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Cannabis Basics: Getting up to Speed with Current Laws, Legislation, & Essential Business Issues

The cannabis and hemp industries in the U.S. have exploded in recent years due to increased numbers of states allowing businesses to grow, process, and sell cannabis products for medical and adult use. But one may ask: how are these businesses capable of operating if federal laws prohibit them?
This series provides an essential foundation for any businessperson or professional looking to get smart about the cannabis industry. In the first episode of this series, our panel of experts will bring you up to speed on the complex and constantly evolving legal framework governing cannabis businesses. With this context, our panelists will also discuss the opportunities and challenges of operating in the cannabis space.

To view the accompanying webinar, go to: https://www.financialpoise.com/financial-poise-webinars/cannabis-investment-successes-failures-strategies-for-the-future-2021/

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Cannabis Basics: Getting up to Speed with Current Laws, Legislation, & Essential Business Issues

  1. 1. 1
  2. 2. 2 Practical and entertaining education for attorneys, accountants, business owners and executives, and investors.
  3. 3. Disclaimer The material in this webinar is for informational purposes only. It should not be considered legal, financial or other professional advice. You should consult with an attorney or other appropriate professional to determine what may be best for your individual needs. While Financial Poise™ takes reasonable steps to ensure that information it publishes is accurate, Financial Poise™ makes no guaranty in this regard. 3
  4. 4. Meet the Faculty MODERATOR: Jack O’Connor - Sugar Felsenthal Grais & Helsinger LLP PANELISTS: Ruth Rauls - Saul Ewing Arnstein & Lehr LLP Chelsie Spencer - Ritter Spencer PLLC 4
  5. 5. About This Webinar - Cannabis Basics: Getting up to Speed with Current Laws, Legislation, & Essential Business Issues The cannabis and hemp industries in the U.S. have exploded in recent years due to increased numbers of states allowing businesses to grow, process, and sell cannabis products for medical and adult use. But one may ask: how are these businesses capable of operating if federal laws prohibit them? This series provides an essential foundation for any businessperson or professional looking to get smart about the cannabis industry. In the first episode of this series, our panel of experts will bring you up to speed on the complex and constantly evolving legal framework governing cannabis businesses. With this context, our panelists will also discuss the opportunities and challenges of operating in the cannabis space. 5
  6. 6. About This Series Cannabis Law 2021 The U.S. cannabis industry has exploded over the past decade. With every emerging industry comes legislation, rules, investors, and questions. The legalized cannabis industry is no different. And as more states in the U.S. adopt adult use and medical cannabis laws and regulations, it is incumbent on businesspeople and professionals to educate themselves about the challenges and opportunities facing the industry, as well as how to navigate the legal landscape governing cannabis businesses, whether those businesses “touch the plant,” or not. Thankfully, we’re here to help. In this series, we provide an essential foundation for any businessperson or professional looking to get smart about the cannabis industry. In our first episode, we present an overview of the cannabis industry and the competing legal frameworks at state and federal levels. In our second episode, we will discuss investment strategies for getting involved in the cannabis industry. Our third episode will discuss specific legal issues surrounding intellectual property rights in the cannabis space. And we’ll conclude with our fourth episode, focused on legal and business issues for employers and employees in states where cannabis has been legalized for both medical and adult use. 6
  7. 7. Episodes in this Series #1: Cannabis Basics: Getting up to Speed with Current Laws, Legislation, & Essential Business Issues Premiere date: 1/20/21 #2: Cannabis Investment: Successes, Failures, & Strategies for the Future Premiere date: 2/17/21 #3: Protecting Intellectual Property in the Cannabis Industry Premiere date: 3/17/21 #4: Cannabis Legal & Business Issues for Employers & Employees Premiere date: 4/7/21 7
  8. 8. Episode #1 Cannabis Basics: Getting up to Speed with Current Laws, Legislation, & Essential Business Issues 8
  9. 9. Cannabis Basics: Terminology & Jargon What is “Cannabis,” exactly? • a plant genus that produces three species of flowering plants: Cannabis sativa, Cannabis indica, and Cannabis ruderalis • Cannabis sativa & Cannabis indica are used to produce both adult use & medical cannabis products • Native to Asia, but grows almost anywhere and has long been cultivated both for the production of hemp and to be used as a drug Source: https://www.leafly.com/news/cannabis-101/glossary-of-cannabis-terms 9
  10. 10. Cannabis Basics: Terminology & Jargon Cannabinoids • Chemical compounds unique to cannabis that on the body’s cannabinoid receptors, producing various effects. Currently more than 85 known cannabinoids, all with varying effects. THC (tetrahydrocannabinol) • Best known & most abundant available cannabinoid in marijuana plants, responsible for psychoactive effects or the “high,” of cannabis products. 10
  11. 11. Cannabis Basics: Terminology & Jargon CBD (cannabidiol) • One of many cannabinoids found in cannabis. CBD has gained support for its use as a medical treatment as research has shown it effectively treats pain, inflammation, and anxiety without the psychoactive effects associated with THC. Hemp • a fibrous product that can be produced from the male cannabis plant (meaning it generally can’t be used to produce intoxicants), used in the manufacture of rope, paper, clothing, beauty products, and other goods. 11
  12. 12. State-Based Legalization of Cannabis in the U.S. At present (but constantly changing): • 33 states, 4 of 5 US Territories, & the District of Columbia allow medical cannabis use • 11 states, the District of Columbia, Guam, and the Northern Mariana Islands allow adult (or “recreational”) use of cannabis, including: Alaska, California, Colorado, Illinois, Maine, Massachusetts, Michigan, Nevada, Oregon, Vermont, and Washington • 15 other states have decriminalized cannabis use 12
  13. 13. State-Based Legalization of Cannabis 13 Source: Lokal_Profil, CC BY-SA 2.5, https://commons.wikimedia.org/w/index.php?curid=2370050
  14. 14. Federal Criminal Law: the Controlled Substances Act The Controlled Substances Act (“CSA”), 21 U.S.C. §§ 801-971 criminalize the following with respect to cannabis: • Growing; • Processing; • Selling; • Knowingly renting, managing, or using property for the purpose of manufacturing or distribution; • Selling or offering to sell drug paraphernalia (including equipment, products, or materials of any kind which is primarily intended or designed for use in manufacturing cannabis); and • Deriving profits or proceeds from violations of the CSA 14
  15. 15. Federal Policies Allowing for State-Compliant Cannabis Operations Rohrabacher–Farr Amendment • 2014 federal law prohibiting the Department of Justice Department from using funds to interfere with implementation of state-based medical cannabis laws. • Did not change legal status of cannabis, and must be renewed each fiscal year to remain in effect 15
  16. 16. Federal Policies Allowing for State-Compliant Cannabis Operations Ogden Memorandum (2009) • Memorandum issued by the US Department of Justice to US Attorneys across the country to guide prosecutorial decision-making, allocation of resources, and guidance for US Attorneys located in states where cannabis is legalized/decriminalized/etc. • Ogden memorandum prioritizes prosecution of significant traffickers and disruption of illegal drug manufacturing and trafficking networks. • Emphasizes that federal prosecutors "should not focus federal resources in States on individuals whose actions are in clear and unambiguous compliance with existing state laws. . . .” 16
  17. 17. Federal Policies Allowing for State-Compliant Cannabis Operations Cole Memorandum 1 (2011) • DOJ Memorandum issued to clarify Ogden Memorandum: Ogden Memo not intended to protect private, large-scale, profitable cannabis cultivation centers from federal enforcement or prosecution, even when complying with state law • Also notes that using federal resources to enforce the CSA against cancer patients or caregivers may not be efficient 17
  18. 18. Federal Policies Allowing for State-Compliant Cannabis Operations Cole Memorandum 2 (2013) • Further updates Ogden Memo to address state initiatives to legalize the possession of small amounts of cannabis and regulate its production and sale. • Second Cole Memo highlights 8 specific enforcement priorities relating to noncompliance with other state laws, aimed at preventing: • 1. distribution of cannabis to minors; • 2. revenue from being funneled to criminal enterprises/gangs/cartels; • 3. movement of cannabis from state-to-state; • 4. state-authorized cannabis activity as a cover for illegal activity; • 5. violence and the use of firearms in cultivation and distribution of cannabis; • 6. drugged driving and other adverse public health consequences; • 7. growing cannabis on public lands and any environmental threat posed by that production; and • 8. cannabis possession or use on federal property 18
  19. 19. Federal Policies Allowing for State-Compliant Cannabis Operations Cole Memorandum 3 (2014) • Additional refinement to previous iterations • Links possible violations of the Bank Secrecy Act (31 USC §§ 5311-5332) and money laundering statutes to the enforcement priorities listed in the Second Cole Memo. • Clarifies that prosecution of a person for financial crimes associated with cannabis "does not require an underlying marijuana-related conviction under federal or state law." 19
  20. 20. Federal Policies Allowing for State-Compliant Cannabis Operations FinCen Guidance (2014) • Published simultaneously with Third Cole Memo • Department of Treasury guidance memo that puts the onus on financial institutions to conduct due diligence to identify customer conduct in violation of the eight priority factors set forth in Second Cole Memo. • Financial institutions that act "willfully blind" by failing to conduct appropriate due diligence are subject to potential prosecution. 20
  21. 21. Federal Policies Allowing for State-Compliant Cannabis Operations Rescission of the Cole Memorandum – Sessions Memorandum (2018) • A setback for state-legal cannabis industry operators • Sessions memorandum rescinds previous DOJ guidance on federal cannabis enforcement • BUT - does not rescind the FinCen Guidance from 2014. Directs federal prosecutors to instead "weigh all relevant considerations, including federal law enforcement priorities set by the US Attorney General, the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes on the community." • Also directs US Attorneys to use their investigative and prosecutorial discretion 21
  22. 22. Federal Policies Allowing for State-Compliant Cannabis Operations Permitted Uses of Cannabis by the Federal Drug Enforcement Agency (DEA) • DEA has stated that Schedule I controlled substances may only be used for legitimate medical, scientific, research, and industrial purposes. • DEA policy statement notes that "consistent with the purposes and structure of the CSA, persons who become registered to grow marijuana to supply researchers will only be authorized to supply DEA-registered researchers whose protocols have been determined … to be scientifically meritorious. Permitted Uses of Cannabis by The National Institute on Drug Abuse (NIDA) • NIDA supplies researchers with cannabis from its farm at the University of Mississippi through tightly controlled channels 22
  23. 23. Capital Constraints: Access to Banking & Taxation Issues Banking • Because the CSA criminalizes nearly all cannabis-related business activity, cannabis businesses cannot bank with traditional lenders who are FDIC-insured (nor will these lenders agree to bank these businesses, especially in light of FinCen Guidance) • Result: lots (LOTS) of cash flowing through cannabis businesses with very few places to keep it; • Private investment tends to be main source of capitalizing cannabis businesses • Some state-based credit unions will bank cannabis businesses, but solutions are limited 23
  24. 24. Capital Constraints: Access to Banking & Taxation Issues Taxation • Additional tax and accounting challenges presented because cannabis businesses are federally illegal • Internal Revenue Code Section 280e: businesses that traffic in controlled substances cannot deduct any expenses incurred in carrying on the production, distribution, and sale of controlled substances. • This means that businesses operating within the cannabis industry cannot deduct certain expenses, many of which are deductible for businesses operating within a legal industry • The marginal tax rate for cannabis businesses is therefore – HIGH (pun! We only put one in the materials!) 24
  25. 25. Additional Challenges: Restricted Access to Bankruptcy Relief • Bankruptcy relief (Chapter 7, 11, 13, etc.) is a federally-based form of relief • Since cannabis businesses and individuals working within the cannabis industry are deemed to be violating federal law, the courthouse doors are effectively closed to debtor- companies and individuals seeking bankruptcy relief while engaged in a cannabis business or employed by a cannabis business • Notably: this restriction is far-reaching, and extends to ancillary businesses (most commonly landlords) and not just “plant-touching,” businesses • The Office of the U.S. Trustee (the bankruptcy division of the Department of Justice) has taken a hard line on these issues, and seeks dismissal of these cases when filed 25
  26. 26. The 2018 Farm Bill (Hemp Farming Act of 2018) • The 2018 Farm Bill legalized production of hemp as an agricultural commodity & removed hemp from the list of controlled substances. • Also requires Secretary of Agriculture to conduct study of hemp-related agricultural pilot programs implemented under prior 2014 Farm Bill, • Does not create a system for producers to grow hemp as freely as other crops: caps THC content for industrial hemp plants at 0.3% 26
  27. 27. Proposed Federal Legislation STATES Act • Introduced in 2018, the “Strengthening the Tenth Amendment Through Entrusting States” (STATES) Act, would recognize legalization of cannabis and the U.S. state laws that have legalized it through their legislatures or citizen initiative. • Proposes amending the CSA to exempt individuals and companies from federal prosecution if possessing/producing cannabis in compliance state law 27
  28. 28. Proposed Federal Legislation SAFE Banking Act • Proposed and passed the House of Representatives in 2019 (not passed in the Senate) to govern disposition of funds gained through the cannabis industry in the US • Generally prohibits federal banking regulator from penalizing a depository institution for providing banking services to a legitimate cannabis business; and protects lending institutions’ access to federal deposit insurance, among other protections 28
  29. 29. About the Faculty 29
  30. 30. About The Faculty Jack O’Connor - joconnor@sfgh.com Jack is partner in the Chicago office of Sugar Felsenthal Grais & Helsinger LLP. Jack’s practice covers a range of healthy and distress business engagements. Jack leads Sugar Felsenthal’s “Vice,” practice, working with business clients in the Beer, Spirits, and Cannabis industries. Jack is also widely recognized for his excellent work as a restructuring attorney including recognition by various organizations for his strategic thinking and tactical expertise, including SuperLawyers Magazine, Leading Lawyers Magazine, and the Turnaround Management Association. 30
  31. 31. About The Faculty Ruth Rauls - ruth.rauls@saul.com Ruth concentrates her practice on complex commercial litigation, employment litigation, real estate litigation and litigation involving closely-held corporations. She has extensive experience litigating matters at the trial and appellate levels in state and federal court in New Jersey and New York, as well as in private mediations and arbitrations. She has litigated claims arising under the New Jersey Consumer Fraud Act, the New Jersey Law Against Discrimination, and various other federal and state statutory and common law causes of action. To read more about Ruth, please visit: https://www.saul.com/attorneys/ruth-rauls 31
  32. 32. About The Faculty Chelsie Spencer - cspencer@ritterspencer.com Chelsie Spencer is a cannabis and hemp attorney. She is a founding member of Ritter Spencer PLLC. Chelsie practices in the areas of medical marijuana and hemp and represents clients across those industries for their business law and compliance needs. Chelsie represents all facets of the cannabis and hemp industries, including dispensaries, growers, processors, manufacturers, retailers, and more. Forbes Magazine dubbed Chelsie the “rare friendly face in the midst of a cutthroat CBD hurricane, the person you want on speed dial when things turn sour” for her work in the cannabidiol (CBD) industry. In addition to navigating complex issues and transactions in these highly regulated industries, she frequently writes, speaks, and presents on issues affecting these industries at conferences and forums across the United States. To read more, go to https://www.financialpoise.com/webinar-faculty/chelsie-spencer/ 32
  33. 33. Questions or Comments? If you have any questions about this webinar that you did not get to ask during the live premiere, or if you are watching this webinar On Demand, please do not hesitate to email us at info@financialpoise.com with any questions or comments you may have. Please include the name of the webinar in your email and we will do our best to provide a timely response. IMPORTANT NOTE: The material in this presentation is for general educational purposes only. It has been prepared primarily for attorneys and accountants for use in the pursuit of their continuing legal education and continuing professional education. 33
  34. 34. About Financial Poise 34 DailyDAC LLC, d/b/a Financial Poise™ provides continuing education to attorneys, accountants, business owners and executives, and investors. It’s websites, webinars, and books provide Plain English, entertaining, explanations about legal, financial, and other subjects of interest to these audiences. Visit us at www.financialpoise.com Our free weekly newsletter, Financial Poise Weekly, updates you on new articles published on our website and Upcoming Webinars you may be interested in. To join our email list, please visit: https://www.financialpoise.com/subscribe/

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