Opportunities and Challenges with Cannabis · OPPORTUNITIES AND CHALLENGES WITH CANNABIS Presented...

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O P P O R T U N I T I E S A N D C H A L L E N G E S W I T H C A N N A B I S

Presented by: Alexander Malyshev – Carter Ledyard & Milburn LLP (New York, NY)

Janet Jackim – Sacks Tierney P.A. (Scottsdale, AZ)Kristen Brightmire – Doerner, Saunders, Daniel & Anderson, L.L.P. (Tulsa, OK)


A L E X A N D E R G . M A LY S H E VYO U N G L AW Y E R A DV I S O RY B OA R D C H A I R - E L EC T

C A R T E R L E DYA R D & M I L B U R N L L PN E W YO R K , N E W YO R K


OUTLINE

• What is Cannabis, Hemp and CBD?

• What are the laws applicable to each, and why should you care?

• What sorts of companies are in the Cannabis and Hemp business?

• Do you know if you are doing business with Cannabis and Hemp companies?

• M&A and Public Markets Trends.

• Ethics.

• Questions.


SOME USEFUL DEFINITIONS TO GET US STARTED

• Cannabis is a plant belonging to the Cannabaceae family and containing avariety of biologically active chemical compounds. Hemp and marijuana areboth varieties of cannabis, though “cannabis” is often used interchangeablywith “marijuana.”

• Marijuana is cannabis containing over 0.3% THC on a dry weight basis. It isdesignated as a “controlled substance,” due to its intoxicating and psychoactivequalities. It is a “scheduled” drug under both U.S. law and under several U.N.conventions (to which most nations are signatory).

• Hemp is cannabis containing less than 0.3% THC. Used to be a major industrialcrop, but was swept up in the drug war along with Cannabis. In the U.S.legalized as part of the 2018 Farm Bill, if it meets the definition of “Hemp.”

• THC: Tetrahydrocannabinol. One of the main intoxicating constituents ofcannabis. THC concentration is what distinguishes Cannabis from Hemp.

• CBD: Cannabidiol. The main non intoxicating constituent of Cannabis, whichcan be derived from hemp, and has exploded in popularity recently.


LAW APPLICABLE TO CANNABIS

• Under the Controlled Substances Act (“CSA”) cannabis(excluding hemp) is listed as a Schedule I drug. The samecategory as heroin, LSD, GHB or MDMA .

• It is the Federal Government’s stance that cannabis (a) has ahigh potential for abuse, (b) has no currently accepted medicaluse in treatment in the United States, and (c) lacks safety in useunder medical supervision.

• This is at odds with various state laws, as well as internationaldrug treaties that schedule cannabis differently, including thosespecifically regulating “medical” marijuana. But those state laws(and treaties) do not override federal prohibition.

See CSA (21 U.S.C.A. § 812(b)(1)); Single Convention on Narcotic Drugs (1961) (Article 28) as amended.


MARIJUANA ENFORCEMENT PRIORITIES

• The DOJ previously had a published set of enforcement priorities (the Cole Memo), which has been incorporated by FINCEN. They are preventing:

the distribution of marijuana to minors; revenue from the sale of marijuana from going to criminal enterprises, gangs, and cartels; the diversion of marijuana from states where it is legal under state law in some form to

other states; state-authorized marijuana activity from being used as a cover or pretext for the trafficking

of other illegal drugs or other illegal activity; violence and the use of firearms in the cultivation and distribution of marijuana; drugged driving and the exacerbation of other adverse public health consequences

associated with marijuana use; the growing of marijuana on public lands and the attendant public safety and

environmental dangers posed by marijuana production on public lands; and marijuana possession or use on federal property.

• Cole Memo was rescinded by AG Jeff Sessions in 2018. • Federal prosecutors retain prosecutorial discretion. • AG William Barr has indicated dissatisfaction with the inconsistent state and federal laws. • No indication to date federal prosecutors have plans to prosecute state-legal marijuana

activities differently than before.


IMPACT OF FEDERAL LAWS AND REGULATIONS

Those doing business with Cannabis companies are potentially liable for:

• Conspiring to manufacture and distribute marijuana (18 U.S.C. § 846);

• Aiding and abetting the manufacture and distribution of marijuana (18 U.S.C.§ 2);

• Acting as an accessory after the fact for the manufacture and distribution ofmarijuana (18 U.S.C. § 3); and

• Violating the Money Laundering Control Act (18 U.S.C. § § 1956 and 1957).

In addition Federal agencies, like the IRS, CBP, USCIS, and FINCEN, have specific Cannabisrelated policies.

Federal prohibition also impacts Federal rights, like Intellectual Property (Trademark andPatent) and Bankruptcy.


WHAT SORT OF COMPANIES ARE IN THE “CANNABIS BUSINESS”?

• Leaf Touching Operations (State Licensed)• Growers• Processors • Distributors • Dispensaries

• Non-Leaf Touching Operations• Professional management and consulting• Sales of paraphernalia• Suppliers of materials needed to manufacture

marijuana • Suppliers of packaging and back-office

logistics• Software and inventory management• Landlords

• Banking and Professional Services


BEST PRACTICES AND PRACTICAL CONSIDERATIONS

• Enhance KYC / vendor intake when you suspect a connection to the industry. Analyze existing relationships.

• Consider making it a specific question on an intake questionnaire.

• Designate a knowledgeable in-house attorney to deal with clients or business partners in the industry.

• Determine whether those counterparts have sufficient controls in place to make sure that the company is not paid with the proceeds of illicit cannabis activities.

• Educate appropriate stakeholders on the business side.


JA N E T E . JA C K I MU S / C A N A DA C A N N A B I S S T E E R I N G

C O M M I T T E E C O - C H A I RS A C K S T I E R N E Y P. A .

S C OT T S DA L E , A R I ZO N A


CANNABIS BUSINESS STRUCTURES (ARIZONA MEDICAL MARIJUANA ACT) (A .R .S . §§ 36-2801 et seq.)

• Arizona Dispensaries: approx. 130, medical marijuana only• Sole entity owns the exclusive license to conduct all facets

of MMJ business• Nonprofit entity (corp, LLC or p/s) managed by board,

officers• All principals licensed by State• All employees, volunteers, contractors licensed by State• Managed by affiliated entity(ies)• Vertically integrated USUALLY• Investors buy into the management entities• Board members, officers and/or investors frequently sue

each other• Banking extremely limited


CANNABIS BUSINESS STRUCTURES IN ARIZONA


CANNABIS BUSINESS STRUCTURES IN ARIZONA

Dispensary and Cultivation Managers: Typically owned by dispensary or affiliate All cannabis is owned by the dispensary; managers are mere

service providers For-profit entity, usually an LLC whose members are board

members, officers of the dispensary Under long or short-term contract (license and/or

management services agreement) to manage the dispensary or cultivation

Contract is complicated, multi-layered All employees, volunteers and subcontractors licensed by the

State Can sell marijuana to other dispensaries, but all receipts are

owned by the selling dispensary


CANNABIS BUSINESS TRANSACTIONS IN ARIZONA

• Who Are Canna Companies? Leaf-touching dispensaries, cultivators, processors, distributors

• Who Does Business with Canna Companies? I do! All businesses A-Z: accountants, attorneys, advertisers, bankers (some), governments, employment agencies, landlords, equipment lessors, suppliers, investors, lenders, marketers, other retailers, construction contractors, utilities…

• Practice Tips: • Know your customer or contract ‘partner’, touch cannabis? • Cash payments? Bank relationship? • How regulated? Policies and procedures? • Seed to sale tracking? • Audited by State or independent auditor?



• Not for the light of heart or average deal junkie! • In addition to federal illegality (as Alex mentioned earlier), there

are risks and issues peculiar to this industry:• Enforcement actions (Local, federal) against principals

continue• Stepped up IRS scrutiny over business expense deductions,

resulting in unknown, trailing tax liabilities• Cash, cash and more cash: numerous safes, limited banking

capabilities – accounts could be shut down, no advance notice

• Bankruptcy filing n/a, but State court receiverships OK• Regulations from the FDA yet to be issued



• Not for the light hearted (continued):• State/province laws regulating cannabis vary by jurisdiction• Minimal guidance from courts • Assignments/transfers of cannabis licenses prohibited• Multi-level deal structures to avoid/minimize assignability

prohibitions• Poor to non-existent books and records, outputs unreliable,

no metrics, minimal tax planning• Silent partners/lenders stake a claim when the business

succeeds• UCC remedies against cannabis collateral?



• If your client insists upon transacting with a cannabis business:• Arizona statistics: 3-5 ‘acquisitions/sales’ occurring on any

day, $15 – 30 million, not necessarily metrics-focused• Strategic in-state, out-of-state ‘buyers’• Here comes recreational (aka adult-use) laws• ‘Buyers’ / ‘sellers’ misnomers: it’s a change of control

transaction• Usually an LLC membership purchase // CONTROL!• Illegality is not a defense• Limited availability of escrow, title services• Intense due diligence activities – significant federal tax

liabilities likely, seed to sale tracking deficiencies, State inspection failures


EFFECTS UPON EMPLOYEES INVOLVED IN CANNABIS BUSINESS TRANSACTIONS

• State/federal enforcement actions could lead to job loss, shut-down • Illegal transporting of cannabis could lead to criminal charges• What if the employee is opposed to cannabis on religious or other bases?• Poor or defective CBD or THC products can cause public harm, even death• Will I survive? Old vs. new team mentalities• Ownership of IP in question• Employee at disadvantage/risk of prosecution when regulations are non-

existent• Loss of banking privileges• Health effects of working with cannabis?• Change, change and more change! DYNAMIC INDUSTRY, MOVING PARTS,

MINIMAL LEGAL GUIDANCE. EMPLOYEES MAKING MONEY, CASHING IN ON AGRICULTURAL / SCIENCE KNOWLEDGE. OFFERS GREAT OPPORTUNITIES !


K R I S T E N B R I G H T M I R ED O E R N E R , S AU N D E RS , DA N I E L &

A N D E RS O N , L . L . P.T U L S A , O K L A H O M A


POSSESSION AND USE AT WORK

• Designing and Communicating Rules • Possession• Use

• Smoking and Vaping Rules


DRUG TESTING UNDER FEDERAL LAW

• Testing under Department of Transportation regulations• Aviation• Pipeline• Public / Mass Transportation• Railroad• Ships/Vessels• Trucking/School Bus/Tour Bus

• Agencies involved include the Federal Aviation Administration, the Federal Motor Carrier Safety Administration, the Federal Railroad Administration, the Federal Transit Administration, the Pipeline & Hazardous Materials Safety Administration, and the United States Coast Guard (now with the Department of Homeland Security).


DRUG TESTING UNDER FEDERAL LAW

• Under federal law, marijuana remains illegal• One system for all - Simple• DOT has issued guidance as to marijuana in light

of states’ actions


DOT “RECREATIONAL MARIJUANA” NOTICE

“… We want to make it perfectly clear that the state initiatives will have no bearing on the Department of Transportation’s regulated drug testing program. The Department of Transportation’s Drug and Alcohol Testing Regulation – 49 CFR Part 40 – does not authorize the use of Schedule I drugs, including marijuana, for any reason.

Therefore, Medical Review Officers (MROs) will not verify a drug test as negative based upon learning that the employee used “recreational marijuana” when states have passed “recreational marijuana” initiatives. …

It is important to note that marijuana remains a drug listed in Schedule I of the Controlled Substances Act. It remains unacceptable for any safety-sensitive employee subject to drug testing under the Department of Transportation’s drug testing regulations to use marijuana. …”


DOT “MEDICAL MARIJUANA” NOTICE

“…. The Department of Transportation’s Drug and Alcohol Testing Regulation – 49 CFR Part 40, at 40.151(e) – does not authorize “medical marijuana” under a state law to be a valid medical explanation for a transportation employee’s positive drug test result.

That section states:

§ 40.151 What are MROs prohibited from doing as part of the verification process?As an MRO, you are prohibited from doing the following as part of the verification process:(e) You must not verify a test negative based on information that a physician recommended that the employee use a drug listed in Schedule I of the Controlled Substances Act. (e.g., under a state law that purports to authorize such recommendations, such as the “medical marijuana” laws that some states have adopted.)

Therefore, Medical Review Officers will not verify a drug test as negative based upon information that a physician recommended that the employee use “medical marijuana.” Please note that marijuana remains a drug listed in Schedule I of the Controlled Substances Act. It remains unacceptable for any safety-sensitive employee subject to drug testing under the Department of Transportation’s drug testing regulations to use marijuana …”


DRUG TESTING UNDER STATE LAW

• Fifty States (plus Canada and/or other jurisdictions)

• A multitude of laws and regulations!


MEDICAL MARIJUANA…

• 1996 – California first state to permit use• As of September (best available information), 34

states and the District of Columbia and Canada all permit medical marijuana • Some for certain conditions• Some left to the discretion of the prescribing

physician


RECREATIONAL MARIJUANA…

• 2012 – Colorado and Washington legalized recreational marijuana

• As of September (best available information), 11 states and the District of Columbia and Canada all permit recreational marijuana


STATE DRUG TESTING ISSUES

• Does the state have specific statutes addressing drug testing?• Does the state have specific statutes addressing medical marijuana

and/or testing?• How do employers know which person is legitimate? What

will they know? Will it be too little? Too much?• Anti-discrimination provisions?• Safety-sensitive positions carve-outs?• What does it mean to be “impaired” on the job?

• Ah, the science of testing for marijuana…• Who will handle the questions about the drug test results? Your

MRO? The Supervisor? HR?• How does a single employer manage its drug testing in multiple

states?


OTHER ISSUES WHICH MAY ARISE

• Americans with Disabilities Act• The ADA specifically states that “a qualified individual with a

disability shall not include any employee or applicant who is currently engaging in the illegal use of drugs, when the covered entity acts on the basis of such use.” 42 U.S.C. § 12114(a).

• Knowledge of underlying impairments• What you “know” may be impacted by the state in which the

medical marijuana is prescribed.• Will you be required to provide a reasonable accommodation?

To the marijuana? To the underlying condition?• State Disabilities Laws

• Some states have enacted laws specifically addressing the interplay with medical marijuana; e.g. Connecticut

• Traditional Labor Law – Collective Bargaining


ANY QUESTIONS?

Kristen BrightmireJanet E. JackimAlexander G. Malyshev

Opportunities and Challenges with Cannabis · OPPORTUNITIES AND CHALLENGES WITH CANNABIS Presented...

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