Weed Wanted: June 2024

New Oregon hemp rules take effect next week. As of Monday, July 1, 2024, all hemp retailers or wholesalers who store, transfer or sell industrial hemp or hemp items for resale to another person must have a hemp vendor license from the Oregon Department of Agriculture (ODA). The vendor license fee is $100 annually and is valid from July 1 to June 30. You can find the application here.

If you have anything to do with the Oregon hemp trade, whether locally or from out-of-state, please read this blog post carefully. The vendor license requirement is very broad and is certain to catch many people off guard.

Where did these new hemp rules come from?

The new rules arise from House Bill 4121, which Governor Tina Kotek signed into law on March 20, 2024. That law covered both marijuana and hemp considerations. I annotated HB 4121 in my legislative preview here and my session wrap-up here. I would encourage anyone interested in the background of this new hemp vendor licensure program to read those posts.

Following the session, ODA undertook a quick rulemaking round, and adopted OAR 603-048-0175 on June 5. It’s a short rules section, and worth a read as well. You can also find an FAQ style summary from ODA here.

Does the new hemp vendor license apply to out-of-state sellers?

Yes! This is something unusual about the new program, which I highlighted back in February and March. I am not aware of any other state that has taken a similar approach, and I believe it will surprise a lot of people. That said, the rule and the ODA FAQ are clear that both local and out-of-state wholesalers and retailers require a hemp vendor license. The requirement also applies to all online vendors that sell into, or out of, Oregon.

Who does NOT need a hemp vendor license?

There are a handful of exceptions to the licensure requirement, pursuant to OAR 603-048-0175(1). These include:

Brokers. Or, as provided by OAR 603-048-0175(1)(a), a person who “only facilitates the sale or transfer by connecting buyers and sellers and the person does not store the industrial hemp or hemp items at any time.”
Shippers. Or, as provided by OAR 603-048-0175(1)(d), a person who “only transports hemp or hemp items and does not store [them] at any time other than as necessary for transportation or delivery.”
Licensed growers, handlers, or agricultural hemp seed producers, provided the licensee “first notifies [ODA] of the location where the industrial hemp items are stored, transferred or sold in the license application, or on another form provided by [ODA].”
Oregon Liquor and Cannabis Commission marijuana licensees.

What if I have multiple sites?

The rules are clear that “a vendor must obtain a separate license for each vendor site.” OAR 603-048-0175(3). They also provide that “each unlicensed vendor site identified by [ODA] is a separate violation.” At another $100 per site (per year), the cost of compliance is small as compared to the alternative. Here, it’s also worth noting that ODA came down a bit on price: originally, the fee was slated at $200 per site, but wholesalers and smaller retailers pushed back and ODA acceded. For mid-year applicants, the fee is not pro-rated.

What else is changing in Oregon hemp?

Quite a bit. HB 4121 covered a lot of territory beyond the hemp vendor registration requirements. Extensive new rules are coming on everything from hemp product registration, to enforcement, to limitation on hemp product sales containing cannabinoids for human or animal consumption. The Oregon Secretary of State also issued a temporary administrative order back on May 16^th, establishing criteria for presumptive testing of hemp plants.

All of these developments and changes are beyond the scope of today’s post. Instead, I will refer anyone to my prior summaries linked above, or to HB 4121 itself (also linked above) for more information. Finally, I would recommend that anyone active in the space keep abreast of the ODA’s Resources, Bulletins and Trainings page, and sign up to receive program email updates.

The post Oregon Hemp Alert: New Vendor License Requirement Takes Effect July 1 appeared first on Harris Sliwoski LLP.

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Wednesday, June 26, 2024

California State Fair’s cannabis award winners 2024 and how to smoke them

The future keeps happening in California first—this time with world-class weed in the most mainstream setting of all: The state fair. In late June, the California State Fair started notifying the winners of its Cannabis Awards, organized by Embarc. The medal holders on the podium represent the peak of the craft of cannabis flowers, extracts, […]

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It is Legal, or Not? What to Make of All These DEA “Position” Letters

The Drug Enforcement Administration (DEA) seems happy to respond to public and private parties inquiring about the control status of various substances. DEA answers some of these inquiries more quickly than others, and the response letters are usually short and to the point. The letters typically come from the desk of Terrence L. Boos, Ph.D., Chief of the Drug & Chemical Evaluation Section. They often contain helpful diagrams of the chemical structures at issue, just above the signature blocks.

Last month, my colleague Griffen Thorne touched on one of these letters, which covered THCA. The title of that article was “Bad News for Intoxicating Hemp Products.” As you might infer, the letter concluded that hemp-derived THCA is a schedule I controlled substance, notwithstanding purported “loopholes” of the 2018 Farm Bill.

This blog post will not analyze whether DEA got it right or wrong in any of the recent letters. Instead, I’m going to talk about what the letters mean more generally, and how we should “weight” them. For context, below is a list of the letters I’m talking about, going back three years or so:

I may have forgotten or missed one or two recent letters. If that’s the case, feel free to drop me a line, or give me the business in the comments.

Anyway, the question for today is: “how much weight should we ascribe to these position letters from DEA? What are the legal ramifications of DEA writing these things?” The simplest answer I can give is that DEA’s views should be given significant weight. Relatively speaking, DEA’s pronouncements are a lot more authoritative than the pronouncements of someone like me, but less authoritative than those of a court.

To illustrate:

On February 16, 2024, I opined that THCA is not legal under federal law. What I think doesn’t matter, really, because I’m not in charge of anything. I’m just a lawyer who has studied these things. Other professional people (including friends of my law firm) have reached the opposite conclusion on THCA. Doesn’t matter.
On May 13, 2024, DEA opined that THCA is not legal under federal law. This is the same conclusion I had reached a few months prior. It doesn’t mean I was “right,” though. This is because DEA could also be wrong (and has been wrong before). Same with yours truly.
Someday, DEA might arrest someone for selling THCA products, in accordance with DEA’s position set forth in the May 13, 2024 letter. That person could fight back in court, arguing that DEA is wrong to consider THCA products controlled. A court would probably consider DEA’s views authoritative, to an extent, and grant those views some deference. It’s still possible that a court could rule against DEA, however. It wouldn’t be the first time.

A sort of narrower, more academic question might be: “are these DEA letters more or less authoritative than ‘interpretive rules’ by DEA on similar questions?” (To give you a flavor of what I’m talking about, here’s an interpretive rule from 2001, regarding THC products in schedule I.)

In my view, the answer to that question should be “no, these recent DEA letters aren’t more or less authoritative than interpretive rules.” This is because unlike proposed rules, interpretive rules are not binding. They don’t have the force of law, and they don’t require notice under 5 U.S.C. 553. Instead, interpretive rules are just DEA’s opinions on the record. They are like the spate of letters referenced above, all gussied up.

But, let’s get back to the question of DEA undertaking enforcement action, per its position in one of these letters. That’s what most people really care about!

A long time ago, I wrote a blog post called “Are CBD Food and Drinks Really Not Legal? Really?” In that post, I explored a similar question in the context of another agency, the Food and Drug Administration. The FDA took a position, outside of rulemaking, on the legality of CBD in food and beverages upon the release of the 2018 Farm Bill. I wrote in that post:

Someone could (and might) sue FDA if FDA were to take an enforcement action based solely on the fact that a food or beverage product containing Farm Bill hemp-CBD were sold in commerce. Would they win? I’m guessing not. But the question for the courts would be what level of deference to afford FDA, and the law is somewhat unclear on that today. Some commentators believe that Congress needs to clarify the issue, arising from a line of cases known as Chevron and Mead….

The Chevron and Mead cases have been around forever. Federal courts have used them for nearly 40 years and in more than 18,000 judicial opinions, to defer to an agency’s “reasonable interpretation of an ambiguous statute.” I’m sure agencies like FDA and DEA appreciate Chevron deference quite a lot. Recently, however, the doctrine has been challenged by a pair of pending cases before the U.S. Supreme Court. I don’t mean to be dramatic, but we should get a decision on those cases any day.

If the Supreme Court discards or weakens Chevron deference, the DEA letters would lose a bit of authority in my view. That said, the letters would still serve as valuable industry benchmarks, and remain more authoritative than opinions of someone like me, or anyone short of a federal court.

Things to watch for next are:

what the U.S. Supreme Court does in the above-mentioned cases;
what Congress does in any 2024 Farm Bill; and
what enforcement actions DEA takes, if any, on the substances it believes are controlled.

For now, I’m happy that DEA is willing to share its positions as a pen pal to industry, eschewing the stuffy rulemaking process for every minor cannabinoid (and magic mushroom spore). I also think that, notwithstanding the fact that people are e.g. selling THCA everywhere, folks should pay close attention to DEA’s reading of the law on these things. The Administration will get it right more often than not.

And even when not, being the test case is no fun at all.

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Tuesday, June 25, 2024

FREE Webinar Tomorrow, June 26th: Can the California Cannabis Industry be Saved?

California’s cannabis market is broken. Taxes are too high, local control has proved disastrous, the illegal market is growing and regulations are too burdensome. There are not enough retain licenses and too many cultivation licensees. Over the past few years, the situation has become so dire that many licensees have exited the industry, including some of the largest and most well-capitalized players in the state.

In this webinar, Griffen Thorne (Partner, Los Angeles) and Hirsh Jain of Ananda Strategy will discuss whether the California market is too far gone or whether it can be saved.

Specifically, Hirsh and Griffen will look at:

The history and complexity of California’s cannabis regulatory system and how the state is proposing even more onerous requirements on licensees.
California’s illegal market problems, breaking down California’s own data on enforcement efforts and the consequences of its lax enforcement policies.
The high rates of taxation at the state and local levels, and the massive unpaid tax obligations of numerous licensees.
How local control is suffocating retail expansion in California
Many disputes among licensees regarding payment for goods.
Some solutions that the state could employ to reduce the burden on licensees and promote the legal market.

Join us for this free webinar tomorrow at 12 PM Pacific.

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Monday, June 24, 2024

Vancouver weed visitor’s guide 2024

Vancouver is a global weed tourism hotspot waiting to happen. We found fire weed, great views, delicious eats, and a swanky smoking lounge—perfect for your next cannabis vacation.

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Friday, June 21, 2024

Leafly’s 5 top THC drinks of 2024

Find the best THC drinks of 2024. We reviewed popular THC beverages & chose what we think are the top picks for different needs & budgets.

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Works of Fire: America’s best cannabis for 4th of July 2024

With Red Bubblegum, White Mochi, and Blue Lobster.

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Thursday, June 20, 2024

Watch: A ‘water sommelier’ pairs joints, bongloads, and dabs with the right H20

Put down the Dasani, and step away from the bottle.

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Minnesota Social Equity Verification: Key Dates Start June 21

The Minnesota cannabis social equity initiative

As Minnesota continues to develop its legal cannabis industry, the Minnesota Office of Cannabis Management (OCM) has taken significant steps to ensure that the process is inclusive and equitable. One of the most notable advancements in this area is the recent update to the social equity application and verification process for cannabis licenses.

This advancement aims to address the harmful societal impacts of the War on Drugs, historical disparities, and ensure that those most affected by cannabis prohibition have the opportunity to participate in the new market. Historically, communities of color and economically disadvantaged groups have been disproportionately affected by cannabis prohibition. Recognizing this, Minnesota has committed to creating a more inclusive industry by providing these groups with enhanced opportunities to obtain cannabis licenses.

Just recently, Minnesota enacted amendments and modifications to their new cannabis law enacting a licensing preapproval and vetted lottery process for qualified social equity applicants. In addition to streamlining the application process, Minnesota has also introduced support services for social equity applicants. These services include business development training, mentorship programs, and access to financial resources. By providing these tools, the state hopes to empower social equity applicants to succeed in the cannabis industry.

Recognizing the importance of awareness and education, the OCM has established a campaign focused on outreach and education regarding the new and ever-evolving regulations surrounding cannabis licensing. These initiatives aim to inform potential applicants about the benefits of social equity verification and guide them through the process. This includes community workshops, online resources, and partnerships with local organizations.

Minnesota social equity verification requirements

Beginning on Monday, June 24, 2024, the OCM will begin the verification process for qualified individuals who want to be pre-approved for cannabis licenses.

Broadly speaking, to qualify for a social equity cannabis license under Minnesota regulations, an applicant must have been convicted of cannabis possession or sale, be a military veteran, or have worked for a farming operation. These specific requirements are explained in more detail below and can be found on the OCM website here with the required documentation for each category:

The applicant was convicted of an offense involving the possession or sale of cannabis prior to May 1, 2023;
The applicant had a parent, guardian, child, spouse, or dependent convicted of an offense involving the possession or sale of cannabis prior to May 1, 2023;
The applicant was a dependent of someone convicted of an offense involving the possession or sale of cannabis prior to May 1, 2023;
The applicant is a military veteran, including service-disabled veterans, or current/former members of the National Guard;
The applicant is a military veteran or National Guard member who lost honorable status due to an offense involving the possession or sale of cannabis;
The applicant has been a resident for the past five years in an area with:
1. High cannabis enforcement rates as determined by federal or state studies or data;
2. A poverty rate of 20% or more;
3. Median family income not exceeding 80% of the statewide median family income;
4. At least 20% of households receiving Supplemental Nutrition Assistance Program (SNAP) assistance; or
5. Populations that experienced a high level of vulnerability, according to the Centers for Disease Control and Prevention’s Social Vulnerability Index; or
The applicant has participated in farm operations for at least three years, providing the majority of day-to-day labor and management on a farm with gross sales between $5,000 and $100,000 in the previous year.

Key upcoming dates for Minnesota social equity applicants

On June 21, 2024, the OCM will host a training workshop from 4-6 pm at Sabathani Community Center Auditorium located at 310 E 38^th St. Ste. 200, Minneapolis, Minnesota 55409. Participants for the training can register here. For anyone unable to attend in person, the OCM will publish another recording on its website providing an outline of the verification process.

On June 24, 2024, the OCM will open the social equity verification process allowing participants to ensure they meet the social equity requirements. This process will end on July 10, 2024.

On July 24, 2024, those applicants that were verified as social equity applicants will be able to submit an application for cannabis license preapproval. Those license applications will then go through review and a vetting process and will be entered into a lottery to be held later this fall. This preapproval process window will close on August 12, 2024.

Conclusion

The OCM is moving swiftly in order to bring the Minnesota legal cannabis market online. In doing so, they are prioritizing social equity applicants and providing guidance and a preapproval vetting process for those applicants ready to apply. However, this process will require the submission of specific documents and evidence that the applicant meets the criteria set forth above, so it is best if applicants begin reviewing the documentation requirements now. Applicants should then start compiling those documents and getting their applications ready.

Be sure to review the OCM website for additional requirements and resources. They plan to publish additional materials in the coming weeks to assist social equity applicants through the process of obtaining a cannabis license.

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Wednesday, June 19, 2024

Celebrating Juneteenth

Our offices are closed today in commemoration of the Juneteenth holiday. In the past, we’ve used this occasion to highlight the need for criminal justice reform, inside and outside of the cannabis industry.

Juneteenth is also a day of celebration, to commemorate the liberation of enslaved people in the United States.

We hope you have the day off today! And that you have the opportunity to celebrate and reflect on the significance of our newest federal holiday.

We’ll be back tomorrow with our regular programming.

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Friday, June 14, 2024

Ohio legal cannabis buyer’s guide to 2024

What’s legal, where to buy it, what to smoke, and how.

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Thursday, June 13, 2024

Leafly Buzz: 14 hot California pre-rolls of Summer

Including Dunkz, Moon Valley Cannabis, and Humo.

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Wednesday, June 12, 2024

What Hunter Biden’s Verdict Means for Cannabis Users

I wrote about Robert Hunter Biden’s indictment for violation of federal gun laws in a post entitled “What the Hunter Biden Indictment Means for Cannabis Users” back in September 2023. On June 11, 2024, a jury in a federal district court in Delaware found Hunter guilty of three felony counts. Today I want to look at how this could affect cannabis users.

Cannabis legalization and gun control laws

Below is a list of prior posts from our blog on the intersection between cannabis legalization and federal gun control laws, which give a lot of background to what this post discusses:

Without rehashing these prior posts, the main issue is that federal law prohibits ownership or possession of guns by persons who are addicted to or unlawfully use controlled substances. This includes cannabis, even in states where it is legal, and even if it is for purely medical purposes. In fact, the ATF’s required form to purchase a firearm states this clearly.

In 2022, the US Supreme Court rendered a decision in New York State Rifle & Pistol Association, Inc. v. Bruen, which changed the tests courts use to determine whether laws infringe the Second Amendment.

Following Bruen, numerous federal court challenges have been lodged against the federal prohibition on gun possession or ownership by cannabis users. Many of these cannabis-related challenges have been successful. In fact, federal courts have already found different federal firearm restrictions unconstitutional, and the US Supreme Court is expected to rule on a similar challenge (not cannabis-related) this month.

In other words, it’s likely that in the next few years the US Supreme Court will consider an appeal regarding cannabis users’ gun rights. Based on my review of the current landscape of decisions, I believe the US Supreme Court would hold that cannabis users still have Second Amendment rights, but it would qualify that decision by allowing restrictions on possession by persons under the influence of cannabis.

The Hunter Biden matter

Now, how does this relate to Hunter Biden? Hunter’s case involved allegations that he was addicted to crack cocaine (not cannabis) when he purchased a firearm. Two of the charges related to false statements on governmental forms, and one related to possession of a gun in violation of federal law. As mentioned, the jury found him guilty on all three charges.

Once the Delaware court sentences Hunter, he is likely to challenge the above-mentioned federal laws on the grounds that they are unconstitutional under Bruen. While crack is obviously much different from cannabis, federal gun control laws treat all controlled substances the same. In other words, the law that Hunter was found guilty of violating would also apply to similarly situated cannabis users. Likewise, if the law is held to be unconstitutional with respect to drug users, it would likely apply equally to Hunter and cannabis users.

All that said, the difficulty for Hunter will be in the fact that he was charged for lying on a federal form. Even if the prohibition on gun ownership by drug users were held unconstitutional, there is still the problem that what he wrote on a federal form was not accurate. This is also an issue that some of the cannabis challengers could face as well.

What’s next for cannabis users and gun control laws

Ultimately, these federal challenges have a long way to go, and there is always the possibility that he is pardoned before an appeal is exhausted. That said, it’ll be interesting to watch folks from very different political persuasions linking up to challenge federal gun laws. As always, we’ll keep posting with more updates, so stay tuned to the blog.

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Tuesday, June 11, 2024

Grow award-winning autoflower seeds strains at home with Fast Buds

Fast Buds autoflower seeds are well on their way to redefining what you can expect from autoflowering strains worldwide.

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Five unique autoflowers from Royal Queen Seeds ideal for outdoor growing

See how these five unique autoflowers from Royal Queen Seeds can make this your best outdoor growing season yet.

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Harris Sliwoski LLP Welcomes Esteemed Litigation Team

We are pleased to announce the addition of an esteemed litigation team to the Oregon office. Matt Goldberg, Nicole Gossett-Roxbury, and Deb Fernando have joined our law firm from Lotus Law Group. They will continue to focus on high-stakes business and real estate litigation.

Their clients include business owners and operators, investors, financial institutions, and others. Their experience covers business and real estate transactions, trademark law, employment law, and regulatory matters.

Matt is licensed in Oregon, Washington, and New York. Nicole is licensed in Oregon. Deb is a certified paralegal. These accomplished professionals will add significant depth to the firm, including to its Cannabis Law practice group, distinguished as a national leader since 2010.

Vince Sliwoski, Harris Sliwoski’s Managing Partner, stated:

“We have worked with and across from Matt and his team since 2015, as peers, adversaries, and collaborators. Their work product and client advocacy are second to none. I’m so glad to have them on our team– and not to have to tussle with them ever again.”

Matt Goldberg, who will also serve as the firm’s first in-house general counsel, stated:

“We have long admired Harris Sliwoski for its sophisticated, innovative approach, and for its stellar reputation among clients and other lawyers. When we first considered combining our practice with another leading law firm, Harris Sliwoski was the first name on our wish list. We are thrilled to be joining Harris Sliwoski and we look forward to a great future for both the firm and its clients.”

Please find each individual’s bio available at the links below:

We are thrilled to have Matt and his group join our law firm, and we are looking forward to providing our clients with even better service going forward.

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Friday, June 7, 2024

A New Angle on Cannabis Banking Protections

Sometimes I’ll write about cannabis banking when I’m working on a project for a bank or credit union, but newsworthy developments on cannabis banking seldom seem to drop. Yesterday, however, we had a development worth covering: a Congressional Subcommittee added cannabis banking protections to a critical government spending bill. A GOP-chaired Subcommittee, no less.

Marijuana Moment ran a good story on the marked-up bill, which covers cannabis banking and other cannabis- and non-cannabis issues. You can view the bill and related items, here. The relevant language is at Section 134. It provides:

None of the funds made available by this Act may be used to penalize a financial institution solely because the institution provides financial services to an entity that is a manufacturer, a producer, or a person that participates in any business or organized activity that involves handling hemp, hemp-derived cannabinoid products, other hemp-derived cannabinoid products, marijuana, marijuana products, or marijuana proceeds, and engages in such activity pursuant to a law established by a State, political subdivision of a State, or Indian Tribe. In this section, the term ‘‘State’’ means each of the several States, the District of Columbia, and any territory or possession of the United States.

I have some fussy suggestions as to language choices here, but I like Section 134 overall. And I think it’s a good idea to wedge this into a spending bill, even if annual renewal would be required. Reasons include:

the SAFE(R) Banking Act has stalled out seven years running, and can’t get over the hump;
States and Tribes continue to launch, expand and refine cannabis programs;
the economic output of regulated marijuana continues to grow nationwide;
banking services (like actual, full-service offerings) are crucial on everything from bill-pay to physical safety;
once Congress approves a spending bill rider—particularly one that restricts spending—they tend to stick; and
as I’ve explained elsewhere, marijuana rescheduling won’t fundamentally change the status quo on cannabis banking.

Change is in the wind, though. Last month, I told American Banker that “[w]e saw a dramatic increase in banks moving into the space in the past 12 months…”. That was not just speculation. First Citizens Bank announced in January that it would expand its hemp banking platform into the cannabis/marijuana space (and FCB is the 15^th largest bank in the country, according to the Federal Reserve.) Federal data from last fall also shows a record number of banks active in the space. Anecdotally, we continue to spin up cannabis programs for credit unions here at the law firm, or help them expand offerings.

The question for today is whether more financial institutions would wade into the fray if this marked-up bill passes. I think they would, although this one lacks the springboard potential of SAFER as currently postured. SAFER wouldn’t be subject to annual renewal; but more importantly, it would also foreclose enforcement actions by the Justice Department. The Subcommittee’s marked-up bill does not and cannot do this, which would be duly noted by bank directors. This proposal would also be less impactful than an update to the old-as-dirt FinCEN guidance on BSA Expectations Regarding Marijuana-Related Businesses— assuming any update gave more latitude to financial institutions than the 2014 memorandum.

Anyway, yesterday’s rider is a new approach and worth a watch. We’ll opine further if it passes. In the meantime, check out our myriad of banking posts, but specifically the following:

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Thursday, June 6, 2024

Leafly’s top 6 CBD gummies of 2024

Find the best CBD gummies of 2024. Leafly reviewed popular CBD gummies & chose what we think are the top picks for different needs & budget.

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ILGM+ Phylos Bioscience help you find your Biscotti Bliss—June 2024’s Leafly HighLight

A double dose of Biscotti is just what your next sunny afternoon ordered.

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Study finds weed users get more active than abstainers

Pot correlates with increased light activities, not sloth

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Wednesday, June 5, 2024

Cannabis M&A: Protecting Against Undisclosed Liabilities

When someone buys a cannabis business, and not just that business’s assets, they essentially inherit all of its liabilities. And there are usually a lot.

If the business is in the midst of a lawsuit, owes back taxes, is behind on rent, etc., the buyer will need to deal with those problems on its own–unless the purchase agreement requires some form of assistance from the seller.

Smart cannabis business buyers spend a lot of time doing “diligence” on the target business either before signing a purchase agreement or before closing, in large part to flag potential liabilities. But in some cases, buyers fail to ask the right questions or sellers (whether intentionally or not) fail to disclose material information about the business.

We call these “undisclosed liabilities,” and if they are not properly addressed in the purchase agreement, they can lead to serious problems for the buyer. Below, I’ll identify a few common ways that buyers protect themselves from undisclosed liabilities.

Conducting thorough due diligence

You probably wouldn’t buy a car without test driving it, making sure title was clear, and maybe even having a mechanic check it out. So would you buy a business without making sure you weren’t walking into a minefield first? You’d probably be surprised at the amount of folks who would.

The first and best way to avoid undisclosed liabilities is to thoroughly diligence the target business. The diligence process usually involves lawyers sending written questionnaires to the seller’s counsel, seeking a host of information about the business.

A good diligence questionnaire will include information about its finances, debt, real estate, employment matters, litigation, corporate structuring and governance, intellectual property, owned and leased assets, licensing and regulatory matters, and so on. Increasingly they will include things like privacy law compliance and other “newer” legal concerns.

This is really only the start — the buyer’s counsel and tax/financial advisors will review many of the documents and flag concerns for the buyer. Buyers may also do things like physical inspections of the business premises or assets.

Concerns raised in the diligence process will drive negotiations with the seller and in some cases necessitate changes to the deal structure. In more extreme cases, a buyer may walk altogether.

In the next few parts of this post, I’ll address tools sophisticated buyers use to proactively mitigate liabilities that were not disclosed in the due diligence process.

Indemnification

One of the most common risk-mitigation strategies in business purchases is requiring the seller to indemnify the buyer in the event that the buyer suffers harm as a result of certain identified acts or omissions of the seller. These usually include inaccuracies in representations by the seller or breach of the purchase agreement by the seller.

For example, a purchase agreement may state that the seller must indemnify the buyer and company (as well as their affiliates) against harm they may suffer as the result of seller’s breach of a representation. Say there was a representation by the seller that the company owed no back taxes, when in fact it did and the tax collector came knocking, the buyer could require the seller to pay the back taxes and defend it in any tax proceeding.

Indemnification provisions can be incredibly complicated and heavily negotiated. For example, sellers will often push for a cap on their indemnification obligation, since after all, a seller wouldn’t want to end up responsible for paying more than they were paid in the deal to cover the buyer’s expenses. Buyers on the other hand may push for carveouts to seller caps in cases of fraud or concealment of material undisclosed liabilities.

Additionally, indemnification provisions only really work to the extent that the seller has money to actually indemnify the buyer. A good rule is to assume that once the seller is paid, it (and its money) will vanish from the face of the earth, leaving the buyer left holding the bag regardless of how well it negotiated an indemnification provision. Still, buyers have a few options to protect against this.

Offsets and holdbacks

One easy way (in theory at least) to protect against a disappearing seller is to ensure that money will be tied up post-closing. There are two main ways this typically happens.

First, buyers may establish a holdback of part of the purchase price to be held in a neutral escrow account for some period following the closing. For example, if the purchase price is $5mm, the buyer may insist that $750,000 is held for a year in an escrow account post-closing, and that any liability that arises during this time may be satisfied out of the escrow fund.

Second, where any part of the purchase price or consideration will be paid or granted post-closing, the buyer may include an offset provision similar to the escrow holdback. Rather than having a pot of money held in escrow, the buyer could simply deduct future payment. Where part of the purchase price is paid via a seller note or post-closing installments, offset provisions are common. But they can also be used against things like post-closing options, warrants, or earnout provisions.

Conclusion

Undisclosed liabilities are the bane of any sophisticated buyer’s existence. Thinking proactively about mitigation strategies early on can save buyers headache and financial misery down the road. Cannabis M&A is no easy task and buyers who address undisclosed liabilities head on will be in a lot better position down the road.

For more on cannabis M&A, check out some of our other posts below:

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Tuesday, June 4, 2024

How Rapid Relief Cooling Gel with CBG, CBD & THC nails the recipe for relief

Rapid Relief Cooling Gel from Rare Cannabinoid Company combines CBG, CBD & THC in a new formula to tackle muscle & joint discomfort.

The post How Rapid Relief Cooling Gel with CBG, CBD & THC nails the recipe for relief appeared first on Leafly.

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California’s Cannabis Lounges and Assembly Bill 374: Food, Fun, Weed

As California continues to pioneer in the cannabis industry, a new trend is taking the scene by storm: cannabis consumption lounges. These lounges are becoming the ultimate hangout spots, and the latest buzz is about adding food and non-alcoholic drinks to the menu. Let’s dive into what’s happening with consumption lounges in California and how they’re looking to integrate food and beverages for an even better experience, through proposed legislation known as Assembly Bill 374 (“AB-374”).

What’s a cannabis consumption lounge?

Think of a cannabis consumption lounge as the cool new spot where adults can legally enjoy cannabis products in a social setting. These lounges, unlike retail dispensaries, let you kick back and consume cannabis on-site, much like a bar does with alcohol. Whether you’re in West Hollywood or San Francisco, some cities are all in on this idea, while others are still warming up to it.

Cannabis-friendly cafés: already a thing in California

Yes, cannabis-friendly cafés are already a reality in California! West Hollywood started the trend in 2018 with its cannabis lounge program. Imagine enjoying tacos, burgers, or wings while choosing from a menu of pre-rolls, edibles, infused beverages, or concentrates. These cafés are unique because they operate with special permissions: they’re part dispensary and part consumption lounge, thanks to both state and city authorizations.

New bill to expand food sales for dispensaries

Exciting news: a new bill just passed in California’s lower house that could change the game for cannabis dispensaries. That bill is AB-374 and you can view it here. If AB-374 becomes law, these spots will be able to sell food and non-alcoholic drinks alongside their cannabis products. This will not only create new opportunities in the cannabis space but will go along way towards normalizing its use and enjoyment. Picture a cozy café where you can enjoy a coffee or a sandwich while indulging in your favorite cannabis goodies, just like the famous cafés in Amsterdam.

Assemblymember Matt Haney is the force behind this bill. He pointed out the missed opportunities under the current rules, which prohibit dispensaries from selling anything other than cannabis. His new bill includes strict regulations ensuring that cannabis and food areas are kept separate to prevent any contamination. Proposed regulations include prohibiting customers or employees from smoking or vaping cannabis products in food preparation, food storage or washing areas, and requiring non-cannabis food and beverages be kept separate in order to prevent contamination. The added language remedies prior concerns by California’s Governor, who vetoed an earlier version of the bill.

Come for the wine, stay for the cannabis

California’s push to expand food sales in consumption lounges marks a big step towards normalizing cannabis. By blending cannabis with food culture, the state aims to boost local economies and create a unique draw for tourists, much like its famous wine industry. Haney captures this vision perfectly: “People come to California for our wine industry; they can come for our cannabis as well.”

California’s consumption lounges are poised to become the next big thing in social cannabis use. So, whether you’re a local or a tourist, get ready to enjoy a more vibrant and social cannabis experience in the Golden State!

We will continue to track developments with cannabis consumption lounges and AB-374. In the meantime, feel free to reach out to our California cannabis attorneys with any questions.

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Monday, June 3, 2024

Bad News for Hemp THC Beverages in California

At some point in the last few years, people seemed to realize that getting a cannabis (marijuana) license is not cheap or easy, and that it’s a whole lot easier to sell intoxicating cannabinoid products. You’ve probably read some of our posts on like THCA or delta-8 products, for example. Another extremely popular alternative has been hemp THC beverages. But that may be starting to change, at least in California.

When we talk about hemp THC beverages, we mean beverages containing hemp-derived delta-9 THC. But wait, you may be asking, “doesn’t federal law only allow for up to 0.3% THC, so wouldn’t these products by definition not be intoxicating?”

The answer is yes and no. There is a federal law cap of 0.3% THC. But, hemp THC beverages can be intoxicating without hitting that threshold. A hemp THC beverage with 5 or 10 milligrams may be intoxicating, and depending on the product’s overall weight, may end up being less that 0.3% THC.

So based on this “loophole,” you can find hemp THC beverages all over the place. But that may not be the case for too long in California.

In April 2024, Governor Gavin Newsom issued a directive to the California Department of Public Health (CDPH) and Alcoholic Beverage Control (ABC) to take action to ensure that hemp products sold in California are lawful. His directive, styled “California Takes Action to Protect Youth from Illegal Hemp Products,” proclaims:

Mislabeled and misleading products do not belong in the marketplace—especially when they put our kids’ health and safety at risk… Today, the state is taking action to protect Californians, especially our kids, as we work to further close loopholes and increase enforcement to prevent children from accessing hemp and cannabis products.

Today’s notices come after a number of highly intoxicating hemp beverages have been seen in retail settings across the state – which could lead to them dangerously winding up in the hands of young Californians. Hemp products, which are separately regulated from the legal cannabis market, are required to comply with a number of consumer safety laws, including strict labeling requirements. Distributing or selling products that do not meet these requirements is a crime, and can result in the loss of an applicable license.

Concurrently with Newsom’s directive, CDPH and ABC issued their own general warnings to licensees concerning purportedly illegal products, here and here respectively.

On May 30, 2024, the California Department of Public Health (CDPH) issued a warning to consumers not to drink Mary Jones brand hemp-infused sodas because they allegedly contain delta-9 THC isolate. According to CDPH, this is a problem since, under state law, “hemp products” are defined as products that do not have THC isolate as an ingredient.

CDPH’s announcement is likely to have a chilling effect on the hemp THC beverages industry in California, as it shows that the agency views products it claims contains isolate THC as problematic. It remains to be seen whether it will take any other actions besides its May 30 warning.

Additionally, it remains unclear whether CDPH will take action against companies selling hemp THC beverages made without THC isolates. State law gives CDPH and other agencies a lot of power to go after companies that sell “adulterated” or “misbranded” products, and both of these definitions can be stretched very far regardless of the source of THC.

Also for what it’s worth, under state law, “THC” is defined to include:

(1) Tetrahydrocannabinolic acid.

(2) Any tetrahydrocannabinol, including, but not limited to, Delta-8-tetrahydrocannabinol, Delta-9-tetrahydrocannabinol, and Delta-10-tetrahydrocannabinol, however derived, except that the [CDPH] may exclude one or more isomers of tetrahydrocannabinol from this definition . . . .

(3) Any other cannabinoid, except cannabidiol, that the [CDPH] determines . . . to cause intoxication.

As you can see, it’s not only delta-9 THC isolate that could be a problem, but potentially any intoxicating cannabinoid that CDPH takes issue with.

As an aside, you may be wondering about federal law issues relative to hemp THC beverages in light of the recent proposed amendments to the upcoming 2024 Farm Bill that restrict intoxicating cannabinoids. I wrote about that amendment here, if you’re not familiar.

The amendment doesn’t specifically set any kind of restrictive milligram cap on hemp THC beverages that would effectively make them unlawful if intoxicating. However, what it does do is exclude from the definition of “hemp” products that contain “quantifiable amounts” of THC or other intoxicating cannabinoids.

What “quantifiable amounts” means is left up to federal regulators, so it’s entirely possible that the feds later adopt regulations that effectively prohibit intoxicating hemp THC beverages.

All of this is to say that for the time being, there is a lot of unknown for the hemp THC beverage industry in California and federally. Stay tuned to the Canna Law Blog for more updates.

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