Cannabis Customers for Trade Vendors - 02 - CRF March 2019 ......presentation, what are we referring...
Transcript of Cannabis Customers for Trade Vendors - 02 - CRF March 2019 ......presentation, what are we referring...
1
Cannabis CustomersKey Considerations for Trade Vendors Selling to a “Budding” Industry
Andrew Behlmann973‐597‐[email protected]
Jeffrey D. Prol973‐597‐2490
2Cannabis CustomersKey Considerations for Trade Vendors
DISCLAIMER
By continuing to attend the following presentation, read the following materials, or both, you
acknowledge and agree that this presentation
• is intended solely as an informational overview to educate participants on the general
regulatory landscape associated with selling goods, services, or both to customers involved in
the cannabis industry;
• does not constitute legal advice or a legal opinion;
• is not intended to encourage participants to, or to inform participants how to, engage in or
assist others with tax evasion, structuring, money laundering, or other illegal activities;
• does not create an attorney‐client relationship between any participant and Lowenstein
Sandler LLP or any of its attorneys, and no such relationship will exist unless and until an
engagement letter has been fully executed; and
• may not be complete or up to date due to, among other things, ongoing changes in federal,
state, and local laws and regulations and the time and other constraints imposed by the
presentation format.
All participants are strongly encouraged to consult with their legal, financial, accounting, and tax
advisors when making business decisions related to the cannabis industry.
2
2
3Cannabis CustomersKey Considerations for Trade Vendors
OVERVIEW
•Lay of the Land: Legalization and Regulation
• Industry Overview
•Market Growth
•Who Are Cannabis Customers?
•Business Risks
•Regulatory Issues
•Legal Concerns
•Practical Considerations
LAY OF THE LANDTHE HISTORY OF CANNABIS PROHIBITION AND THE SHIFT TOWARD WIDESPREAD STATE LEGALIZATION
3
5Cannabis CustomersKey Considerations for Trade Vendors
LAY OF THE LANDALPHABET SOUP: CANNABIS, MARIJUANA, CBD, THC, BHO, CSA, DEA?
Source: Merriam‐Webster
6Cannabis CustomersKey Considerations for Trade Vendors
LAY OF THE LANDALPHABET SOUP: CANNABIS, MARIJUANA, CBD, THC?
• Cannabinoids: • 113 identified to date• Cannabinoid receptors in cells of the human body
• THC: Delta‐9‐Tetrahydrocannabinol• Psychoactive compound found in cannabis• CSA Schedule I substance• Dronabinol: Synthetic THC approved by FDA as appetite
stimulant for AIDS patients, antiemitic for chemotherapy • CBD: Cannibidiol
• CSA Schedule I substance• Up to 40% of a cannabis plant’s extract• Epidiolex: CBD‐based drug approved by FDA in
September 2018 for two epilepsy disorders; Schedule V
4
7Cannabis CustomersKey Considerations for Trade Vendors
LAY OF THE LANDALPHABET SOUP: CANNABIS, MARIJUANA, CBD, THC?
• When we refer to “Cannabis” or “Marijuana” in this presentation, what are we referring to?
• Broadly:
• The cannabis plant itself
• Products derived from the cannabis plant
• Marijuana – dried flowers / leaves
• Hashish – resin of the cannabis plant
• Oils – most potent cannabis products
8Cannabis CustomersKey Considerations for Trade Vendors
LAY OF THE LANDFEDERAL REGULATION: HISTORY
1937
Marihuana Tax Act
Effectively prohibited cannabis at the federal level. Medical use was permitted, with heavy regulation and costly fees.
1970
Controlled Substances Act
Completely prohibited cannabis at the federal level, with no medical exceptions.
1990
Solomon‐Lautenberg Amendment
Used federal highway funds to encourage states to suspend drivers’ licenses of anyone who commits a drug offense.
2014
Rohrabacher‐Farr Amendment
Prohibits U.S. Department of Justice from interfering with state medical cannabis laws. Requires annual renewal. Does not change legal status of cannabis under CSA.
5
9Cannabis CustomersKey Considerations for Trade Vendors
LAY OF THE LANDFEDERAL REGULATION: TREATMENT OF MARIJUANA UNDER THE CSA
• CSA: Federal statute that regulates the use of certain drugs and potentially harmful chemicals
• Controlled substances are divided into five schedules based on medical use, potential for abuse, potential for addiction – lower number = “worse” drug
10Cannabis CustomersKey Considerations for Trade Vendors
LAY OF THE LANDFEDERAL REGULATION: TREATMENT OF MARIJUANA UNDER THE CSA
•Marijuana is a CSA Schedule I Drug
• Classified with and treated similarly to hard drugs like heroin, LSD, peyote, MDMA (ecstasy), methaqualone (Quaaludes)
•Marijuana is technically “worse” from a regulatory standpoint than drugs like cocaine, codeine, fentanyl, methamphetamine
Schedule Description Examples
I Substances have a high potential for abuse, have no currently accepted medical use in treatment in the U.S., and have a lack of accepted safety for use under medical supervision
MDMA (Ecstasy)HeroinLSDMarijuanaMethaqualonePeyote
6
11Cannabis CustomersKey Considerations for Trade Vendors
LAY OF THE LANDFEDERAL REGULATION: TREATMENT OF MARIJUANA UNDER THE CSA
• November 30, 2011: Governors of Rhode Island and Washington submitted a petition to DEA / HHS seeking to reclassify marijuana as a Schedule II drug
• To be classified in Schedule II‐V, a substance must have a “currently accepted medical use in treatment in the U.S.”
• Five elements:
• Drug’s chemistry is known and reproducible
• Existence of adequate safety studies
• Existence of adequate and well‐controlled studies proving efficacy
• Drug is accepted by qualified experts
• Scientific evidence is widely available
12Cannabis CustomersKey Considerations for Trade Vendors
LAY OF THE LANDFEDERAL REGULATION: TREATMENT OF MARIJUANA UNDER THE CSA
• In response to the 2011 petition (and prior petitions in 1992 and 2001), HHS concluded in July 2016 (and DEA concurred):
the scientific evidence is insufficient to demonstrate that marijuana has a currently accepted medical use under the five‐element test. . . . No studies have scientifically assessed the efficacy and full safety profile of marijuana for any specific medical condition. The limited existing clinical evidence is not adequate to warrant rescheduling of marijuana under the CSA.
• For now, marijuana remains a CSA Schedule I drug
• We’ll revisit the significance of this classification in a little bit
7
13Cannabis CustomersKey Considerations for Trade Vendors
LAY OF THE LANDTHE TIMES THEY ARE A‐CHANGIN’ ‐ PUBLIC OPINION HAS CHANGED A LOT IN 50 YEARS
14Cannabis CustomersKey Considerations for Trade Vendors
Prohibition
1911‐1933
Massachusetts (1911) –required a prescription
By 1933, 29 states had criminalized cannabis.
Decriminalization
1973‐1978
States, starting with Oregon, began passing statutes decriminalizing cannabis possession to varying degrees (some were later repealed). After 1978, no more decriminalization took place until 2001.
Medical
1996
Starting with California, states began legalizing medical cannabis through legislation and ballot measures.
Medical use is now legal in 33 states.
Recreational
2012
Colorado and Washington became the first two states to legalize recreational cannabis.
10 States + DC now permit recreational use.
LAY OF THE LANDSTATE REGULATION: HISTORY
8
15Cannabis CustomersKey Considerations for Trade Vendors
LAY OF THE LANDSTATE REGULATION: THE SURGE OF STATE LEGALIZATION
Source: Business Insider Jan. 4, 2019
INDUSTRY OVERVIEWWHO ARE THESE “CANNABIS CUSTOMERS” ANYWAY?
9
17Cannabis CustomersKey Considerations for Trade Vendors
INDUSTRY OVERVIEWTHE U.S. CANNABIS INDUSTRY IS EXPLODING
• Nearly non‐existent industry ten years ago
• $10.3 billion industry in 2018
• 25% annual revenue growth 2013‐2018
• Industry revenues projected to surpass $23B by 2022
• State legalization efforts have driven exponential growth
0
10
20
30
2013 2017 2018 2019 (Est) 2022 (Est)
$ Billions
Total U.S. Cannabis Sales
18Cannabis CustomersKey Considerations for Trade Vendors
INDUSTRY OVERVIEW…WITH RECREATIONAL USE AS THE FASTEST GROWING SECTOR
• Recreational sales are the fastest growing segment
• Projected to be almost two thirds of all revenues by 2022
0
10
20
30
2013 2017 2018 2019 (Est) 2022 (Est)
$ Billions
Total U.S. Cannabis Sales
10
19Cannabis CustomersKey Considerations for Trade Vendors
INDUSTRY OVERVIEWONE BOOMING EXAMPLE: COLORADO
20Cannabis CustomersKey Considerations for Trade Vendors
INDUSTRY OVERVIEWONE BOOMING EXAMPLE: COLORADO
11
21Cannabis CustomersKey Considerations for Trade Vendors
INDUSTRY OVERVIEWONE BOOMING EXAMPLE: COLORADO
Five‐Year Revenue CAGR
17.7%
22Cannabis CustomersKey Considerations for Trade Vendors
INDUSTRY OVERVIEWMASSACHUSETTS: $9.3M SALES IN THE FIRST FOUR WEEKS
12
23Cannabis CustomersKey Considerations for Trade Vendors
INDUSTRY OVERVIEW
WHO ARE THE PLAYERS?
24Cannabis CustomersKey Considerations for Trade Vendors
INDUSTRY OVERVIEWINDUSTRY PARTICIPANTS: THE CANNABIS SUPPLY CHAIN
•Producers – Plant Growers – “Cultivators”
PRODUCTIONPRODUCTION
•Flower Products
•Edible Products
•Topical Products
•Cartridge Products / “Vape” Pens
•Oil Extracts / Concentrates
PROCESSINGPROCESSING
•Wholesale Distributors
DISTRIBUTIONDISTRIBUTION
•Dispensaries
•Healthcare Providers
RETAILRETAIL
13
25Cannabis CustomersKey Considerations for Trade Vendors
INDUSTRY OVERVIEWPRODUCTS AND SERVICES SEGMENTATION, 2018
Edible Products, 13%
Oils / Extracts / Concentrates, 23%
Pre‐Rolled Joints, 5%
Flower Products, 57%
Other Products, 2%
26Cannabis CustomersKey Considerations for Trade Vendors
INDUSTRY OVERVIEW
WHAT DO THEY ALL HAVE IN COMMON?
14
27Cannabis CustomersKey Considerations for Trade Vendors
28Cannabis CustomersKey Considerations for Trade Vendors
INDUSTRY OVERVIEWCANNABIS INDUSTRY PARTICIPANTS PURCHASE A WIDE VARIETY OF PRODUCTS AND SERVICES
Cultivator
Greenhouses
Utilities
Fertilizers
Soils
Growing Vessels
Logistics
Industrial Space
Office Space
Quality Testing
Payroll Services
Accounting
Payments
15
29Cannabis CustomersKey Considerations for Trade Vendors
Processor
Utilities
Packaging
Shipping Services
Warehouse Space
Office Space
Quality Testing
Payroll Services
Accounting
Payment Processing
Marketing
Equipment
Security Services
Office Supplies
INDUSTRY OVERVIEWCANNABIS INDUSTRY PARTICIPANTS PURCHASE A WIDE VARIETY OF PRODUCTS AND SERVICES
30Cannabis CustomersKey Considerations for Trade Vendors
INDUSTRY OVERVIEWCANNABIS INDUSTRY PARTICIPANTS PURCHASE A WIDE VARIETY OF PRODUCTS AND SERVICES
Retailer
Utilities
Warehouse Space
Storefronts
Office Space
Payroll Services
AccountingPayment Processing
Marketing
Equipment
Security Services
Furniture
16
CRF MEMBERSHIP POLLEXPERIENCES WITH CANNABIS CUSTOMERS
32Cannabis CustomersKey Considerations for Trade Vendors
POLL RESULTS
17
33Cannabis CustomersKey Considerations for Trade Vendors
POLL RESULTS
34Cannabis CustomersKey Considerations for Trade Vendors
POLL RESULTS
18
35Cannabis CustomersKey Considerations for Trade Vendors
POLL RESULTS
36Cannabis CustomersKey Considerations for Trade Vendors
POLL RESULTS
19
37Cannabis CustomersKey Considerations for Trade Vendors
POLL RESULTS
BUSINESS RISKSNEW INDUSTRY, NEW (AND OLD) CHALLENGES
20
39Cannabis CustomersKey Considerations for Trade Vendors
BUSINESS RISKSIS THE “GREEN RUSH” REALLY A NEW GOLD RUSH?
40Cannabis CustomersKey Considerations for Trade Vendors
BUSINESS RISKSA BETTER ANALOGY: THE ALCOHOLIC BEVERAGE BUSINESS POST‐PROHIBITION
U.S. Annual Liquor ConsumptionBefore Prohibition140,000,000 gallons
During Prohibition200,000,000 gallons
2016 U.S. Marijuana SalesLegal$6.9 billion
Illegal$46.4 billion
21
41Cannabis CustomersKey Considerations for Trade Vendors
BUSINESS RISKSSTILL LARGELY A STARTUP‐DRIVEN INDUSTRY
• Industry maturity varies drastically by state and type
• California (Medical 1996 / Recreational 2016)
vs.
• Delaware (Medical 2011 / Recreational 2015)
• Like any emerging, high‐growth industry, lots of . . .
• . . . high‐profile institutional investment and M&A
• . . . hype and speculation
• . . . startups with various levels of capitalization and little or no operating history
The overall cannabis industry profile is very reminiscent of the tech boom of the late 1990s – early 2000s!
42Cannabis CustomersKey Considerations for Trade Vendors
BUSINESS RISKSCOMMON PROBLEMS AND RISK FACTORS
• Inadequate capitalization
• Overly optimistic financial projections
• Loosely affiliated management teams and “advisors”
• Reliance on widely publicized deals and investments
• Inadequate understanding of relevant regulatory overlays
• Market saturation
• Unavailability of banking services
• Political risks
• Asset forfeiture
22
LEGAL AND REGULATORY CONCERNSWE’RE FROM THE GOVERNMENT AND WE’RE HERE TO HELP.
44Cannabis CustomersKey Considerations for Trade Vendors
LEGAL AND REGULATORY CONCERNSFEDERAL, STATE, AND LOCAL LAWS AND REGULATIONS CREATE A MYRIAD OF UNIQUE RISKS
• Federal Law
• Banking
• Money Laundering
• Tax
• Bankruptcy
• Intellectual Property
• Civil Litigation
• State Law
• Local Law
• Zoning / Land Use / Permitting
• Landlord / Tenant Issues
23
45Cannabis CustomersKey Considerations for Trade Vendors
LEGAL AND REGULATORY CONCERNSCANNABIS IS STILL PROHIBITED BY FEDERAL LAW
FOR THE TIME BEING, CANNABIS REMAINS A CSA
SCHEDULE I CONTROLLED
SUBSTANCE
46Cannabis CustomersKey Considerations for Trade Vendors
LEGAL AND REGULATORY CONCERNSFEDERAL ISSUES: RISK OF FEDERAL CRIMINAL PROSECUTION OF CANNABIS BUSINESSES
2009 Ogden Memo: “As a general matter, pursuit of these
priorities should not focus federal resources in your States on individuals whose actions are
in clear and unambiguous compliance with existing state laws providing for the medical use of marijuana.”
2011 Cole Memo I: “The Ogden Memorandum was never intended to shield
such activities from federal enforcement
action and prosecution, even where those activities purport to
comply with state law.”
2013 Cole Memo II: “Prosecutors should continue to review marijuana cases on a case‐by‐case basis and weigh all available information and evidence, including, but not limited
to, whether the operation is demonstrably in compliance with a strong and effective state regulatory
system.”
24
47Cannabis CustomersKey Considerations for Trade Vendors
LEGAL AND REGULATORY CONCERNSFEDERAL ISSUES: RISK OF FEDERAL CRIMINAL PROSECUTION OF CANNABIS BUSINESSES
2014 Cole / FinCENMemos: Opened the door (a little bit) to banking of cannabis businesses, subject to burdensome reporting
requirements.
2018 Sessions: Jettisoned the Cole memos – “a return to the rule of law”: “[P]rosecutors should follow the well‐established principles that govern all federal prosecutions. These principles require federal prosecutors deciding which cases to prosecute to weigh all
relevant considerations of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular
crimes on the community.”
2019 Barr: Stated in confirmation hearing
testimony that he doesn’t plan on using federal resources to “go after” cannabis companies if they are complying with
state law.
48Cannabis CustomersKey Considerations for Trade Vendors
LEGAL AND REGULATORY CONCERNSFEDERAL ISSUES: CIVIL AND CRIMINAL RISKS FOR SUPPLIERS
• Harsh penalties for violating the CSA – or aiding and abetting
• Imprisonment
• Fines
• Asset forfeiture
• Property used in (equipment, supplies, real estate, vehicles) or derived from (cash, purchased items) criminal activity
• Criminal, administrative, civil• Including real estate (landlords)
25
49Cannabis CustomersKey Considerations for Trade Vendors
LEGAL AND REGULATORY CONCERNSFEDERAL ISSUES: LIMITED AVAILABILITY OF BANKING SERVICES
Because cannabis remains a CSA Schedule I controlled substance and Congress has not expressly authorized federally chartered
and/or regulated banks or credit unions to bank cannabis businesses without penalty, what guidance exists generally
comes from the executive branch of the federal government and is subject to change with shifts in leadership.
50Cannabis CustomersKey Considerations for Trade Vendors
LEGAL AND REGULATORY CONCERNSFEDERAL ISSUES: LIMITED AVAILABILITY OF BANKING SERVICES
• Single largest regulatory issue facing cannabis businesses
• Many banks are unwilling to take on the hefty regulatory burdens that come with banking cannabis businesses
• Filing Suspicious Activity Reports (SARs) pursuant to the 2014 FinCEN Guidance
• Ensuring customers comply with state law
• Ensuring customers comply with federal regulatory guidance (which has whipsawed in the past 6 years)
• There is a growing willingness, particularly among smaller, local banks, to do business with cannabis companies
• But, at least for now, this still remains a heavily cash business
26
51Cannabis CustomersKey Considerations for Trade Vendors
LEGAL AND REGULATORY CONCERNSFEDERAL ISSUES: LIMITED AVAILABILITY OF BANKING SERVICES
• FinCEN SAR filing requirements extend to any transaction that “involves funds derived from illegal activity”
• FinCEN Memo: “. . . financial transactions involving a marijuana‐related business . . .”
• This verbiage technically includes the receipt by a cannabis company’s vendors (i.e., you) of payments from the cannabis company
• Wire or ACH payment probably qualifies
• Unclear whether a non‐cannabis business depositing a cash or check payment from a cannabis business qualifies as a transaction “involving” a cannabis business
52Cannabis CustomersKey Considerations for Trade Vendors
LEGAL AND REGULATORY CONCERNSFEDERAL ISSUES: MONEY LAUNDERING
27
53Cannabis CustomersKey Considerations for Trade Vendors
LEGAL AND REGULATORY CONCERNSFEDERAL ISSUES: AVOIDING INVOLVEMENT IN MONEY LAUNDERING
• Potentially an issue when dealing with any cash business
• Bank Secrecy Act anti‐money laundering compliance requirements do not apply to nonfinancial businesses
BUT . . .
• The federal criminal money laundering statutes (18 U.S.C. §§ 1956 and 1957) apply to everyone (including you)
• Federal criminal statutes have various mental state requirements applicable to each element
54Cannabis CustomersKey Considerations for Trade Vendors
LEGAL AND REGULATORY CONCERNSFEDERAL ISSUES: MONEY LAUNDERING
Three primary methods:
• Placement
Sneaking “dirty” money into the financial system in ways designed to avoid raising suspicion / reporting requirements
• Layering
Separating proceeds of illegal activity from their origin through multiple layers of transactions
• Integration
Reintroducing laundered money into lawful trade via a “front” with a facially legitimate explanation of the source
28
55Cannabis CustomersKey Considerations for Trade Vendors
LEGAL AND REGULATORY CONCERNSFEDERAL ISSUES: MONEY LAUNDERING
18 U.S.C. § 1956Whoever, knowing that certain property represents the proceedsof some form of unlawful activity, conducts or attempts to conduct such a financial transactionwhich in fact involves the proceeds of specified unlawful activity . . . • with the intent to promote the carrying on of specified
unlawful activity; or with intent to engage in [tax evasion]; or• knowing that the transaction is designed in whole or in part to
conceal or disguise the nature, the location, the source, the ownership, or the control of the proceeds of specified unlawful activity; or to avoid a transaction reporting requirement under State or Federal law . . .
56Cannabis CustomersKey Considerations for Trade Vendors
LEGAL AND REGULATORY CONCERNSFEDERAL ISSUES: MONEY LAUNDERING
18 U.S.C. § 1956. . . shall be sentenced to a fine of not more than $500,000 or twice the value of the property involved in the transaction, whichever is greater, or imprisonment for not more than twenty years, or both.
29
57Cannabis CustomersKey Considerations for Trade Vendors
LEGAL AND REGULATORY CONCERNSFEDERAL ISSUES: MONEY LAUNDERING
18 U.S.C. § 1957Whoever . . . knowingly engages or attempts to engage in a monetary transaction in criminally derived property of a value greater than $10,000 and is derived from specified unlawful activity, shall be punished as provided in subsection (b).• Punishable by fines and/or up to ten years’ imprisonment• Must be conducted by, to, or through a financial institution• Designed to make it difficult for criminals to spend proceeds• Impacts third parties who provide opportunities to spend
proceeds of SUA• But: Each transaction is a separate offense – no aggregation• Defendant has to know that the property is proceeds of
some form of criminal activity
58Cannabis CustomersKey Considerations for Trade Vendors
LEGAL AND REGULATORY CONCERNSFEDERAL ISSUES: MONEY LAUNDERING – TRADITIONAL RED FLAGS
• Insistence on dealing in cash, near‐cash, or cryptocurrency
• Unwillingness to ID principals
• Fictitious principal IDs
• Multiple cash payments under $10K on open account, even with larger account balance
• Multiple COD/CIA purchases in a short time, each under $10K
• Payment from personal accounts / credit cards
• Requests not to file IRS Form 8300 for large cash payments
• Requests not to comply with state reporting requirements
• Unusually large purchases, especially large purchases of a small number of items
• Cash overpayments on account requesting refund by check
30
59Cannabis CustomersKey Considerations for Trade Vendors
LEGAL AND REGULATORY CONCERNSFEDERAL ISSUES: INCOME TAX
Internal Revenue Code, § 280E
No deduction or credit shall be allowed for any amount paid orincurred during the taxable year in carrying on any trade or businessif such trade or business (or the activities which comprise such tradeor business) consists of trafficking in controlled substances (withinthe meaning of schedule I and II of the Controlled Substances Act)which is prohibited by Federal law or the law of any State in whichsuch trade or business is conducted.
60Cannabis CustomersKey Considerations for Trade Vendors
LEGAL AND REGULATORY CONCERNSFEDERAL ISSUES: WHAT IS THE IMPACT OF IRC § 280E?
• The only deduction a taxpayer is allowed on its federal return in connection with the sale of a CSA Schedule I controlled substance (like cannabis) is for the cost of goods sold.
• Senate Report: “All deductions and credits for amounts paid or incurred in the illegal trafficking in drugs listed in the Controlled Substances Act are disallowed. To preclude possible challenges on constitutional grounds, the adjustment to gross receipts with respect to effective costs of goods sold is not affected by this provision of the bill.”
• Does not prohibit paying business expenses
• Only prohibits deducting business expenses other than COGS for federal income tax purposes
31
61Cannabis CustomersKey Considerations for Trade Vendors
LEGAL AND REGULATORY CONCERNSBANKING + TAX ISSUES = IRS REPORTING REQUIREMENTS FOR CASH TRANSACTIONS
62Cannabis CustomersKey Considerations for Trade Vendors
LEGAL AND REGULATORY CONCERNSBANKING + TAX ISSUES = IRS REPORTING REQUIREMENTS FOR CASH TRANSACTIONS
32
63Cannabis CustomersKey Considerations for Trade Vendors
LEGAL AND REGULATORY CONCERNSFEDERAL ISSUES: BANKRUPTCY
Because cannabis is illegal to cultivate, possess, process, or sell
under federal law, the United States Trustee (an arm of the USDOJ) has taken the position that “marijuana assets” cannot be administered (i.e., sold or used) by a bankruptcy estate
or trustee.
The UST will, as a matter of policy, move to dismiss any bankruptcy case involving “marijuana assets” and has attempted (with varying success) to extend this policy to
equipment vendors and landlords of cannabis businesses.
64Cannabis CustomersKey Considerations for Trade Vendors
LEGAL AND REGULATORY CONCERNSFEDERAL ISSUES: INTELLECTUAL PROPERTY
• Cannabis businesses cannot register federal trademarks because their primary business is prohibited by federal law
• Some IP protections are available to cannabis businesses:
• Registration of trademark for non‐cannabis business use
• State‐law trademarks
• Common‐law trademarks
• Common to all of the above: Aggressive enforcement
33
65Cannabis CustomersKey Considerations for Trade Vendors
LEGAL AND REGULATORY CONCERNSFEDERAL ISSUES: PRACTICAL TAKEAWAYS
The current federal regulatory environment suggests that federal authorities will not attack legitimate payments to trade vendors by cannabis companies
that are operating in substantial compliance with state law, not running afoul of the eight “enforcement
priorities” set forth in the 2013/2014 Cole memos, and not otherwise violating other federal criminal laws
66Cannabis CustomersKey Considerations for Trade Vendors
LEGAL AND REGULATORY CONCERNSPRACTICAL TAKEAWAYS
• Only deal with state‐licensed cannabis businesses
• Insist on receiving copies of applicable state/local licenses before doing business
• Verify that the customer is the correct, licensed party
• Require customer to provide periodic updates of license information
• Require immediate notice of any loss of licensure of any governmental enforcement actions
• Require robust representations, warranties, and covenants re: compliance with applicable state laws and regulations
• Your contracts should provide you with the ability to terminate in the event of a change in law, failure of customer’s legal and regulatory compliance, or failure to provide periodic license updates
• Choice of forum / choice of law clauses should designate cannabis‐friendly state for customers in the cannabis business
• Stay up to date on federal law and shifting enforcement priorities
• If a large cannabis customer files bankruptcy, consider joining UST’s motion to dismiss and suing in a cannabis‐friendly state court
34
FREQUENTLY ASKED QUESTIONSNOW WHAT?
68Cannabis CustomersKey Considerations for Trade Vendors
FREQUENTLY ASKED QUESTIONS
How are vendors getting paid by recreational cannabis businesses
that are unable to obtain traditional bank accounts?
35
69Cannabis CustomersKey Considerations for Trade Vendors
FREQUENTLY ASKED QUESTIONS
Do I have to continue selling to a customer with a supply contract if they enter the cannabis business and I have a moral or ethical
objection?
70Cannabis CustomersKey Considerations for Trade Vendors
FREQUENTLY ASKED QUESTIONS
My customer wants to pay a large balance in cash. How can I accept the payment while keeping my business and employees safe?
36
71Cannabis CustomersKey Considerations for Trade Vendors
FREQUENTLY ASKED QUESTIONS
What about doing business with Canadian cannabis companies?