It’s been a minute since we wrote about the new OLCC tax compliance rules for retailers. These temporary rules require all retailers to certify tax compliance via the Oregon Department of Revenue (DOR) in order to renew or transfer ownership of a marijuana retailer license. OLCC has a pretty good FAQ sheet here, as part of its general overview page on the subject here.
The temporary rule has been in effect for transfers in ownership since June 16, 2023. (Transfers in ownership are defined as ownership changes of 51% or more.) We’ve dealt with a few tax compliance issues in these situations already, including people scrambling to clean up their dashboards ahead of sale. For retail license renewals, the temporary rule has been in effect only since September 15, 2023. We had one retailer client trip on this new requirement already, which is kind of amazing since the rule literally took effect on Friday.
From this week’s experience, I have some good news to share. OLCC appears willing, as a matter of course, to allow any retailer who has applied for but not yet received a certificate of tax compliance (“DOR Certificate”) to continue to operate under temporary authority, at least through the 30-day late renewal window. I’d like to emphasize the “has applied for” bit in that last sentence. Also, it’s worth mentioning that retailers (and their applicant owners) should not wait until the eleventh hour to submit DOR Certificate applications. We are learning that the process isn’t always quick or easy– particularly if an individual or entity is in arrears and angling for a payment plan with DOR.
Another item of note is that these conditional letters are automatically generated. They are sent within 24 hours of renewal payment and submission to the email address associated with a licensee’s account. For this reason, I believe the conditional letters do not mention tax compliance or lack thereof, as of this writing. (I haven’t actually seen one lately.)
So what should last-minute shoppers keep in mind? Well, anyone approaching a license renewal deadline should: 1) ensure all DOR Certificate applications are submitted well before the license expiration deadline (including requisite applications of any “applicant” owners); and 2) reach out to their OLCC investigator (i) with evidence of any and all required DOR submissions, and (ii) to confirm everything that I am saying is true. I’m not your lawyer. (Probably. And if I am, you should still reach out.)
So that’s my PSA on a few finer points in this latest program provision. In the bigger picture, my colleague Jesse Mondry asked back in May: “How Many Retailers Will Close Due to Governor Kotek’s New Tax Compliance Missive?” At that point, DOR reported that 9% of licensed cannabis retailers, or around 75 licensees, hadn’t fully paid their taxes. I’m guessing those numbers will drop a bit with OLCC now beginning to enforce this new rule— even with a bit of wiggle room being afforded to certain licensees.
Finally, please note that this remains a dynamic area. As I recently explained, the tax compliance rules are temporary in nature: OLCC will adopt permanent rules this fall. The permanent rules could evolve in any number of ways, including by requiring non-retail licensees to show tax compliance. Watch this space.
As the U.S. cannabis industry expands, high-profile lawsuits involving cannabis brands and the use of cannabis trademarks “inspired” by well-known companies have emerged. One recent example is popular candy brand Skittles’ lawsuit against a cannabis company for using the name “Zkittlez” on various products.
Please join us on Thursday September 21st at 12:00pm PT, for a lively and informative conversation about the legal issues surrounding cannabis trademarking. The presenters will focus on recent litigation, but will also cover best practices for protecting your cannabis brand’s trademarks.
The legal status of cannabis trademarks in the United States.
Factors courts consider when determining trademark infringement.
Recent lawsuits involving cannabis trademarks.
Best practices for protecting your cannabis brand’s trademarks.
Questions prior to this webinar are strongly encouraged and can be submitted through the registration link.
We welcome anyone involved in the cannabis industry, including cannabis business owners, lawyers, and entrepreneurs.
Panel
The event will feature cannabis-focused intellectual property attorneys Paul Coble and Fred Rocafort as speakers, and Chair of HB Litigation Practice Jihee Ahn as moderator.
I’m pretty sure that more ink has been spilled on the Secure and Fair Enforcement Act (“SAFE Banking”), than any other proposed cannabis law. It just won’t pass and it just won’t die. Specifically, SAFE Banking was introduced in 2017 and it passed the House seven times (seven times!) with bipartisan support since 2019. The public likes it too: here’s a November 2022 Data for Progress poll revealing that “By a +65-point margin, voters support ensuring that banks do not discriminate against legitimate marijuana-related businesses.” This bill should pass, right?
It’s getting closer. SAFE Banking will finally go to mark-up this week in the Senate Banking Committee. That Committee is preparing to vote before October 1, although what they’ll be voting on at this point isn’t entirely clear. (For some chatter on that, check out this Marijuana Moment piece from last Friday.) But let’s assume that SAFE Banking, after mark-up, holds onto its key tenets. It would prevent federal banking regulators from:
prohibiting, penalizing or discouraging a bank from providing financial services to a legitimate state-sanctioned and regulated cannabis business, or an associated business (such as a lawyer or landlord providing services to a legal cannabis business);
terminating or limiting a bank’s federal deposit insurance primarily because the bank is providing services to a state-sanctioned cannabis business or associated business;
recommending or incentivizing a bank to halt or downgrade providing any kind of banking services to these businesses; and
taking any action on a loan to an owner or operator of a cannabis-related business.
Would any of that be truly helpful? In a vacuum, yes. But we don’t live in a vacuum, and if something like this passes you can expect a host of collateral issues. Most worrisome to me is that SAFE Banking could ultimately increaseAML/BSA compliance burdens for financial institutions with cannabis clients. Hundreds of them already offer services to state-licensed marijuana businesses: these banks are well versed in the old-as-dirt 2014 FINCEN guidance on working with industry. If SAFE Banking passes, we’ll surely get additional rules and guidance from the Treasury Department and elsewhere. Be careful what you wish for.
This issue was highlighted in a well-written American Banker piece published yesterday (it’s paywalled, but they’ll trade you a freebie for an email). In that article, I and others also opined that SAFE Banking isn’t as critical as when the law was first introduced in 2017. This is because SAFE Banking wouldn’t actually solve a lot of cannabis banking issues, beyond access to banking services (which is already sort of solved). Specifically, it wouldn’t:
grant access to SBA programs (there’s another bill floating around for that)
increase lending options in any direct or discernible sense;
grant U.S. cannabis companies access to public capital markets (sorely needed);
require Visa, Mastercard, etc. to work with the cannabis industry (super sorely needed); or
Do I still hope SAFE Banking passes? I think so. The devil is in the details with something like this. And, as I told American Banker:
Right now, most states only have small credit unions working with the industry, and most of these credit unions only offer basic merchant accounts with relatively high fees. A few have more expansive offerings, like equipment loans, but generally cannabis companies don’t have access to the full suite of services that other, similarly sized commodities businesses have and they pay more for those limited services.
In that article, I also mentioned that I’ve learned not to get my hopes up with SAFE Banking. Even if this bill gets out of Committee, it would need a floor vote, and then reconciliation with whatever the House is thinking on the topic. That feels like miles and miles away, especially today when Congress is struggling to keep the lights on.
I don’t mean to be discouraging. In fact, it’s easier to feel OK when you think of SAFE Banking as not the biggest deal. These days, it’s really not.
On September 14, 2023, Special Counsel David Weiss of the Department of Justice filed an indictment against Robert Hunter Biden in the District of Delaware. The indictment pleads three counts, which I analyze below. The Hunter Biden indictment centers on issues I’ve analyzed in many posts this year (see links at the bottom). Today I want to talk about what Hunter Biden’s indictment could mean for cannabis users.
Controlled substances users can’t buy or own guns
If you’re not up on the law here, here’s a summary from my most recent post on the matter, “Federal law prohibits cannabis users from buying or owning guns.” And in this post I noted:
The Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) requires firearm purchasers to complete a form named ATF 4773, which requires the applicant to respond “yes” or “no” to the following question:
Are you an unlawful user of, or addicted to, marijuana or any depressant, stimulant, narcotic drug, or any other controlled substance?
Warning: The use or possession of marijuana remains unlawful under Federal law regardless of whether it has been legalized or decriminalized for medicinal or recreational purposes in the state where you reside.
If an applicant answers “yes” to this question, their application will be denied. If they are in fact a marijuana user – even someone who uses medical or recreational marijuana in a state where it is fully legal – but answer no, they can be charged with a crime. So in sum, the federal government believes that even state-legal cannabis users should be stripped of their Second Amendment rights.
A 2022 U.S. Supreme Court case, New York State Rifle & Pistol Association, Inc. v. Bruen, held that the test for determining whether a gun control law is constitutional is (1) whether the affected person has Second Amendment rights, and (2) whether the restriction is “consistent with the Nation’s historical tradition of firearm regulation.”
All or virtually all courts that have dealt with the federal cannabis gun control law agree that cannabis users have Second Amendment rights. And nearly all courts agree that the federal cannabis restriction is not “consistent with the Nation’s historical tradition of firearm regulation.”
What the Hunter Biden indictment for cannabis users
Now let’s turn to Hunter Biden’s indictment and how it could affect cannabis users. The indictment relates to his completion of the ATF 4773. The counts are:
Allegedly making a false statement on ATF 4773 that he was not an unlawful user or addicted to a controlled substance;
Allegedly making a false statement to the federal firearms license (FFL) holder who apparently sold him a pistol that he was not an unlawful user or addicted to a controlled substance; and
Allegedly possessing a firearm while he was not an unlawful user or addicted to a controlled substance.
It bears noting that Hunter Biden’s alleged addiction was not to cannabis, but to crack cocaine. That said, the ATF 4773 makes no distinction between crack cocaine, cannabis, or any other controlled substances. So the analysis is similar. And that means, both for him and for cannabis users, that there seems to be a decent chance of prevailing on at least some of the charges.
As I’ve noted in many of my posts linked below, federal courts keep ruling that the federal laws restricting gun rights for cannabis users are unconstitutional. If struck down, either by Hunter Biden or in a challenge brought by cannabis users, would likely mean that the government would not prevail on the final charge against Hunter Biden (possession while an unlawful user).
But what about the false statement charges? That is much different. As I noted months ago, “Even if federal courts completely do away with restrictions on marijuana users’ gun rights, that won’t affect the potential for federal charges for making misrepresentations on the ATF 4473.” In other words, if a person makes a false statement NOW or in the past on the ATF 4773, it may be fair game for prosecutors to prosecute those charges even after changes in law. That’s because false representations are different from possession. And there doesn’t seem to be any push to change those requirements.
Federal laws on controlled substance users and guns are likely unconstitutional
In my view, cannabis users are likely to prevail, and these laws are likely to be held unconstitutional, in the coming years. The indictment of Hunter Biden may speed that process up and he will undoubtedly attack the constitutionality of those same laws in Delaware. Only time will tell, so please stay tuned to the Canna Law Blog for more updates.
Weed officially became legal in Minnesota on August 1, 2023, and it’s now the 23rd state to legalize cannabis for adult use.
And while the majority of Minnesotans had been ready for legal cannabis for some time, achieving legalization in a no-ballot purple state required a consistent and concerted effort from a swath of legislators, stakeholders, and advocates.
Two of these advocates, Leili Fatehi and Laura Monn Ginsburg, worked for four years to bring Minnesota into the modern era of cannabis consumption, executing a big-picture strategy that ultimately helped Democrats secure a political trifecta, ushered in an era of downright legislative hustle, and finally ended cannabis prohibition in the North Star state.
Cannabis advocacy in Minnesota
When Fatehi and Monn Ginsberg came together as legalization advocates in 2019, “no one thought that Minnesota was going to be legalizing anytime in the near future,” said Fatehi.
Minnesota does not allow ballot initiatives, meaning that legalization must come through the legislature. With a divided House and Senate, cannabis legalization was not on anyone’s agenda or radar — even within the Democratic party. “It wasn’t an issue that was on the party platform,” she said, “It was considered a third rail issue that the party didn’t want to touch.”
Courtesy of Leili FatehiLeili Fatehi, cannabis advocate
But having worked in political circles through their public affairs and political consulting firm Apparatus, Fatehi and Monn Ginsberg saw something different. “We were at an election party,” shared Fatehi, “and as I’m looking around, I see senator so-and-so smoking a joint, and there’s a council member, and there’s another prominent political figure.”
Seeing that several politicians felt comfortable consuming cannabis in the open while others were incarcerated for it led to the realization that, while the state had a long tradition of grassroots advocacy, something was missing: a grasstops approach. From there came the creation of the advocacy group Minnesotans for Responsible Marijuana Regulation (MRMR), whose efforts focused on promoting legislative leadership on cannabis legalization.
Gina Coleman/Weedmaps
Working alongside other pro-legalization groups such as Minnesota NORML and Sensible Change for Minnesota, and under the snappy campaign slogan “MN Is Ready,” they got their first big win in 2021 when House Majority Leader Ryan Winkler agreed to take up the issue and gained House approval on the comprehensive legalization bill HF 600 — a first-ever in the state.
“With that win, now [legalization] was definitively a Democratic position,” said Fatehi. “There was political support behind it, and there was a consolidated bill.”
Navigating the House and Senate on the path to legalization
Despite getting HF 600 to pass in Minnesota’s House and making legalization a priority for Democrats, a significant hurdle remained, “We had a divided legislature. Senate Republicans wouldn’t even give this stuff a hearing,” said Fatehi.
A diverse and growing group of policy stakeholders came together under the umbrella of the MN Is Ready coalition, including industry members, labor unions, and community representatives, among others, and set up a political action committee (PAC), turning their focus to the electorate and November 2022 midterm elections.
Tony Webster/Wikimedia CommonsCannabis advocacy at a past Twin Cities Pride parade
“We did the kind of work that PACs do in those swing districts, where there were third-party candidates, and we knew they could cost a Democratic seat,” said Fatehi. “It was instrumental towards getting a pro-legalization majority, meaning democratic control in both chambers of the legislature, which no one expected.”
In January 2023, Democrats officially took control of the House and Senate for the first time since 2014, giving the party a political trifecta and an emboldened attitude toward getting things done. The state has now become a powerhouse for progressive legislation, with cannabis legalization as the cherry on top of a long list of accomplishments.
The makings of a cannabis legalization bill
Before cannabis legalization could be passed, a bill had to be written. And given that Democrats had enjoyed only one other trifecta in the last 30 years, the general party ethos had become “LFG” — Let’s F–king Go.
“The last thing you want to do is assume that passing good legislation means that it’s going to lead to good outcomes.”
— Laura Monn Ginsburg
“So then we had to do this last push, which was to build the external infrastructure to help the legislature to be able, in a very short period, to put together a really good bill and pass it,” said Fatehi.
The process may have been relatively quick, but it involved hundreds of hours of working group sessions and public hearings to help legislators put together the policy provisions that went into the bill. “By virtue of having to go through so many committee stops, we had some really thorough conversations,” said Monn Ginsburg, including everything from wastewater runoff to impacts on schools and students. By delving into the finer details, they could craft a piece of legislation that Fatehi and Monn Ginsburg felt was uniquely Minnesotan.
Courtesy of Laura Monn GinsburgLaura Monn Ginsburg, cannabis advocate
“That’s something I feel was special about the process we went through; we really talked through it,” said Monn Ginsburg. “We had some substantive conversations with twenty-plus committees throughout the Minnesota legislature about every nook and cranny of this bill.”
With minor differences between the House and Senate bills, both passed within the same week this past April. The reconciled bill was officially signed into law on May 30, 2023, by Governor Tim Walz.
Automatic expungement of all prior cannabis possession misdemeanors and petty misdemeanors is underway and will affect nearly 70,000 Minnesotans impacted by the war on drugs. The bill also created a panel to consider the expungement of prior gross misdemeanor and felony cases related to cannabis possession and sales.
Cannabis licensing unique to the Minnesota market
While other state’s cannabis laws helped inform the creation of Minnesota’s, their development came down to creating a collaborative vision for what would make sense for their own state. “We knew we wanted to be craft, we knew we wanted to keep multi-state operators (MSOs) out, and that we wanted it to be equitable,” said Fatehi.
With those guiding principles in mind, hundreds of hours were spent brainstorming different ways to set up the licensing model. “And that is what resulted in this unique model in the bill,” Fatehi explained, “We’re not capping the number of licenses — it’s based on canopy size and designed to create an environment to support local Minnesota businesses.”
Gina Coleman/WeedmapsCurrently, 14 different types of licenses are available to businesses looking to participate in the adult-use and medical cannabis markets.
One of the ways the bill will help protect the Minnesotan market, at least initially, is through its unique licensing structure. “We spent a lot of time thinking through how these different pieces are going to work together,” said Fatehi.
As it stands, 14 different types of licenses are available to businesses looking to participate in the adult-use and medical cannabis markets, and they can be combined to support various business structures or activities, aiming to provide local businesses with flexibility as the market grows and evolves. For example, a retail license holder can also hold a cannabis delivery service license, a medical cannabis retailer license, and a cannabis event organizer license.
Additionally, communities disproportionately impacted by prohibition will be prioritized for participation in the legal market. Social equity applicants, which may include people who live in low-income communities, have been previously convicted of a cannabis possession or sales offense, and veterans discharged over a cannabis offense, among others, will be given priority in licensing along with grants to help with startup costs and technical training.
Building on the foundations of the current hemp market
The state’s low-dose hemp market fills another uniquely Minnesotan piece to the legalization puzzle. While Fatehi and Monn Ginsburg were busy rallying Democratic support for the midterm elections, in May 2022, Minnesota made a bold and unexpected move that could set the state up for success when legal cannabis finally comes online.
“On the eve of the adult-use market opening up, these businesses are capitalized.”
— Leili Fatehi
Passed as part of an omnibus health care bill, the groundbreaking law — HF 3595 — legalized hemp-derived Delta-8, CBD, and low-dose THC edibles and beverages. And while jokes ensued when local GOP members were confused about the bill’s ramifications, Democrats insisted the intentions were clear.
“It wasn’t an accident. It was very much intentional,” said Fatehi. “When we created that marketplace for hemp-derived THC edible products, it created an opportunity for our local businesses to begin making these products, building out their supply chains, getting their brand out there, building customer loyalty, and developing relationships with local policymakers.”
Minnesota’s low-dose hemp-derived THC market has been booming, with sales in July 2023 reaching nearly $6 million. These products are available in mainstream retail outlets largely prohibited in recreational and medical cannabis markets, such as restaurants and grocery, convenience, and liquor stores.
Gina Coleman/WeedmapsMinnesota’s low-dose hemp-derived THC market has been booming, with sales in July 2023 reaching nearly $6 million.
“On the eve of the adult-use market opening up, these businesses are capitalized; they already have cannabis businesses. They’re competitive, not just in terms of getting a license [for adult use], but for being successful after that. The entire competitive landscape is different, and the consumer expectations are different as well,” said Fatehi.
What’s next for Minnesota’s legal weed market
When cannabis became officially legal in Minnesota on August 1, 2023, Minnesotans were allowed:
With the work of legalization behind them, Monn Ginsburg and Fatehi are shifting their focus to supporting the fledgling market “because the last thing you want to do is assume that passing good legislation means that it’s going to lead to good outcomes,” said Monn Ginsburg.
They’ve now launched the Minnesota Cannabis Resource Center (MCRC), which is a public benefit corporation that will operate as a “think/do” tank centered on advancing a safe, equitable, and sustainable industry through its support to legislators, regulators, and industry as the market is developed and launched.
The duo also runs Blunt Strategies, a cannabis-focused public affairs and strategic consultancy whose primary focus is supporting local businesses, ensuring they have the tools, resources, and skill sets they need to thrive.
“We helped pass the law to look this way,” said Fatehi. “It’s both our pleasure and our obligation to now make sure that these businesses are set up for success.”
New York’s Marijuana Regulation and Taxation Act (MRTA) requires anyone applying for a retail dispensary or on-site consumption license to submit a notice of their intention to apply to the municipality (or community board in New York City) at least 30 days prior to submitting the application. The Office of Cannabis Management (OCM) and Cannabis Control Board (CCB) included that requirement in the final adult-use rules and regulations (Section 119.3).
Here are the specifics:
the notification must be made between thirty (30) and two hundred seventy (270) days prior to filing an application; and
the notification “shall be in a form provided by the [OCM].”
Here’s why the New York municipal notice requirement is suddenly pressing: during the September 12, 2023 CCB meeting it was announced that the license application portal for retail dispensaries will open on October 4, 2023, with review of retail dispensary applications that include secured real estate to start on November 3, 2023. That means that, basically, any prospective applicant for a retail dispensary license needs to submit the notification to it’s municipality (assuming it has already secured real estate), like now.
Here is why the notification requirement is an issue: that little reference to a “form provided by the [OCM].” As of this writing, the New York OCM has not provided a form municipal notice for the general adult-use application. The OCM’s website has an entire section devoted to notifying a municipality or community board; the attached form is for CAURD provisional licensees and expressly states that the applicant has “obtained a provision license from the Cannabis Control Board[.]” Clearly, the provided form is not applicable for general adult-use applicants.
To recap, the MRTA and adult-use rules and regulations require the OCM’s “form” to be submitted at least 30 days prior to submitting the application (that 30 day period is likely fast approaching), but no such form currently exists. We took the liberty of asking the OCM about the form and were advised that “the form could change in the future when non-conditional licenses are rolled out” and that “[c]urrently, we have no other form in this regard.”
Of course, you can always modify the OCM’s form to make sure a timely submission is made (not so easy in PDF, but doable), but some community boards have already stated that they will not accept a modified form and it is jarring (albeit unsurprising) that the general application portal is scheduled to open and a required form that must be submitted imminently (accordingly to the timeline) does not yet exist. If you are considering applying for a New York retail dispensary license, we strongly urge you to consult an attorney.
The wait is (almost) over! During the September 12, 2023 Cannabis Control Board (CCB) meeting, the CCB announced that New York’s full, adult-use cannabis license application portal will open on October 4, 2023. The CCB meeting covered a number of other important topics, but we’ll save those for another post. For anyone planning on applying for an adult-use license, here are the important things to know about the application process:
The application portal is “planned” to open on October 4, 2023 at 8am and will be open until December 4, 2023 at 5 pm. New York’s Office of Cannabis Management (OCM) plans to accept adult-use cannabis license applications for the following license types:
Cultivators;
Processors;
Distributors;
Microbusinesses; and
Retail Dispensaries.
The OCM will review and approve retail dispensary and microbusiness applicants with a proposed location secured by November 3, 2023 at 5 pm. It is unclear how exactly the staged review will work (particularly in the context of the required notification to municipality) but we expect the timing to be addressed as part of the OCM’s subsequent FAQs. As a reminder, applicants no longer need to have a location secured prior to applying.
The implication is that the OCM will be reviewing applications all at once (i.e., not on a rolling basis), but we assume application review will be addressed as part of the OCM’s FAQs.
The OCM released this application mock-up, which lays out what the actual application looks like. It is very similar to the CAURD application, but includes a separate social and economic equity application.
Within the application, there is a separate Social and Economic Equity certification that will be available (and come with a 50% reduction in application and licensing fees) if the applicant qualifies under the below categories:
individuals from a community disproportionality impacted by the enforcement of cannabis prohibition;
woman-owned businesses;
minority-owned business;
service-disabled veteran-owned businesses; and
distressed farmers.
This is the huge step New York has been waiting for since the Marijuana Regulation and Taxation Act was passed back in April of 2021. The next few weeks will likely include deluge of additional information, including OCM FAQs that clarify ambiguity in the application forms and process, including any required forms for applicants (such as the Notification to Municipality and True Parties in Interest forms).
Stay tuned! And if you are interested in pursuing a New York adult-use cannabis license application of any kind, please reach out to the our local cannabis business lawyers.
Major banks like JPMorgan Chase and Wells Fargo, as well as landlords such as BentallGreenOak and Ashkenazy Acquisition Corp., have found themselves indirectly involved with New York City’s unlicensed cannabis dispensaries, potentially exposing them to legal issues. This situation arises due to the proliferation of unlicensed retail shops in the city, with as many as 2,000 of them now operating since New York legalized recreational marijuana in 2021.
A new law known as Local Law 107 of 2023 (“LL 107”) that came into effect in July allows the city to fine landlords up to $10,000 if they knowingly lease space to tenants who illegally sell cannabis. (See our commentary here.) While cannabis consumption is legal at the state level in New York, it remains illegal at the federal level. Banks receiving payments from cannabis sales, and especially unlicensed cannabis dispensaries, could face regulatory penalties.
An analysis by PincusCo and Bloomberg revealed that more than two dozen landlords had multiple unlicensed cannabis stores as tenants. It can be challenging for some landlords to determine whether their tenants plan to sell cannabis, as some of these stores initially appeared as convenience stores or bodegas that later added cannabis products alongside snacks and cigarettes.
Landlords attempting to evict tenants engaged in illegal cannabis sales have encountered a slow eviction process. Some cases won’t reach a courtroom until September, even after receiving notices from the Manhattan District Attorney’s Office.
Banks that have financed properties with unlicensed cannabis tenants could also face repercussions. A Bloomberg analysis found that JPMorgan Chase & Co., Signature Bank, Bank of America Corp., Wells Fargo & Co., and New York Community Bank had numerous mortgages for properties leased to illegal smoke shops. Banks have been cautious in states where recreational cannabis sales are legal, including language in loan agreements that could put borrowers in default if the property is used in violation of federal law.
The takeaways here are that failing to conduct proper due diligence could: 1) lead to serious tenant headaches, including exposure under LL 107 with respect to unlicensed dispensaries, and 2) expose concerns about the strength of the bank’s anti-money laundering programs. Banks and all other landlords should take care to diligence their incoming retail clients carefully, and include strong lease language with respect to “allowed use” on site.
Over the last several months there has been a lot going on in New York’s cannabis world, with the “highlights” being litigation, corporate letters, municipal legislation, and generally just a lot of back and forth about where New York’s adult-use cannabis market is going and how it is getting “there” (wherever “there” is”). Over the next few weeks, we will be breaking down the big ticket events, but in the interim, we thought it might be helpful to consolidate the “schedule” into one post, with the what, when and why it’s important laid out.
When: September 12, 2023 at 10:15 AM (Live Stream Link in the Link)
Why It’s Important: This is going to be the biggest CCB meeting since the November 2022 meeting during which the first version of the adult-use rules and regulations were released. On tap for this meeting is likely:
“Final” approval of the adult-use rules and regulations;
Announcing when the adult-use application portal is going to be open (likely in October);
Addressing the ongoing litigation and corresponding injunction; and
hopefully, addressing the mounting frustration amongst the New York cannabis community about the OCM and CCB’s missteps.
What: Status Conference for the Fiore v. CCB/OCM litigation
When: September 15, 2023 at 10:00 AM
Why It’s Important: As of right now, there is a preliminary injunction in place that prohibits the OCM from issuing any further Conditional Adult-Use Retail Dispensary (CAURD) licenses. We need not get into the details of the OCM’s missteps (which have been well-reported). But Judge Bryant has been vocal from the very first hearing about the parties trying to find a resolution, and in the shadow of the September 12, 2023 CCB meeting, the hearing will likely provide real clarity on the future of the CAURD program.
What: New York State Senate Subcommittee Hearing on Cannabis
When: October 30, 2023
Why It’s Important: Everyone agrees that the OCM and CCB’s rollout of New York’s adult-use cannabis regime has been simultaneously rushed and way too slow. New York State Senator Jeremy Cooney announced the legislative session as a “fact finding hearing” during which industry stakeholders will testify about their experiences during the roll out and regulators will have to answer questions regarding the obvious issues with the rollout of licenses. The hope is that the hearing will act as a catalyst for legislative change to the MRTA.
__________
There is a lot happening in New York’s cannabis market. As we work our way through September, we expect real clarity on the future of New York’s adult-use cannabis market. Stay tuned!
Last week, the Department of Health and Human Services (HHS) recommended rescheduling cannabis from schedule I to III under the Controlled Substances Act (CSA). My colleagues already covered various implications of the proposed cannabis rescheduling (see here and here). Today, I want to talk about one of the most important consequences of the announcement other than 280E reform: the effect on cannabis investments.
What’s been happening with cannabis investments?
Some stage-setting is in order. In the earlier days of cannabis legalization, cannabis startups typically did fundraising via equity investments. Everyone and their grandma wanted to own a piece of a cannabis company, and many of these people were willing to pay top dollar for a piece of the pie. I don’t have an exact statistic, but early on it seemed like debt finance was pretty uncommon, whereas equity finance was the norm.
At the time, cannabis investors and businesses alike thought that if they could pay a lot up front, get their feet in the door, and expand market share, they’d succeed. A lot of this rested on the false assumption that federal legality was around the corner – and that federal legalization would end 280E, allow interstate commerce, and so on. Obviously, that never happened. Lots of businesses bet big and lost bigger. Over the years, equity finance slowed down and debt finance, with hyper leveraged deals and massive interest rates, spiked. Up until a few days ago, most cannabis businesses would be hard pressed to find meaningful sources for cannabis investments.
Flash forward to last week. Within a few hours of the cannabis rescheduling news, publicly traded stocks began to shoot up. It looks like they are still going up as the Biden Administration has announced (still pretty tenuously) support for reform. This is obviously good news for publicly traded cannabis companies. But most cannabis companies are not publicly traded.
Over the years, our corporate cannabis team has represented countless companies doing equity and debt financing, as well as potential investors in negotiating and diligencing these transactions. Today, I want to talk about many of the things we have seen over the years and how cannabis rescheduling is likely to change things.
What’s actually happening?
If you want to really understand the ins and outs of the cannabis rescheduling announcement, read my colleague, Vince Sliwoski’s, recent post here. In a nutshell, the government has not yet rescheduled cannabis. If/when that happens, it will be on schedule III, meaning state-legal programs will still violate federal law. However, section 280E of the Internal Revenue Code would no longer burden cannabis companies. Section 280E has, bar none, been the biggest roadblock to financial success in the industry. If it goes away, expect to see a massive influx of capital in the form of investments, as one of the biggest expense sources will be lessened. 280E reform won’t change regressive state taxation, but that’s often much less impactful than federal reform.
At the same time, nobody really knows what will happen if cannabis is placed on schedule III. Technically, schedule III means a host of DEA and FDA regulations could apply. But it seems less than likely that the federal government would virtually ignore state-level cannabis programs during the schedule I era, reschedule cannabis, and then enforce state-level programs out of existence via enforcement of healthcare regulatory requirements. I tend to think that the status quo will prevail, but at the end of the day, nobody knows yet. And we won’t know until rescheduling happens and the DEA and FDA provide guidance on the matter.
Investors and companies beware!
Given that cannabis is still on schedule I, companies doing fundraising need to be very careful. Since nobody knows if cannabis rescheduling will even occur, let alone whether it will lead to drastically different federal interventions, companies making promises about the future could be in for a wild ride in terms of securities fraud litigation. We’ve seen cannabis companies make sketchy or untenable claims in investment offering materials many times in the past, and this announcement is almost certain to kick that into high gear in the future. All those companies are doing is rubber stamping future litigation and a bad time.
By the same token, cannabis investors need to be doubly vigilant when it comes to diligencing prospective investments. Over the years, we’ve worked with tons of investors to do basic diligence projects prior to investments. We’ve seen just about every conceivable skeleton in the closet over the years. The difference between then and now is that we used to have a fundamental understanding of the interplay between federal and state laws.
In the wake of this announcement, there are tons more unknowns regarding what cannabis rescheduling will do in the long term. This makes cannabis investments much more difficult from a diligence perspective. Investors who are unfamiliar with the market or regulatory structure and try to do diligence on their own may be in for a rude awakening.
Are the wonky structures going away?
One of the most annoying things about the cannabis industry is the org charts. In any other line of business, org charts are clear and make sense. In cannabis (and now psychedelics), you see some of the most wonky and bizarre org charts imaginable. See here for a good summary by my colleague, Vince Sliwoski. In a lot of cases, cannabis companies try to take what should be one company, and split it into two, or three, or five, or ten, often in an attempt to mitigate 280E impacts. Even though the tax courts can and for years have disregarded lots of this stuff, it’s still pervasive.
With 280E potentially going away, I predict a lot more sanity in cannabis org charts and corporate structuring. Without a need to find “creative” ways to deduct costs otherwise prohibited by 280E, businesses are going to see the light of day and realize that simplicity is key. This is good not only for good corporate governance, but also for cannabis investments. It is much easier for companies to bring in capital if investors understand the org chart – i.e., what they are specifically investing in.
There are still a lot of unknowns about what cannabis rescheduling will do. But we already can see a tangible uptick in public company stock prices, which naturally will lead to investments in non-public companies. Stay tuned to the Canna Law Blog to learn more about cannabis investments in the coming months.
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Courtesy of Laura Monn Ginsburg
Gina Coleman/Weedmaps
Gina Coleman/Weedmaps