Cannabis: It’s An Industry and Not Just Mother Jones Anymore

Sep 21, 2017 | Blog

Gone, in many respects, are the days of Reefer Madness and the “shame” associated with daring to even publically mention, much less discuss or, forbid, think of legally selling marijuana. While the sales of legalized marijuana are still well below that of tobacco, beer and liquor, there has been a significant increase in sales during this past decade and the projected growth over the next decade is tremendous. According to recent economic reports, the relatively nascent cannabis business grew to more than $6 billion a year at retail as of last year. It is currently projected to climb to roughly $20 billion annually within the next decade. In short, the business of legalized marijuana distribution is very much a business. In fact, it is an industry at this point. Beyond the core of the industry which includes in-state dispensaries, cultivation facilities, and testing laboratories, have sprung up a host of ancillary businesses, including transportation, storage, distribution, processing, as well as, advisory services. These businesses run the gamut of mom-and-pop variety operations to vastly larger companies, several of which have reported raising capital in excess of $100 million.

This growth has been fueled by a series of factors, including swelling public support for the legalization of marijuana, an ever-expanding landscape of state level marijuana legislation, state politicians unafraid to step up and support such legislation, a shift in Congress towards reform and, to a lesser extent, the White House’s shifting enforcement policies. Recent public opinion polls have shown support for medical marijuana in the range of 88-93% nationwide. Even support for legalized recreational use has risen to 60% in polls conducted this year. At the same time, what was once a trickle has become something of a flood in the number of states that have passed legislation, either by public referendum or state legislatures, legalizing the distribution of marijuana for medicinal purposes. Currently, 28 states (as well as Washington, D.C.) allow for the legal sales of medical marijuana and there are 8 states (and D.C.) that allow for its legal use recreationally. Most bills passed with large majorities, regardless of what party controlled the particular state legislatures. There has been strong bipartisan support for legalization legislation (particularly for medical use) in the states that have past such legislation and both sides of the aisle in Congress have also warmed to reforms. Additional states are expected to pass legalization bills in 2018 too.

The 800-pound gorilla in the room has generally been the federal government. Since the passage of the Controlled Substances Act (CSA) in 1970 at the federal level, marijuana has been, and continues to be (at least in theory), illegal as listed as a Schedule I drug. Thus, for purposes of federal law, cannabis has no currently accepted medical use and clearly no legal recreational use…and is considered to have a high potential for abuse just like opioids, LSD, etc. The past several administrations in D.C. have vacillated. Under President Obama’s administration, a time marked by significant expansion of state legalization and public support, a series of policy changes were instituted to temper enforcement at the federal level, at least as so long as the legalizing states maintained strong laws and regulatory systems. During Obama’s second term in office enforcement slackened even more as long as those in the business were shown to be complying with applicable state laws and accounted for concerns at the federal level. Currently, the guidance provided under the Obama administration remains in place. However, it is still unclear how President Trump’s administration will definitively address marijuana sales and use. Trump has expressed concern as to the legalization of marijuana for purely recreational purposes. His Attorney General, Jeff Sessions, has a rather long history of opposing legalization, including for medicinal purposes. However, others have been quick to point out that it would likely be extremely difficult to “put the genie back in the bottle” in its entirety with respect to legalization, especially for medical marijuana distribution and use. Additionally, members of Congress, both Democrats and Republicans, have clearly stated that Congress ultimately has the reins on the Department of Justice’s enforcement capabilities under the CSA (including the power of the purse) and also as to the ultimate determinations as to what substances should remain under federal control. At the same time, regardless of who holds the reins at the federal level, states are continuing to legalize the sale, distribution and use of marijuana both medically and recreationally and that shows no indication whatsoever of stopping in the near term.

One notable impact of the wavering enforcement of marijuana laws at the federal level, however, continues to be shown in the world of business financing in the industry. Financing from banks is virtually nonexistent. Given how regulated the banking industry is many financial institutions resist doing business with cannabis business owners because marijuana is still illegal (at least on the books) at the federal level. So, in a number of respects it remains a cash business. At the same time, an array of alternative funding sources have arisen through, among other things, crowdfunding, private equity firms, venture capitalists, angel investors and the like. Additionally, legislation has been introduced on Capitol Hill seeking to prevent the federal government from interfering with the “production, possession, distribution, dispensation, administration and delivery of marijuana” in states that have legalized it. The legislation was proposed, in part, to give greater comfort to the financial community in doing business with those in the cannabis industry.

Not surprisingly, given that this industry is highly regulated and met with various shifting tides as to enforcement, the legal aspects of doing business within the industry are of significant importance and multi-layered. Operating in the industry generally involves such areas of the law as: business formation, corporate governance, contracts, intellectual property, state licensing and regulations, regulatory compliance, local advocacy, mergers & acquisitions, real property and litigation. Probably given the grassroots nature of the original growth within the industry, which arose from a number of mom-and-pop and informally structured businesses, there has been a Mother Jones and 60s counter-culture mentality that has pervaded various “corporate” aspects of this industry. While that may have worked, to some extent, early on (especially when the businesses sought to operate under the radar screen of the authorities before legalization took hold), it has also resulted in highly risky informal company structures and documentation. Inexperience, practical hurdles and budgetary constraints also have likely impinged on the formalities of successfully running businesses within the cannabis industry from a legal standpoint.

However, the industry is highly regulated and, as such, brings clearly to mind Benjamin Franklin’s famous quote of “an ounce of prevention is worth a pound of cure.” For instance, companies in the marijuana business are like virtually every other company when it comes to establishing a proper corporate structure from the outset. Failing to do so can be fatal to a company’s success within the industry. For example, if the company is a C-corporation it should have, at the very least, bylaws, a shareholder agreement, articles of incorporation and stock certificates. Maintaining registration within their state of incorporation is also important. An operating Board is needed. Properly handling funds of the business (and not commingling them with personal funds) is key to avoiding legal liabilities. These are only a small cross section of considerations. But, in short, the point is that basic proper corporate documents and governance is likely to be critical to the ongoing success of a business within the cannabis industry.

Similarly, while an abundance of general “forms” exist online and by publication, they are likely to be a poor substitute for documents prepared with a keen eye specifically to doing business in the world of marijuana production and distribution. Why? First, the industry is heavily regulated. Licensing is required at multiple levels. General forms rarely take this into consideration, much less stay on top of the ever-evolving regulations and licensing requirements. Additionally, it cannot be ignored that at the federal level marijuana remains illegal, for now, and this must be considered in developing appropriate operational documents for businesses in the business of legalized marijuana. Similar concerns apply also to, for instance, operational contracts as to, for example, cannabis production, storage, specialized land and facility leases, etc. In short, Mr. Franklin was wise beyond his years as his words about an “ounce of prevention” should equally be applied by those seeking to develop their own pathway to a successful business enterprise in the ever-growing cannabis industry. While there are plenty of small businesses serving the world of legalized marijuana, there can be no mistake that this is becoming big business and a rapidly growing industry. Mother Jones still publishes but its past counter-culture philosophy cannot ignore that the business of legal cannabis is, in fact, a business with all of the attendant legal responsibilities needed to grow and prosper.

Should you have questions or require additional information, please contact Eric W. Sleeper.