In the past two weeks, the SEC has temporarily suspended two marijuana stocks that trade on the OTC Markets. The suspensions lasting until June 5, involved, respectively, a questionable press release concerning a proposed acquisition and a lack of information provided to investors concerning the company’s controlling interests. While specific to these two companies, it is possible that the SEC may apply more careful scrutiny concerning publicly-traded cannabis-related businesses in the future.

The Oregon Legislature recently passed Senate Bill 1057, which currently sits on the Governor’s desk awaiting her signature. The bill primarily addresses the Oregon Liquor Control Commission’s (OLCC) control over the state’s medical cannabis program and includes seed-to-sale tracking requirements for cannabis businesses. Two notable provisions would affect adult-use cannabis businesses operating in Oregon:

Regulating Immature Plants

SB 1057 removes a Measure 91 restriction on the OLCC regulation of immature plants, which are any plants that are not flowering. (The term flowering is not defined by statute.) ORS 475.070(3)(B) currently limits OLCC control over (i) the number of immature plants possessed by a producer, (ii) the size of the grow canopy a producer uses to grow immature plants, and (iii) the weight or size of shipments of immature plants made by a producer.

Section 56 of SB 1057 will remove these restrictions on OLCC regulation of immature plants and immature plant canopies. Section 57 will amend ORS 475B.075 such that the OLCC will be required to regulate both immature and mature plant canopies and to take into consideration the market demand for adult-use cannabis in the state and whether the availability of adult-use cannabis is commensurate with market demand.

Even without SB 1057, the OLCC is obligated to regulate mature plant canopies to ensure a balance of supply and demand. SB 1057 expands on the OLCC obligation to regulate both immature plant canopies and mature plant canopies.

While the reasoning for expanding the OLCC’s control over immature plant canopies remains unclear, the likely explanation is that the state wants additional control and oversight to avoid conflict with the 2013 Cole Memo. A priority of the Cole Memo is to prevent diversion of cannabis from states where it is legal to other states.

The OLCC cannabis tracking system (CTS) does not currently require that producers track immature plants. The published FAQ states that individual plants must be tracked once they reach 24 inches in height, and immature plants may be included in a larger lot under a single tracked identification. Therefore, CTS is not a true “seed-to-sale” tracking system and arguably permits diversion of products grown by licensed producers to the gray market. While licensed producers may dislike additional OLCC oversight, reducing the amount of product available on the grey and black markets would likely push more adult users to the regulated market.

Disclosing Financial Interest Holders

The second notable provision of SB 1057 is located in section 8.  This provision gives the OLCC the explicit authority to require a licensee or applicant to disclose the name and address of each person that has a “financial interest” in a licensed business, as well as the nature and extent of that interest. This is of particular interest given the broad authority already granted to the OLCC in ORS 475B.025. The existing statute grants the OLCC authority to grant, refuse, suspend or cancel licenses. The existing statute also includes the authority to adopt, amend or repeal rules necessary to carry out the intent and relevant statutory provisions.

OAR 845-025-1030 details the Oregon license application process. Among the requirements, an applicant must include the names and other required information for individuals with a financial interest in the applicant but who are not an applicant under the rules. This begs the question, “Why does SB 1057 grant the OLCC statutory authority to obtain this information?” The logical answer is that the OLCC believes either it may not have the regulatory authority, or that one or more applicants have questioned the OLCC’s authority. Regardless of whether the Governor signs SB 1057, prospective applicants should be prepared to disclose all individuals that have a financial interest in the applicant.

Adult consumption of marijuana for medical or recreational purposes is legal in many states, including Washington State.  Consumption also effectively is decriminalized (but still illegal) in British Columbia, Amsterdam, and other cities and provinces. Yet foreign citizens who have ever smoked pot or consumed any type of cannabis — even where it is legal — can be caught in a trap when they come to the U.S. border.

When a foreign traveler flies, drives or sails into the United States, an Immigration Officer with Customs & Border Protection (CBP) under the Department of Homeland Security may inquire about marijuana use. They may ask questions, or, if the traveler permits access to cell phones or other technology devices, they may draw inferences from information on the technology, including from photographs or Facebook or other social media posts. Vacation photos, including visits to Seattle that feature the traveler posing in front of retail marijuana shops, can result in several hours in a CBP detention room, followed by denial of entry into the United States.

Under U.S. immigration law, if the foreign traveler admits to use of marijuana that is in any way unlawful, the person will be refused entry.  This rule applies even if the consumption was outside the United States (in a country where such use is illegal) or inside a state within the United States where consumption was legal under state law.  And don’t expect the CBP officer to cut you any slack; he or she simply has no discretion to ignore admitting to the facts of an illegal act, even if made under duress. The person will be found inadmissible and removed from the U.S. as soon as possible. The bar is “permanent,” unless the person is granted a waiver of inadmissibility.

There are three factors weighed in a waiver decision:

(1)       The risk of harm to society if the applicant is admitted into the U.S.;

(2)       The seriousness of the prior violation; and

(3)       The reasons for wishing to enter the country.

Canadians can make a waiver application at a U.S.-Canada port of entry. Citizens from other countries apply through a U.S. consulate or embassy outside the United States. The waiver process can take the better part of the year, but, if successful, should result in a waiver. Even then, the waiver is only good for five years though it can be renewed (which is a recent improvement over the prior one-year waiver period).

When a CBP Immigration Officer asks questions, your answers must be truthful (and no, there is no exception for “but I didn’t inhale”). However, a foreign traveler can decline to answer a question — and also can refuse to relinquish a cell phone or to grant social media access. Foreign travelers declining to answer are best served by being polite and as composed as possible. The Immigration Officer’s response may be, “I guess you’re not coming in today.”  However, a temporary delay is almost always a more favorable result than a permanent bar, and allows time to contact an immigration lawyer to assess options or to apply for a waiver before your next visit to the United States.

On May 10, 2017, Attorney General Jeff Sessions issued a memorandum establishing revised charging and sentencing policy applicable to the Department of Justice (the “Charging Memo”). The Washington Post quotes the Attorney General as saying “We are returning to the enforcement of the laws as passed by Congress, plain and simple.” Further, “These are drug dealers, and you drug dealers are going to prison.” The Charging Memo advises that prosecutors should charge and pursue the most serious, readily provable offense. The policy directs prosecutors to consider whether an exception is justified.  All exceptions require documentation for the exception reasoning and approval.

The Charging Memo also requires that prosecutors disclose all facts that affect sentencing guidelines or mandatory minimum sentences. Prosecutors should recommend sentencing within the applicable advisory guideline range. Prosecutorial discretion advising a sentence outside the range also require documentation and approval.

The direct impact of the Charging Memo on state-regulated adult-use cannabis is unclear. There is probably little immediate impact to state-regulated medical cannabis programs because of the Rohrabacher-Blumenauer amendment to the FY 2018 appropriations bill. See our earlier coverage here.

The Charging Memo states that any inconsistent previous policy is “rescinded.” It footnotes other policy-oriented memoranda issued during the Obama presidency, but notably does not reference the 2013 Cole Memorandum. As of the date of this post, the Cole Memo remains posted on the DOJ website. Remaining on the website provides little comfort because the two footnoted memoranda, “Guidance Regarding § 851 Enhancements in Plea Negotiations” and “Department Policy on Charging Mandatory Minimum Sentences and Recidivist Enhancements in Certain Drug Cases” both remain posted. Further, the DOJ webpage for former Attorney General Eric Holder’s Smart on Crime initiative notes that information may be outdated. Therefore, remaining on the website should not imply that any particular document reflects current policy.

The Cole Memo states that it applies to all federal enforcement activity, including civil enforcement and criminal investigations and prosecutions, concerning cannabis in all states. Some careful readers might conclude that the Cole Memo is arguably inconsistent with the Charging Memo. Specifically, the Cole Memo provides that prosecutors should use discretion in using its enforcement resources, and consider whether a cannabis operation is compliant with state law consistent with the outlined enforcement priorities. Notably, even the Cole Memo explicitly states that individuals and businesses cannot rely on it to avoid investigation or prosecution, even in the absence of the enforcement priorities.

At a minimum, the recently released Charging Memo reminds us all that the prosecutorial discretion framework outlined in the Cole Memo could face similar “reconsideration” by the new Attorney General. At the same time, it is inconceivable that this new guidance simply overlooked its impact on state-legal cannabis regimes. It is possible that the Charging Memo’s silence with respect to the Cole Memo is positive sign instead of a warning shot, but only time will tell.

Lane Powell supports the Cannabis Investor Network (CIN) in Seattle.  The mission of CIN is to connect accredited investors with state-legal cannabis businesses that need additional capital.  Lane Powell hosted the inaugural event in our Seattle office earlier this year with about 40 guests, and hosted the second event last night with about twice that number.  Pitches from several segments of the cannabis industry were very well received and everyone seemed to welcome the opportunity to connect with other business people in the industry.  CIN is based in Seattle and open to Accredited Investors and cannabis businesses seeking capital.

How it works:

Those interested in pitching their company to the Cannabis Investment Network begin by submitting their application and materials online through this Deal Funding page. Companies must be beyond the idea phase though they need not have revenue. Candidates for presentation should submit a comprehensive pitch deck, which includes your business plan, financial projections and other relevant company background and information.

Following submission of your application and supporting documentation, CIN will review and evaluate your proposal to ensure it has everything needed to make an informed decision. During this review process, CIN representatives will be in contact with you to source additional details about your company, the management team, operations, marketing plans and financial projections. Once CIN has what it needs and thinks your company would be a good fit to present to its Investor Network, CIN will schedule an in-person meeting or phone screen with you where you walk through your pitch deck.

After the screening meeting, if CIN decides to proceed, CIN will schedule your company to present at an upcoming meeting.

At the investor event, you will be given approximately ten minutes to present and five minutes for Q&A. You should expect that you will be participating with several other companies at the meeting.

In the past five years, twenty-nine states and the District of Columbia (DC) have voted to legalize medicinal marijuana; and seven states and DC have legalized recreational marijuana use.  The federal government has historically classified cannabis, whether in the form of marijuana, hashish or hash oil, as an illegal controlled substance.  However, in 2011, the Department of Justice (DOJ) changed its policy regarding the enforcement of the Controlled Substances Act in states where marijuana is legal.  The Cole Memo explained the DOJ’s new policy of not prosecuting or seizing assets from marijuana businesses and users that complied with state law.

Continue Reading Medicinal marijuana patients’ protection from federal enforcement extended through the end of the fiscal year on September 30.

On April 28, 2017, the Oregon Liquor Control Commission (OLCC) approved rules allowing licensed recreational cannabis growers to also grow for Oregon Medical Marijuana Program (OMMP) cardholders.  The OLCC’s authority to regulate canopy sizes, including the authority to shrink sizes, is found in ORS 475B.075(c).  The rules go into effect May 1, 2017, and will meet the compliance guidelines of the federal Cole Memorandum.

This is a big and welcome development for OLCC licensed recreational cannabis growers.  With agreement between the producer and cardholders, what the new Oregon rule means is that licensed recreational producers will be allowed to grow additional canopy above what their recreational grow license allows.

Under the new bump-up rules and upon cardholder consent, 25 percent of the medical yield may be sold by the producer to both OMMP dispensaries and processors.  Of course, all such production and transfer of excess product must be tracked in the Cannabis Tracking System (CTS).

In order to qualify for bump-up registration, a processor must submit a control plan to the OLCC describing how the producer will segregate the medical canopy and the recreational canopy, segregate harvested usable cannabis from the medical and recreational canopies, and provide the OLCC with copies of all medical patient agreements.  Here are some rules that the licensed recreational producer must bear in mind if it seeks the benefit of the bump-up registration opportunity:

  • Limited to agreements with twenty-four (24) patients during any one calendar year.
  • Canopy limits of 240 sq ft per patient for outdoor producers — 3,360 in total and 60 sq ft per patient for indoor producers — 840 sq ft in total.  Note:  the bump-up rules do not address their application to mixed-production producers.
  • Transfer of excess product must be tracked in the Cannabis Tracking System (Metric).
  • Limited to transferring three (3) pounds of usable cannabis to each patient named in an agreement, and each patient not named in an agreement.
  • Transfers to a registered processing site or registered dispensary are limited to 25 percent of the total annual yield from the producer’s medical canopy.
  • Must notify the OLCC upon termination of a patient agreement.

In sum, bump-up rules allow licensed recreational producers to expand sales — with cardholder agreements — to OMMP dispensaries and processors.

Oregon Gov. Kate Brown recently signed into law Senate Bill 863. The bill attracted bi-partisan support as it moved through the legislature and is well intended. The bill protects consumer names, addresses and other personally identifiable information. Patrons of adult-use cannabis retailers in Oregon no longer have to worry about whether or not their information will be recorded or transmitted to a third party. The obvious benefit to consumers is that their personally identifiable information is not available to unscrupulous persons or government bodies. Maintaining privacy in the face of potential federal investigations sometime in the future is a welcome development.

Continue Reading Chaos Theory, the Butterfly Effect and One More Banking Hurdle?

The regulated cannabis industry is growing exponentially. Regulators, with the help of industry leaders and advisors, are demanding that the industry “grow up” and embrace the realities of functioning in a highly-regulated environment. Adolescent behavior will not be tolerated.

The OLCC is responsible for limiting the size of cannabis canopies. The term canopy is defined as “the surface area utilized to produce mature plants calculated in square feet and measured using the outside boundaries of any area that includes mature marijuana plants including all of the space within the boundaries.” The “square footage of canopy space is measured horizontally starting from the outermost point of the furthest mature flowering plant in a designated growing space and continuing around the outside of all mature flowering plants located within the designated growing space.” Therefore, canopy limitations apply to mature plants located within a two dimensional space.

Continue Reading Oregon Cannabis Producers Need to ‘Grow Up’ and Respect Boundaries

Next month, voters in five more states will decide whether to legalize recreational marijuana. As reported by The New York Times in an insightful article on this issue, some legalization advocates hope a (green) thumbs up from voters in these states (California, Massachusetts, Maine, Arizona and Nevada) will blow enough smoke in the face of “the war on marijuana” to help bring about nationwide legalization. In fact, the lieutenant governor of California is quoted in the article as believing that legalization in California’s ginormous economy will “put more pressure on Mexico and Latin America” to also consider legalization.

Continue Reading If More States Vote ‘Green’ This November, Some Believe It Could Be ‘The Beginning of the End of the War On Marijuana’