The cannabis industry has a corporate governance problem. It is a topic that legal analysts have discussed at length, and yet it continues to be an area that is especially important to emerging cannabis companies and mature cannabis companies alike.
In the world of startups and emerging companies, it is not uncommon to see founders sacrifice best corporate governance practices in an effort to become established faster and build their market presence. Early investors and shareholders are often tolerant of governance shortcomings as companies focus their energy on growth and market-share. After all, the consequences of lacking sufficient corporate governance controls are not always a clear deterrent in the early stages of a closely held company. However, many cannabis companies do not have the luxury of a normal growth period, with time to mature and adopt normal governance policies. With stringent (and ever-changing) regulatory requirements, and an ongoing demand for transparency, cannabis companies can avoid headaches (and potentially worse) by implementing strong corporate governance practices early on.
When it comes to corporate governance, best practices suggest that, among other things, (i) boards (whether board of directors or board of managers) should consist of diverse and independent members, (ii) management … Keep reading
In a post last week, we discussed the ongoing personal bankruptcy case In Re Adair, in which a United States Trustee is seeking to have the court dismiss a Chapter 13 plan of an individual that is employed by a “non-plant-touching” ancillary marijuana business. The Trustee argued that, as the debtor’s salary is paid by an employer that derives income from the sale of cannabis, which remains federally illegal, approval of the bankruptcy plan would “improperly involve a federal court in administering the fruits and instrumentalities of federal criminal activity”. This argument has also been made in other bankruptcy cases in which the debtors engage in activities related to the marijuana industry, resulting in a seemingly blanket refusal by the bankruptcy courts to confirm any plans involving state-sanctioned marijuana operations.
However, a significant chink in the armor occurred last week when the Ninth Circuit Court of Appeals issued a ruling in Garvin v. Cook, which affirmed a bankruptcy court’s confirmation of a Chapter 11 plan involving income derived from the sale of marijuana. The Trustee in Garvin objected to the plan in question based, in part, upon 11 U.S.C.A. § 1129(a)(3), which provides that “[t]he court shall … Keep reading
The U.S. Justice Department (“DOJ”) has said that an Oregon woman who is employed by a marijuana staffing agency cannot use bankruptcy protection because of her firm’s ties to the cannabis industry. The U.S. Trustee—a DOJ bankruptcy administrator—objected to confirmation of the debtor’s Chapter 13 plan and moved to dismiss on the grounds that her income is earned in violation of the federal Controlled Substances Act (“CSA”).
The debtor, Ms. Adair, works for Greenforce Staffing, which advertises itself as a full-service staffing and temporary employment agency focused on labor solutions for the cannabis industry. Moreover, its website claims that the company specializes “in providing skilled harvesting, cultivation lifecycle, and trimming temporary labor services for licensed Oregon producers” as well as providing “a suite of permanent and temporary placement services for all aspects of the cannabis industry, including, but not limited to, bookkeeping, product packaging, garden management, and retail.”
Even though Greenforce is by no means a plant-touching operation, the Trustee argued that confirming Ms. Adair’s Chapter 13 plan would nonetheless improperly involve a federal court in administering the fruits and instrumentalities of federal criminal activity. The objection continued:
The Debtor receives her income from Greenforce, and Greenforce receives … Keep reading
Whether a cannabis firm is in the recreational or the medicinal space it seems as though there is an excess of rules and demands whichever way you turn. The new California regulations read like those for a proper pharmaceutical firm, while we know that bank financing or even financing receivables can demand extraordinary documentation. And there’s no need to dwell upon the continued uncertain status of cannabis and its derivatives per the Cole Memo and the fact that cannabis remains largely a cash business with its attendant risks.
So with all of that to consider, it would not be surprising for a consumer facing cannabis firm not to think much about sending out a few text messages. Well, perhaps more than a few. In early April it was reported that Eaze Solutions, Inc. agreed to pay $1.75 million in settlement of a class action claim that it had bombarded consumers with unsolicited, autodialed text messages. The company’s mobile app facilitates the personal delivery of recreational and medical marijuana throughout California, earning it the moniker (at least by plaintiff’s counsel) of the “Uber of weed.” (No report from Uber as to how they feel about this compliment.) The successful plaintiffs … Keep reading
Over the past few months we have posted a number of articles regarding the 2018 Farm Bill and its effective “legalization” of non-psychoactive, cannabis-derived, cannabidiol (“CBD”). While CBD has indeed been removed from Schedule I of the U.S. Federal Controlled Substances Act (the “CSA”), there remains a large degree of ambiguity regarding the ability of companies to commercially sell CBD products to consumers. Recently, the Food and Drug Administration (the “FDA”), one of the Federal agencies regulating CBD, established some bright line rules regarding such products (e.g. “it is unlawful to introduce food containing added CBD… into interstate commerce, or to market CBD or THC products as dietary supplements [absent prior approval from the FDA]”). However, despite this guidance, a grey area remains with respect to topical products, which include creams, sprays, roll-ons, lotions, and salves.
Over the past few weeks, CVS and other big-name retailers have announced that they will begin selling CBD topical products. While CVS is limiting sales to only those stores located in states that have approved the sale of CBD, those sales remain subject to the FDA. In formulating its regulatory framework for the CBD industry, the FDA has announced that it … Keep reading
As we discussed in a post back in February, one of the biggest hurdles facing the legal cannabis industry today remains the lack of access to banking services. Despite the legalization of cannabis on the state level, banks and credit unions have remained hesitant to provide financial services to cannabis-related businesses ( “CRBs”) out of concern that providing services to CRBs could potentially expose them to charges of money laundering and aiding and abetting federally-illegal operations. Originally introduced in May 2017, the “Secure and Fair Enforcement (SAFE) Banking Act” is a potential solution to the banking issues faced by CRBs across the country. And while the 2017 Act was unsuccessful, the bill enjoyed bipartisan support.
Last week, Sen. Jeff Merkley (D-OR) and Sen. Cory Gardner (R-CO)—along with 20 cosponsors—reintroduced the Secure and Fair Enforcement (SAFE) Banking Act into the Senate. The (SAFE) Banking Act’s companion bill was introduced in the House last month by Rep. Ed Perlmutter (D-CO) and a bipartisan group of 108 cosponsors. Following a hearing, the legislation was approved with bipartisan support in the House Financial Services Committee in March. It currently has 165 cosponsors.
Based on legislators’ comments on the proposed bill, it’s clear that … Keep reading
As discussed in more detail in my prior post, Alpenglow Botanicals (“Alpenglow”) is a state licensed Marijuana dispensary based in Colorado. Alpenglow was audited for several tax years and the IRS made adjustments, denying Alpenglow’s deductions for ordinary and necessary business expense under §280E. The company’s two principals paid the assessed liability under protest and filed a refund suit. The district court dismissed the suit for failing to state a claim upon which relief could be granted. Alpenglow appealed to the 10th Circuit, which ultimately affirmed the district court’s dismissal.
Supreme Court Petitioned
On February 21st, Alpenglow filed its cert petition, asking the U.S. Supreme Court to consider whether:
- by enacting §280E, Congress empowered the IRS to investigate federal drug crimes and administratively determine whether a taxpayer is criminally culpable under federal drug laws and
- 280E is a penalty for crime.
The U.S., as Respondent, could have acquiesced to the petition, submitted its brief in opposition, or waived its right to respond. The U.S. elected to waive its right to file an opposition brief—leading me to conclude that they (a) thought the Court would quickly dead list the petition or (b) … Keep reading
Just months ago, the hemp industry seemed to be on a clear path to legal certainty when the 2018 Farm Bill was passed on December 20, 2018 (the “2018 Farm Bill”). Though the passage of the 2018 Farm Bill legalized the production of industrial hemp, one of the main sources of cannabidiol (“CBD”), and the transport of hemp-derived CBD products across state lines, the CBD industry now finds itself in a state of disarray. So why all the confusion surrounding the CBD industry, especially at a time when CBD-infused products are flooding the marketplace? What the 2018 Farm Bill did NOT do was change the Food and Drug Administration’s (the “FDA”) authority to regulate any products containing CBD that are sold as food additives, topicals, drugs or dietary supplements in accordance with the Federal Food, Drug, and Cosmetic Act. As a result, the FDA has since made it clear that it is currently unlawful to introduce food or supplements products into interstate commerce that contain CBD, without first going through the FDA’s approval process.
So you must be wondering why the FDA has taken this position, given the intent of Congress with the passing of the 2018 Farm Bill. … Keep reading
On Monday, New Jersey legislators voted in favor of a measure that would both legalize marijuana and expunge past marijuana convictions. Many industry stakeholders were relieved last week, when Gov. Phil Murphy and Assembly leaders announced that they had reached an agreement on the proposed bill following months of intense negotiations.
Approved by the Assembly Appropriations Committee and the Senate Judiciary Committee, the bill is expected to be put on the floor for a final vote next week on March 25. If passed, the Garden State will become the 11th state to legalize adult-use cannabis. Broadly, the measure legalizes the possession, use and purchase of marijuana and establishes a proto- regulatory regime not unlike what we have seen in Massachusetts. It calls for the establishment a five-member commission “to oversee the development, regulation and enforcement of activities associated with the personal use of cannabis,” according to the NJ Assembly Democrats.
The bill, among other things:
- Permits municipalities to collect up to a 3% tax from cannabis retailers in their jurisdiction, 2% from growers and processors and 1% from wholesalers;
- Provides for conditional licensing which would allow time for potential license holders to obtain financing;
- Enshrines the right of
… Keep reading
The $867 billion 2018 Farm Bill was signed into law by the President on December 20th, 2018.
The reconciled farm bill mainly just reauthorized many expenditures in the prior 2014 Farm Bill. However, it put an end to five decades of hemp prohibition. Hemp was afforded limited legal protections in 2014, when Congress passed a farm bill that authorized states to develop pilot programs for its research. The 2014 Farm Bill eventually gave rise to a patchwork of state regulations regarding hemp and hemp-derived CBD. While the bill did include legislation that impacts traditional U.S. farmers, the portion of the bill that stands to have the most impact is the part that focuses on hemp.
The 2018 Farm Bill, among other things:
- Removed hemp’s low amounts of THC from the Controlled Substances Act;
- Allows the U.S. Department of Agriculture to regulate the crop like any other agricultural commodity;
- Permits hemp products – like CBD – to be introduced into interstate commerce.
- Allows hemp production in all 50 states for any use, including flower production and CBD or other cannabinoid extraction;
- Allows interstate commerce for hemp and hemp-derived CBD
However, this updated guidance was interpreted and misinterpreted throughout the hemp … Keep reading