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June 16, 2021 – The legalization of cannabis was one of the big winners of the 2020-2021 legislative cycle, with big states like New York and New Jersey significantly expanding their medical cannabis programs while developing an entirely new adult cannabis industry in the heart of the East Coast. These moves have already had the expected domino effect of putting pressure on other states along the coast, with Virginia postponing its legalization deadline to July 1, 2021 and the Pennsylvania Governor renewing its commitment to sign a bill to expand its state program, when it reaches his desk.
The western states are also continuing to modernize and expand their existing laws, with Arizona and New Mexico also legalizing adult cannabis.
Proponents of this latest push include a coalition of social justice advocates striving to rebuild communities torn by the war on drugs, individuals who believe that existing drug laws unnecessarily restrict their freedoms, and those who understand the vast financial potential of the cannabis industry see. The last category includes both businesses looking to make a profit and financially weak state and local governments that will benefit most directly from taxing cannabis at various stages in the supply chain.
Although medical cannabis is legal in some form in 36 states and adult cannabis has been legalized in 17 states and the District of Columbia, the federal government’s designation of cannabis as a List I drug still poses significant legal and commercial risks to industry participants. While we’ll cover some of these risks in more detail in the articles below, we’ll outline some of them here.
Cannabis (excluding hemp) is a List I drug under the Federal Controlled Substances Act (CSA). This means that regardless of the existence of medical cannabis laws in most states, the federal government’s stance is that cannabis currently has no recognized medical use and cannot be sold or prescribed. From time to time there have been efforts at the Congress level to provide protection to ancillary industries serving the cannabis sector, with protections for the banking sector (in the form of the SAFE Banking Act of 2021, HR 1996) being the most advanced. But as of the date of this article, none of them have crossed the finish line.
Because of the primacy clause in the U.S. Constitution, state laws cannot override the federal prohibition. United States v McIntosh (9th Cir. 2016). Still, some courts have found that federal law (at least in relation to medical cannabis) does not fully anticipate state law and that the two can coexist. See, for example, Hager v. M&K Constr. (NJ April 13, 2021). This is rooted in the instruction from Congress to the US Department of Justice not to use resources to prosecute state-compliant medical cannabis companies. This approval tab is generally known as the “Rohrabacher addition” and has been approved annually since 2014.
At about the same time, the Justice Department issued non-binding guidelines on enforcement priorities known as the “Cole Memorandum” to its attorneys. The memorandum advised the division’s attorneys not to use their “limited resources” to prosecute medicinal cannabis operators and cannabis users who comply with relevant state laws and the additional priorities set out in the memorandum (including the Non-diversion of cannabis across state borders).
The Cole memorandum did not survive the Trump administration and was overturned by US Attorney General Jeff Sessions. In practice, it appears to have remained in force, both because the department’s lawyers have retained their discretion and because it is included in the guidelines of the banks of the Financial Crimes Enforcement Network (FinCEN), the financial crime division of the U.S. American Department of the Treasury.
Engaging in the cannabis industry exposes individuals to federal prosecution for plotting to manufacture and distribute marijuana (18 USC § 846); Aid to the manufacture and distribution of marijuana (18 USC § 2); Subsequent action as an accessory to the manufacture and sale of marijuana (18 USC § 3); and violation of the Money Laundering Control Act (18 USC §§ 1956 and 1957). Federal agencies – like the IRS, Customs, and FinCEN – also have specific cannabis-related guidelines that industry participants must be aware of.
Operators who are not federally licensed (sometimes known as “illegal” cannabis operators) are fully prosecuted under those laws, as well as applicable federal laws that often mirror the CSA. It is important to note, however, that even those who work in accordance with state laws are breaking federal laws; it just so happens that these laws are not currently enforced (either at the discretion of the prosecutor or by order of Congress).
Concern about a possible change to the guidelines came to a head last year when the federal grand jury summoned the Ghost Management Group, the operator of “Weedmaps,” which for a time operated both state legal and illegal cannabis dispensaries California performed, became public. The subpoena is broad and industry participants are still waiting for the final outcome of the investigation. That, coupled with two businessmen convicted of bank fraud for helping a company called Eaze earlier this year help banks and credit card companies process transactions related to cannabis, is a reminder that federal enforcement may not be so ” Hands off “is how industry insiders would like to believe.
Participation in the industry is particularly risky for non-nationals, whose participation can result in permanent immigration bans.
Despite some predictions that the state-approved cannabis industry will grow to $ 80 billion by 2030, the cannabis industry is facing headwinds and business risks that only increase the closer you get to the plant.
Plant contacting companies, which include medical cannabis growers, distributors and retailers, must obtain a license from the state in which they operate. Application fees range from a few hundred dollars to tens of thousands of dollars, depending on the state and type of license. Successful applicants, who often have to go through a capital-intensive and detailed application process, can expect license fees in the mid five- to six-digit range. In key markets, the process is highly competitive and unsuccessful applicants often cannot get the application fee back, let alone the money invested in preparing the documents and consulting with consultants.
Some licenses require an executed lease or property ownership in a properly demarcated location at the application stage. Since many outside investors usually wait until an application is secured, it is difficult for everyone but the very financially strong to compete. States that sponsor social justice programs are still trying to figure out how the process works for these requests.
Even those who are successful have to deal with unique handicaps. These include limited access to banking, no access to legitimate credit card processing, the cost of implementing seed-to-sale tracking, and the inability to take advantage of traditional economies of scale as each state must be isolated to even get the slightest diversion from Preventing cannabis across national borders. Additionally, the federal illegality makes it impossible to deduct many expenses under Section 280E of the Income Act, and federal rights (such as trademark and bankruptcy protection) are not available. These legitimate operators have to compete with an illegal market that doesn’t care about such compliance and is sometimes poorly monitored while still trying to make a profit.
Nonetheless, the industry continues to grow at an impressive rate and new legal issues and business challenges continue to emerge as it evolves.
The opinions expressed are those of the author. They do not reflect the views of Reuters News, which are committed to integrity, independence and bias under the trust principles. Westlaw Today is owned by Thomson Reuters.
Alex Malyshev is a partner at Carter Ledyard & Milburn LLP and chairman of the cannabis, hemp and CBD industry group. He contributed to the chapter “Banking and Investment Considerations for Cannabis Businesses” in “Health Care and the Business of Cannabis: Legal Questions and Answers” (American Health Law Association 2021). He can be reached at email@example.com.
Sarah Ganley is an associate in the firm’s Litigation Department and can be reached at firstname.lastname@example.org. Both authors live in New York.