By Matt Goldberg
In the months since Oregon voters approved Measure 91, there has been a surge of interest among would-be cannabis entrepreneurs in the coming legalized recreational marijuana regime. Whether they are repurposing the family farm into a commercial grow operation or bringing on sophisticated investors to build a vertically integrated, brand-driven cannabis empire, clients are facing the same set of basic issues as they position themselves for the best possible outcome in this newly legalized industry.
CORPORATE (STUFF) MATTERS
One of the biggest misconceptions I see over and over is that a business achieves full limited liability simply by registering an LLC with the Secretary of State. Yes, you need an LLC or a corporation registered with the State of Oregon. That is already required for a medical dispensary license and you will surely need it for a commercial license; the mere registration, however, provides only a thin veil of protection from personal liability for owners. LLCs need proper operating agreements and corporations need proper bylaws (and other items, too). Whatever the form of the entity, corporate formalities need to be observed with respect to decision-making, handling of money and property, and dealings with third parties.
Oregon’s “blue sky” — or securities — laws present other traps for unwary entrepreneurs. You are most likely selling a security if you are taking an “investor’s” money in exchange for a membership interest in your cannabis LLC. In many situations, there are exemptions related to the number and wherewithal of investors that allow start-ups to avoid having to compile prospectus-type information for possible investors. Whether or not exemptions exist applicable to your situation, you need to know that the laws against selling unregistered securities may apply to you and you need to act accordingly on the front end.
FROM MEDICAL TO RECREATIONAL AND BEYOND
Many clients are either already growing under the Oregon Medical Marijuana Act (OMMA) or are running a dispensary licensed and regulated by the Oregon Health Authority (OHA). Although people growing for patients with state medical marijuana cards must be registered with the OHA to benefit from OMMA’s legal protections, they are not technically licensed to grow. Even so, by amassing a collection of patients who designate a connected group of growers, some medical growing operations have taken on a scale one normally only associates with full-blown commercial growing in a recreational 21-and-over system. Some Oregon legislators would like to see existing medical grow facilities (not located in residential areas) to be folded into the coming recreational system. House Bill 2676, introduced before the new legislative session kicked off in February, would accomplish just that, providing a plug-and-play method for ensuring supply to the incipient recreational marketplace.
As for dispensaries, there are only so many locations that satisfy the buffer zone requirements (distance from schools, parks, other dispensaries, etc.) currently in place through the OHA’s dispensary rulemaking — especially in light of the moratoria banning medical dispensaries that were permitted by the dispensary bill, enacted by a great number of Oregon municipalities, and that are largely still in place as this column goes to press. The same or very similar buffer zones will dictate acceptable locations for recreational stores as well. Plus, no one knows what the full extent of local regulation will be, meaning there is uncertainty about whether and how local jurisdictions will try to ban recreational cannabis businesses.
The point is that a lot of clients feel a working medical dispensary or medical grow operation is a ticket of sorts with which to get a recreational license and succeed with it. If they are already in the medical space, they want to do what they can to safeguard what they have; if they aren’t operating under the medical umbrella yet, they want to find a location, start a company, do their build-outs and start medical grows or dispensaries as soon as possible.
REAL ESTATE GOES BOOM
Depending on whom you talk to, it appears as if a real estate boom is afoot in Oregon as market participants jockey for positions within the emerging industry. Do you want to grow outdoors in southern or eastern Oregon or do you plan to grow indoors in urban or suburban warehouse space? Are you renting or buying? If the former, you need to find a cannabis-friendly landlord who won’t be defaulting on its bank’s mortgage covenants by bringing in a tenant whose cannabis business is still federally illegal. If you find such a landlord, you need the opportunity to have input on the lease to address issues such as possible changes in state law that could alter your business model and implicate the viability of the lease.
If you are buying, are you planning to finance? You should hope not if you want to be honest with your lender about what actually will be occurring in your facility. Institutional lenders will not knowingly finance cannabis businesses, so keep that in mind as you plan for your real estate needs.
Also, ask yourself if you want to be in a city or some unincorporated county location. Who will be making the zoning ordinances that will govern your location? Who will be reviewing your business license application if you are required to submit one? Spend the time to ask yourself these questions and to obtain the answers if you do not already know them.
NEW OREGON LAWS, SAME OLD CRAPPY FEDERAL ONES
No new state coming online, Oregon included, can remedy the problems caused by the ultimately unsupportable federal classification of cannabis. Oregon cannabis entrepreneurs still must contend with the discriminatory income tax treatment of Section 280E of the tax code. And since Oregon, unlike Washington, has a state income tax, they will be contending with it twice. Since the U.S. Patent and Trademark Office will not issue a federal trademark on a cannabis brand or product that “touches the plant,” Oregon’s cannabis industry must rely on less robust state trademark protection. In Oregon, as in other states, this protection is better than nothing and definitely worth doing, but will ultimately be but a placeholder system for protecting cannabis-related intellectual property until the federal system catches up.
Matt Goldberg advises cannabis businesses throughout the Pacific Northwest at Cannabis Lawyers NW, LLC (www.cannabislawyersnw.com). He can be found on Twitter at @Cannabis_Lawyer.