There’s Always Certainty in Taxes: IRS Issues Tax Guidance for the Marijuana Industry

During these unpredictable times, there is certainty in taxes. This month the Internal Revenue Service (“IRS”) posted a dedicated marijuana-industry specific webpage providing general tax guidance and FAQs for the predominantly cash-based industry.  The guidance does not signify a change to the existing law but rather reminds marijuana business owners of their responsibility to pay federal taxes.

This IRS guidance is on the heels of a report from earlier this year by the Treasurer Inspector General for Tax Administration (“TIGTA”), aptly titled “The Growth of the Marijuana Industry Warrants Tax Compliance Efforts and Additional Guidance.” In the report, TIGTA recommended that the IRS develop educational guidance to assist marijuana businesses in understanding their tax obligations.

In the recent tax guidance, the IRS confirms that marijuana businesses are subject to the limitations of Section 280E of the Internal Revenue Code. Section 280E explicitly disallows tax deductions or credits for businesses that traffic a Schedule 1 or controlled substance. Although marijuana may be state-legal, on the federal level it is still considered a controlled substance classified as a Schedule 1.  Section 280E greatly impacts the profitability of marijuana businesses, because they are not able to make the same tax deductions or … Keep reading

Changes to the Accredited Investor Definition

Marijuana-related businesses (“MRBs”) planning to raise money in private offerings should be aware of recent changes to the “accredited investor” definition under the Securities Act of 1933, as amended (“Securities Act”). The U.S. Securities and Exchange Commission (“SEC”) recently adopted a final rule (the “Final Rule”) amending Rule 501(a) of Regulation D promulgated under the Securities Act, which expands the definition of “accredited investor.”

Topline conclusion: These changes establish additional investor eligibility qualifications, thereby increasing the available pool of potential investors who may participate in private securities offerings. This is good news for MRBs hoping to raise money, particularly under Rule 506(b) or Rule 506(c).

When will these changes become effective?  The Final Rule will become effective sixty (60) days following its publication in the Federal Register. It is anticipated that the effective date will be sometime in early November 2020.

Will the Final Rule change the income and net worth standards required for individuals?  No. The income and net worth thresholds for individuals remain the same.  That is, individuals must still have an annual income of at least $200,000 (or $300,000, together with his/her spouse) or a net worth of more than $1 million (excluding the … Keep reading

Four Years Later and Maine is Poised to Finally Launch the Sale of Adult-Use Cannabis in October

After having been indefinitely postponed in April 2020 due to the COVID-19 pandemic and nearly four years after Maine residents voted to legalize adult-use recreational cannabis, Maine is set to launch the long-awaited retail sale of adult-use recreational cannabis this coming October. While voters passed a ballot measure in 2016 to legalize adult-use recreational cannabis, state legislators and regulators have spent the time in between battling how to regulate the industry. And, as the state only started accepting applications to its adult-use recreational cannabis program back in December 2019, some had hoped that recreational sales would begin in April prior to the state announcing the indefinite postponement, which was then suggested would last beyond June.

Four months later, on August 14th, 2020, Maine’s Office of Marijuana Policy finally announced its plans for the issuance of the state’s first adult-use marijuana establishment licenses beginning on September 8th, which is anticipated to give stores enough time to harvest, test and package products for sales to begin a month later on October 9th. In light of the ongoing pandemic, the Office of Marijuana Policy is also working with the state’s Department of Economic and Community Development … Keep reading

Leveling the Playing Field: Various Approaches to Social Equity

Since the era of cannabis legalization commenced, stakeholders, regulators, and ordinary citizens alike have been concerned about the lack of social equity and diversity in the cannabis industry.  Even prior to the modern era of legalization, the inextricable relationship between race, enforcement, and the origins of prohibition has served as a troubling reminder of our country’s systemic inequity, as we have previously noted. Therefore, in recent years regulators have attempted to address past social and racial disparities by ensuring that those from disproportionately impacted communities would not be blockaded from the legal market.  This week we will take a look at various approaches that state regulators have implemented to combat inequity in the industry.

While several states have made social equity provisions a part of their marijuana programs, jurisdictions have taken slightly different approaches and experienced myriad results.  Since 2016, at least six (6) states have enacted considerable measures to increase diversity in their respective marijuana programs by either eliminating or mitigating barriers to entry into the market (including, Massachusetts, California, Michigan, Ohio, Illinois, Washington). Moreover, with respect to adult-use marijuana, Massachusetts, California, and Illinois have each made social equity a key aspect of their legalization plans.

Massachusetts  Keep reading

New Massachusetts Cannabis Regulations Up for Public Comment and Final Vote

The Cannabis Control Commission (CCC) assembled on July 20, 2020, to approve draft changes to the cannabis adult-use, medical-use, and colocated operator regulations. A Virtual Public Hearing on the draft regulations was held on August 3rd and public comments will be accepted until August 14th.

The new draft regulations encompass various changes across the board – from new CCC approval procedures, operational requirements, licensing updates, and receivership processes. Given the expansiveness of the proposed changes, it is critical for current and future operators as well as investors, lenders, and financial institutions engaging with industry participants to review and understand the additions and modifications.

Colocated Marijuana Operators (CMOs). In regard to the promulgated regulations concerning Colocated Marijuana Operators, the CCC has proposed to combine the regulations previously set forth in 935 CRM 502.000 with the existing  935 CMR 500.000 (Adult-Use Regulations) and 935 CMR 501.000 (Medical-Use Regulations) due to redundancy in the currently effective colocated operator regulations.

Licensure/Certifications. Some key developments in the new regulations regarding licensure include:

  • Expansive processes pertaining to patient certification/registration such as:
    • permitting patients with certain identified hardships to renew on a 2-year basis instead of annually
    • expressly adding telehealth visitation
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Recent OCIE Risk Alert Demonstrates SEC’s Continued Focus on Private Fund Advisers

The staff (the “Staff”) of the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (“OCIE”) recently issued a Risk Alert focused on certain key compliance issues for registered investment advisers that manage private equity funds or hedge funds (collectively, “private fund advisers”). OCIE’s Risk Alert highlights certain common deficiencies the Staff has observed, and its publication demonstrates the Staff’s continued focus on regulating private fund advisers. For purposes of this Cannabis Business Advisory blog, private fund advisers and investors alike in the cannabis space are advised to carefully take note of this Risk Alert, especially given the already enhanced scrutiny of the industry.

The Staff emphasizes three general areas of deficiencies OCIE has identified in examinations of private fund advisers: (1) inadequate disclosure of conflicts of interest, (2) inaccurate allocations and disclosures of fees and expenses, and (3) failure to properly maintain, establish and enforce policies and procedures relating to material non-public information (“MNPI”).

Conflicts of Interest Disclosures

The Staff underscores the antifraud provisions in Section 206 of the Investment Advisers Act of 1940 (the “Advisers Act”).  In particular, the Staff cautions advisers who are subject to these antifraud provisions to eliminate or otherwise make “full and … Keep reading

Does the SAFE Banking Act Still Have a Chance?

FinCEN’s most recent information regarding financial institutions providing services to cannabis-related businesses (“CRBs”) indicates a slight decline in the overall number of depository institutions providing such services during the first quarter of 2020. FinCEN speculated that the decline might be short-term and attributable to late Suspicious Activity Report filings. Regardless, the number of financial institutions actively banking cannabis has stayed steady for over a year. Although there may be many reasons preventing new entrants from coming into the space, one of the biggest hesitations relates to the Senate’s failure to pass the SAFE Banking Act, or some version of it. As the November elections near, it may seem even more unlikely that the SAFE Banking Act will finally become law; however, with the GOP controlled Senate preparing its own version of a second coronavirus stimulus package, there is still a chance that the Senate could include provisions of the SAFE Banking Act similar to those included in the HEROES Act passed by the House in May. Strategically and practically, it would make sense.

Since it passed in September 2019, the SAFE Banking Act has been stalled in the Senate’s banking committee led by Sen. Mike Crapo of Idaho. In … Keep reading