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I get quite a few calls from clients that MESSED UP their corporate formation.
- Owners are afraid of being SUED because their entity is not “formally” set up
- The State Franchise Tax Board has SUSPENDED the entity
- NO ONE has been ISSUED any equity (stock if a C corp; units if an LLC)
- NONE of the owners have a shareholder agreement (e.g. c corp) or
- operating agreement (e.g. LLC)
- Directors are ONE THE HOOK for anything that GOES WRONG
- Someone has left the entity and there is NO RIGHT TO REPURCHASE
Some of these problems are EASY FIXES.
- Let’s Diagnose YOUR Problem
First – let’s compare notes. Do you have all of the below?
2) Let’s drill down one more level.
a) DO YOU USE UNANIMOUS WRITTEN CONSENTS in lieu of Annual Meetings of Shareholders or Directors? √ CHECK
–> (Note: LLC’s use Resolutions.)
b) Do your Unanimous Written Consents (or Resolutions) specify ALL material events to your shareholders or directors? √ CHECK
By material – I mean, that any event or decision or information that a reasonable person would need to make an informed decision. Are we on the same page?
[the SEC defines materiality as: “to which there is a substantial likelihood that a reasonable investor would attach importance in determining whether to buy or sell the securities registered.”
Practice Tip: Consider being as specific about what you put into these Consents and Resolutions. They can be used to disclose an entity’s important (ie. material) facts and events and can serve as a chronological record of the decisions made by the entity.
3) What is the status of these documents:
Have ALL shareholder’s executed a stock purchase, shareholder or if an LLC – an operating agreement?
Are there differences in the agreements between these individuals?
If so, is that because some have more or less rights than others?
Fiduciary duties: In the LLC context, did you limit the duties that one member has to the others or between the manager and any member?
Deadlocks: How do you resolve deadlocks? If there are only two owners and they each own 50% of the equity, how will you resolve a deadlock?
Rights to Repurchase or Buyouts: What triggers the rights? what is the method of valuation? Does one equity holder have the right to force another equity holder to buy them out (ie. they have a put) versus the Company or a member have the right to buy away the equity of another member (ie. an call like option?).
4) Tax Matters: Many suspension and reporting problems come about because the tax preparer, advisor and the Client are not communicating about the following items:
IF YOU WOULD LIKE TO GO THRU MY APPROACH TO FORMATION, PLEASE GIVE ME A CALL 310-570-2399. I offer fixed or flat fee programs for various scenarios.
On June 21, 2016 the FAA posted FINAL Rules for Commercial Drones – to go into effect August 2016.
Overview: You need a certification to operate commercially. Most requirements are waivable. Most require a reasonableness standard.
You will need a certification to operate commercially. Here are the min. requirements:
- must either hold a remote pilot airman certificate with a small UAS rating or be under the direct supervision of a person who does hold a remote pilot certificate (remote pilot in command).
- To qualify for certificate, a person must either:
- Pass an initial aeronautical knowledge test at an FAA-approved knowledge testing center; OR
- Hold a part 61 pilot certificate other than student pilot, complete a flight review within the previous 24 months, and complete a small UAS online training course provided by the FAA.
- Be vetted by the Transportation Security Administration.
- Be at least 16 years old
I will attempt to give you a summary of the summary so that you can get a sense of what this first Final set of rules requires.
- 55 lbs all in including packages
- Visual line-of-sight (VLOS) only
- Remain close enough to see the aircraft with vision unaided by any device
- May not operate over any persons other than you, not under a covered structure, and not inside a covered stationary vehicle (imagine that one).
- Day only
- Must yield to other aircraft.
- May use visual observer (VO) – will require further reading to understand.
- First-person view camera cannot satisfy “see-and-avoid” requirement but can be used as long as requirement is satisfied in other ways.
- Max. speed of 100 mph (87 knots).
- Max. altitude of 400 feet above ground within 400 feet of a structure.
- Min. weather visibility of 3 miles
- Operations in Class B, C, D and E airspace are allowed with the required ATC permission.
- Operations in Class G airspace are allowed without ATC permission. •
- No person may act as a remote pilot or for more than one aircraft
- No ops from a moving aircraft or vehicle unless the operation is over a sparsely populated area.
- No careless or reckless operations.
- No carriage of hazardous materials
- Requires preflight inspection – must read full set of rules
- A person may not operate if he or she knows or has reason to know of any physical or mental condition that would interfere with the safe operation of a small UAS.
- Foreign-registered small unmanned aircraft are allowed to operate under part 107 if they satisfy the requirements of part 375.
- External load operations are allowed if the object being carried by the unmanned aircraft is securely attached and does not adversely affect the flight characteristics or controllability of the aircraft.
- Transportation of property for compensation or hire allowed provided that attached systems, payload and cargo weigh less than 55 pounds total;
- The flight is conducted within visual line of sight and not from a moving vehicle or aircraft; and
- wholly within the bounds of a State and not between (1) Hawaii and another place in Hawaii through airspace outside Hawaii; (2) the District of Columbia and another place in the District of Columbia; or (3) a territory or possession of the United States and another place in the same territory or possession.
- Most of the restrictions discussed above are waivable if the applicant demonstrates that his or her operation can safely be conducted under the terms of a certificate of waiver.
Call me to discuss if your commercial drone project falls within the Final regs and what you must know and do about it. 310-570-2399
I get multiple calls each week – how can you help me – a licensed dispensary – obtain a workable banking relationship?
The answer I give is really a question. A series of questions about the business that is calling me and few ever can answer the simplest question.
The simple questions are:
- Regardless of what you sell, explain how your business works to me.
- Are you licensed?
- Who formed your dispensary?
- Do you have a lease?
- How about a simple one paragraph business plan?
- Have you ever been in any type of business?
If you can’t answer these questions to me, lord knows, a bank won’t want to take your money as a depositor. That would be almost true regardless of the fact you propose to be in the medical marijuana business but the marijuana part takes it up a notch. You must be even more organized. This is not the 60s and you must begin to talk and act like a real business person.
Federal Law makes banking as a “marijuana-preneur” really hard.
Here is why: It is plain and simple, Marijuana is still a Class 1 drug and possession and distribution violate Federal law. State law, like in California, differs from Federal law and that only makes things more complex and confusing. For example, how on earth can you maintain a bank account? Nothing here is intended as advice to circumvent state of federal law. Caveat Emptor. But if you prepare a Business Profile based on the concerns of the Federal enforcement agencies, your likelihood of developing a workable relationship with a bank, improves drastically.
- Prepare yourself: Create a Business Profile
- Business Plan: Using the Cole Memo and SAR Due Diligence Items as your Table of Contents
- What assets do you have? Build a simple balance sheet
- Business licenses
- Organizational Documents
- Background on Members of LLC
- Credit Reports and Credit background
- Know the Cole Memo (Prosecution Guidelines):
- Know the Federal Government’s Priorities for Prosecuting Marijuana Activity (things to avoid)
- The “Cole Memo priorities” include:
- Preventing the distribution of marijuana to minors;
- Preventing revenue from the sale of marijuana from going to criminal enterprises, gangs, and cartels;
- Preventing the diversion of marijuana from states where it is legal under state law in some form to other states;
- Preventing state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;
- Preventing violence and the use of firearms in the cultivation and distribution of marijuana;
- Preventing drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use;
- Preventing the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands; and
- Preventing marijuana possession or use on federal property
[More on the Cole Memo: “The Cole Memo reiterates Congress’s determination that marijuana is a dangerous drug and that the illegal distribution and sale of marijuana is a serious crime that provides a significant source of revenue to large-scale criminal enterprises, gangs, and cartels. The Cole Memo notes that DOJ is committed to enforcement of the CSA consistent with those determinations.” See Fin Cen Directive)]
3. Suspicious Activity Reports: Even if you find a bank that you can work with, they will most likely have to file a SAR. But you should go in prepared to answer these question in advance.
- Note: “This FinCEN guidance clarifies how financial institutions can provide services to marijuana related businesses consistent with their BSA obligations. In general, the decision to open, close, or refuse any particular account or relationship should be made by each financial institution based on a number of factors specific to that institution.”
- Due Diligence Items You Must Address:
- verifying with the appropriate state authorities whether the business is duly licensed and registered;
- reviewing the license application (and related documentation) submitted by the business for obtaining a state license to operate its marijuana-related business;
- requesting from state licensing and enforcement authorities available information about the business and related parties;
- developing an understanding of the normal and expected activity for the business, including the types of products to be sold and the type of customers to be served (e.g., medical versus recreational customers);
- ongoing monitoring of publicly available sources for adverse information about the business and related parties;
- ongoing monitoring for suspicious activity, including for any of the red flags described in this guidance; and
- refreshing information obtained as part of customer due diligence on a periodic basis and commensurate with the risk.
- “Marijuana Limited” SAR Filings: This is the reality
- To quote the above FinCen Notice: “A financial institution providing financial services to a marijuana-related business that it reasonably believes, based on its customer due diligence, does not implicate one of the Cole Memo priorities or violate state law should file a “Marijuana Limited” SAR.”
- Red Flags: If your business exhibits any of these, change your business:
- A customer appears to be using a state-licensed marijuana-related business as a front or pretext to launder money derived from other criminal activity (i.e., not related to marijuana) or derived from marijuana-related activity not permitted under state law.
- Relevant indicia could include:
- The business receives substantially more revenue than may reasonably be expected given the relevant limitations imposed by the state in which it operates.
- The business receives substantially more revenue than its local competitors or than might be expected given the population demographics.
- The business is depositing more cash than is commensurate with the amount of marijuana-related revenue it is reporting for federal and state tax purposes.
- The business is unable to demonstrate that its revenue is derived exclusively from the sale of marijuana in compliance with state law, as opposed to revenue derived from (i) the sale of other illicit drugs, (ii) the sale of marijuana not in compliance with state law, or (iii) other illegal activity.
- The business makes cash deposits or withdrawals over a short period of time that are excessive relative to local competitors or the expected activity of the business.
- Deposits apparently structured to avoid Currency Transaction Report (“CTR”) requirements.
- Rapid movement of funds, such as cash deposits followed by immediate cash withdrawals.
- Deposits by third parties with no apparent connection to the account holder.
- Excessive commingling of funds with the personal account of the business’s owner(s) or manager(s), or with accounts of seemingly unrelated businesses.
- Individuals conducting transactions for the business appear to be acting on behalf of other, undisclosed parties of interest.
- Financial statements provided by the business to the financial institution are inconsistent with actual account activity.
- A surge in activity by third parties offering goods or services to marijuana-related businesses, such as equipment suppliers or shipping servicers.
- The business is unable to produce satisfactory documentation or evidence to demonstrate that it is duly licensed and operating consistently with state law.
- The business is unable to demonstrate the legitimate source of significant outside investments.
- A customer seeks to conceal or disguise involvement in marijuana-related business activity. For example, the customer may be using a business with a non-descript name (e.g., a “consulting,” “holding,” or “management” company) that purports to engage in commercial activity unrelated to marijuana, but is depositing cash that smells like marijuana.
- Review of publicly available sources and databases about the business, its owner(s), manager(s), or other related parties, reveal negative information, such as a criminal record, involvement in the illegal purchase or sale of drugs, violence, or other potential connections to illicit activity.
- The business, its owner(s), manager(s), or other related parties are, or have been, subject to an enforcement action by the state or local authorities responsible for administering or enforcing marijuana-related laws or regulations.
- A marijuana-related business engages in international or interstate activity, including by receiving cash deposits from locations outside the state in which the business operates, making or receiving frequent or large interstate transfers, or otherwise transacting with persons or entities located in different states or countries.
- The owner(s) or manager(s) of a marijuana-related business reside outside the state in which the business is located.
- A marijuana-related business is located on federal property or the marijuana sold by the business was grown on federal property.
- A marijuana-related business’s proximity to a school is not compliant with state law.
- A marijuana-related business purporting to be a “non-profit” is engaged in commercial activity inconsistent with that classification, or is making excessive payments to its manager(s) or employee(s).
To speak further about having us help you develop your Business Plan to help you determine compliance with the Cole Memo, the FinCen and the SAR and Red Flags, please give me a call 310-570-2399
Is your “financial advisor” subject to the new Department of Labor Conflict of Interest in Retirement Plans and Fiduciary rules?
Have you asked them the following questions:
Do you consider yourself a fiduciary?
- If not, why not?
- Are you willing to act as a fiduciary with a duty to act solely on my behalf?
- Are you willing to disclose to me any conflicts of interest that may interfere with your acting solely on my behalf?
- Are you willing to put this commitment in writing?
How are you compensated?
- Do you earn fees or commissions based on the number of products that I buy or the size of my investment?
- Will you earn a higher fee or other type of compensation if I invest in certain products you recommend or will you receive fees for services related to specific investment products?
- Will you provide a list of the fees and commissions you receive either directly from me or from other sources in writing?
Are you a licensed or registered investment adviser?
- Are you registered with the State, U.S. Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), or the Certified Financial Planner Board of Standards, Inc. (CFP Board)?
- For how long? What is your experience?
- Who supervises you, or, are you a sole practitioner?
- If a sole practitioner, do you have professional liability insurance?
- Have you (or your firm) ever been disciplined? For what?
I can help you determine whether YOUR “financial advisor” is your fiduciary?
And if you suspect that your financial advisor is not acting in your best interest, or have been harmed by a recommendation that they have made, let’s discuss what might be done to help you.
Call me at 310-570-2399 or email me at gregory[@]rutchik.com
Today I saw on Bloomberg the lawsuit and countersuit ex-Sequoia partner sued by his former “stipper.” Before I get too far ahead of myself, here is the Complaint and the Countersuit A-0001316509-1. Did you enjoy the read? Horrific right? What surprised you most?
What is great about these documents is that neither of them holds anything back. They are lewd, lascivious and raw. Exactly the kind of stuff you would not want public. But the real shocker is that the ex-Sequoia partner actually agreed in writing to pay the woman, $40,000,000, had paid her the first $10,000,000 and she brought the law suit “simply” on breach of contract grounds to enforce the deal.
How does this relate to normal civil discourse you ask?
Well, it may not. Few of us bring any of these facts to the table. For better or for worse.
Couple of take aways:
- The guy really tried to make good on a bad decision. He clearly had the money and liked the woman, since he continued to see her, and thought he’d just throw money at it and make it go away. Lesson: Be prepared to pay for your decisions, always. There is no free lunch.
- She was in it for the money. It was her job and she was paid handsomely. Lesson: Know what the otherside’s motivation is, always. When it changes, be aware of the change.
- Is the agreement enforceable? Probably and more importantly, both of them have the funds to litigate the case to throw the question to a jury. Lesson: Agreements are worth nothing until you seek to enforce them. If you are not willing to enforce them or worry that the other side will not fulfill their promise, then don’t get into an agreement with them.
- Will it go to trial? Probably not. Most cases settle. Lesson: Litigation generally only benefits the lawyers. If you can resolve things yourselves, it will be less public, less costly and you will probably be able to sleep better sooner. Otherwise, be prepared to fight for the long haul.
While many rejoice that the Grateful Dead will play a tribute concert in July and that up to 20 states have provided some legalization for marijuana, running a marijuana business – even legally (under state law) has major problems. Having a banking relationship is impossible. See e.g. http://www.pewtrusts.org/en/research-and-analysis/blogs/stateline/2015/1/5/states-find-you-cant-take-legal-marijuana-money-to-the-bank and http://www.huffingtonpost.com/2015/01/05/marijuana-money_n_6416678.html and http://www.denverpost.com/marijuana/ci_27360883/oregon-bank-opens-doors-colorado-marijuana-businesses (Not any more though: they have since closed their doors). Despite state-laws that permit certain marijuana sales, Marijuana remains a Class 1 drug under the Controlled Substances Act, and illegal under Federal law. Federal banking laws prevent MOST bank from taking cash from any business that violates Federal law. This post is a bit of a simple primer on the various pieces that one must understand to avoid banking violations: The players: 1) The Department of Treasury governs Federal banks. In February 2014, the DOT issued guidelines (“FinCen”) that state that while the priority for marijuana related transactions should be lowered – because the Department of Justice lowered it’s priority – even the smell of marijuana on cash (or any activity that is suspected of violating Federal law) will trigger the filing of a SAR – suspicious activity report. 2) DOJ’s Cole Report asks law enforcement to prioritize their enforcement with goals of:
- Preventing the distribution of marijuana to minors;
- Preventing violence and the use of firearms in the cultivation and distribution of marijuana;
- Preventing marijuana possession or use on federal property.
3) Banks are asked by FinCen “[a]s part of its customer due diligence, a financial institution should consider whether a marijuana-related business implicates one of the Cole Memo priorities or violates state law.” 4) Banks are to file SAR’s and a Currency Transaction Report (“CTR”), for any deposit or withdrawal in excess of $5k via the BSA. Specifically: “The obligation to file a SAR is unaffected by any state law that legalizes marijuana-related activity. A financial institution is required to file a SAR if, consistent with FinCEN regulations, the financial institution knows, suspects, or has reason to suspect that a transaction conducted or attempted by, at, or through the financial institution: (i) involves funds derived from illegal activity or is an attempt to disguise funds derived from illegal activity; (ii) is designed to evade regulations promulgated under the BSA, or (iii) lacks a business or apparent lawful purpose.” And because marijuana is illegal under Federal law, all marijuana related transactions trigger a SAR. 5) Marijuana Limited SARs: That said, banks are given permission to file limited SARs. “SAR should be limited to the following information: (i) identifying information of the subject and related parties; (ii) addresses of the subject and related parties; (iii) the fact that the filing institution is filing the SAR solely because the subject is engaged in a marijuana-related business; and (iv) the fact that no additional suspicious activity has been identified. Financial institutions should use the term “MARIJUANA LIMITED” in the narrative section.” 6) But FinCen also helps banks identify red-flags which would cause a bank to terminate its banking relationship or file a Marijuana Termination SAR. In sum, the banking world is scared shitless of Medical Marijuana businesses. Until the Federal government changes its classification, banking will continue to be difficult.
As my right honorable colleague Matt Kumin reminded me, Criminal Law must be considered when advising a marijuna-preneur(sm). It is with that thought that I leave today’s comment. In a recent Criminal case, the Court asked the jury three key questions on which the prosecution hinged:
(1) “Possession of marijuana with the intent to collectively or cooperatively cultivate marijuana for medical purposes is authorized under the Compassionate Use Act so long as the marijuana is not cultivated for profit.”
(2) “Possession of marijuana is lawful if authorized by the Compassionate Use Act. The Compassionate Use Act allows a person to possess marijuana for personal medical purposes when a physician has recommended or approved such use. The amount of marijuana possessed must be reasonably related to the patient’s current medical needs. The People have the burden of proving beyond a reasonable doubt that the defendant was not authorized to possess marijuana for medical purposes. If the People have not met this burden, you must find a defendant not guilty of this crime.”
(3) “Possession of concentrated cannabis is lawful if authorized by the Compassionate Use Act. In order for the Compassionate Use Act to apply, a defendant must produce evidence tending to show that his possession or cultivation of concentrated cannabis was for personal medical purposes with a physician’s recommendation or approval. The amount of concentrated cannabis possessed must be reasonably related to the patient’s current medical needs. If you have a reasonable doubt about whether the defendant’s possession or cultivation of concentrated cannabis was unlawful under the Compassionate Use Act, you must find the defendant not guilty.”
The Jury convicted in People v. RAYGOSA, Cal: Court of Appeal, 2nd Appellate Dist., 4th Div. 2014.
Afterall, they had four pounds in their car, cash, four cell phones and a scale.
“Here, the People presented substantial evidence from which the jury reasonably could have concluded that defendant intended to sell the large quantity of marijuana he possessed. Jackson testified that in his experience, people package marijuana like defendant did when they plan to sell it to a dispensary. He further testified that most people consume only one-half gram to one gram of marijuana per dose and that it would be unreasonable for one person to carry around so much marijuana for his personal use. Jackson opined that the knotted bags would not keep the marijuana fresh for very long, and that other evidence recovered during the arrest — the scales and cash — further indicated that defendant (and Hernandez) planned to sell the marijuana. A jury could conclude from this evidence that defendant possessed more cannabis than was reasonably necessary for his personal medical use and intended to sell it.”
One of the greatest resources for understanding the status of Medical Marijuana across the United States is: http://www.ncsl.org/research/health/state-medical-marijuana-laws.aspx
But this still does not tell an entrepreneur the answers to their basic questions:
1) How do I start at growing business?
2) Do I need to become a collective or dispensary to start selling to a dispensary?
3) Do I have to pay the collective tax?
For these answers and more, sign up for my free, starter seminar next week.
Sign up here and I will let you know the details.
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