Husch Blackwell Partner Steve Levine and the Cannabis team were featured in the Sacramento Business Journal on September 19, 2018. In the article Steve explores California’s laws and regulations on the emerging cannabis industry. Husch Blackwell opened our Sacramento office doors on January 2 of 2018.
Tilray became the first US IPO on Nasdaq on July 19th by a marijuana company. The company priced 9 million shares at $17 apiece and by the end of the day, closing at $22.39, a jump of slightly more than 32 percent on day one. As the date of posting this blog and the second day of trading, the price has hit a high of over $31, another jump of approximately 38 percent.
What does this mean?
Clearly the national securities exchanges (i.e. NYSE and Nasdaq) in the United States are getting increasingly comfortable with the listing of plant-touching businesses operating in Canada. What they are not comfortable with, are plant-touching businesses operating in the United States. As a result, plant-touching businesses operating in the United States – except for Colorado – are only able to list on either a Canadian exchange (i.e. the CSE) or on the over-the-counter-bulletin (i.e. OTCQB or OTCQX).
Tilray’s total revenue in 2017 was only $20.5 million but its resulting valuation on the public market is a multi-billion dollar valuation. Thus this company has taken advantage of the United States robust public markets that NO plant-touching operating business in the United States can even list with because of the fact that marijuana is still illegal at the federal level.
I wonder what the valuation of these Canadian companies would look like if our much stronger United States’ companies were afforded the same opportunities and there was a change in federal law in the United States? There are companies in Colorado that have operated for almost 10 years and have annual revenues in excess of $100 million…I have a feeling there would be a substantial market adjustment for many of these public companies.
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.
“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.
Check out the Meet the Press interview with Governor Hickenlooper’s thoughts on the Trump administration’s stance on marijuana after his meeting with Attorney General Jeff Sessions. His insight should be reassuring to the marijuana industry, but he explicitly stated that state-legal marijuana businesses that are not following the letter of state law should be prosecuted.
Myself, Winn Halverhout and Fred Miles were interviewed by Advisory Board about the main challenges facing providers related to medical marijuana, how the new administration might change the legal landscape, and more.
Check out the article here. Advisory Board is a best practices firm that uses a combination of research, technology, and consulting to improve the performance of health care organizations around the world.
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.
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.
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.
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.