The cannabis business ¬– highly-competitive, tightly regulated, volatile and still illegal under federal law – is not for the faint of heart. But the rewards can be great.
If you are paying any attention, you will notice a mini cultural revolution underway. The legal dispensation of marijuana, also called “cannabis” because it is derived from the cannabis plant, is big.
Once a taboo subject, it is now mainstream.
Currently medical marijuana is being dispensed in 31 states, plus the District of Columbia. Recreational use, also known as adult use, is legal in 9 of those states, plus the District of Columbia.
In Texas, the only legal form of dispensation is for cannabidiol, a low THC form used to treat and lessen the severity of seizures for those with intractable epilepsy.
Consider Colorado, which has the most mature legal marijuana dispensation market in the United States: total sales as self-reported by marijuana dispensary businesses since the state started tracking them in 2014 are over $5.5 billion dollars.
And recently, a prime-time national morning news network reported that Coca-Cola revealed that it was looking into adding cannabis-infused drinks to its repertoire, and beer companies are seeking partnerships with cannabis growers to offer similar products.
This business, however, is not for the faint of heart. It is highly-competitive, tightly regulated, volatile and still illegal under federal law. Success is likely available primarily to those with deep pockets, extensive industry knowledge and a tolerance for high-risk.
DEEP POCKETS
Reputable publications dedicated to reporting on the cannabis industry have estimated that the cost of entry is $10 million to $25 million. Expensive licensing application fees, requirements for specialized real estate facilities and security systems, and attorneys and consultant fees quickly add up.
For example, New York requires, among other items, a $10,000 non-refundable license application fee, an additional fee of $200,000 if the application is approved, and a $2 million-dollar bond if a licensee cannot show it has the real estate necessary to produce cannabis.
INDUSTRY KNOWLEDGE
One would be foolish to invest in an existing business or a start up without doing extensive due diligence about the existing or prospective market position of the company. Although currently only privately held companies can own these businesses, everything about ownership is public. Detailed ownership information at the individual level is required by the licensing agencies in connection with the application process and available either via open records act requests or directly via website content. Even lenders frequently are required to complete financial declarations even if they don’t own an equity interest.
Furthermore, incentives such as royalties and convertible promissory notes are limited for cannabis businesses.
In Colorado, for example, absent limited exceptions, a non-owner is barred from receiving payments tied to profits and convertible promissory notes are permitted only if they are registered with the Marijuana Enforcement Division.
Finally, once up and going, and because access to banking is limited due to federal laws, cannabis businesses receive payments in cash. Thus, they must deal with IRS/FinCEN Form 8300 reporting requirements for cash payments of more than $10,000. These reports include information on who paid the money, and on whose behalf, it was paid.
HIGH-RISK TOLERANCE
Possession, transportation and the sale of cannabis remain federal crimes under the Controlled Substances Act of 1970 (CSA).
One of the most damaging potential results of operating in this unknown legal environment is the forfeiture of real property used in connection with the business. Federal and state laws permit seizure of a criminal accomplice’s assets that either (a) have facilitated a criminal enterprise, or (b) are derived from the criminal enterprise.
Imagine the harsh awakening for the landlord that has a building seized by the federal government because it was leased to a grow operation or retail dispensary.
Until cannabis is rescheduled to permit its use under the CSA, the operation of a marijuana dispensaries and grow sites are crimes punishable under the federal courts’ sentencing guidelines. And it’s not a defense that marijuana sales are legal under the operators’ state laws.
Where we are today in terms of the likelihood of enforcement at a federal level is anyone’s guess.
Unless you have a large balance in your bank account, a full working knowledge about the uniqueness of operating a cannabis business and a stomach for the unknown, make the widget and avoid the weed.
Veronica Chavez Law is a shareholder and attorney at Brackett & Ellis P.C., a local Fort Worth law firm. Law practices in the areas of commercial real estate, land use and banking and advises prospective and existing cannabis business in the foregoing areas. She is licensed to practice in Texas and Colorado.
vlaw@belaw.com