Cannabis business law in vermont

1. Cannabis business law in vermont

2. Topics • Federal Responses to State Cannabis Laws • Banking, Financing and Taxation in the Cannabis Industry • Cannabis Laws in Vermont: How We Got Here • Obtaining a Vermont Cannabis Business License • Legal Best Practices: Packaging And Testing • Legal Ethics & Cannabis

3. Federal Responses to State Cannabis Laws

4. First and foremost Despite state legalization, cannabis remains a schedule I controlled substance under the controlled substance act (CSA) and remains illegal under federal law

5. SO what do the feds say? Cole I Cole II Cole III FinCEN Guidance

6. Memos and more memos • Ogden Memo (2009) • Cole I (2011) • Cole II (2013) • Cole III (2014) • FinCEN Memo (2014)

7. The ogden memo • The first DOJ guidance memorandum addressing State-regulated medicinal cannabis programs • Indicated that DOJ should not prioritize prosecuting individuals who were operating in “clear and unambiguous compliance” with state law • Made an exception for large-scale commercial operations • Generally thought at the time to indicate the Obama administration’s acceptance of cannabis legalization by the states Issued by the Department of Justice in October of 2009. Drafted by Deputy Attorney General David W. Ogden. Subject: “Investigations and Prosecutions in States Authorizing the Medical Use of Marijuana”

8. Not so fast, folks! The First Cole Memorandum (Cole I) • Issued by the Department of Justice in June of 2011 • Drafted by Deputy Attorney General James M. Cole • Subject: “Guidance Regarding the Ogden Memo in Jurisdictions Seeking to Authorize Marijuana for Medical Use “ • Was issued to provide “clarification” of the Ogden Memo • Reiterated the Government’s position that cannabis remained a “dangerous and illegal drug” • Was interpreted by many as a reversal of the Ogden memo • Indicated that it was DOJ’s intention to reprioritize the prosecution of state medical cannabis programs

9. The dark days • “Obama Cracks Down On Medical Marijuana” – National Public Radio, July 18, 2011 • “Feds Crack Down on Medical Marijuana in California” – Rolling Stone, October 7, 2011 • “Obama’s War on Pot” – Rolling Stone, February 16, 2012 • On September 25, 2012 the DEA tried to shut down more than seventy medical marijuana dispensaries in and around Los Angeles • A June 2013 report issued by Americans for Safe Access found that the DEA had carried out some 270 medical marijuana raids under Obama • The same report found that Obama administration had spent $300 million “interfering” with state medical marijuana laws over the last four and a half years

10. Another plot twist The Second Cole Memorandum (Cole II) • In 2013, the DOJ issued its third guidance memorandum regarding cannabis. • Drafted by Deputy Attorney General James M. Cole • Subject: “Guidance Regarding Cannabis Enforcement” • Once again was interpreted by many as a reversal of DOJ’s position on medical cannabis regulation by the states • Contained an enumerated list of DOJ’s “enforcement priorities” regarding to cannabis prosecutions • Became the unofficial “rules” which were incorporated into every state’s regulatory framework

11. Cole II – Federal Priorities • Prevention of the distribution of marijuana to minors • Preventing revenue from going to criminal enterprises, gangs and cartels • Prevention of the diversion of marijuana from states where it is legal to states where it is illegal • Prevention of the use of state-authorized marijuana activity as a cover for other illegal drugs or activity • Prevention of violence and the use of firearms • Prevention of drugged driving or other adverse public health consequences • Prevention of the use of public lands for marijuana production • Prevention of marijuana possession or use on federal property.

12. What changed? • Many believe that the legalization of cannabis for adult recreational use in Colorado and Washington State in 2012 was a “wake-up call” to the federal government • Following the votes in Colorado and Washington, the feds were forced to choose between a strict crackdown, which would be in direct opposition to the will of the people in both states, or some sort of compromise • Cole II indicated a shift in Federal policy away from strict enforcement and towards regulation • DEA raids and federal prosecutions of state-compliant cannabis businesses dropped off dramatically • Many credit Cole II with providing the “security blanket” necessary for the cannabis industry to truly begin to take shape

13. Financial Guidance memorandums Third cole memorandum (Cole III) Department of The Treasury memorandum Guidance memorandum issued by the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) Issuing concurrent guidance to clarify Bank Secrecy Act expectations for financial institutions seeking to provide services to marijuana-related businesses Laid out a serious of rules and regulations for financial institutions to follow when providing services to cannabis-based businesses Considered by many to be overly onerous and expensive for institutions to comply with Has been crucial in allowing some financial institutions to provide services to the industry • Issued by the Department of Justice as guidance to financial institutions concerning services for state-compliant cannabis businesses • Contacted the exact same enforcement priorities enumerated in Cole II • Was meant to provide a level of security and assurance to financial institutions who provided services to the cannabis industry • Was widely ignored by the financial industry

14. And then this

15. The revocation of cole • In January 2018, Attorney General Jeff Sessions issued a memorandum revoking all previous guidance issued by the DOJ concerning state sanctioned cannabis regulation • The new guidance did not explicitly order a crackdown on the cannabis industry • The guidance restated the status of cannabis under federal law (illegal) and reiterated the long-held policy of prosecutorial discursion on the part of individual U.S. Attorney's offices • Sessions’ decision made financial institutions even less inclined to provide services than they were before • Interestingly enough, the cannabis industry as a whole pretty much shrugged it off

17. The united states Cannabis industry2018 • Medicinal cannabis is legal in thirty states, the District of Columbia and the territories of Guam and Puerto Rico • Adult use of cannabis (recreational use) is legal is nine states, with several more likely within the next year • Cannabidiol (CBD) is legal in sixteen states • Only four states remain that completely outlaw cannabis in all forms: Nebraska, Kansas, South Dakota and Idaho • The legal cannabis industry took in approximately 9 Billion dollars in 2017

18. Despite all the progress federal prohibition is still a drag • Employment • Can be discriminated against, reprimanded, or terminated for medical cannabis use • No federal employment • No protections under the ADA or any Federal law • Military Service • No military service for medicinal cannabis patients • Firearms • Illegal under federal law for a medical cannabis user to posses a firearm • Federal Housing and Assistance • Medical cannabis users are ineligible for Section 8 housing and other federal assistance programs

19. State Agencies and Federal funding • While the Judicial and Legislative branches may make noise about withholding federal funding from states which have regulated cannabis, this is unlikely to actually happen • The complexity and interrelated nature of federal budgeting would make implementing this sort of policy extremely difficult • Furthermore, neither Justice nor the Executive branch have the authority to withhold already authorized funds from the States. Only the Legislative branch has that authority, and the Legislative branch is the most supportive of cannabis regulation.

20. Preemption and the controlled substances act Article VI of the Constitution of the United States provides: “This Constitution, and the laws of the United States which shall be made in pursuance thereof; and all treaties made, or which shall be made, under the authority of the United States, shall be the supreme law of the land; and the judges in every state shall be bound thereby, any thing in the constitution or laws of any state to the contrary notwithstanding.” (U.S. Const. art. VI, cl. 2)

21. So the controlled substance act preempts state laws regulating cannabis, right? • Probably? Possibly? Maybe? Maybe Not? • While a majority of commentators have simply concluded that the CSA preempts State laws legalizing and regulating cannabis, the analysis isn’t actually that simple • The CSA explicitly states that it does not preempt state law unless there is “a positive conflict in which the CSA provision and state law cannot stand together” • A “positive conflict” has been held to exist when the state law is drafted in such a way that it becomes impossible to comply with both the state and federal law at the same time • Since the CSA and State laws legalizing and regulating cannabis can exist simultaneously, it is unlikely that the Government could use preemption as an way to nullify State law

22. The unresolved state-federal conflict is creating more and more headaches for everyone • Insurance Coverage • Americans With Disabilities Act Protections • Bankruptcy Relief (Or lack thereof) • Over/Under Supply at the State Level • Interactions with Federal Agencies such as USDA & FDA • Air/Rail Travel (Alaska) • Schools and Colleges • Uncertain Enforcement Priorities • Financial Chaos • Cash Only Industry • Lack of Scalability • Lack of Nationwide Industry Standards • Lack of Consistency of Message • Lack of Opportunity to Educate People

23. So what happens next?

24. banking, finance and taxation in the cannabis industry Commercial banking issues Business financing Due diligence IRS rule 280E

25. What’s the problem with getting a bank account? • Banking and the Controlled Substances Act (CSA) • Bank Secrecy Act • Asset Forfeiture • FDIC (Or a loan, or a credit card, or financing, or…)

26. Banking and the controlled substances act • Given cannabis’ Schedule I classification under the CSA, any financial institution providing services to plant-touching businesses could be charged with a number of federal crimes • Despite the 2014 FinCEN guidance on how to safely regulate and service cannabis industry accounts, many institutions continue to refuse to do so

27. Why don’t the banks just rely on the fincen guidance memorandum? • Memorandum is only guidance, NOT statutory law • Compliance with FinCEN regulation is extremely labor intensive and expensive • Taking on cannabis businesses creates the possibility of incurring penalties for regulatory violations • Low tolerance for risk in the banking industry (At least on the customer-facing side) • It is what the few institutions that do provide services to the industry use as legal protection (It’s not) • Lost some of it’s authority after Sessions revoked Cole III

28. Bank secrecy act (BSA) • The Currency and Foreign Transactions Reporting Act of 1970 • Requires U.S. financial institutions to assist government agencies to detect and prevent money laundering • Financial institutions must: • Keep records of cash purchases of negotiable instruments • File reports of cash transactions exceeding $10,000 (daily aggregate amount) • Report suspicious activity that might signify money laundering, tax evasion, or other criminal activities. 

29. Other financial industry concerns Asset forfeiture Federal deposit insurance company (FDIC) United States government corporation which provides deposit insurance to depositors in US banks Has authority to conduct investigation of banks Theoretically could “seize” a bank for operating in violation of federal law • Mechanism by which law enforcement can seize assets “reasonably believed” to be connected with illegal activities, almost always drug-related • As long as cannabis remains Schedule I there are serious concerns about this

30. Financing and the cannabis industry • Private investment into the US cannabis industry during the first five weeks of 2017: $178 Million • Private investment into the US cannabis industry during the first five weeks of 2018: $1.23 Billion • US investment has been almost exclusively limited to private placement • Handful of publicly traded US cannabis company trade over the OTC markets, but most are poor investments • First NASDAQ listing of a cannabis company “CRON” March 2018 • Canada allows cannabis companies to list on both of its major exchanges, the CSE and TSX • Several US companies have listed on Canadian exchanges in order to have better access to capital

31. Developing trends in cannabis financing General Minimum Requirements For Funding • Company must be incorporated (S-Corp, LLC, etc.) • Company must be a dispensary or growing operation that has been in business for at least six months • Company must have a business bank account • Company must have gross monthly sales in excess of 10k • Company must qualify based on personal credit Until commercial banking becomes more involved, cannabis financing in the U.S. will remain primarily in the hands of private equity firms and VC’s

32. Due diligence in the cannabis industry Lender due diligence Borrower due diligence Fully understand the terms of the financing Debt financing? Equity financing? Avoid toxic financing to the greatest extent possible Research the source of funds Don’t be afraid to say NO • Understand the deal • Research management and board • Conduct thorough financial analysis of company records • Understand the company’s direction and vision • Ensure regulatory compliance strategies are in place • Determine proper valuation of company

33. The Bane of the cannabis business balance sheetInternal revenue code 280e “No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted”

34. Californians Helping To Alleviate Medical Problems, Inc. v. C.I.r., 128 T.C. 173 (2007) (CHAMP) “We do not believe it to have been artificial or unreasonable for petitioner to have characterized as separate activities its provision of caregiving services and its provision of medical marijuana. Petitioner was regularly and extensively involved in the provision of caregiving services, and those services are substantially different from petitioner’s provision of medical marijuana. By conducting its recurring discussion groups, regularly distributing food and hygiene supplies, advertising and making available the services of personal counselors, coordinating social events and field trips, hosting educational classes, and providing other social services, petitioner’s caregiving business stood on its own, separate and apart from petitioner’s provision of medical marijuana.” - 9th Circuit Court of Appeals

35. What the 9th circuit's decision in “CHAMP” meant for cannabis industry taxation • While 280e forbids plant-touching businesses from taking most standard business deductions, deductions for cost of goods sold (COGS) are specifically allowed. • Department of the Treasure regulations state that a taxpayer must include as inventoriable costs all direct (e.g., the cost of inventory and delivery, and the cost of materials and labor for manufactured inventory) AND indirect production costs (i.e., rent and utilities related to inventory) • The CHAMP Court found that IRC 280e only applies to business entities directly involved in the trafficking of a Schedule I or II controlled substance, but did not apply to a secondary business which did not have the same direct contact with cannabis • One strategy formed after the ruling involved retailers offering a secondary service alongside its dispensary business. This could be a caretaking business(for medical dispensaries), merchandising company, a food and beverage concession, etc. You then allocate expenses between the dispensary and the other activity. 

36. Watch out for OLIVE though! • Another Post-CHAMPS strategy involves dispensaries forming a separate “management company” which leases all ordinary and necessary goods and services, including real estate, to the main company at a “premium” price, much of which then can be deducted as COGS. Expenses from the secondary, non-plant-touching business can be deducted normally • It is crucial that the two business entities be separate enterprises, with impeccable business records for each. • In Olive v. C.I.R., 792 F.3d 1146 (9th Cir. 2015) the Court held that a dispensary which gave away food, beverages and apparel did not constitute two separate businesses for the purposes of allocation • Most tax professionals recommend having the secondary business adjacent but separate from the dispensary business 

37. Cannabis industry taxation tips • Understand the tax ramifications of your corporate structure • With the pending changes to the Tax Code it has become even more important to consult with a tax professional when selecting a business structure • Be creative. Don’t be afraid of trying out novel approaches like allocation, management companies and supplemental service companies. (With guidance from a tax professional experienced in the cannabis industry) • Keep Extensive and Flawless Business Records • Expect to Be Audited

38. Vermont’s Cannabis laws How we got here

39. obtaining a Vermont cannabis business license

40. Vermont’s current cannabis laws and proposed regulations

41. Legal Best Practices: Cannabis Product Packaging and Testing

42. Product Packaging and labeling(You didn’t think was going to be easy, did you?) • Product packaging and labeling are among the more heavily regulated aspects of the cannabis industry • While there are no “official” industry standards, yet, many state’s are implementing similar regulations • At minimum, labeling and packaging components: • Must identity, purity, strength, and composition of the packaged products • Must be tamper-evident, resealable & child-resistant • Must not appeal to children • Must not affect the safety, purity, or quality of the product

43. Packaging and labeling regulations for edibles : California • Regulations require a primary panel and an information panel • Primary panel labeling must include: • The identity of the product • The amount of THC/CBD in the package • The CDPH-issued universal symbol • The net weight or volume • In addition, primary paneling for edible products must include the words "cannabis-infused" and contain the amount of THC/CBD per serving.

44. Packaging and labeling regulations for edibles : California • Informational panel labeling requirements include: • The manufacturer's name and contact information (website or phone number) • The date the product was manufactured • The government warning statement • The ingredient list • Instructions for use • The expiration date • The unique ID/batch number • In addition, the informational panel for edible products must also contain allergen information, a list of artificial food colorings and basic nutritional information (the amount of sodium, sugar, carbohydrates and fat per serving). Medicinal products must be labeled "For Medicinal Use Only."

45. Packaging and labeling regulations for cannabis products (Retail): Colorado Retail Marijuana Stores must include the following information on every Container: • The license number of the Retail Marijuana Cultivation Facility(-ies) where the Retail Marijuana was grown • The license number of the Retail Marijuana Store that sold the Retail Marijuana to the consumer • The Harvest Batch Number(s) assigned to the Retail Marijuana within the Container • The date of sale to the consumer • The net weight, in grams to at least the tenth of a gram, of the Retail Marijuana prior to its placement in the Container • The Universal Symbol, indicating that the Container holds marijuana, which must be no smaller than ¼ of an inch by ¼ of an inch

46. Packaging and labeling regulations for cannabis products (Retail): Colorado • The following warning statements: • “There may be health risks associated with the consumption of this product.” • “This product is intended for use by adults 21 years and older. Keep out of the reach of children.” • “This product is unlawful outside the State of Colorado.” • “There may be additional health risks associated with the consumption of this product for women who are pregnant, breastfeeding, or planning on becoming pregnant.” • “Do not drive or operate heavy machinery while using marijuana.” • A complete list of all nonorganic pesticides, fungicides, and herbicides used during the cultivation of the Retail Marijuana.

47. Packaging and labeling regulations for cannabis products (Retail): Colorado Additional Requirements for edible products: • Ingredient List. A list of all ingredients used to manufacture the Edible Retail Marijuana Product; which may include a list of any potential allergens contained within • Statement Regarding Refrigeration. If the edible product is perishable, a statement that the product must be refrigerated • Serving Size Statement. “The standardized serving size for this product includes no more than ten milligrams of active THC.” • Statement of Expiration Date. A product expiration date, for perishable edible products, upon which the product will no longer be fit for consumption, or a use-by-date, upon which the product will no longer be optimally fresh.

48. Trademarking •  The U.S. Patent and Trademark Office (USPTO) will not register trademarks for cannabis or cannabis related products and services • Often state registration is the only option available to cannabis businesses, especially plant-touching businesses • U.S. uses a “first-to-use” standard to address trademark ownership disputes, not a “first-to-register” standard, which provides traditional common law protections

49. Trademarking tips for the cannabis industry •  Make sure the name or mark you are using is clear and not already in use • Begin using your name or mark in commerce • Register your name or mark at the state level • Get creative with names and marks, create some which are not directly related to cannabis and see if the USPTO might approve them

50. Proper food safety procedure for edible products