SACRAMENTO, Calif., June 29, 2020 -PRESS RELEASE- The three state cannabis licensing authorities of California announced today that businesses with state commercial cannabis licenses expiring between July 1, 2020 and August 31, 2020 may request 60-day deferrals of their license fee payments. This allows for fee deferral financial assistance to be provided to additional licensees.
The license fee deferrals are intended to provide immediate financial assistance to state cannabis licensees impacted by COVID-19. Though deemed an “essential business” under Executive Order N-33-20, the cannabis industry is excluded from federal or banking-dependent assistance for small businesses, due to cannabis’s status as a Schedule I controlled substance federally.
“We hope that today’s announcement will provide assistance to the industry as we continue to work together to address the challenges created by the pandemic,” said Lori Ajax, chief of the Bureau of Cannabis Control.
The Bureau of Cannabis Control (BCC), California Department of Food & Agriculture (CDFA) and California Department of Public Health (CDPH) are currently accepting requests for fee deferrals. Refunds will not be given for fees that have already been paid. Additional fee deferrals are not available for licenses that expired before July 1, 2020. License fee payment due dates for fee deferrals already granted are not extended.
A licensee who is unable to comply with a licensing requirement due to the pandemic may submit a disaster relief request to their respective licensing authority. To provide immediate assistance to licensees, licensing authorities have been providing relief from certain regulatory provisions unrelated to fees since the time of the first stay-at-home orders.
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Foreign Investment in U.S. Cannabis: A Continuing Love/Hate Relationship
The U.S. cannabis industry attracts all kinds of entrepreneurs and investors. That has been true since Colorado and Washington legalized cannabis for adults 21 and up back in 2012, and since other states began creating comprehensive licensing regimes. The ever-emerging nature of the industry and its state-by-state quilt of regulations creates all kinds of business development and investment opportunities that most cannabis businesses hope culminate in either a very nice exit once our federal government (hopefully) legalizes/deschedules cannabis altogether, or that results in the ability to really compete long-term as interstate commerce opens up and serious, large-scale competition moves into the space when federal prohibition falls.
Foreign investors are not immune to the charms and allure of cannabis. And where only 11 states have legalized cannabis for adult use–some with extremely competitive licensing regimes– the appeal of cannabis increases exponentially for investors still looking to be early movers in the space. Additionally, there’s been a pivot in the investor scene of late where a lot of the fast, reckless money has left the space after significant bouts of mismanagement at larger cannabis companies and with some multi-state operators (generating certain vulture investment opportunities), so investors are really getting wise to the accordant pitfalls of cannabis (which are still many).
Foreign investors though have a special set of issues to deal with when it comes to cannabis, and they don’t necessarily stem from state law licensing issues. Mainly, the gorilla in the room is federal law, which is significantly more severe on foreign investors where, in addition to violations of the federal Controlled Substances Act (“CSA”), immigration consequences are undoubtedly worse in some ways.
Even though the Department of Jusice (“DOJ”) issued the now-rescinded Cole Memo in 2013, outlining various enforcement priorities for the DOJ in states with cannabis legal reform while basically articulating a “stand down” position, that memo didn’t discuss anything around foreign investment in cannabis. In fact, no federal guidance from the DOJ has ever done that. At the same time, the Department of Homeland Security (“DHS”) has taken a hardline stance of enforcement against foreign participation in cannabis (including even ancillary business investment), and it shows no sign of relenting anytime soon.
Any direct or peripheral involvement in the U.S. cannabis industry, whether ancillary or direct, is ultimately at odds with our immigration laws. Specifically, where a consular officer or an officer of the DHS has reason to believe that the foreign national is or has been an illicit trafficker of any controlled substance as defined in the CSA, or attempted to do so, that individual may be determined to be inadmissible into the U.S., which equates to a lifetime ban.
Similarly, pursuant to the Immigration and Nationality Act (“INA”), a foreign national is inadmissible for knowingly aiding, abetting, assisting, conspiring, or colluding with others in the illicit trafficking of a controlled substance. Even the spouse or child of the foreign national found inadmissible under the INA is also inadmissible into the U.S. if they have, within the previous 5 years, obtained any financial or other benefit from that illicit activity, and knew or reasonably should have known that the financial or other benefit was the product of such illicit activity. Where the state-by-state cannabis trade remains federally illegal, any foreign investment or ownership in a cannabis business is illicit activity that violates the INA.
The legalization of cannabis in Canada also seemed to put U.S. Customs and Border Protection (“CBP”) in a frenzy back in 2018. CBP, which is part of the DHS, and whose officers determine who can and cannot enter the U.S., announced in 2018 that Canadian citizens cannot come to the U.S. to participate in the licensed cannabis industry. CBP subsequently reiterated in a 2018 teleconference that foreign national investors who have knowingly financed and promoted the growth of the cannabis industry will be denied entry and could even get a lifetime ban. Additionally, the U.S. Customs and Immigration Service announced in 2019 that participation in the licensed cannabis industry can lead to a finding of lack of good moral character when applying for naturalization.
In the end, until citizenship is secured, non-immigrants may be denied entry and given a lifetime ban, and permanent residents may also be denied entry and ordered removed from the United States, for owning or financing a state-licensed cannabis business. And if you enter the United States for purposes of conducting commercial cannabis activity and you mislead CBP officials (which is probably a common practice at this point), you can also face these extreme consequences.
If you’re a foreign investor or owner in a cannabis business or planning to be and you’ve gotten comfortable with the above risks, it’s also important to note that if you do skirt the Feds, you may be dealing with a ticking time bomb anyway where the states and the Feds routinely share information (willingly or otherwise) about cannabis businesses and their owners and investors.
Most states allow foreign investment in cannabis, and only a few have residency requirements or other barriers to entry that would prevent a foreigner from owning or investing in a cannabis licensee. The main issue is that with most states any owner or financier is going to have to go on record with regulators regarding their involvement with the business, and in most of those states any kind of meaningful ownership or control is going to lead to background checks with the Federal Bureau of Investigation (at minimum). This is just the tip of the iceberg regarding information sharing between the Feds and the states when it comes to cannabis licensees (access to financial institutions via the FinCEN guidelines is another popular pathway for the Feds to know who exactly is involved with these businesses at all times).
The bottom line is that no federal agency has issued guidance that would somehow outright permit or look the other way regarding foreign direct investment or ownership in cannabis businesses in the U.S. What we do have is a hard nosed reality between DHS and CBP that puts foreigners in the crosshairs of significant consequences for supporting the cannabis industry financially or otherwise (and of course there’s the issue of bringing cannabis-derived funds back into the investor’s country of residence). This dynamic probably won’t change anytime soon unless and until we have meaningful legal reform at the federal level, which is also probably a long way’s off at this point. So, foreign investors looking at cannabis should definitely proceed with extreme caution (if at all) and take the time to really understand the myriad and unique risks posed by participating in the industry.
Cannabis Investment Basics: Debt v. Equity
Towards the end of 2019, it seemed that cannabis investments had all but dried up. Today, our cannabis lawyers are seeing a huge uptick in investment transactions of all kinds in cannabis and hemp businesses. With investments on the rise again, we plan to do more posts on various legal aspects of cannabis investments. At the outset, it’s best to understand some fundamentals, and the best place to start is looking at the question of debt vs. equity.
It is extremely common for cannabis businesses (and especially startups) to raise capital through issuing equity (i.e., stocks in a corporation or membership interest in a limited liability company, or “LLC”). Typically, startups seek to offer a significant chunk of equity in exchange for a large monetary investment that can be used to cover initial operating or startup costs (think of things like costly tenant improvements that virtually all cannabis licensees are required to make in order to get a permit and start operating). Generally, these equity offerings are of a not insignificant amount, and we’ve seen a lot of businesses offer close to half of the equity in the business to an investor. This makes sense from a common-sense point of view as investors in startups probably don’t want to drop half a million to get a 3% stake.
Another alternative is debt. Cannabis businesses can take out loans without issuing any equity to third parties, leaving the founders in the driver’s seat of the business. Lenders may be less willing to provide large loans to startups as they don’t get anything in return except a promise to be repaid (and there’s always a risk that repayment may never happen for a business that doesn’t even have permits yet). It’s therefore very common for lenders to ask for something additional besides just a promise to repay: a security interest in some asset of the company (like real property, tangible assets, or in some cases even things like IP). It’s also very common for lenders to require corporate or personal guarantees where third parties promise to pay the debt of the borrower in the event of a default. Debt can often be a less-attractive method of raising capital for startups. Founders may be rightfully worried about offering security interests and personally guaranteeing large debt. Moreover, loans that require immediate repayment with large amounts of interest may not be viable for businesses that aren’t yet operational.
There are some hybrid methods of fundraising that cannabis businesses commonly employ. One of the most common methods is convertible debt, which basically is a loan that converts into equity upon the occurrence of a future event. The business getting the loan will issue a promissory note that can be converted into equity. Convertible notes often include complex formulas for how debt converts into equity, and parties can freely negotiate how and when the debt can convert, and there are a lot of complex legal and non-legal terms that both investors and startups should consider when entering into a convertible note arrangement.
For cannabis businesses seeking money from third parties, serious consideration should be made as to the type of investment transaction they will use and what is best–giving up a stake in the company or taking on guaranteed and/or secured debt. Additionally, companies should carefully consider cannabis regulations that affect investments and require disclosure of investors or lenders, so as to avoid disputes by investors who gave money before knowing they had to be disclosed.
Cannabis Use Associated with Better Sleep for Seniors
Much research has looked at sleep and cannabis, as indica strains and CBD companies everywhere promote that cannabis can help with sleep. However, not much of this research has looked into sleep patterns in seniors until now.
According to a new study, the daily use of cannabis by older adults is associated with improved sleep duration, as sleep is a major issue that patients medicate for. This new study from the University of California at San Diego is unique because it looks at cannabis use and how it can help sleep for seniors both with and without HIV.
“Researchers with the University of California at San Diego assessed the relationship between daily cannabis use and sleep quality over a 14-day period in a cohort of older adults (ages 50 to 70) with and without HIV,” the study explains when giving an overview of procedures used and the setting of the study. “Participants wore actigraphy watches during the study period to objectively assess their quality of sleep.”
The Results of The Study
The researchers found that overall, cannabis helped seniors get, on average, an 30 extra minutes of sleep. Those being studied used smartphones and actigraphy watches to log their sleep patterns, similar to the way sleep patterns are logged by smartwatch devices. The patients recorded when they fell asleep and woke up and if they took the watches off.
Currently, there are mixed findings on how cannabis impacts sleep quality when all the research is compared. This probably depends on things like frequency and amount of use, type of cannabis, and reasons for use.
This particular study was carried out because there are more older people living with HIV than in previous years, and elderly people with HIV often have issues with sleep quality and try to find ways to improve their sleep. There was not much information on this population, so the study sought to get more details.
“Overall, this study demonstrates that coupling smartphone-based EMA and actigraphy devices to examine the relationship between cannabis use and sleep in the real-world can provide novel insights into the temporal relationships of these behavioral cofactors,” the authors state. “In our small sample, findings showed cannabis use was associated with longer sleep duration later that night but was not associated with sleep efficiency nor sleep fragmentation. As recreational and medicinal cannabis use continues to rise, new methodologies that utilize technology … will prove useful to further characterize and investigate the relationship between cannabis use in the real world and health behaviors across the lifespan.”
The authors also hope to see the study repeated with larger sample sizes that can gather more detail about cannabis use in seniors. It also acknowledged that causality cannot be assumed, and that variations in sleep could also be due to other factors.
While even those who carried out the study admit that research is still in its early stages and more work needs to be done, it’s clear that cannabis and sleep have a strong connection, especially in cases where patients are medicating to help with sleep problems.
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