Cannabis Business Blog

Hundreds of companies in Washington, Oregon, California and Canada are attracting billions in investments from just about every class of investor.

But the realities of investing in cannabis are far different from those in any other industry. You’ll need to be fingerprinted, undergo a background check, surrender your banking records and be ready to deal with state and federal laws that often seem in open conflict.

Any business can find itself in a cash crunch when big expenses or payroll disbursements come due. When you form an entity to do business in cannabis, how do you finance a big expense that needs to be made right now?

To read the full article, visit Puget Sound Business Journal's website. Subscription is required.

The Financial Crimes Enforcement Network (“FinCen”)  issued a Marijuana Related Business update in June with data from the first quarter of 2017. FinCen reports that the number of depository institutions that are actively banking marijuana businesses increased to 368 by the end of March of 2017. This is an approximate 22% increase from the end of March 2016. FinCen has received an increasingly large number of suspicious activity reports (“SARs”) from banking institutions for marijuana businesses.

Raising money into any business can be stressful and time consuming, and requires compliance with a multitude of state and federal laws. Understanding the investment landscape and being prepared can make the process smoother and quicker.

• Details Matter. From the type of entity you’ve formed to run your cannabis business to your capitalization structure, your business plan, and the agreements between the founders and the company, details matter to investors and play a role in the decision of whether to invest in a company. Having a business structure that facilitates investment and clean documentation are important first steps in attracting outside capital.

Justice Department has options to crack down, but may galvanize the push for even wider legalization

In statements that were perhaps inevitable but nonetheless surprising to the cannabis industry, White House Press Secretary Sean Spicer on February 23, 2017, provided the first official comments on how the Trump administration may address recreational marijuana.

Responding to a question from an Arkansas reporter regarding medical marijuana, Spicer indicated that the Trump administration sees “a big difference” between medical and recreational marijuana, stating that federal law needs to be followed “when it comes to recreational marijuana and other drugs of that nature.”

Spicer also indicated that enforcement decisions will primarily be a Department of Justice (“DOJ”) matter, stating that enforcement is “a question for the Department of Justice,” but that he believed there would be “greater enforcement of [federal law], because again, there’s a big difference between medical use, which Congress has, through an appropriations rider in 2014, made very clear what their intent was on how the Department of Justice would handle that issue,” which, Spicer stated, is “very different from the recreational use, which is something the Department of Justice will be further looking into.”

Although Spicer’s statements should probably not be considered as the Trump administration’s definitive policy statement on recreational marijuana use, they do raise a variety of concerns for cannabis businesses.

In a long-awaited decision released this morning, the United States Drug Enforcement Administration announced that it has denied two petitions to reschedule marijuana under the Controlled Substances Act (the “CSA”). The DEA concluded that marijuana should remain a Schedule I controlled substance because it does not meet the criteria for currently accepted medical use in treatment in the United States; there is a lack of accepted safety for use of marijuana under medical supervision and it has a high potential for abuse.  The DEA’s decision relies on a scientific and medical evaluation and scheduling recommendation from the United States Department of Health and Human Services (“HHS”), based on studies conducted by the United States Food and Drug Administration and National Institute on Drug Abuse (“NIDA”).

Washington State Bar Association is hosting its CLE program, “Marijuana Law: Changes in Regulation and Best Practices” seminar taking place next Tuesday, April 12, 2016 in Seattle, Washington.

The marijuana industry is a rapidly evolving landscape. The seminar will address changes and updates in the law, what constitutes medical marijuana, commercial best practices relating to contracts, and ethical considerations in running a cannabis law practice.

The seminar will kick off with introductions by program Co-Chairs, Andy I. Aley, Owner at Garvey Schubert Barer and Co-Chair of the Cannabis  practice group and Jared Van Kirk, Owner at GSB and Co-Chair of its Labor and Employment practice group. Emily Harris Gant, also Co-Chair of Garvey Schubert Barer’s Cannabis practice group, will lead off the seminar with reviews of Washington’s legislative and regulatory updates.

This blog post will be in two parts. The first part will provide the reader with an understanding of the laws and concepts associated with the taxation of the marijuana business. The second part will take these ideas and concepts and attempt to provide some practical operational guidance.

The First Part

The income taxation of a marijuana business, whether it be a producer, processor, wholesaler or retail establishment, is very different from a non-marijuana business. Everyone entering into the business will want to talk with a tax expert experienced in the taxation of a marijuana business in order to maximize the return on their investment.

There are several sections of the Internal Revenue Code (“IRC”) that impact the taxation of the marijuana business. Businesses, in general, in which the sale of merchandise is an income producing factor, calculate their taxable income in accordance with three primary sections of the IRC. Those are code sections IRC § 162(a), IRC § 471 and IRC § 263A.

Hal Snow shares his views with Puget Sound Business Journal’s Emily Parkhurst on the surprises, growth of the burgeoning marijuana industry, and issues faced by the industry such as putting together financing structures, non-Washington residents not being allowed to invest in companies, and the struggle in dealing with banking issues. Hal also discusses how GSB’s Cannabis practice group came to fruition with their team of experienced and dedicated attorneys with backgrounds ranging from business law, M&A, land use, real estate and regulatory, and also their experience in helping companies navigate the complexities of highly regulated industries.

Read the article here (subscription required): http://www.bizjournals.com/seattle/print-edition/2016/02/12/su

A little over a year ago, the Department of Justice released the infamous “Wilkinson Memo” containing DOJ policy guidance to U.S. District Attorneys on Marijuana in Indian Country.

Chaos ensued.

Media and industry began shouting “Marijuana is legal in Indian Country!” from the rooftops. Tribal leaders were swarmed by tribal members demanding that marijuana be immediately legalized. State and local jurisdictions were worried about the impact of legalization on their jurisdictions. Some tribes immediately announced their intent to open large marijuana operations; other tribes issued strong statements against legalization, and lawyers all started scratching our heads.

As the debris settles, we look back at a year with several tribes attempting to enter into the industry. The federal government either closed down their operations or the tribes shut down their operations themselves. Two tribes successfully opened two retail shops.

The truth is that there is just too much uncertainty in the law for most tribes to confidently enter into the industry. But there does seem to be economic opportunity available and some tribes will be able to take advantage of that.

Here are some highlights from 2015:

• • Development of the National Indian Cannabis Coalition. In February 2015, Jeff Doctor (Seneca) announced the establishment of NICC. NICC’s mission is to educate tribal leaders and elected officials on the emerging regulated cannabis industry while advocating for parity on behalf of Indian Country. NICC has been on the forefront of cannabis policy development in Indian Country, speaking at conferences around the country and weighing in on policy development at the Congressional and Administrative level.

• • Development of a draft tribal marijuana bill. Congress has been paying attention to the concern in Indian Country that dabbling in the cannabis industry could lead to the termination of federal grants or other funding. House representatives drafted a bill that would clarify that tribes would not lose federal funding if they were engaged in economic development in the cannabis industry.

• • HHS Secretary Burwell promised that tribes engaged in the cannabis industry will not lose their federal funding so long as they do not use HHS funds in those endeavors. (Now we need more such statement from other Agencies).

• • Suquamish and Squaxin Island open and operate (successfully) two retail marijuana stores on their reservations. While other tribes were being raided, these tribes in Washington were quietly negotiating with the State and preparing to open their retail stores. Now I hear that several other tribes are in negotiations with Washington State to do the same.

What should we look for in 2016?

• • Ruling in Menominee v. DEA and DOJ determining whether a tribal college is an “institute of higher learning” for the purposes of growing hemp under the Farm Bill.

• • Congressional legislation protecting federal funding for tribes engaged in the cannabis industry.

• • Development of a single federal policy regarding legalization of cannabis in Indian Country.

• • Development of tribal cannabis businesses in states with some form of legalization.

There have been a couple tribes who have tried unsuccessfully to open marijuana operations within states that have no form of legalized marijuana. The logistics of ‘legalization on an island’ are at this point, in my opinion, too difficult to overcome. Instead, the focus should be on developments within states with some form of marijuana legalization. I understand that this means that tribes in restrictive states without other forms of economic development will lag behind others – but cannabis remains a schedule 1 Controlled Substance carrying severe penalties for those convicted of possession, intent to manufacture or distribute. It is just not worth the risk unless you KNOW your intergovernmental agreements are strong and protect tribal people and tribal investments.

We are still in the infancy of this industry, both in Indian Country and the “outside” world. Growing pains are inevitable. What is both encouraging and frightening is that for the first time since gaming, non-Native businesses are coming to Indian Country. A word of caution - be careful who you work with – the sharks are circling and while they can leave and change their name, we are tribal people and members of our tribal nations from the beginning of time to the end of time and these businesses will remain part of our tribal history forever. Make sure that history tells a good story of developing cutting edge industries in a good way.

Garvey Schubert Barer will be sponsoring and attending the Cannabis Collaborative Conference at the Portland Expo Center on February 3 and 4. The conference will kick off with a keynote address from former NBA All-Star and Portland Trail Blazer Cliff Robinson, a cannabis advocate, and will feature 80 cannabis industry speakers and more than 90 exhibitors.

The numerous sessions are devoted to informing both existing businesses and new ventures about recent industry developments, including interactive workshops and hands-on demonstrations hosted by the Oregon Liquor Control Commission. This year’s conference is shaping up to be a can’t-miss event for members of the cannabis community.

You can find us at the following events on Wednesday, February 3:

• 2:15-3:00 PM - “Ask the Experts” Roundtable

Emily Harris Gant, Scott G. Warner and William K. Kabeiseman will participate in this informal round table session and will be available to answer attendees’ questions about corporate, intellectual property and real estate & land use issues, respectively, as they relate to the cannabis industry.

• 3:15-4:00 PM - The Status of Investing in the Cannabis Industry

Harold E. Snow, Jr. will review the law and regulations concerning who can invest in the cannabis industry and how, both directly and indirectly, and he will offer suggestions on maximizing investor participation in the emerging cannabis industry.

• 7:00-10:00 PM - Evening Reception

GSB is hosting the conference’s Wednesday evening party.

We hope to see you there!