BREAKING NEWS: Trump Makes “States Rights” Cannabis Deal, Sessions Back in Doghouse

Cannabis Mergers and Acquisitions: Preparing for Success

The cannabis industry in California in 2018 is still finding its feet on many fronts – with both a regulatory framework and a banking solution being very much under construction. As these normalize, companies will establish their business metrics and get a firmer idea of the size of their opportunity, and then naturally increased M&A activity will follow, as has been the norm in other states, like Oregon and Colorado.

There’s a strong argument to be made that the M&A market for cannabis ancillary technologies will be very active in coming years, with companies having tremendous opportunities for exits at high valuations relative to their business metrics. Certainly those companies that create technologies and prove business models now stand to gain from future expansion in legalization of adult use, and any future, positive change in federal policy. With a few exceptions, such as Constellation Brands (makers of Corona) buying a minority stake in a Canadian medical cannabis company, almost all large U.S. companies cannot be owners in the cannabis industry, meaning the future acquisition of established companies is likely to be at a premium.

M&A activity for direct operators will continue to be driven by regulatory concerns, including local ownership requirements, political pushback against widespread “big marijuana” acquisitions, and the transferability of underlying permits and licenses. State licenses are not transferable in California, or Oregon, and if other states follow this model, then acquisitions are unlikely to be a primary means to achieving scale for direct operator businesses.

Preparing for M&A Opportunities: Get Your House In Order Now

The M&A diligence process is notoriously comprehensive, invasive, and painful – an acquirer is not only confirming the business assets and backing up the numbers, but just as importantly they are trying to avoid acquiring any liability or future regulatory issues. Therefore, by taking the steps below, you not only minimize the pain of any diligence process, but you also get out ahead of any the issues, and even without M&A on the horizon, you’ll never regret paying more attention to organization and compliance in your business. Here are some steps you can take now to best prepare for future M&A:

1. Create a Secure Data Room. Include everything a potential acquirer wants to see: business and financial records, tax records and all government filings, equity ownership documents including vesting details, key business contracts, contracts with employees, and all agreements with investors. With all this data, did we mention that it must be secure? Look for a provider with encrypted transmission and two-step authorization, and limit those who have access.
2. Standardize key contracts, and contemplate M&A Scenarios. If your business depends on key contracts with partners, suppliers, distributors, key customers, etc., and those contract all contain a strict “no assignment” clause, then your desirability as an acquisition target will be severely diminished.
3. Tie Up Loose Ends and Prepare for the Disclosure Schedule. M&A can be a delicate scenario, and a surprising percentage result in disputes – in my experience, 90% of M&A disputes stem from an undisclosed issue of the target company. Hence, the disclosure schedule, which will list every known issue – the company’s key contracts, financing arrangements, and every claim threatened or brought against the company. Therefore, any claims should be resolved prior to the transaction, if at all possible, and all others will need to be disclosed.
4. Get a Chief Compliance Officer and Document their Work. We’ve written previously about the work of a Chief Compliance Officer, and although it’s a more primary concern for direct operators, even ancillary business should maintain in strict compliance with applicable state laws.

M&A Consultants – Some are Great, Some are Useless, and Some are Downright Dangerous

The cannabis industry, as a whole, is experiencing an explosion of industry-focused consultants, whose levels of competence run the gamut. As an industry still in its infancy, the consulting market hasn’t yet matured, to weed out the bad actors through reputation or elevate the best firms. I regularly hear from clients that past consultants added zero value or (worse yet) badly mismanaged aspects of their business. Also, remember that consultants are not bound by the same ethical rules as attorneys, for example, concerning confidentiality and conflicts of interest.

So for consulting services in 2018, it’s very much buyer beware, and you should assume no level of competence until competence is demonstrated. If you are hiring an M&A consultant – consider that because so few large-scale cannabis M&A deals have been successfully consummated to date, you may be better served to retain a top M&A consultant that services businesses generally, and then rely on your excellent cannabis-focused attorneys (*ahem*) to guide you on all of the cannabis-related aspects.

Finally, if you have your house in order as described above, you may have much less of a need for an M&A consultant and a much smoother time through the M&A process. Ultimately, that’s what it’s all about.

For more on cannabis company acquisitions, see:

• Marijuana Business Acquisitions
• Marijuana Business Acquisitions – Stock for Stock Deals
• Oregon Cannabis Company Acquisitions
• Oregon Cannabis Company Acquisitions, Part 2: Term Sheets
• Oregon Cannabis Company Acquisitions, Part 3: Due Diligence
• How Canadian Companies Invest in U.S. Cannabis

source https://www.cannalawblog.com/cannabis-mergers-and-acquisitions-preparing-for-success/

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Washington Cannabis Processors Must Acquire Endorsement to Produce Edibles

As of April 1, 2018, Washington marijuana processors are required to hold a special endorsement from the Washington State Department of Agriculture (WSDA) to make marijuana-infused edibles (MIEs). This requirement follows from the WSDA’s appointment to share regulatory authority over MIEs with the Washington State Liquor and Cannabis Board (LCB). The WSDA’s Food Safety Program regulates, inspects and provides technical assistance to food processors generally, regarding product safety issues. Now, the WSDA will conduct similar activities with MIE processors including carrying out enforcement and recalls when necessary.

The endorsement costs $895 initially and $895 for each annual renewal. Applications must be submitted to the Washington State Department of Revenue Business Licensing Service website. Technically, processors are required to hold the endorsements as of April 1, but WSDA is providing a 30-day grace period. Therefore, the clock is ticking on any processors who have not yet acquired this mandatory endorsement.

Note that the endorsement is only available to businesses that already hold a processor license. The LCB is not currently accepting applications for new processor licenses. To add an MIE endorsement, a business or individual must currently have a processor license and only produce MIE products at a single facility. A business or individual cannot add MIE products under a Food Processor license, process MIE products at a facility that processes non-marijuana food products, or process non-marijuana food products at a facility that produces MIE products.

Prior to April 1, the WSDA had contracted with the LCB to inspect the facilities of processors making MIEs, so in some ways, not much is changing. Other than the new $895 fee, processors shouldn’t feel the impact of this regulatory change immediately. The LCB will maintain authority over marijuana activities such as processor license requirements, packaging, and labeling. Processors that are currently in compliance with food-related regulations for MIEs will not need to re-submit food safety information (e.g., floor plan, sanitation procedures) when applying for the MIE endorsement. If there are no changes to ownership, location, or products, WSDA will not require an inspection. Processors that have not produced MIEs before will have to submit additional information to WSDA and LCB. In 2015, the WSDA provided an outline of the basic requirements for processing MIEs and that document is available here.

Looking forward, processors can expect to deal with the WSDA more frequently. The WSDA now has authority to undertake enforcement action and implement recalls. On March 19, the WSDA issued a letter to stakeholders, stating that processors “may experience more frequent inspections, as well as more outreach efforts and industry engagement.” WSDA intends to inspect MIE-producing facilities within 12 months of the endorsement and may collect additional information during those inspections. Processors who make ownership, location, or product changes must submit materials to both WSDA and LCB.

If you hold a processor license that currently produces MIEs, you need to apply for this special endorsement this month to continue operating. This firm is very familiar with licensing procedures and can assist your business throughout the process of applying for this new endorsement. Feel free to contact us with any questions and stay tuned for additional updates.

source https://www.cannalawblog.com/washington-cannabis-processors-must-acquire-endorsement-to-produce-edibles/

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California Cannabis: Scams and Schemes of the Week

I’ve had it with the scams and schemes in the cannabis industry. I’ve never seen so much dangerously ignorant and downright criminal behavior. Since beginning work in the cannabis industry, I have yet to go a single day without encountering some sort of scam. The unscrupulousness of some attorneys, consultants, and operators in this industry needs to be called out and eliminated in order to establish an ethical, regulated industry in California. Accordingly, I’ll be posting a weekly list of scams and schemes to help unsuspecting victims avoid getting taken for a ride.

Scam #1: We Turn Your Cash into a Check Through Real Estate Investment!

There is a group pitching a scheme to turn dispensary cash into checks that can be deposited in the bank. The method: fork your cash over to this group. They toss your cash in with other “investors” and buy real estate with it. They flip the property, and send the proceeds to you in a check. Folks, this is textbook money laundering. The pitcher of this scam is exhibiting at industry conferences across the country and handing out “attorney-approved” contracts. Brazen, stupid, and dangerous for all involved.

Scam #2: Cannabis Cryptocurrency

If you want a lesson on what the government thinks about combining anonymous cryptocurrency with a federally prohibited substance, look no further than the life sentence handed down to Ross Ulbricht, creator of the Silk Road. Ulbricht was convicted of money laundering, computer hacking, and conspiracy to traffic narcotics. Those are the exact same charges that could be brought against any cannabis cryptocurrency company. Don’t get me started on the value of cannabis cryptocurrency on the secondary market. It’s complete b.s.

Scam #3: You Must Cultivate Before Obtaining a Permit

Most people laugh out loud when they hear this. Unfortunately, there are some black market attorneys who have stuck around and are continuing to provide clients with downright criminal advice, trying to convince would-be business partners or landlords to engage in unlawful behavior. The days of collectives and “creative” lawyering to get around the laws are over: We’ve now got a robust regulatory system under MAUCRSA, which makes it crystal clear that under no circumstances should anyone engage in any sort of commercial cannabis activity prior to obtaining all local approvals and a state license.

Scam #4: Your DUI Attorney Can Handle Your Tax Audit

Just say no. You are a legitimate business, and you need to retain a legitimate specialist to handle your legal matters.

source https://www.cannalawblog.com/california-cannabis-scams-and-schemes-of-the-week/