businesses, their employees and patients acting in compliance with state rules.  Note, this does not prevent the DOJ from using funds to prevent adult-use marijuana programs.  However, just last week, a bipartisan group of 59 lawmakers wrote a letter that the DOJ should be blocked from enforcing federal marijuana prohibition in states that have enacted legalization, medical AND adult-use.  It is still unclear when there will be enough appetite in Congress to get adult-use marijuana shielded from the DOJ, but I remain hopeful.

The state’s marijuana shops raked in $1.51 billion sales of medical and recreational flower, edibles and concentrate products during 2017, according to Colorado Department of Revenue data released last Friday. Adult-use sales topped $1.09 billion in 2017, with the remaining $416.52 million coming from medical marijuana. Cannabis sales in the state were up 15.3 percent in 2017 compared to sales growth of 31 percent in 2016.

What does this mean?

Colorado continues to have solid growth in state-legal marijuana sales but have slowed down considerably compared to 2016.  Clearly the market is moving towards a plateau or possibly even a regression in 2018 due to new adult-use markets like California and Nevada recently coming online. Operators in Colorado need to be prepared for market consolidation, tighter margins and increased competition.

Sen. Cory Gardner of Colorado wants to attach an amendment to the GOP-led tax reform bill that would allow state-legal marijuana growers, processors and sellers to deduct normal businesses expenses from their taxes.”  Section 280E of the tax code, 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.  Gardner’s amendment will include a 280E fix so that the provision no longer applies to marijuana businesses that operate in accordance with state or local laws.

What does this mean?

A 280E fix would be monumental for the cannabis industry.  The inability for state-legal cannabis businesses to take deductions for normal business expenses has the potential to cripple the industry if not addressed in the near future.  While I believe that getting this amendment in on the tax bill is a moon shot, I hold out hope that it is still a possibility.  At a minimum, the GOP is finally listening to the plights of our industry and is attempting to be part of the solution.

 

Edibles

The deadline for compliance with new edible restrictions and labeling requirements is fast-approaching. Infused product manufacturers (medical and retail) may no longer produce, transfer, or donate any edible marijuana products in the shape of a human, animal, or fruit or shapes that bear the likeness or contain characteristics of a realistic or fictional human, animal, or fruit, including artistic, caricature, or cartoon renderings. Also beginning on October 1, 2017, no medical marijuana center or retail marijuana store may sell any non-compliant edible product. Any marijuana business with non-compliant edible products must follow waste disposal rules.

Potency Testing

Also beginning on October 1, 2017, each container holding medical and retail marijuana product must be labeled with the potency of THC and CBD. The potency must be expressed in milligrams and either be:

  • in a font size that is not less than 10 point font and at least two font sizes larger than the surrounding label text, and must be bold, and enclosed within an outlined shape such as a circle or square; or
  • highlighted with a bright color such as yellow.

These new potency labeling regulations apply to medical and retail establishments. Operators have been aware of these rules for some time and should be in compliance ahead of the October 1 deadline. We suggest operators use the next few weeks to double check inventory for old stock of non-compliant product.

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.

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.

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.