Guest Post: Changes to Colorado Residency Requirements

By Charles Alovisetti, Senior Associate at Vicente Sederberg, LLC.

This is article is the second in a series, which will provide a general overview of the laws that impact raising money in the cannabis industry.

Introduction

welcometocoloradoColorado currently has the strictest residency requirements for ownership of marijuana establishments in the United States, imposing a two-year residency requirement for any owner of a licensed business. In addition to the constraints imposed by such a lengthy residency requirement, the Colorado Marijuana Enforcement Division (the “MED”), which is the regulatory body concerned with the marijuana industry, takes a broad view of what constitutes ownership (e.g., guarantying the debt of a licensed entity can constitute ownership). Earlier this year, on May 11, 2016, in order to address the funding difficulties created by the strict residency requirements (note that because the changes to the residency requirements apply to both medical and retail marijuana businesses, this article will not distinguish between the two when discussing the legislative changes and will simply refer to licensed entities, which shall mean both medical and retail licensed entities), the Colorado Senate passed Senate Bill 16-040, as amended by the House, commonly referred to as the “Residency Bill” (the “Bill”). The Bill was subsequently signed into law by Governor Hickenlooper on June 10, 2016. The Bill, which goes into effect on January 1, 2017, will radically change the residency requirements imposed on licensed businesses. These changes are addressed in detail below. This article, with limited exceptions, only addresses the changes explicitly described in the Bill and does not address the further complexities raised by draft rules promulgated by the MED regarding the Bill since these rules are not yet final.

Current State of Colorado Law

As noted above, in addition to requiring that all owners of a licensed business be at least two-year Colorado residents (and must also meet certain background requirements), Colorado takes the view that a person or entity that has a beneficial interest in a marijuana business and/or substantial control over a marijuana business is considered an “owner.” A beneficial interest has been informally defined as being paid based on profits (whether gross or net). In determining if a person or entity has an ownership interest in a marijuana business, the state considers a non-exhaustive list of factors, including whether a person or entity 1) bears risk of loss and opportunity for profit; 2) is entitled to possession of the licensed premises; 3) has final operational decision-making authority over business; 4) guarantees the businesses’ debts or production levels; 5) is a beneficiary of the business’s insurance policies; 6) acknowledges tax liability for the business; 7) acts as an officer or director of the business; 8) is contracted to manage the overall operation of the business; 9) has a licensing agreement with the business (note that it is possible to structure licensing agreements so as to avoid triggering the determination of ownership, but this can be complicated); 10) has ownership of shares or other equity interests of the licensed business; 11) has a secured interest in furniture or fixtures directly used in the manufacture or cultivation of marijuana; or 12) has a secured loan with the business. In addition, any security interest in the furniture, equipment, or fixtures used directly in the manufacture or cultivation of marijuana or marijuana product may be considered ownership depending on the circumstances. Given the thoroughness of the foregoing list, it’s not difficult to understand why licensed entities have had difficulty raising capital from out-of-state investors.

However, Colorado laws do allow for out-of-state residents to invest in marijuana businesses through a permitted economic interest (“PEI”). A PEI is a financial interest in the form of an unsecured debt instrument, option agreement, warrant, or any other right to obtain ownership interest in a marijuana business, provided the conversion or transfer right is contingent on the holder qualifying as an owner and obtaining licensure as an owner by the MED – this could be upon the occurrence of either the holder meeting the two-year residency requirement or a change in law (which the Bill represents). A PEI may only be held by a natural person who is a U.S. resident. Holders of PEIs are subject to fingerprinting and criminal history background checks and must disclose financial and personal information with the MED in their applications. As of today, PEIs remain useful to licensed businesses since they allow them to accept out-of-state investment in advance of the Bill going into effect. On January 1, 2017, PEI holders will become eligible to have their interests converted into equity holdings in licensed businesses. After the Bill goes into effect, any kind of option, warrant, or similar convertible instrument will still be required to take the form of a PEI.

New Residency Bill

Before delving into the specifics of the Bill, it is worth noting that the summary attached to the Bill contradicts the actual law, as it was written prior to the passage of the final version of the Bill, and it should be ignored.

The Bill adds a number of new defined terms. Understanding these new terms is the key to understanding the Bill:

Direct Beneficial Interest Owner: Prior to the Bill, there was only a defined term for “Owner”; that concept has now been split in two – Direct Beneficial Interest Owner and Indirect Beneficial Interest Owner. Under the existing system, any level of control that the MED, using the 12-factor test outlined above, determined rose to the level of ownership resulted in the entity or individual being listed as a zero percent Owner (e.g., an individual who guaranteed the debts of a licensed entity might be considered as a zero percent Owner of that business, despite owning no equity in that entity). The term Direct Beneficial Interest Owner is meant to cover existing Owners who directly hold equity in a licensed entity. Direct Beneficial Interest Owners are subject to residency requirements and full background checks (except for Qualified Limited Passive Investors, a type of Direct Beneficial Interest Owner described in detail below). A Direct Beneficial Interest Owner must be either a resident of Colorado for at least one year or a US citizen. Publicly traded companies are explicitly barred from holding licenses.

Indirect Beneficial Interest Owner: The second new category that was previously included in Owner is Indirect Beneficial Interest Owner. No residency requirement exists for an Indirect Beneficial Owner. An Indirect Beneficial Interest Owner includes the following individuals and entities: (a) a holder of a PEI, (b) a recipient of a commercially reasonable royalty associated with the use of intellectual property by a licensee, (c) a licensed employee who receives a share of the profits from an employee benefit plan, (d) a qualified Institutional Investor (defined below), or another similarly situated person or entity as determined by the state licensing authority. The Bill does not explicitly state what kind of background check will be required for an Indirect Beneficial Interest Owner. Currently, the draft rules set forth an identical set of criteria to determine suitability to those for Direct Beneficial Interest Owners, but this may change in the final rules.

Institutional Investor: Up to 30% of a licensed business can be held by an Institutional Investor, and the Bill does not contemplate any residency requirement for an Institutional Investor since an Institutional Investor will be considered an Indirect Beneficial Interest Owner and residency requirements only apply to Direct Beneficial Interest Owners. The Bill sets out a list of entities that meet the definition: banks, registered investment companies, ERISA funds, and any other entities to be identified during the rule-making process. The current draft rules do not list any types of entities not specifically identified in the Bill. While not discussed in the Bill, the draft rules and legislative history make it clear that an Institutional Investor must be passive and may not have any control over a licensed company beyond voting its shares (meaning that the minority protections present in a typical non-control transaction cannot be present).

Qualified Limited Passive Investor: This is defined as a natural person who is a U.S. citizen and is a passive investor owning five percent or less of the equity of a licensed business.

New Residency Rule

In place of the existing rule that requires all Owners to be at least two-year residents of Colorado, the Bill now allows an entity to be either (i) held by an unlimited number of Direct Beneficial Interest Owners, each of whom must meet the one-year Colorado residency requirement, or (ii) if one or more Direct Beneficial Interest Owners do not meet the one-year residency, then the following conditions must be observed: (a) At least one officer of the licensed entity must be a Colorado resident of at least one year, (b) all officers with day-to-day operational control over the business must be Colorado residents of at least one year, and (c) there must be no more than 15 Direct Beneficial Interest Owners (this limitation is measured by natural persons on a look-through basis). A licensed business, whether wholly held by Coloradoans meeting the residency requirement or held by one or more Direct Beneficial Interest Owners who do not meet the residency requirement, may also have up to 30% of its equity held by qualified Institutional Investors.

Reasonable Royalties Now Allowed

coins-in-hand-1559x893One additional major change in the Bill is the allowance for commercially reasonable royalties to be paid to Indirect Beneficial Interest Owners. As the law currently stands, a royalty would be considered a form of ownership by the MED (as the royalty would likely be based on the profit of the licensed entity) and would thus make the recipient of the royalty subject to residency and other ownership requirements. In addition, the current system requires all of the Owners to be present at MED meetings—which presents a major obstacle to the operator of a licensed business who wants to enter into multiple licensing agreements since any licensor could potentially put a license at risk by refusing to attend a meeting or by committing a bad act. However, Indirect Beneficial Interest Owners, while still subject to background checks, are not subject to residency requirements or the limitation of 15 natural persons (as is the case for Direct Beneficial Interest Owners when one or more equity holders does not meet the one-year Colorado residency requirement). It may also be the case, though we will need to wait for the final rules, that removing an Indirect Beneficial Interest Owner is easier than removing a Direct Beneficial Interest Owner from a license.

Conclusion

As noted above, the MED is granted authority to promulgate rules pursuant to the Bill, and final analysis of the Bill will require careful study of these new rules. The MED is currently accepting written comments to the draft-proposed rules in advance of a formal, public hearing regarding the permanent rules on Friday, September 2, 2016. In addition, as with any other change in a regulatory regime, we will need to pay close attention to how the Bill plays out when actually put into practice.

This information is educational only and shall not be construed as legal advice. Please consult your attorney prior to relying on any information in this article.


Charlie Alovisetti, Vicente Sederberg LLC
Charlie Alovisetti, Vicente Sederberg LLC

Charlie Alovisetti is a senior associate and co-chair of the corporate department at Vicente Sederberg LLC. Prior to joining Vicente Sederberg, Charlie worked as an associate in the New York offices of Latham & Watkins and Goodwin where his practice focused on representing private equity sponsors and their portfolio companies, as well as public companies, in a range of corporate transactions, including mergers, stock and asset acquisitions and divestitures, growth equity investments, venture capital investments, and debt financings. In addition, Charlie has experience counseling portfolio and emerging growth companies with respect to general corporate and commercial matters and all aspects of compensation arrangements, including executive employment and consulting agreements, stock option plans, restricted stock plans, bonus plans, and other management incentive arrangements. Charlie has experience in both U.S. and cross-border transactions, and has advised clients across a range of industries including cannabis, technology, manufacturing, software, digital media, energy and clean tech, healthcare, and biotech. He holds a Bachelor of Arts, with honors, from McGill University and a law degree from Columbia Law School, where he was a Harlan Fiske Stone Scholar. Charlie is admitted to practice in both Colorado and New York.

Member Spotlight: Cannabis Consumers Coalition

In the cannabis industry, the life cycle of growers, retailers, extractors, and infused product manufacturers would not exist were it not for the consumers. As we move toward self-regulating our industry from the inside out, it’s important to consider all views and perspectives in those decision-making processes. This month, we check in with Larisa Bolivar of Cannabis Consumers Coalition to talk about the work she’s doing to protect the interests and concerns of cannabis consumers. cannabisconsumerscoalition

Cannabis Industry Sector:
Advocacy

NCIA Member Since:
April 2016

Tell me a bit about you and why you founded Cannabis Consumers Coalition?

I have been in the cannabis industry/movement since 2001 when I moved to Colorado as a medical cannabis refugee, and I have been a cannabis consumer for 25 years. I helped to establish safe access for Colorado patients through my organization called Caregivers for Safe Access, which became the Colorado Compassion Club and the first dispensary in Colorado prior to 2009. After several years on hiatus from the front lines of the movement, and spending time consulting on policy, business and communications in the emerging industry, I saw a need for more consumer-focused advocacy and that what was missing was a consumer protection agency. Much of the conversation had been focused on the needs of the industry, and that continues to play out today. It is my mission to change that. I believe that consumers are who drive the economy.

I believe my background is perfect for the task of playing watchdog for the industry. I have worked in startup and corporate environments in multiple emerging markets, including software, dot-coms, clean tech, and cannabis. My work in clean tech and software really prepared me for working in a tightly regulated environment. The clean tech company that I worked at, GridPoint, a billion-dollar-valuated startup with successful launch and exit is a smart grid company focused on energy management in the utility space, one of the most regulated industries in our country. When working in software, I worked as a technical recruiter staffing sensitive, high-level technical contracts mostly in defense, which is also highly regulated. I understand highly regulated environments really well, and it is easy to forget the consumer when trying to jump through so many regulatory hoops. I believe that with a strong consumer voice, we will eventually have fewer regulations.   

Larisa Bolivar, Executive Director of Cannabis Consumers Coalition.
Larisa Bolivar, Executive Director of Cannabis Consumers Coalition.

How does CCC provide unique value to the cannabis industry and movement?

The mission of the Cannabis Consumers Coalition is to provide cannabis consumers with a voice in the growing cannabis industry, and to ensure consumer rights and ethical behavior on behalf of cannabis-related businesses. The biggest value we provide is giving consumers a powerful voice and helping them to realize the purchasing power they have with their dollar in helping to hold the industry accountable to operating in an ethical, consumer-centric model. We provide consumers with a powerful voice, and have been very effective in changing laws to protect consumers. This occurred recently when we obtained and released the names of pesticide violators in Colorado. We quickly made a lot of enemies, and good friends, in the industry. Some business owners have called us anti-industry, which is quite the contrary. I risked my life trailblazing medical marijuana and laying the foundation for the launch of a billion-dollar industry in Colorado. This was pre-regulation, prior to when moneyed interests got into the game and created the framework for regulations. The industry began with blazing the path to create that possibility, breaking ground for the foundation to be laid. As such, I feel personally accountable for it, along with many of my peers and supporters who were also trailblazers and pioneers.

Consumers deserve the right to know that the cannabis they are purchasing is indeed the quality that is being marketed. They also need a strong voice to fight for their rights, and that is what I myself provide, especially with my history of activism, along with the support of our legal team at Fox Rothschild LLP. An Am Law 100 law firm, they have nearly 750 attorneys spanning multiple practice areas and across multiple industries, and have a reputation for working with nonprofit organizations and community groups.

Another value we provide is in helping businesses strive to provide the best consumer experience and high quality products. Quality end products in the cannabis industry are multi-faceted, starting with how a plant is grown, how it’s positioned in the market, to the consumer experience at retail outlets. All of it is so interrelated.

Here in Colorado, the issue of public consumption is hot and there are a couple of initiatives in the works this year to address that need. Can you tell me more about that and how you’re involved in this effort?

Indeed this is probably the hottest issue Colorado. Voters voted for the right to use cannabis legally, yet there are no places to consume. This also poses issues for cannabis consumers visiting the state. There are bed and breakfasts and some hotels that allow for consumption, but there are no places to consume and socialize. There are two initiatives in consideration.

There is the Responsible Use initiative put forth by Denver NORML, which is a private club designated license that requires people to become members, bring their own cannabis and allows for permitted events. The other initiative, The Neighborhood Approved Cannabis Consumption Pilot Program Initiative, will give permission to businesses, including bars, to allow cannabis consumption. Either one will be good for consumers. One is more exclusive, and by requiring membership it keeps things manageable and accountable by limiting the amount of people who can join, it does alienate neighborhood groups and businesses. My concern with the initiative permitting businesses to allow consumption, including bars, is that tourists new to cannabis consumption and consuming alcohol, can easily over-consume the two if they are not “seasoned” cannabis consumers.

Why did you join NCIA?

We joined NCIA after careful research into industry trade groups and selected the one that was the most diverse, influential, and had an ethical and inclusive industry. It is our desire to see a successful multi-billion dollar industry built on a foundation of integrity and inclusiveness, and NCIA offers that. While we may not align with the philosophies of all members, the organization pushes integrity in all that is does, and what I like the most is that it has organized councils that are really committed to creating an exemplary foundation for the entire industry, not just its members. You can see this in their Minority Business Council, where the discussions are always industry and community focused. I also like the networking available, especially meeting other passionate cannabis business owners across the country and having dynamic and energizing conversations.  

Guest Post: Cash Management in the Cannabis Industry

Jeff Foster, Co-Founder, Jane, LLC
Interviewed by Vinnie Fiordelisi, Sr. Director of Corporate Communications, Jane, LLC

Jeff Foster, co-founder of Jane
Jeff Foster, co-founder of Jane

For nearly two decades, Jeff Foster has worked with some of the world’s largest retailers and financial institutions to define, design, and implement e-commerce and retail payment processing and risk management solutions. Here he shares some advice and insights on cash management and financial services in the cannabis industry.

What is the state of cash management in the cannabis industry?

It’s a real mess. Employee theft is even higher than in bars and restaurants. Many of the dispensary owners we talk to say it’s as high as 10-15% of sales. Robberies are a real threat. The cash reconciliation process is time-consuming, costly, and susceptible to human error. But the biggest issue is it’s almost impossible to run a multi-million dollar business with all cash.

What are the common problems you hear from dispensary owners when it comes to them doing business effectively and simply?

The cannabis business has the most complicated legal and regulatory framework in the history of retail and many of the dispensary owners are first-time entrepreneurs. Combine these two things, further complicate it by a lack of banking and a business that is bustling seven days a week, and you find it extremely difficult to navigate this constantly evolving landscape.

What challenges do dispensaries face as it relates to financial services?

What challenges don’t they have? Very few have access even to depository banking, much less checking. Most cannot process credit or debit cards legitimately so they are on a strictly cash basis. So imagine having to make payroll, pay rent, or buy hundreds of thousands of dollars worth of product without the ability to write a check or send a wire. Most of the dispensary owners we talk to spend as much as 25% of their time simply managing this process. With full access to banking and financial services those same tasks would take almost no time at all.

Where do the federally regulated banks stand on working with cannabis businesses?

Marijuana is still a Schedule I drug, selling it is a felony, and the Bank Secrecy Act prevents banks from taking deposits known to be a result of a crime. This obviously makes the landscape particularly treacherous for a federally chartered bank.

I do believe more and more banks will get involved in the marijuana business. We are seeing it with the financial institutions we are working with in Colorado for our Triple Play program. There is too much momentum and popular acceptance to put the genie back in the bottle. So it is important for marijuana retailers to be prepared. Banks that do accept cannabis businesses are going to be very cautious and only accept clients that are unquestionably above board and fully transparent.

Any final advice for dispensary owners?

Yes, for dispensaries accepting Visa and MasterCard, my advice is to stop unless and until you have signed a contract that includes the name of the bank. I’ve been in payment processing for almost 20 years and our other company currently processes over $3 billion annually in Visa/MasterCard for some of the largest retailers in the world, so I have some knowledge on the subject. There are very few sponsor banks in the U.S. who will knowingly accept a merchant in the cannabis business and both Visa and MasterCard strictly prohibit utilizing a bank outside of the U.S. for domestic transactions.

Unfortunately some dispensary owners have been led to believe that if they have a terminal and their deposits show up in the bank that “it’s working.” Well that may be true, but I can nearly guarantee there is a break in the chain somewhere and that broken link can lead to fines in the hundreds of thousands of dollars and expulsion from the Visa/MasterCard network for life…just for a start.

Banking is coming. Credit card processing is coming. Dispensary owners need to focus on running their businesses within the framework established by the Department of Justice, the Financial Crimes Enforcement Network and their state and local laws regarding the sale of marijuana. If they do that, and remain patient, they will be first in line as legitimate financial services finally arrive.


Jeff Foster is co-founder of Jane, LLC, a Sponsoring level member of NCIA since July 2014. For nearly two decades, Jeff has worked with some of the world’s largest retailers and financial institutions to define, design and implement e-commerce and retail payment processing and risk management solutions. Jeff co-founded Jane after recognizing the overwhelming need for cash management and financial services solutions in the legal cannabis industry. As an innovator in financial services, Jeff is a sought-after expert and speaker. He has been quoted in numerous publications including; The Wall Street Journal, Business Week, The Financial Times, The Washington Post and The Washington Business Journal and has appeared on Bloomberg Television and ABC News. Jeff also speaks at countless financial services and cannabis trade shows globally, where he advocates and educates on everything from strategy and trends to best practices.

Member Spotlight: New Economy Consulting

NCIA’s member spotlight for the month of February takes us to Oregon, where we speak with Sam Chapman, co-founder of New Economy Consulting, a political and business consulting firm for the legal cannabis industry. Sam’s background includes consulting for statewide political campaigns, small business development and media relations, as well as direct involvement as a lobbyist for drug policy reform at the local, state, and federal levels. Having Sam in the room at an NCIA event always raises the dialogue with his insight and expertise, and we’re glad to have him as part of the NCIA community. 

Cannabis Industry Sector:

NECRegulatory Compliance and Consulting

NCIA Member Since:

December 2013

Who does New Economy Consulting work with?

NEC provides a range of services and support to cannabis entrepreneurs, investors, and local governments. We specialize in drafting state license applications, writing and navigating local regulations, screening compliant real estate, regulatory compliance support, and political advocacy.

The New Economy Consulting Team
The New Economy Consulting Team

How do you serve your clients?

On behalf of our clients, NEC handles all aspects of licensure for retail, wholesale, production, and processing facilities. We provide clients with a holistic approach, encompassing services from locating and screening compliant property, to compliant buildout design and supervision, to local and state compliance inspection support.

What makes NEC unique?

NEC is unique in that our business consulting services are directly informed by our active political lobbying. Our researchers maintain a finger on the daily pulse of regulatory movement in the industry at both the state and local level. We strategically deploy our proprietary research in support of our client’s business ventures. An example of where NEC goes above and beyond for clients is in tracking the local regulations of over 90 Oregon counties and cities. This body of research allows NEC to quickly and confidently screen property and determine that property’s compliance with current and expected rules and regulations.

Sam Chapman, NEC co-founder
Sam Chapman, NEC co-founder

What has been NEC’s largest impact on the Oregon cannabis industry?

Before I co-founded NEC, I helped write and pass HB 3460, which legalized and regulated medical dispensaries in Oregon. NEC has successfully championed many pro-industry causes including raising more than $30,000 in support of Measure 91, legalizing the adult use of cannabis.

What should clients know before contacting NEC?

NEC is a boutique firm with a strong commitment to our clients. We choose our client and partner relationships with care. Our ideal client is well-capitalized, with business experience inside and out of the cannabis industry, has a clear vision of their project goals, and shares in our vision of creating and maintaining an industry to be proud of. We take great pride in contributing to the new marijuana economy while simultaneously supporting and shaping social justice reforms at the state, local, and federal level.

You work primarily in Oregon, which is an evolving landscape when it comes to marijuana policy and regulations. Can you briefly summarize the important regulatory frameworks that exist for business owners, and what changes are on the horizon for this market?

The Oregon Legislative Committee on Marijuana Legalization is considering many changes to the existing recreational program, including the potential removal of the residency requirements for recreational licenses. The committee has historically been hesitant to allow out-of-state majority ownership of Oregon marijuana businesses. However, many committee members have recently expressed that they now view residency requirements as a barrier for local business to raise much-needed capital.

While there is no guarantee that the current residency requirements will be eliminated, NEC has already begun to identify current and future market opportunities available to out-of-state business owners and investors.

Why did you join NCIA?

NEC enthusiastically joined NCIA as a member in 2013 and supports NCIA’s strategic lobbying at the federal level and especially their focus on our industry’s need for banking reform and 280E tax solutions. We strongly feel that the National Cannabis Industry Association is the tip of the spear when it comes to fighting for the federal reforms that affect all marijuana businesses on a daily basis.

Contact:

New Economy Consulting website

Member Spotlight: Hypur

For December’s member spotlight, we zoom in on Arizona-based Hypur, an NCIA member business who is committed to “innovation with purpose” by providing solutions for one of our industry’s major hurdles: financial compliance. Navigating the various layers of regulations with mastery is an important aspect of being transparent, legitimate, and compliant, and is an essential cornerstone of NCIA’s mission and values. 

hypur_logo_fullcolor600Cannabis Industry Sectors:

Software Technology, Compliance, Financial Services

NCIA Member Since:

2015

What technology solutions does Hypur provide?

Our solution is a technology platform that provides unprecedented transparency and accountability for banks and regulators, and legitimacy, safety, and convenience for businesses and their customers. With many banks and credit unions wanting to bank these booming industries, and government bodies wanting banking services available to them, we knew the demand for our platform would be robust. Hypur represents the future of commerce for cash-intensive businesses and high-risk challenging industries. Hypur’s technology provides financial institutions with a state-of-the-art compliance platform that enables them to profitably bank these businesses – revolutionizing the businesses and the communities they operate in.

What kind of banking and payment solutions does Hypur provide?

Hypur Mobile AppThe Hypur payment network is available to clients of our financial institutions. It gives retail locations the ability to accept cashless payments from their consumers via their mobile devices. Additionally, businesses that have accounts at Hypur partner financial institutions have the ability to conduct business-to-business transfers electronically without cash.

Can you give us some insight into the unique regulations that affect cannabis business owners in your sector?

Hypur serves financial institutions, which must comply with FinCEN guidance and all BSA/AML laws that govern their institutions. They must also comply with regulatory expectations from the FDIC (Federal Deposit Insurance Corporation), OCC (Office of the Comptroller of the Currency), or NCUA (National Credit Union Association).

Why did you join NCIA?

Hypur always seeks to support leading organizations that intersect with industries of interest. We have taken note of the many important ways that NCIA is advocating for fairness, education, and awareness for the legal cannabis market, and are delighted to be a part of the NCIA community.

Contact Hypur:
Website
Twitter

Guest Post: Raising Money 101 – What’s an Offer and Why Does it Matter?

by Charles Alovisetti, Vicente Sederberg LLC

This is article is the first in a series, which will provide a general overview of the laws that impact raising money in the cannabis industry.

Any business owner planning to raise capital should consider the federal Securities Act of 1933, commonly referred to as the “Securities Act.” In addition to federal law, each state has its own set of laws that regulate securities sales, commonly referred to as the “Blue Sky Laws.” Both the Securities Act and any applicable Blue Sky Laws must be complied with in connection with the sale of securities – a security being proof of ownership or debt that has been assigned a value and may be sold (stocks and bonds are examples). Both the Securities Act and the Blue Sky Laws regulate the sale of securities by prohibiting the offer and sale of unregistered securities (other than pursuant to specified exceptions) and requiring companies to provide investors disclosure of all material facts concerning the securities for sale.

Ecrivains_consult_-_Texte_4_mainsCrucially for business owners, it’s not only the actual documents to raise money that are governed by the Securities Act: so are those initial business plans and executive summaries that might be circulated to gauge interest. Ensuring that your business plans are not violating any securities laws is the focus of this article.

In analyzing whether a transaction or communication is in compliance with the Securities Act and Blue Sky Laws, it’s helpful to think through the following questions:

  • Does the transaction or communication constitute an offer or sale?
  • Is the offer or sale of a security (as defined in the Securities Act and the Blue Sky Laws)?
  • If there is an offer or sale of a security, is the security properly registered with federal and state authorities?
  • If there is an offer or sale of a security and the security is not registered, does the transaction fall within one or more of the specified exemptions to registration?

As you assess your materials for compliance, begin by asking whether an offer has been made. If a transaction or communication does not constitute an offer, then compliance with state and federal securities law is not a concern. However, if an offer is unintentionally made – a common mistake – it may trigger a violation of securities law since it is unlikely that the unintentional issuer will have taken into account the necessary disclosure items and determined the relevant exemption to registration. Note that in the context of securities law, “issuer” means any company that issues or proposes to issue a security.

What, then, is an offer, from the federal standpoint and from that of the state of Colorado? Section 2(a)(3) of the federal Securities Act defines “offer” as “every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value.” Under the Colorado Securities Act, “offer to sell” includes any attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security for value and “offer” means an offer to sell or an offer to purchase. What constitutes an offer, furthermore, may be a matter of perceived intent rather than explicit proposal: the SEC has noted that “[t]he publication of information and statements, and publicity efforts, generally, made in advance of a proposed financing, although not couched in terms of an express offer, may in fact contribute to conditioning the public mind or arousing public interest in the issuer or in the securities of an issuer in a manner which raises a serious question whether the publicity is not in fact part of the selling effort.” As a practical matter, these definitions, as well as the SEC’s guidance, mean that many communications that would not be considered offers under contract law may well be considered offers for purposes of state and federal securities law.

From a practical point of view, then, how should an entrepreneur approach an action that might be considered an offer – distributing information about a new company, for example? To mitigate risk of a securities violation, consider the following factors before circulating information about your business:

  • Include Appropriate Disclaimers: If you do proceed with distribution, any documentation provided to potential investors should contain disclaimers that clearly indicate that the provided information is not an offer or a solicitation of an offer to buy securities. Note that such disclaimers do not necessarily mean the document will not be considered an offer.
  • Require Further Information: Any documentation should also state explicitly that further information about a purchaser will be required before an offer can be made.
  • Minimize Details: Generally speaking, the fewer details provided about a potential security, the better. Even high-level details can result in a document being considered an offer.
  • Ensure Accuracy: Make absolutely sure that any information provided is correct and not misleading (i.e., do not claim that cannabis is legal in the United States, note that it remains illegal at the federal level). Avoid selective disclosure and be prepared to stand behind any claims made.
  • Follow Best Practices: Every communication should adhere to best practices regarding offerings in general (e.g., avoiding general solicitations, keeping track of distributed documents, etc.)
  • Seek Legal Counsel: When in doubt, speak to a qualified securities attorney. It’s always easier to do things right the first time, whereas it may not be possible to fix certain mistakes.

This information is educational only and shall not be construed as legal advice. Please consult your attorney prior to relying on any information in this article.


Charlie Alovisetti, Vicente Sederberg LLC
Charlie Alovisetti, Vicente Sederberg LLC

Charlie Alovisetti is a senior associate at Vicente Sederberg LLC. Prior to joining Vicente Sederberg, Charlie worked as an associate in the New York offices of Latham & Watkins and Goodwin Procter where his practice focused on representing private equity sponsors and their portfolio companies, as well as public companies, in a range of corporate transactions, including mergers, stock and asset acquisitions and divestitures, growth equity investments, venture capital investments, and debt financings. In addition, Charlie has experience counseling portfolio and emerging growth companies with respect to general corporate and commercial matters and all aspects of compensation arrangements, including executive employment and consulting agreements, stock option plans, restricted stock plans, bonus plans, and other management incentive arrangements. Charlie has experience in both U.S. and cross-border transactions, and has advised clients across a range of industries including technology, manufacturing, software, digital media, energy and clean tech, healthcare, and biotech. He holds a Bachelor of Arts, with honors, from McGill University and a law degree from Columbia Law School, where he was a Harlan Fiske Stone Scholar.

*Currently only admitted in New York

 

 

Guest Post: Illinois Cannabis Businesses – Guidelines for Compliance with Illinois Employment Laws

By Jennifer Adams Murphy, Esq., and Ryan Helgeson, Esq., of Wessels Sherman

If you are successful in obtaining a dispensing or cultivation license under the Illinois Compassionate Use of Medical Cannabis Pilot Program Act (“IMCA”), you have already made a substantial time and financial investment in your new business. You know that to be successful, you must have a dependable workforce. Continued success, however, will require employment policies which will minimize the substantial risks and costs of employment litigation and regulatory challenge. To that end, the following issues should be addressed before you begin to hire employees:

Hiring Considerations

wessels_1Needless to say, your application process must be compliant with state and federal discrimination laws. Of specific relevance to your business will be federal and state laws pertaining to arrest and conviction records. The EEOC generally considers blanket rejection of applicants with conviction records illegal, and state and federal laws prohibit inquiries regarding arrest records. These laws require special attention in your business because the IMCA requires that all employees of a dispensing organization or cultivation center obtain an “agent identification card” which will not be issued under the (proposed) regulations when an applicant has been convicted of violent crimes and certain felonies. Without a card, an individual cannot commence employment under the IMCA. Because of the potential conflict between IMCA regulations and these employment laws, the safest practice is to advise applicants that their employment is contingent upon their receipt of an identification card from the state (rather than incorporating the conviction restriction into your application).

The IMCA requirements for issuance of an agent identification card, which appear to require an applicant to have a Social Security card, are in potential conflict with I-9 employment authorization requirements. Pursuant to I-9 regulations, an employer may not specify which documents an employee provides to demonstrate their employment authorization. An employee can provide any documents that satisfy the Form I-9 requirements; employers cannot insist upon a particular document such as a Social Security card. To avoid violation of federal law, your application process should clearly state that the required Social Security card and state identification card are to meet the agent identification requirements and not for employment authorization purposes.

A contract disclaimer should be included in your employment application to ensure the at-will status of any hired employees.

Employment Record Retention

The proposed IMCA regulations require that all employment-related documents be retained for five years. I-9 employment authorization forms must be completed and retained apart from employees’ personnel files.

Employee Classification

Employers who grow and transport cannabis may be able to take advantage of overtime exemptions under state and federal law. In certain situations, minimum wage exemptions may also be available. However, do not assume minimum wage or overtime exemptions apply — careful evaluation is required. Also, regardless of classification, hours worked must be recorded and retained.

Other Policy Considerations

wesselshandbookAn employment handbook should be considered. Handbooks should have contract disclaimers and must include anti-harassment policies. In addition, employment policies should address privacy issues, particularly given the regulatory requirements of video monitoring in this industry.

Required posters pertaining to employment laws must be posted.

Adoption of an employment dispute arbitration policy should be considered. A carefully drafted arbitration policy will provide for resolution of employee disputes through arbitration rather than in courts.

Voluntary compliance with the Illinois Drug-Free Workplace Act may be a wise choice. After a conditional offer of employment is made, cannabis cultivators may wish to require a drug screening. Thereafter, a program of reasonable suspicion or random drug testing could be implemented.

Employment laws are always challenging to navigate. The issues outlined above are examples of some of the issues which are easily overlooked or misunderstood. A thorough understanding of your responsibilities as an employer in this highly regulated area will diminish the risk of costly and disruptive claims.

For further information, please contact Jennifer Adams Murphy, Shareholder at Wessels Sherman Law Firm (630-377-1554 or jemurphy@wesselssherman.com) or Ryan Helgeson, Associate Attorney (312-629-9300 or ryhelgeson@wesselssherman.com). 

Wessels Sherman is a law firm with offices in Illinois, Minnesota, Wisconsin, and Iowa with a practice limited to management-side labor and employment law, and has been a member of NCIA since September 2014. Ms. Murphy has been practicing for over 27 years, counseling clients and litigating before agencies and state and federal courts. Mr. Helgeson counsels and represents clients in connection with immigration and other employment-related matters.


For more on navigating the complex issues 0f human resources, register today for NCIA’s upcoming Educational Series event, Recruit, Retain, and Develop Your Talent, taking place on March 2 at the History Colorado Center in Denver!

Recruit, Retain and Develop Your Talent — This panel of experts will help you build your human resources competencies! They will present the latest trends in talent acquisition and management. You will learn how to select the best person for the position and your organization, discover how to set and align your teams towards organizational goals, and drive and engage your best performers while managing others, up or out! Acquire the knowledge and tools you need to ensure your employees and your organization are successful. Featuring: Kara Bradford, Chief Talent Officer, Viridian Staffing — Carole Richter, Principal, CRichter ~ HR Consulting, LLC — Maureen McNamara, Cannabis Trainers.

NCIA Member Profile: MBank

In the course of less than a week at the end of January, Oregon-based MBank went from announcing that they would be doing business with cannabis companies in Colorado to breaking the news that they would be retreating from Colorado for the time being, unable to support the infrastructure required to offer these services in the state. As NCIA’s first bank member, we sat down with CEO Jef Baker to ask a few questions and get to know them better.

Cannabis Industry Sector:

Financial Services

NCIA Sustaining Member Since:

December 2014

One of MBank's brick and mortar locations in Lake Grove, OR.
One of MBank’s brick and mortar locations in Lake Grove, Oregon.

How does MBank uniquely serve the cannabis industry?  

One of MBank’s goals is to serve the underserved. We recognize that serving the cannabis industry very much meets that objective. With that mission in mind, we set about figuring out how to provide banking services. We’re a little unique in that way as a bank has to be creative and innovative in order to go about solving problems.

Why should cannabis industry professionals looking for financial services use MBank?

While we recognize there are very few banks legitimately operating in this space and therefore few good choices for cannabis industry professionals, our hope is people choose to bank with us for the same reason anyone does. That means they understand what we’re about and hopefully appreciate wanting to partner with someone that has a vision they agree with. Beyond wanting to change the status quo with regards to banking, we also take great pride in customer service through treating people with respect.

NCIA’s primary mission includes advocating for equal access to banking, but many banks in this country are reluctant or not willing to work with cannabis business owners. What are your thoughts on the future of banking in the cannabis industry? How will this situation improve for the industry going forward?  

Smaller banks will most likely lead the way as they tend to embrace innovation a little more than larger institutions. As banks successfully demonstrate their ability to serve this industry, more banks will follow. If there are additional changes at the federal level, that most likely would generate more banks entering this space.

What are some of the challenges that banks have to deal with to do business with the cannabis industry?

CEO Jef Baker inside one of MBank's Oregon locations.
CEO Jef Baker inside one of MBank’s Oregon locations.

Our challenge is to make sure we support and serve customers who understand that compliance is critical. We feel it is extremely important to ensure we implement strong policies and procedures, especially for new lines of business. The systems created are not designed to be intrusive or overbearing, but they are developed to help us manage risk, as we interpret it, as well as those that regulate us.

Do you still want to do business in Colorado, or other states?  

The reason we are one of the first banks to so aggressively enter this space is part of our mission is to serve a completely underserved market. We very much want to serve customers in Colorado but have discovered we need to build our program to better handle the huge volume there.

How do you characterize your relationship with regulators on marijuana banking?  

It is our belief that regulators do not object to their banks providing services to the cannabis industry. We believe they do have a high expectation of their banks developing strong compliance programs in this area. This is new and we are all learning together. It is critical for us to have a strong relationship with our regulators.

Why did you join NCIA?  

MBank offers banking services for the cannabis industry in Oregon.
MBank currently offers banking services for the cannabis industry in Oregon.

We believe this organization wants to see the cannabis industry be treated fairly by helping ensure that quality banking services are available. That is right in line with our mission of serving the underserved. Our position is not one that supports legalization or advocacy for legal matters (that is for others), but rather a focus on providing an industry banking services they deserve, which means both access to services as well as treating people with respect. We believe NCIA is an organization that will allow us to further and pursue that vision.

If you are a member of NCIA and would like to contribute to the NCIA blog, please contact development officer Bethany Moore by emailing bethany@thecannabisindustry.org. 

 

Guest Post: Say It Right – Colorado’s Retail Cannabis Advertising Regulations

By Jeff Cohn, CEO of COHN

With the Colorado market looking to reach $1 billion in sales this year, as well as Oregon and Alaska joining Washington and Colorado in regulating retail marijuana sales, the cannabis industry is exploding at unbelievable rate with no end in sight. With so many landmines to navigate in this nascent industry, we wanted to simplify the legal jargon for the Colorado advertising regulations in a quick reference guide. We hope you find this resource useful in building your brand while abiding by the regulation nuances.

Retail_Marijuana_Ad Regulations Infographic

 

Jeff Cohn is CEO of COHN, Inc., a sponsoring member of NCIA since October 2014. COHN is a Denver-based integrated marketing firm with a passion for contributing their years of retail and service business marketing experience to the cannabis industry. With COHN’s expertise, they are well positioned to help expanding businesses grow their brand and recognition.

Guest Post: Child-Resistant Marijuana Packaging – Better Safe Than Sorry

By Scott Simpson, TricorBraunsafetycap

While the legislative landscape in the cannabis industry continues to evolve both locally and nationally, one element that seems consistent is the need for producers and marketers of cannabis-related products to act responsibly in protecting children from unintended access to their products, and for good reason. Though less likely that a child under the age of five would have the desire or wherewithal to consume a harmful quantity of a floral-based product, the compelling nature of some of the edible offerings such as candies and cookies makes the likelihood not a matter of if, but when. And considering the potential liability, purveyors of such products would be wise to take every precaution as it relates to packaging.

Child-resistant packaging dates back to 1970 when after a series of accidental overdoses, Congress passed the Poison Prevention Packaging Act of 1970 and along with it, specific protocol testing to validate the functionality of child-resistant (CR) packaging. As time evolved, additional products deemed dangerous to children such as insecticides and pesticides were also added, and in 1995, the protocol testing was modified to include a ‘senior-citizen component’ as many of them found current forms of CR packaging difficult to open. When considered along with the oversight from the Consumer Product Safety Commission (CPSC), the governing body for determining what requires CR packaging, this legislation has served both industry and citizenry effectively since inception.

It is well documented that when Colorado began offering recreational marijuana products, there were few packages well-suited for the industry, and while a number of new offerings are in development, many products are currently packaged in the least expensive container and with some dubious CR performance or unverified claims of meeting CPSC guidelines. Indeed Colorado has put forth guidance on the requirements for the market, but prudent producers of cannabis products, especially edibles, would be wise to make purchase decisions based on the true protection the packaging affords and not on price alone. Sooner or later, it would seem, an incident will take place where this very issue will take center stage, and based on our considerable expertise in the packaging arena, we think it to your advantage to be able to demonstrate that balanced judgment (price vs. protection) and proven components were considered when choosing a CR package. Presuming this choice was made well, being able to cite components similar if not identical to those used by the ethical pharmaceutical industry should go a long way to demonstrate reasonable consideration was in fact used to protect the product from accidental ingestion by a child.

A quote often noted by the CPSC is that “child-resistant packaging is not child-proof packaging and as such the components should be considered the last line of defense.”

Scott Simpson is Vice President at TricorBraun XpressPaka Sponsoring level member of NCIA since July 2014, based in St. Louis, MO, with an office in Aurora, CO. TricorBraun, launched in 1902, has grown to become a leading source of rigid packaging and related services, and has extensive experience in this packaging segment and offers assistance to NCIA members in evaluating options for current or future packages.

Inside the Illinois Medical Marijuana Program with the Illinois Cannabis Industry Association

The Illinois Cannabis Industry Association (ILCIA) is the official Illinois affiliate of NCIA. In advance of NCIA’s Illinois Member Reception and Federal Policy Update on Tuesday, Sept. 16, in Chicago, two of ILCIA’s board members – Dan Linn and Ali Nagib – talked with us about the latest developments for the Illinois medical marijuana pilot program.

ilcia_logo

The number of licenses for cultivation centers and dispensaries are quite limited – only 22 available for cultivation centers and 60 for dispensaries. What are officials with the Illinois Department of Agriculture looking at in applications to determine who will be awarded a license? Is there a chance to earn bonus points in any category?

Dan: The Department of Agriculture will be grading on a number of different features but the grow plan and horticultural experience will be heavily weighted in the scoring. In the event of a tie between competing applications for a single license the application with the higher scored grow plan will be awarded the license.

Ali: The main required categories don’t have specific bonus points available, but each application has an entire Bonus Section of areas that are not required but available for applicants to gain additional points if the required sections meet a certain score threshold.  The Bonus Section areas include Labor and Employment Practices, a Research Plan, a Community Benefits Plan, a Substance Abuse Prevention Plan, a Local Community/Neighborhood Report, an Environmental Plan as well as additional points for Illinois-based applicants and businesses that are minority-owned, female-owned, veteran-owned, or owned by a person with a disability.

Dan-Linn-Picture-193x250
Dan Linn, ILCIA

State officials are making security a high priority for all applications. What kind of standards must applicants meet in their business plan regarding security measures? 

Dan: Applicants will need to have full seed-to-sale inventory tracking accessible in real time by the Illinois State Police.  Security measures will need to include listings of where the bulletproof glass is on the floor diagram of the dispensary, the camera field of vision, the proper-sized televisions to monitor the cameras, as well as background checks on everyone involved in the program.

What is the climate regarding banking access in Illinois? Have any banks come out to say they will allow cannabis businesses to open bank accounts?

Dan: Some banks are just unwilling to work with the cannabis industry. None have publicly come out as being willing to engage this industry, but there are a number of smaller community banks that are handling accounts for cannabis businesses in Illinois.

September 22 is the deadline for submitting applications to open a cultivation center or dispensary. What does the timeline look like for when licenses will be awarded and when is it expected that dispensaries will actually be selling product?

Ali: Recent public reports indicate that licenses will likely be issued later in the fall, probably in November or December. Based on that timeline dispensaries should be open with product on the shelves for patients in late spring/early summer of 2015.

How many expected applications for cultivation centers and dispensaries will be submitted by the September 22 deadline?

Ali: It is likely that there will be an average of at least a few applicants for each of the 82 available licenses, with total applicants numbering anywhere from 250-600.

Applications also just opened for qualifying medical patients to apply for access to medical marijuana. What is the timeline for qualifying patients to apply and when will patients find out if they are accepted into the program?

Ali: Patients with last names beginning A-L can apply now through Oct 31. Patients with last names beginning M-Z can apply Nov. 1-Dec. 31 and beginning Jan. 1 there will be open year-round enrollment for all patients. The state has 30 days by law to process a patient application, plus 14 days to mail it. This means that patients should expect to receive their approval or denial within 45 days of submission.

What are some of the regulations regarding edibles and other infused products?

Ali Nagib
Ali Nagib, ILCIA

Ali: Edibles and other infused products can be produced, but only those that can be kept at room temperature safely; products that require hot-holding or refrigeration are prohibited. Otherwise a wide range of infused products can be produced, and the state regulations have some fairly specific guidelines on the some of the production processes (e.g. which solvents can be used to produce concentrates) in addition to robust testing and labeling requirements.

Dan: Additionally, edibles and infused products must be produced in a sanitary kitchen and cannot look like candy or any name-brand food items.

What is the anticipated cost per ounce once product starts becoming available?

Dan: $250-400 is the estimated initial expected cost per ounce.

Ali: The early stages of the Medical Cannabis Pilot Program are likely to see a wide range of prices and substantial fluctuations as early supply and demand features work themselves out. It is almost certain that initial prices will be above those currently found on the illegal market, if not substantially so, but how the industry will react to the patient demand is uncertain.

The Illinois program is a pilot program that currently expires in 2017, and lawmakers must renew or extend the program at that time. What do you think lawmakers will be considering when deciding to renew or extend the program when the time comes?

Dan: They will be examining any instances of diversion, shenanigans, positive health experiences for patients, jobs created, who is the next President of the United States, how much revenue the program is creating, and probably what the overall public opinion of the program is.

Ali: We expect that by early 2017 the local and national landscape on cannabis policy reform will have continued to progress to the point that we won’t be debating whether or not to extend the pilot program but rather how and when to transition to a full tax-and-regulate framework and how to incorporate medical cannabis patients into it.

Don’t miss your chance to meet the people shaping the landscape of medical marijuana in Illinois. Register online for our upcoming Illinois Member Reception! If you have additional questions about the event please contact us at events@thecannabisindustry.org.

Inside the Illinois Medical Marijuana Program with the Illinois Cannabis Industry Association

The Illinois Cannabis Industry Association (ILCIA) is the official Illinois affiliate of NCIA. In advance of NCIA’s Illinois Member Reception and Federal Policy Update on Tuesday, Sept. 16, in Chicago, two of ILCIA’s board members – Dan Linn and Ali Nagib – talked with us about the latest developments for the Illinois medical marijuana pilot program.

ilcia_logo

The number of licenses for cultivation centers and dispensaries are quite limited – only 22 available for cultivation centers and 60 for dispensaries. What are officials with the Illinois Department of Agriculture looking at in applications to determine who will be awarded a license? Is there a chance to earn bonus points in any category?

Dan: The Department of Agriculture will be grading on a number of different features but the grow plan and horticultural experience will be heavily weighted in the scoring. In the event of a tie between competing applications for a single license the application with the higher scored grow plan will be awarded the license.

Ali: The main required categories don’t have specific bonus points available, but each application has an entire Bonus Section of areas that are not required but available for applicants to gain additional points if the required sections meet a certain score threshold.  The Bonus Section areas include Labor and Employment Practices, a Research Plan, a Community Benefits Plan, a Substance Abuse Prevention Plan, a Local Community/Neighborhood Report, an Environmental Plan as well as additional points for Illinois-based applicants and businesses that are minority-owned, female-owned, veteran-owned, or owned by a person with a disability.

Dan-Linn-Picture-193x250
Dan Linn, ILCIA

State officials are making security a high priority for all applications. What kind of standards must applicants meet in their business plan regarding security measures? 

Dan: Applicants will need to have full seed-to-sale inventory tracking accessible in real time by the Illinois State Police.  Security measures will need to include listings of where the bulletproof glass is on the floor diagram of the dispensary, the camera field of vision, the proper-sized televisions to monitor the cameras, as well as background checks on everyone involved in the program.

What is the climate regarding banking access in Illinois? Have any banks come out to say they will allow cannabis businesses to open bank accounts?

Dan: Some banks are just unwilling to work with the cannabis industry. None have publicly come out as being willing to engage this industry, but there are a number of smaller community banks that are handling accounts for cannabis businesses in Illinois.

September 22 is the deadline for submitting applications to open a cultivation center or dispensary. What does the timeline look like for when licenses will be awarded and when is it expected that dispensaries will actually be selling product?

Ali: Recent public reports indicate that licenses will likely be issued later in the fall, probably in November or December. Based on that timeline dispensaries should be open with product on the shelves for patients in late spring/early summer of 2015.

How many expected applications for cultivation centers and dispensaries will be submitted by the September 22 deadline?

Ali: It is likely that there will be an average of at least a few applicants for each of the 82 available licenses, with total applicants numbering anywhere from 250-600.

Applications also just opened for qualifying medical patients to apply for access to medical marijuana. What is the timeline for qualifying patients to apply and when will patients find out if they are accepted into the program?

Ali: Patients with last names beginning A-L can apply now through Oct 31. Patients with last names beginning M-Z can apply Nov. 1-Dec. 31 and beginning Jan. 1 there will be open year-round enrollment for all patients. The state has 30 days by law to process a patient application, plus 14 days to mail it. This means that patients should expect to receive their approval or denial within 45 days of submission.

What are some of the regulations regarding edibles and other infused products?

Ali Nagib
Ali Nagib, ILCIA

Ali: Edibles and other infused products can be produced, but only those that can be kept at room temperature safely; products that require hot-holding or refrigeration are prohibited. Otherwise a wide range of infused products can be produced, and the state regulations have some fairly specific guidelines on the some of the production processes (e.g. which solvents can be used to produce concentrates) in addition to robust testing and labeling requirements.

Dan: Additionally, edibles and infused products must be produced in a sanitary kitchen and cannot look like candy or any name-brand food items.

What is the anticipated cost per ounce once product starts becoming available?

Dan: $250-400 is the estimated initial expected cost per ounce.

Ali: The early stages of the Medical Cannabis Pilot Program are likely to see a wide range of prices and substantial fluctuations as early supply and demand features work themselves out. It is almost certain that initial prices will be above those currently found on the illegal market, if not substantially so, but how the industry will react to the patient demand is uncertain.

The Illinois program is a pilot program that currently expires in 2017, and lawmakers must renew or extend the program at that time. What do you think lawmakers will be considering when deciding to renew or extend the program when the time comes?

Dan: They will be examining any instances of diversion, shenanigans, positive health experiences for patients, jobs created, who is the next President of the United States, how much revenue the program is creating, and probably what the overall public opinion of the program is.

Ali: We expect that by early 2017 the local and national landscape on cannabis policy reform will have continued to progress to the point that we won’t be debating whether or not to extend the pilot program but rather how and when to transition to a full tax-and-regulate framework and how to incorporate medical cannabis patients into it.

Don’t miss your chance to meet the people shaping the landscape of medical marijuana in Illinois. Register online for our upcoming Illinois Member Reception! If you have additional questions about the event please contact us at events@thecannabisindustry.org.

VIDEO: THREE WAYS TO IMPROVE YOUR CANNABIS BUSINESS’S FOOD SAFETY

Cross-posted from NCIA’s Cannabis Business Summit website.

Training has been Maureen McNamara’s gig for over 20 years. Having cut her teeth in the rough and tumble hospitality world, Maureen realized her 20+ years of experience were well-suited to serve the burgeoning cannabis industry.

In partnership with the National Cannabis Industry Association, Maureen now offers a certification course in food safety for edible manufacturers as well as a responsible vendor program for budtenders, owners, and managers to teach them to sell safely, knowledgeably, and responsibly.

You can learn more about Maureen’s trainings at www.cannabistrainers.com and take part in one at NCIA’s Infused Products and Extraction Symposium which runs from October 27 – 28. For more details visit: http://cannabisbusinesssummit.com/infused-product-symposium/

Guest Post: Plane-ly Legal – Carrying Large Sums of Cash on Commercial Airline Flights

By Luigi Zamarra, CPA

Due to the banking challenges facing our industry, many business owners are working with large sums of cash. Sometimes this cash must be transported: brought to the location where payment is agreed to be made. Sometimes this requires boarding a commercial airline flight with a large sum of cash in your carry-on baggage. (I do not recommend putting cash into your checked baggage.) You should not worry.

While working with a client to plan dividend distributions to their investors, the client expressed his concern that TSA would not allow anyone to board a domestic flight with large sums of cash. This did not seem correct to me for a variety of reasons, so I decided to look into the issue further. Please remember that U.S. currency is “legal tender for all debts, public and private” and there is no law that states that VISA, MasterCard, and the big banks must be in the middle – and get a piece of the action – of every transaction. We have the right to conduct all of our business in cash if we choose, and making such a choice should not subject us to suspicions. As an industry, we should be united in defending our rights to use cash, and we should reject any assertion that using cash implies criminal activity.

It is important to draw a distinction between domestic flights and international flights. On international flights, you must file FinCEN Form 105 with the U.S. Treasury if you are either entering or leaving the U.S. with more than $10,000 of cash currency. This rule does not apply to domestic flights, either intrastate or interstate. On domestic flights, there is no limit; you are legally entitled to fly with as much cash as you see fit, and you are not required to file any form with U.S. Treasury.

It is also very important to understand that TSA is not a law enforcement agency. TSA personnel are not trained in the legal procedures of collecting evidence or conducting investigations, so such actions must be conducted only by law enforcement. TSA’s mission is to “protect the transportation system to ensure freedom of movement of people and commerce.” According to TSA policy, (a) “screening may not be conducted to detect evidence of crimes unrelated to transportation security,” and (b) “traveling with large amounts of currency is not illegal.”

Unfortunately the TSA has engaged in mission-creep recently by searching for cash and engaging in interrogation when cash is found. If you find yourself being questioned by TSA about why you are carrying cash and where you got the cash, you are entitled to refuse to answer these questions. You should state, quietly but assertively, that such information is confidential and that such questions are outside of the TSA purpose and mission. You should also remind the TSA official that such questions are beyond TSA authority, since they are not permitted to investigate evidence of crimes unrelated to transportation security and since there is no danger to air safety from a briefcase of $100 dollar bills. Finally, remind the TSA official that traveling with large amounts of currency is not illegal.

Luigi Zamarra, CPA, has been a member of NCIA since 2013. Luigi CPA is an accounting firm located in Oakland, CA, that helps all types of businesses and individuals with tax planning, tax compliance, and tax dispute services. Luigi specializes in the medical marijuana industry. He helps these businesses comply with IRC Section 280E so as to balance tax cost against audit examination risk.

Guest Post: Commercial Cannabis Compliance – The Key to a Golden Age

By Mark Slaugh, Founder and CEO of iComply, LLC

As I call another contact in Colorado, the knowledge of the latest Denver Post article is still fresh in my mind. The headline reads, “Denver approves plan to increase staff to enforce marijuana regulations.” Our client, busy as usual managing plants, product, and people, sighs in desperation as I tell her about the additional $3.4m in Denver being added to the $25m budget of State regulators.

Exasperated, she says, “man, it seems like they want to regulate as few of us as possible.” She knows the horror stories etched on the tombstones of businesses now shut down due to regulatory enforcement. Forfeit in the grave are dozens of jobs, thousands in investment, and millions in opportunity.

I know the struggle of marijuana businesses to reach the high bar of compliance that has been set in Colorado for commercial cannabis operators. When I started iComply in 2011, it was with the operational understanding of early rules at an initial stage of medical marijuana regulatory framework. At the time, my work had been facilitating the operations of new dispensaries and directing a Southern Colorado industry group making its way through local laws and state legislation.

Back then, we all knew about cameras, about locks, about badging, about tracking sales. What we didn’t know was how long the arm of the Marijuana Enforcement Division (MED) was. Up until last year, the industry and regulators we still figuring it out. Many people viewed enforcement like a Sasquatch; sightings and rumors abound but with very few inspections ever conducted and even fewer enforcement actions taken.

Typical in new markets, about 60% of the industry went out of business in the first 18 months and the Division had over-projected revenues and under-projected budgets. In short, they were down to 12 employees and very little bandwidth in the field to regulate over 1,000 facilities.

To no real surprise, a scathing audit of the MED found they were inefficient and ineffective. However, shortly after Amendment 64 passed, legislators took action. The Division was robustly funded to make up for years of enforcement gaps. The industry, for the most part, rejoiced over the possibility of removing bad actors from the playing field and leveling the standard for compliant cannabis commerce in Colorado.

The only reason anyone in the national industry is allowed to blatantly violate Federal Law is if they can show clear, unambiguous, compliance with State regulatory regimes. These regulations cover the eight Department of Justice Guidelines outlined in the 2012 Cole Memo. As new states bring regulations online from CBD only, to medical and retail marijuana, the signal is clear: expect enforcement to hold businesses accountable to the law.

For experienced and novice operators alike, compliance is a challenge that is difficult to take on alone. Qualified labor shortages are the nature of the market place and budtenders and growers seldom read legalese and are able to fully comprehend the regulatory expectations of the industry. Managing compliance details is crucial and standardizing best practices is far from complete. As the industry matures in Colorado and expands nationwide, owners and operators must keenly hone in on what the future will look like:

State-wide seed to sale tracking using RFID technology, real-time analytic reporting to law enforcement, standard operating procedure requirements, laboratory testing, manufacturing safety protocols, and product homogeneity under certified processes are just a few of the high level expectations likely to govern any cannabis market in the US.

As operators expand the marketplace by opening more facilities amid multiple states, we must contend with a slew of regulatory nuances. Colorado owners are hiring a scarce qualified workforce as compliance officers to internally manage reporting, tracking, and deadlines. Rules change frequently, and interpretations vary from attorneys to individual enforcement agents in the field – making a complex operation even more difficult.

We have clients who, due to missing the filing of one form, have had over 20lbs of product sanctioned by enforcement. For 6 months, they have simply awaited action by regulators with no clear end to empty shelves and disappearing customers in sight.

States who miss the reality of rubber hitting the road are faced with the question of establishing reasonable enforcement procedures inherent to licensing. In Colorado, a record number of application denials, enforcement actions, and administrative hearings has taken the industry by force and surprise since Retail sales came online Jan 1 this year.

A few words to the wise for the Responsible and Compliant vendors of the future.

  • Do everything you can to mitigate the risk of non-compliance.
  • Document, whenever possible, the activities of your facilities.
  • Be pro-active rather than reactive to changing regulation.
  • Support industry organizations to negotiate your rules based on best practices.

Preparing against non-compliance is the first step to ensuring a compliant operation and to reducing scrutiny from Law Enforcement. How we operate will determine our fate and the whole world is watching. Our brave new world still hangs in the balance and any single operator is either an asset or a liability to the overall industry and movement. Compliance is key to unlocking the golden age of commercial cannabis as expectations rise and the industry grows.

 

Mark Slaugh is the founder and CEO of iComply, LLC, and has more than four  years of experience in the regulated cannabis industry development, consulting and compliance business. His successful startup provides valued services to clients on starting operations, production/manufacturing/retail management, and compliance consulting, training, and certification. Additionally, he served as the Colorado Springs Medical Cannabis Council (CSMCC) industry membership and executive director, and as the Southern Colorado Regional Coordinator for the Campaign to Regulate Marijuana Like Alcohol (Amendment 64).

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