Legal Issues Facing the Cannabis Industry

I became fairly well-known in taking companies public through nontraditional means, such as reverse mergers and that sort of thing. And in around 2013, the first cannabis companies in the US that went public did so through reverse mergers. And so I inherited a few of those clients way back then. Started attending conferences, started doing speaking engagements and started realizing this was an exciting potential business opportunity. Not to mention the opportunity to help people get medicine they need and achieve social equity.

And then in 2015, I joined a major global law firm that I left a year ago and help them build their practice. They were one of the first top 100 law firms to openly enter the space. And that's how I really expanded the practice significantly at that point.
EA: We're now a little bit more than a hundred days into the new administration. Do you think the new administration is planning on deschedulizing cannabis?
EA: It's not a priority for Biden. He is not really in favor of legalization, he is in favor of decriminalization. We know that the vice-president is in favor of legalization, but she's now towing the line with his line, which is more about decriminalization and not mandating people go to jail for low-level drug offenses.

But Chuck Schumer is definitely putting on pressure towards legalization. And I think if he manages to get a bill through both houses of Congress, I believe Biden will sign it. But I think it will not get through both houses of Congress within this election cycle.
EA: Do cannabis companies really want to see cannabis deschedulized?
DF:Well, I've written about this quite a bit, that there are going to be winners and losers when legalization happens. And for the most part, the bigger companies, what we call the multi-state operators, they have been planning for legalization from the day of their formation practically, and they're getting ready for it.

But there are many other players, some of the social media players and so on, who took up space when traditional companies wouldn't, and allow advertising and things like that that Facebook and others would not. Those companies could get hurt, as well as some of these smaller groups like dispensaries and growers that are going to suddenly find in competition with major national companies.
EA: The SAFE Banking Act has passed the house again. What are the odds of it passing the Senate?
DF: Not great. They shouldn't be able to pass this as a budget item under what's called reconciliation, because it's hard to say this is about a budget. They might be able to figure out a path to that.

And there are some Republican senators who have said they're in favor, but it's going to be a tough slog in my opinion. And they're going to have to make some changes to the bill, I think, to give it a shot. And it would be really helpful, even if it's more symbolic than meaningful at this point.
EA: Is the banking landscape for cannabis companies opening up a bit, or is it still a major issue? Or is access to capital loans the real issue?
DF:Banking as an issue is mostly moot at this point. There is something like 600 banks that are willing to take cannabis customers. The treasury department has made clear that financial institutions are allowed to do it under certain restrictions. Banks figured that they could charge a lot of fees in exchange for the obligations that they undertake. And so, many of them have realized this is a great opportunity.

We're still though seeing clients who's having their bank accounts shut down and so on, and that's a bit frustrating. But I think that once banking passes, it will be a symbolic move if it does. For example, the US Stock Exchanges might be willing to start listing plant-touching companies, and the lending business firm banks might open up as well.
EA: What about credit card processing? Will we see that, or is that depending on the SAFE Banking Act passing?
DF:I think it's mostly dependent on that, although there is some credit card processing already going on. I remember going to a dispensary in Las Vegas, they took my Amex card. I mean, it's happening quietly in some places. I think you're right though. It will happen not until the banks are comfortable that they have no issues with respect to money laundering and so on.
EA: What's the current state of capital raising for cannabis companies?
DF:It's very strong right now. Last year was not, and that started before the pandemic, that there was a dearth of capital for a period of time when stocks went down. And then stocks recovered and capital is now accessible again.

There's still a limit to how much institutional money is available. It is primarily still family office money, hedge funds and that sort of thing is where most of the money is coming from. But companies are raising nine-figure rounds pretty regularly now.
EA: You mentioned earlier about your history with SPACs, and SPAC seems to be the flavor of the month these days. Are SPACs the best alternative or the best option for a cannabis company to raise capital?
DF:Typical lawyer answer, it depends. It depends on what kind of cannabis company you are. The companies that are, as we call them, ancillary businesses that provide services or products to companies that have a license to produce or sell cannabis, those companies can go on the exchanges and merge with a SPAC and so on.

If you are, as we say, a plant-touching company, then NASDAQ and the New York Stock Exchange will not let you on. So you could still do it. And there's a SPAC that recently announced a merger with four plant-touching companies, but they also said that their NASDAQ listing will have to be given back when they merge, and they'll have to move down to trade on the over-the-counter markets.

So SPACs are an avenue to consider in a variety of arrows in your quiver as you're thinking about your strategic options as you grow as a company. And the SPAC market in general is under attack right now as we know by the SEC and by some pundits who are saying it's a fad and the fad is waning. Or there's too many and it's too competitive. So those are the challenges we face with SPACs.
EA: Besides tax ramifications, which 280E is well known and the impact that 280E has in cannabis companies as well-known. How does the legality or the illegality of cannabis at the federal level affect how cannabis companies operate?
DF:It affects them in many different ways. You can't have any interstate commerce. Every state has to produce, process and sell it and deliver it within a state. The stock exchanges won't list these companies. You can't get a federal trademark on a cannabis brand. As you mentioned, 280E, which prevents cannabis companies from deducting their business expenses is still a problem.

And some still have a fear of federal enforcement of kicking down the door and shutting them down, even though that hasn't happened since the first Obama administration. But there's still some hurdle, and legality would create an explosion of activity in my opinion.
EA: Right now, every everything, while illegal at the federal level, the state laws dictate what needs to be done. How different are the laws in each state, and are there any state laws that are universal?
DF:No. And I'm very involved with the International Cannabis Bar Association, I'm on their advisory board, and we're talking about trying to develop model rules for states so that there could be more uniformity, like we have with corporate law and some other things. And so far there is not an interest in doing that. Some states require you to be vertically integrated, some states say you can't be vertically integrated. Some states have a limited number of licenses, some states have unlimited number of licenses.

The universal themes relate more to things like making sure these facilities are not near a school or a church and things like that. But each state has done something a little bit different and each state, as they legalize, claim they're learning lessons from other states. For example, New York, which just went legal, has got the first THC-based tax of any state. And it's going to be an interesting experiment to see if that makes sense and does well.
EA: And New York is one of those states that you talked about that is not allowing vertical integration in this industry right now.
david feldman: That's correct.
EA: At least for the first couple of years.
DF:And I'm a free trader, and it's frustrating to me to see unnecessary regulatory restriction. We should do as much as we can to allow the free market to rule, while still protecting those who were really disadvantaged by the war on drugs.
EA: Do you expect to see a lot of consolidation in this industry in 2021 or 2022?
DF:Yes, it's already happening. Our law firm, and I have an affiliated consulting firm, we just advised a group of three dispensaries in Pennsylvania that was sold to Terasan, one of the big multi-state operators, at an enterprise value of $70 million. That's just one of many deals that have been announced recently.

And I think the industry is beginning to bet that legalization is on the horizon. And that's scaring some of these smaller companies into thinking they're going to be left in the dust if they don't hook up with one of these larger players.
EA: When I go into a store in California or New York and I buy a diet Pepsi, it's the same product. We often take that for granted. Will we get to see national brands and the ability to do that in the cannabis industry?
DF:Absolutely. I think branding is one of the big trends that's going on now. You already have Willie's Reserve, Charlotte's Web, Seth Rogan's Houseplant. There are already national brands that are developing, cookies is another one. And that's going to continue. And I think people like the reliability of a particular brand, knowing what they're into and so on.

There are still battles going on. There was a cannabis brand called Gorilla Glue, which obviously was violating the trademarks of the real Gorilla Group company, they shut them down. Same thing with the Nerds Candies, people make Nerds Candies with weed, that's illegal. So we have that going on. So branding is important and it's going to continue to be.
EA: In the recent past landlords were not so open to leasing property to a cannabis company, for a variety of reasons. Has that changed? Has landlord's view of cannabis companies changed?
DF: Well, there was an interesting article in the Times today about what's happening in real estate, in particular in New York, as people are getting ready for legalization. And the thrust of the article was that to the extent that there was reticence, the pandemic has changed that. And the real estate folks have been really struggling, and they're much more open to considering these types of alternatives.

And again, it depends on what you're doing. If you're renting a warehouse to grow cannabis, is that the same as renting a store to sell cannabis. And I think there is more and more willingness to be accepting of this, whereas some of the growth facilities. I think it's more of an issue trying to get retail landlords on board, than those who are going to rent space for growth facilities.
EA: David, as we finish up this morning, what states are next? What's next on the horizon for states to declare or to rule a legality of cannabis?
DF: So it looks like in the next year we're going to see Delaware, Connecticut, Rhode Island. And people are saying Minnesota, although I think they've got some headwinds to get it done there. But if you notice, what we're talking about is North East US is beginning to happen. And I didn't even list Pennsylvania, which most people think is not going to happen this year, but which is likely to happen soon.

So we're beginning to move the epicenter of the industry from West Coast to more East Coast. And especially with New York opening up, obviously the financial center of the country and so on, not to mention one of the entertainment capitals of the country. And I think we're going to see a very exciting time for job creation and tax revenue coming in to these North East states.
EA: Great. Thanks for joining me today, David. And thanks for listening to CannaCast as part of the EisnerAmper podcast series. Please visit eisneramper.com/cannabis for more information and podcast. And join us for our next CannaCast podcast where we'll discuss other budding issues. Thank you.

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