The Licenses; The Property; The Business Structure; and The Capital
All business opportunities come with a certain amount of risk, but it’s particularly important for those in the cannabis space to be aware of the potential hazards. Any marijuana business seeking to expand into multiple states must do it correctly, and this requires paying attention to building the foundation and business structure for that growth.
Public perception about marijuana is rapidly changing. An April 20, 2017 Quinnipiac University national poll found that 94% of voters support “allowing adults to legally use marijuana for medical purposes if their doctor prescribes it.” The same poll found that 60% of voters believe the “use of marijuana should be made legal in the U.S.”
Currently, 29 U.S. states, the District of Columbia, Guam and Puerto Rico allow for medical marijuana and/or adult recreational cannabis, meaning a majority of Americans now live in states that allow legal access to marijuana.
This changing tide has created an environment where businesses that were first to establish themselves in the early marijuana markets are now looking to expand into other states, raising the potential for significant growth as these multi-state marijuana companies increase their footprint in the nascent national industry.
The foundational requirement for any multi-state marijuana business strategy is obtaining the state license where you intend to operate. Each state has adopted its own regulatory and licensing scheme and this leads to wide variation between states, so it’s imperative to know the details.
Target a state or states where you can obtain a license and research the state’s residency and ownership requirements. Proactively anticipate which states are considering, or will soon consider, adopting a cannabis regulatory scheme and prepare accordingly. Know what is required to secure a license and whether the state has an open- or closed-market approach, offers limited licenses or imposes a regulatory structure where only a few licenses are issued. Understand each state’s requirement for demonstrating available financial resources, as this can sometimes be prohibitive. Most importantly, retain an experienced cannabis regulatory and compliance attorney. Their services will prove invaluable.
Getting the Property
Expanding into another state requires finding and securing appropriate and qualified real property on which to locate your marijuana business. Each state’s regulatory restrictions on location, land use policies and local zoning can make it challenging to find a location that works, both for the business and for the regulators.
Negotiating the purchase or lease of real property for a marijuana business is complex, time-consuming and, if not properly handled, carries unnecessary risk and expense.
Every property has a history and that history can be fatal to your ambitions. As such, you’ll want to work with an experienced real estate attorney who can alert you to encumbrances, liens, easements, restrictive covenants, environmental contamination and other factors that should inform your decision to purchase (or not purchase) a property.
Even leasing property for a cannabis business is complex. Marijuana leases are unique, so simply defaulting to a standard form lease or a lease provided by a landlord can create problems. State regulators typically examine each proposed lease or sub-lease as a prerequisite to granting a license. Making sure your lease addresses not only the standard business terms, but also is written so that it contains custom, cannabis-specific provisions, requires not just a real property attorney, but one who is familiar with that state’s marijuana laws and regulations.
Appropriate Business Structure
An appropriately flexible and adaptive business structure is important as a marijuana business expands into multiple states. A corporation or limited liability company formed and licensed in one state will most certainly not be qualified to hold a license in other states. At a minimum, a multi-state marijuana business is going to have two or more licensed business entities in two or more states.
Establishing separate entities for each section of a multi-state business operation provides certain protections, such as preventing the whole structure from collapsing if, for any reason, one section fails. With proper design, a multi-state marijuana company can utilize an overarching corporate structure that covers separate licensed entities, thereby allocating risk among different subsidiaries.
For example, in states that allow vertical integration, owners may choose to form a separate legal entity for both the grow and the retail operations. Different legal entities for trademark, branding and licensing, for ownership or leasing of real property and even for ancillary marijuana products, should also be considered.
The assistance of legal counsel with expertise in multi-state business law, tax law and corporate formation and structuring is critical. Correct structuring at the outset is wiser, cheaper and easier than fixing it after the fact.
Access to Capital
As a marijuana business expands into multiple states, access to capital becomes a key business consideration. In some instances, a state’s licensing regulations may require the business applying for the license demonstrate substantial financial resources. Capital to build out facilities and business operations becomes critical.
At this point, most businesses begin thinking about raising capital from investors. A business can raise capital by taking on debt (borrowing money) or selling equity (ownership in the company). Moreover, there are areas in which debt and equity overlap. For instance, a company could offer convertible promissory notes that the holder can later convert to equity ownership.
Once a business begins accepting money from outside investors, a whole host of securities and financial regulations become important. This is particularly true if your investors are from multiple states. In addition to required Securities and Exchange Commission filings, each state has its own regulations and filing requirements.
Consider also that not all investors are equally desirable. Understanding the rules about taking money from “accredited” versus “non-accredited” investors prior to accepting the investment can help you avoid violations, penalties and delays. Offering and selling securities (including debt) is a common business practice, but one for which care and common sense must be exercised. Solicit advice and guidance from a trusted attorney, experienced in securities and financing, before you get into trouble and have to dig yourself out of a financial and/or legal hole.
The time is now
Multi-state marijuana companies are not some distant idea, to be realized only after the Feds move cannabis off of Schedule I or when Big Ag and Big Retail get into the game. It is happening now.
Even smaller, but successful, marijuana businesses operating in one state are quickly looking at other states for growth and expansion.
Opportunities will only increase as more states approve medical and recreational marijuana. Building a solid business and legal foundation for multi-state expansion is the first step.
David Kerr is of counsel with the Fifth Avenue Law Group in Seattle (www.fifthavenue-law.com). He is a leader in the complex area of marijuana business law, including buying or selling a marijuana business; navigating compliance and regulatory issues; facilitating business transactions; and state licensing. He has more than 20 years of experience working as in-house counsel, directing government affairs and working with state and local governments, and can be reached at firstname.lastname@example.org.
This story was originally published in the November 2017 issue of Marijuana Venture, on sale now.