So You Want To Start a Cannabis Business? Ten Points To Consider

[This post is part of a series related to recent client inquiries.  It changes frequently so check back again soon.  For a broad description of the kind of work I do and representative work, see Services.]

When I was in college, no one would have dreamed that marijuana would become mainstream.  Dispensaries are almost everywhere and soon non-medical marijuana use will be legal in California.  Washington, Nevada, Colorado, to name a few, are already there.

 

So how do you cash in?

Build a Business Plan

Nearly every week, I get a phone call from someone “starting” a cannabis business.  A few weeks ago, I spoke to a 20 something who already had a pen manufactured and for sale. I was impressed by how much they had done and yet surprised by some of the risks they were willing to take. I thought I’d give you a top ten list of points to consider.

 

  1. How Much Will It Cost You To Generate The Revenue Number Of Your Reasonable Dreams.

You read that right.  What will it COST you to generate your Revenue projection?

For example, say you envision selling an oil or wax product by the gram to dispensaries. You sell at $14 and they sell for $30. And you dream up a revenue number of $1million. That is 66,666 units sold.

Wow, right?

What will it cost you to make that kind of coin?

Presumably you will purchase the flower, cost?

and have it refined right? Cost?

Add up all of your costs including: raw product, third party services, packaging, Labor, salaries, taxes, insurance, delivery, rent, cash management.  If you want to be even smarter, separate your costs of goods sold from your costs to sell and run the business.

Well, what does it cost you to generate $1mil in revenue? Still probably a good number right

 

2. How Does Your Product Offering Differ From Competitors? (other than yours is the best)

Today you can compare your products on websites like weedify and leafly.  Come January, that competition is going to triple for a while. Prices will fall.

If you have to start selling your product to dispensaries at $10 per unit or $5 per unit, are you still making money?

 

3. Partnership? How Will You Break A Deadlock If You And Your Best Friend Own 50/50

When you go into business with another, even if you do not have a written agreement, you are treated as partners.  If you do not have an agreement, you run some significant risks. Partnerships can be formed under either an S corp, LLC or even general partnership.  Picking the right entity is something I’ve covered elsewhere and if you’ve already formed an entity and aren’t sure if it is done right, that is covered elsewhere too.

Most marriages end in divorces.  Business marriage divorce rates are even higher.  I won’t go into the details of it but you must have a way to break a deadlock if two owners have equal voting rights. What is your plan for that?

For example, let’s say Al and Bert start off great and then Bert decides he wants to take the business in a different direction.  Or, what if Al gets sick of Bert not working as hard as Al, but Bert takes an equal amount of net income.  What if Bert decides that he is going to offer a slice of the business to his nephew?  What if Al shows up with a new expensive piece of equipment and says “I wrote the check from the company check book because I think this equipment will really be fun to have here.”

How will two equal partners break that disagreement?  Without having a serious discussion and taking steps in a written agreement, you’ve bought trouble.

 

4. Competition: How Will You Adjust When Price Per Gram Is 90 cents or $400 per lb?

I have had several conversations after reviewing a business plan that puts price per lb at $2000 USD.  Sure, that happens but in the new world, the price for flower is coming waay down.  How will the reality of a $400 lb if sold in a four lb lot effect your business plan?

 

5. Who Will Pay If Your Pen or Vapor Device Explodes Like an E-Cigarette (and You Have No Insurance)?

I am so impressed by these pen/vape pen companies in getting their products onto the market.  I am not impressed by the fact that they all use the same Chinese factories and few if any have product liability insurance.  When they blow up in someone’s mouth or pocket like e-cigs did – same technology – you can be sure that a plaintiff’s lawyer will sue you, the dispensary and everyone up the chain to the manufacturer.  The manufacturer in China will be insulated from liability because no one will litigate this there.

So what have you done to safeguard IP infringement risk, packing/child proof liability, product liability risk?

6. If You Convert From a Mutual Benefit Corp to a For Profit, Was It Done Right?

Do who did your conversion? Was it done right?

Did it follow the statute?

Generally, a nonprofit public benefit corporation without assets can convert to a for-profit corporation by amending its articles of incorporation and providing a copy of the amendment to the Attorney General at least 20 days prior to its filing. See Calif. Corp. Code § 5813.5(a), (b). However, a nonprofit public benefit corporation with any assets cannot convert into a for-profit corporation through an amendment to its articles unless the amendment has received prior written consent of the Attorney General. Calif. Corp. Code § 5813.5(b). According to the California Attorney General’s publication, “Nonprofit Transactions Requiring Notice or Attorney General Approval,” certification that all charitable assets of the nonprofit will be transferred to another charity is required for consent. Furthermore, the publication states that applications should include:

  • A letter signed by an attorney or a director of the corporation setting forth a description of the proposed action and the material facts concerning the proposed action; authorizing the proposed action, and board meeting minutes reflecting discussion of the proposed action;
  • A copy of the corporation’s current financial statement;
  • A copy of the corporation’s articles of incorporation (if not already on file with the Registry of Charitable Trusts) and the articles of incorporation of any other corporation that is a party to the proposed action;
  • Any independent appraisals of the value of the public benefit corporation that are available. (In complex transactions involving conversion of a large public benefit corporation, the Attorney General usually requires independent valuation appraisals or other evidence that the transaction is fair and reasonable to the public benefit corporation.);
  • A statement of the plan for distribution of the assets of the public benefit corporation to a qualified charitable organization, or for payment by the directors or purchasers of the public benefit corporation of the fair market value of the corporation to a qualified charitable organization.
If it didn’t, what is your liability? If you were a member of an MBC and you suspect conversion (or maybe your rights were terminated completely) did not work properly, let’s discuss your rights.
One more thing:  
If I had a dollar for every call I get that involves a debit card, selling private placements to cannabis cash holders, I’d be able to buy me some real kicks.  No, seriously though: don’t get all jazzed up by a new solution to the age old problem of depositing cannabis cash. If it smells fishy, it probably is.
Happy discuss the above or any other issue.
Feel free to call me 310-570-2399

Cash and Pot: Can’t take it to the bank, yet

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 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.

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.

Criminal Law Must be Considered

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.”

January 2015: Medical Marijuana Related Trademark Applications (only 258?)

I am sure I could dig up more but these are worth looking thru to find your way. This was generated with a Word and Design search using “medical marijuana” in goods and services only.  http://tmsearch.uspto.gov/

Screen Shot 2015-01-27 at 9.51.04 AM 1) The DEAD ones are the most telling. Screen Shot 2015-01-27 at 9.51.17 AM 2) The Registered ones are also Screen Shot 2015-01-27 at 9.51.26 AMimportant to review to see what types ofScreen Shot 2015-01-27 at 9.51.47 AM“products” the gov lets thru and which Screen Shot 2015-01-27 at 9.51.56 AM they do not. Screen Shot 2015-01-27 at 9.52.06 AM

Branding Marijuana Extracts and Strains

Now that the Marley Family has come out with their own brand of Marijuana, says Rolling Stone Magazine, many growers and distributors want to brand their extracts and strains. Much has been written about the impossibility under current US Federal Law to obtain a US Federal Trademark for the actual bud or its progeny.   In this article by Kieran G. Doyle, the most significant take away is:

– Federal Trademarks that steer clear of the Controlled Substances Act can make it thru – (I provide a check list on how to do that in my post here) AND

– Go for State Trademark protection. After all, in the states that permit Marijiuana, a trademark can most likely be obtained.  So what are you waiting for?

California’s forms are here and

Colorado’s filing materials can be found here for example.

Although I am not a Colorado lawyer, I certainly can help you from here in Sunny California.

Maui Waui, Medical Marijuana and Trademarks

According to Jeff Spacoli in “Fast Times at Ridgemont High”, “All I need are some tasty waves, a cool buzz, and I’m fine.”  

Upated: June 2014: Hershey sues edible marijuana company

If you run a medical marijuana dispensary or a manufacture or sell vapors, edibles, pens or product for a legal dispensary, you may also want a Federal trademark to be “FINE.” (See my other post on brand protection) The problem is, the Federal government is not just giving away trademarks – the exclusive right to use a word or mark in connection with a good or service – when connected to medical marijuana.

Here are some guidelines to help you entrepreneurs out there avoid wasting your money on trademark applications without any hope of obtaining protection.

The Controlled Substances Act:

  1. Is the product or service your running the “manufacturing, distributing, dispensing, or possessing certain controlled substances, including marijuana and marijuana-based preparations”? 
  2. If yes, you probably violate the Federal Controlled Substances Act and will be rejected.  See 21 U.S.C. §§812, 841(a)(1), 844(a); see also 21 U.S.C. §802(16) (defining “[marijuana]”).
  3. Is your business focused on “sale of, offer for sale, or use any facility of interstate commerce to transport drug paraphernalia”? This includes: ingesting, inhaling, or otherwise introducing into the human body?
  4. And is the thing your selling medical marijuana?
  5. IF yes to 3 and 4, then, you probably violate the CSA too and will get rejected under 21 U.S.C. §863.

For example,

  • MAUI WAWI – REJECTED – as medical marijuana – because it is a controlled substance under Federal law.
  • MYST 5 – REJECTED – as Oral spray for absorption of medical marijuana – because a product that is inhaling a controlled substance violates Federal law.
  • PRIMORA – REJECTED – as medical marijuana – same as above.

Avoid the CSA:

  1. Your product must be lawful under Federal law – not state law – when applying for a US Trademark;
  2. If your services DO NOT involve the provision of marijuana, marijuana-based preparations, or marijuana extracts or derivatives or any other illegal controlled substances YOU ARE GOOD;
  3. If your services are merely an INFORMATION source for how to “obtain and/or grow marijuana, marijuana-based preparations, or marijuana extracts or derivatives or any other illegal controlled substances” you APPEAR TO BE GOOD;
  4. If your services involve POSSESSION or HANDLING OF, you are probably NOT GOOD to get registration.

Here a few goods and services that have achieved Federal registration:

  • IC 009. US 021 023 026 036 038. G & S: Downloadable computer software featuring a database of information regarding cannabis strains, indications and effects and cannabis dispensaries and their inventories and locations. 
  • IC 035. US 100 101 102. G & S: Providing consumer information in the field of medical marijuana dispensary inventories and locations; providing links to web sites of others featuring consumer information on medical marijuana inventories and locations; providing a web site featuring the ratings, reviews and recommendations on products and services for commercial purposes posted by users; providing consumer information regarding medical marijuana dispensaries, inventories and locations. FIRST USE: 20101024. FIRST USE IN COMMERCE: 20101024
  • IC 039. US 100 105. G & S: Providing a web site and web site links to geographic information and map images in the field of medical marijuana dispensary businesses via interactive computer networks. FIRST USE: 20101024. FIRST USE IN COMMERCE: 20101024
  • IC 042. US 100 101. G & S: Computer services, namely, creating an on-line community for registered users to participate in discussions, get feedback from their peers, form virtual communities, and engage in social networking in the field of medical marijuana; creating and maintaining blogs for others. 
  • IC 044. US 100 101. G & S: Providing health information in the field of medical marijuana, and regarding indications and effects of particular cannabis strains, and regarding medical marijuana dispensaries, inventories and locations. FIRST USE: 20101024. FIRST USE IN COMMERCE: 20101024
  • IC 042. US 100 101. G & S: Computer services, namely, providing on-line non-downloadable web-based computer software for patient documentation and history, inventory control, and inventory management for use among medical marijuana centers, dispensaries, collectives, and patients. FIRST USE: 20100100. FIRST USE IN COMMERCE: 20100100
  • IC 041. US 100 101 107. G & S: Organization and arrangement of educational and instructional seminars and conferences regarding legal, medical and political developments and societal attitudes about medical marijuana not including the provision or display of marijuana, marijuana-based preparations, or marijuana extracts or derivatives, synthetic marijuana, or other substances controlled by the Controlled Substances Act; organization and arrangement of exhibitions for educational, cultural and entertainment purposes regarding legal, medical, and political developments and societal attitudes about medical marijuana not including the provision or display of marijuana, marijuana-based preparations, or marijuana extracts or derivatives, synthetic marijuana, or other substances controlled under the Controlled Substances Act; organization and arrangement of musical exhibitions. FIRST USE: 20100222. FIRST USE IN COMMERCE: 20100222
  • IC 041. US 100 101 107. G & S: Education services, namely, providing seminars and classes in the field of medical marijuana; Entertainment, namely, live music concerts; Providing facilities for educational conventions.
  • Physician services; medical evaluation of individuals to determine whether a medical diagnosis or medical condition is present that may benefit from treatment with medical marijuana.

 

I would be happy to talk you through – or off the ledge – with regards to how best to protect your service or product that does not fall directly afoul of the CSA as well as discussing state and other approaches for what would surely end you up with a US Trademark rejection notice.  Give me a call if I can help 310-570-2399.