As more new financial entities, never before being in the industry, assume a roll in the cannabis space, the business is becoming more easily adaptable and acceptable for scaling up. There is also an increasingly greater number of new entrants who are only in it for financial returns. This has created a new form of greed with no knowledge of the nuances involved, because the investors do not understand how complex the cannabinoid plant is, the variations to its final marketed product being sold and the need for adequate insurance to protect against lawsuits arising from use and abuse: much like alcohol.
When bringing in additional investors these existing/new companies need to examine the effect naïve money will have on the management and control of their companies.
A board seat for these new people is a given with concomitant governance for day-to-day management. Founders will likely be surprised when an agreeable, but AGRESSIVE new investor starts to question existing managers about their business practices and ESPECIALLY THE INSURANCE PROTECTIONS THAT MAY OR MAY NOT BE IN PLACE: money wants to be safe from possible lawsuits due to poor wholesale or retail activity.
One required activity is having the best provisions/written rules for hiring, compensation, capital expenditures, and as Kanna Knowledge reported in our last issue Good Manufacturing Practices: GMP and certification by accredited labs before sales.
When the Federal government lifts the 280E ban on cannabis, existing companies will realize that in order to attract new institutional money, these people will want to see that canna companies have scalable, sophisticated operations, solid, certified financials, and are respected in the industry. Well-written and filed state requirements for reporting also need to be examined by this new money AND insurance carriers. In California the state’s Bureau of Cannabis Control is especially vigilant with the industry’s reporting demands. This might include disclosing each of the individual owners and entities as well as those having stock control. Non-conformance could result in either fine, non-insurance coverage and perhaps dissolution.
Another sticky wicket are real estate holdings, because on this issue, local governmental agencies are in control, and these are often populated with lower- level -governmental bureaucrats. Additionally, landlords are often reluctant to rent to a plant-touching business and regularly charge higher- market-rates with lease protections due the landlord. One way cannabis companies have avoided these problems is to give the landlord a share of profits, so make certain that they are a named insured.
Lastly, all parties in the business must carefully consider how to structure royalties payable for trademark income based on sales revenues. The U.S. Patent and Trademark Office rejects cannabis trademarks for now. But the pressure on them is building. Investors should realize that this will reduce the ability to shelter income. State trademark registrations are not usually granted until the brand owner has used the designation “in commerce” to conduct business in a particular state. Insurers and investors beware and be advised.
To sum up, the cannabis industry is still regulated by a patchwork of laws and the money invested and insurance protection needs to be well-informed, contractual ,and with the mutual responsibilities spelled out! Jason Roberts’ report on canna cases in the courts follows.
See you next time…Happy Holidays…DECEMBER WILL BE A ONE-TIME SPECIAL DOUBLE ISSUE….be safe and well….