Earlier this week, Burns & Levinson’s attorneys Lauren Medeiros Forster and Gustav Stickley V (Gus) spoke on a panel hosted by the Law Firm Alliance about their experiences practicing law in the red-hot cannabis industry. Today on the blog, they’re sharing their perspectives, experiences as cannabis attorneys, and industry predictions. For background: Lauren’s practice focuses on commercial contracts, mergers & acquisitions, finance, securities, lending, and private equity matters in a range of industries, including cannabis. Gus represents cannabis clients focusing particularly on general corporate matters and governance, mergers and acquisitions, finance, securities, and lending.
What is alluring about practicing business law in the cannabis space?
Gus: Working in the cannabis industry makes me feel like a pioneer. New markets are opening up every election cycle, new regulations are being crafted by state regulators, then amended and further amended to keep up with developments and trends in the market. Companies of all sorts pop up with different goals, and different products (some entirely new to the market!). There is always a new problem that arises that taxes the brain and helps us earn the trust of our clients.
Lauren: I like that I have the opportunity to work with companies of all sizes, from startup companies just starting to build out their first facility to multi-state operators (“MSO”) that are acquiring or partnering with another company to expand their operations. This requires me to adapt my approach when advising each individual client, based on the varying needs, expertise, goals, and the deal intricacies of each client.
What do you wish you had known about the industry/the practice before joining?
Gus: I did not realize how varied our clients would be and, as a result, how varied their goals are. I used to work in the banking and lending world and it was always clear what those clients needed to have accomplished. Our cannabis clients have substantial legal needs and what works for one client may not work for another. It’s fun and fast-paced, and there’s a challenge to be the jack of all trades.
Lauren: There’s always more to learn in this industry—it’s the thrill of working in an emerging market – which is one of the reasons I enjoy it. One aspect in particular I wish I knew is that the legal framework is constantly changing, adapting, and requires you to consistently be up to date on the latest developments. With that said, there is a strong base to make your legal footprint in advising clients in the industry, regardless of your legal specialty. Whether it’s real estate, intellectual property, business litigation, or employment and benefits, there is much opportunity for lawyers of all types in the cannabis industry
What is the difference between cannabis licensing/regulatory work as opposed to cannabis corporate transactional work?
Gus: At Burns & Levinson, we are heavily transactional, representing our clients in loan transactions, equity financings, M&A, and venture capital. This type of work is not unlike similar work in any other industry, except that the applicable state regulations can influence the pace, terms, and structure of any given deal.
For example, a secured creditor lending to a cannabis operator has much the same requirements to close as it does when lending to a retail company, except that the collateral includes a regulated commodity which requires that the creditor obtain regulatory approval prior to foreclosing on cannabis-related inventory. Same documents, but drafted to accommodate the underlying regulatory framework.
Licensing is assisting the client in obtaining its initial license or an additional license and is very process-driven. This is very different from traditional transactional work.
Lauren: Completely agree with Gus on this. To add, performing transactional work for a client also creates a need for an “outside general counsel” role that we continue after the transaction is complete. Our clients often come to us with regulatory, legal, and business questions ranging from regulation compliance to drafting an employee equity plan now that the business marriage has been consummated. Sometimes that outside GC work includes updating the disclosures to the regulators and helping clients maintain the validity of their licenses. So even if we do not assist a client during the initial licensing process, we still find ourselves performing licensing-related work throughout the business life cycle of our clients.
How does practicing business law in the cannabis industry differ from other industries?
Gus: The federal illegality of cannabis makes the practice more unique and uncertain. Our clients’ products cannot cross state lines for risk of engaging in interstate commerce and violating federal law; they struggle to find loans that do not come with onerous terms (which would be atypical in a loan to a non-cannabis company); they can’t find a rep and warranty insurer; and they are not afforded the favorable tax treatment available to non-cannabis businesses. On each deal and with each question from a client, we need to review, interpret and apply the underlying regulations, and we do not always find a clear answer. We also work with our clients to ensure they have the requisite protections and safeguards in their transaction documents, regardless of the lack of business resources that are typical in other industries. In doing so, we reduce, but cannot always eliminate, the risks in any proposed activity or business venture.
Lauren: Practicing business law in the cannabis industry is incredibly similar to any other industry, making it easy for attornies to both enter the space and carry a caseload filled with clients in different industries. However, the regulations of each underlying state at play can affect the timing, structure and terms of the transaction. You need to have a good understanding of state regulations to identify whether the transaction documents are in compliance with local laws, and whether they need to be submitted to the regulator and/or approved by it, which can cause delays or require a separate sign and close with the actual deal closing months or years in the future. As the deal lawyers on the transaction, we have to creatively structure contingencies and secondary business arrangements so that our clients can still realize the benefit of the transaction even if it is not approved in the form they initially prefer. Developing relationships with the applicable regulators is also key to understanding how best to structure a transaction subject to local regulations, so we often reach out to local counsel for their opinion on how they think the regulators will perceive our specific issue.
I practice corporate law advising both cannabis and non-cannabis clients. When working with a cannabis client, whether plant-touching or non-plant touching, we have to consider each of these items noted by Gus and me, which requires a shift in my advising strategy.
What are some trends that you see in the cannabis industry? Do you think these trends will stick around or be replaced by new trends yet unknown?
Gus: The consumer demographic is expanding. Often, new cannabis consumers are not young adults who turn 21 years old, but rather are people who grew up during “prohibition,” and have never considered cannabis to be a medicine or an acceptable form of recreation. Many are now curious because alcohol use can be potentially destructive or their prescribed pharmaceuticals are not helping to alleviate whatever malady they suffer from. There’s a growing new target market, a direct benefit of the shifting perspectives and new legislation around cannabis. This trend will stick around. The stigma is dying, and people are curious.
Lauren: There is more and more lobbying for the legalization of recreational cannabis both at the federal and state level. You see it now with Amazon, people of influence, and other powerful marketers putting pressure on federal legislators to take action. Cannabis legalization has really been a rolling stone for the past decade, and I do not anticipate it will lose any speed in the years to come. I expect to see more states legalize and open up new markets, but the future of federal legalization remains murky.
What does the future of the cannabis industry look like to you?
Gus: I predict greater access to the capital markets for operators. Currently, it is very difficult for cannabis companies to raise capital because they cannot trade on US stock exchanges or borrow money from federally chartered banks. Not to mention, many lenders are just generally hesitant to enter the space given the uncertainty of how regulators may treat these loans. The SAFE Banking Act needs to pass, and I am hopeful it will in the next year or so.
I think the stigma around cannabis will continue to wither and purchasing cannabis casually will become ubiquitous, akin to alcohol consumption or using over-the-counter pain medication (depending on the individual’s motivation for using cannabis).
Lauren: I think the cannabis industry will stabilize and continue to grow. New markets will open in more states, the capital markets will be more welcoming to cannabis operators, and the consumer population will diversify and grow. What I am curious to see is whether the multi-state operators will consolidate and acquire huge market share – and what effect this might have on cannabis “branding”— or if regulators will restrict their ability to dominate any particular geographic market and promote local and small cannabis businesses. Some states limit the number of licenses a single entity can exercise control over, but others do not, which makes national identifiers difficult to infiltrate and maintain. While no industry comes with a crystal ball, that is even more true in the cannabis industry.