Cannabis investments are difficult enough when the investor is a U.S.-based person or entity. But things can get immensely more complicated when foreign investment is on the table. Today I want to highlight some of the top considerations for foreign investors and U.S. cannabis companies alike.
1. Legality could cause serious headaches
To this day, cannabis remains federally illegal. State legality has zero effect on federal law. Even the possible rescheduling to schedule III of the Controlled Substances Act (CSA) will not make cannabis federally legal. Things are clearly a mess.
In our cannabis team’s experience, a huge number of foreign investors do not appreciate the nuances between state and federal law and how it could effect them. For example, federal tax laws are unforgiving and don’t allow standard deductions for marijuana businesses. Additionally, federal illegality means that businesses will be siloed without interstate commerce, can’t get access to banking, can’t get access to basically anything for market rate, and so on.
All of these things mean that investments are simply unlikely to net big returns. Sadly to say, lots of investors end up writing off their investments. While federal legality alone isn’t the only reason that businesses, and by extension foreign investments, fail, it’s certainly a big one.
2. Cannabis investment may not be compatible with home country laws
This is actually probably more important than point 1. Cannabis is still illegal in most places in the world. There are still places where possession of cannabis can lead to the death penalty. While possession in a such a country is different from investing into the U.S., the governments in those countries may not see eye to eye, and such investments could lead to a host of different penalties. I’ve spoken with attorneys and business people from other countries who have said that foreign investment directly into a cannabis company is simply not possible.
What this can often lead to is investment into adjacent or ancillary companies in overly complicated deals. And when something is ancillary to the industry and/or a deal is overly complicated, netting a healthy return on investment is even more unlikely.
3. The cannabis industry and immigration law do not mix
Probably the first issue that comes up when looking at foreign investment is immigration and visa status. Immigration law is the province of the federal government. That means that it does not mix well with cannabis. If you’ve been in this space long enough, you’ll have heard of things like denial of naturalization petitions, denial of visas, arrests, and even lifetime bans on entry into the states. So for foreign investors who plan on relocating to the U.S. or even visiting to see the company they are investing in, there are huge risks.
4. Disclosure will likely be required
All states with legal cannabis markets require disclosure of certain people affiliated with a cannabis business. In many states, this includes investors, lenders, or people with other financial interests. Sometimes, the disclosures can be relatively benign, and in other cases much more aggressive.
For reasons expressed in points 2 and 3 above, a lot of foreign investors aren’t exactly thrilled to learn that they have to give personal data (and maybe undergo background checks) over to a state agency. This is yet another reason why foreign investments are often made into ancillary companies — to avoid disclosures. But even that isn’t always likely to fix the issue, and again, overly complicated investments into ancillary companies aren’t necessarily great.
5. Investment targets may get things wrong
Foreign investors often make a critical mistake in assuming that their targets know what they are doing. I’m not talking about operational issues — though a lot of companies clearly need help there — but about legal structures. It’s not unheard of for an investor to want to invest into a company that promises something it legally cannot do — like sell stock to a foreign investor in a state with a residency requirement. Yet things like this do happen from time to time, and once a foreign investor gives money over, it’s a lot harder to get it back.
Foreign investors who know what they are doing usually work with lawyers or other professionals experienced in their target jurisdiction, not only to diligence the target’s operations, finances, etc., but also to make sure that the fundamental aspects of the investment won’t trigger massive legal liabilities.
For some of our older posts on foreign investment in the U.S. cannabis industry, see below:
- Foreign Investment in U.S. Cannabis: A Continuing Love/Hate Relationship
- A Gray Area: Foreign Investment in California’s Cannabis Industry
The post Foreign Investment in U.S. Cannabis: Five Key Considerations appeared first on Harris Sliwoski LLP.
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