Already generating billions of revenue dollars annually, the cannabis industry is moving ever closer to the mainstream, and newly created companies are increasingly seeking out investor assistance to turn their ideas into realities. In this post, we present some issues to consider and measures to take when deciding whether to invest in a cannabis-related company that is seeking funding.
1. Make sure the company has truly obtained all required licensure
Each state has its own system for awarding licenses to grow or sell cannabis. It’s important to understand how far along the business is in the licensing process, and what its status means for your investment. It’s not unusual to invest in a company prior to its obtaining full licensure; however, before doing so, you should protect your stake by ensuring that there are procedures in place for the return of all or most of your money if the company fails to get licensed in a reasonable amount of time.
Make sure you verify with the proper authorities where the company truly stands, as it may not fully understand the nuances of the process, and could be incorrect about its position. Often, this information is public record. We’ve heard … Keep reading
In 2012, Anthony Pisarski and Sonny Moore, marijuana cultivators operating legally under California law, were raided by federal agents, who seized 327 cannabis plants, firearms, and over $400 thousand in cash. Pisarski and Moore were each charged with conspiracy to manufacture and possession with the intent to distribute.
Five years later, and only days ago, their case was reviewed by the Honorable Richard Seeborg, a California U.S. District Court judge.
Judge Seeborg’s decision blocked federal prosecutors from pursuing claims against Pisarski and Moore, ruling that Pisarski and Moore’s actions were legal in light of California’s laws governing the growth and sale of medical marijuana. In his decision to dismiss the federal prosecutor’s claims, Judge Seeborg expressly stated that “[Pisarski and Moore]’s conduct strictly complied with all relevant conditions imposed by California law on the use, distribution, possession, and cultivation of medical marijuana.”
Pisarski and Moore’s defense was based primarily upon legislation known as the Rohrabacher–Farr Amendment, which was passed in 2014 and mandates that federal funds cannot be allocated toward prosecuting individuals following state cannabis laws.
In rendering his trailblazing decision, Judge Seeborg cited United States v. McIntosh, a case heard by the Ninth Circuit last year. In … Keep reading
Here’s some food for thought: 29 states currently have laws broadly legalizing cannabis, in some form. Eight of those states – Alaska, California, Colorado, Oregon, Massachusetts, Maine, Nevada, and Washington, as well as the District of Columbia – have legalized the plant’s sale, for both medicinal and recreational use. These numbers continue to grow. In fact, many studies indicate that cannabis is the fastest-rising industry in North America.
For companies to capitalize on the many opportunities this industry presents, however, they need startup and growth capital. And among the myriad questions they must address before entering the space is: What is best for my company, debt or equity financing?
Below is a primer of the pros and cons of both.
What is debt financing? Debt financing is when a company borrows money from a lender, whether institutional or non-institutional, that it will eventually pay back, in addition to agreed-upon interest. Sometimes debt may be convertible, or may also provide warrants to the lender.
What are some of the pros and cons of debt financing?
– Pros: The advantages of debt financing are many. For example, a company does not give away ownership interests to its lender, and is able … Keep reading
In my previous post, I outlined some of the challenges property owners face with regard to leasing real estate to registered marijuana dispensaries (RMDs) and cannabis cultivation centers (MJ Tenants). For all parties involved, the path to success in the cannabis space begins with an understanding of the differences between applicable state and federal laws. With respect to leasing to businesses that actually touch the flower, there are significant zoning and locational restrictions imposed on RMDs and MJ Tenants that must be taken into consideration.
Additionally, factors like financing, security, and liability are also strong concerns for all stakeholders – protecting the property, as well as the business, is critically important.
3. The cost of financing
Many, if not most, federally regulated lenders do not, or will not, make loans to entities involved in cultivating or dispensing cannabis. Indeed, very few banks will even allow a dispensary to open a simple operating account. Banks remain concerned about the federal prohibitions against the use and sale of cannabis, and because most are either federally chartered or federally insured (or both), their unwillingness to lend to such businesses is expected to continue until marijuana is legalized at the federal level.
As … Keep reading
Recently, I’ve been asked to negotiate several commercial leases for cannabis cultivation centers (MJ Tenants) and registered marijuana dispensaries (RMDs) around Massachusetts. Competition is fierce, and parties are scrambling to scoop up real estate in qualifying zoned areas. As a result, the market value of these properties is increasing rapidly.
While high costs pose an entry challenge for new businesses, many commercial landlords are benefitting from the sudden increases in value. But despite their expanding profit margins, there remains a host of issues for commercial property owners to consider when leasing to operators of RMDs and MJ Tenants, which sometimes contribute to the increased rents/costs that many of the latter are experiencing.
1. Differences between state and federal laws regarding the growth and cultivation of cannabis
State and federal laws are vastly different concerning the cultivation and sale of cannabis, regardless whether for medicinal or recreational use. The Controlled Substances Act (CSA) classifies cannabis as a controlled substance; as such, cultivating and dispensing marijuana remains illegal at the federal level.
Property owners that derive income from tenants who use a space to cultivate or sell cannabis may expose themselves to prosecution under federal laws. It is a violation of … Keep reading
So…You Want to Start a Cannabis Company
Imagine: The state you live in now legally recognizes the recreational use of marijuana, and you’re eager to start a business that capitalizes on the law change. As an intelligent entrepreneur, you recognize that sound legal, business, financial, and tax advice are integral to your company’s success, so you seek out input from trusted advisors. Your jaw hits the floor when your attorney tells you that, depending on how your business operates, you may end up paying a substantial amount more in federal income taxes than you otherwise would if your business were not a cannabis-related concern. You wonder, “Why does it make a difference?”
Cannabis Laws Differ at the State and Federal Levels
Though it may be legal in your state, cannabis is still considered illegal by the federal government. As a result, cannabis companies aren’t eligible to claim the federal tax credits or deductions available to other types of businesses. This is outlined in Section 280E of the Internal Revenue Code, which states that:
No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such
… Keep reading
On Monday, a six-person committee of Massachusetts House and Senate members completed work on a legislative compromise (Bill H.3818) that seeks to overhaul laws regarding cannabis approved by voters in last November’s election.
Local cannabis supporters have criticized the legislation, primarily because it proposes an 8% tax increase on adult-use marijuana.
Below are some of the salient points of the bill:
- The tax rate on retail cannabis will be 20%, representing a significant jump from the 12% that voters approved last fall. Despite the hike, proponents of the bill, including Governor Charlie Baker, argue that the higher rate is commensurate with, if not lower than, those in other states where recreational use is legal – for comparison, Oregon, Colorado, and Washington tax recreational cannabis at 20%, 27.9%, and 37%, respectively.
- The ability of cities and towns to determine whether to permit marijuana businesses will vary by municipality. Specifically, those cities and towns that voted in favor of legalization (comprising roughly 72% of the state’s population) will be able to make the decision to ban or limit marijuana establishments by referendum; for those that opposed, elected officials alone will make the final call.
- Under the new legislation, the rules, regulations,
… Keep reading
In 2013, the principal of a small, private equity fund client asked us what we knew about the world of medical marijuana. He was acting on behalf of a group that had, at the time, recently obtained one of three such licenses issued by the State of Rhode Island, and that needed help navigating the complexities inherent to the nascent cannabis industry. Leveraging our corporate expertise, we assisted in documenting the capital raise necessary for both the build-out of a cultivation facility and construction of a kitchen. That engagement marked our initial foray into the world of legalized marijuana commerce…
Since then, the industry has exploded.
Per Arcview Market Research, marijuana sales are expected to exceed $20 billion in North America by 2021, excluding revenues generated from ancillary cannabis businesses. Eight states – including the Commonwealth of Massachusetts, in 2016 – have voted in favor of the plant’s legalization for recreational use, and certain states now offer banking options for licensed dispensaries. Last year, there was an IPO for a REIT raising capital to purchase real estate to be leased to cannabis businesses. And throughout the first half of 2017, several bipartisan, cannabis-related bills were introduced in Congress, including … Keep reading