I started as a lawyer in the cannabis industry in 2010. Twelve years in there has been immense progress and maturation at the business level for cannabis licensees. This post is dedicated to the top ten list of which arrows all cannabis companies, regardless of state, size, culture, or market share, must have in their business quivers in 2022.
1. Intellectual property
While you still can’t register trademarks with the USPTO for cannabis goods, there is now all kinds of intellectual property and brand strategy that goes into state law registration and registration for ancillary goods and services classes. Cannabis businesses need to keep these issues on their radar when crafting brand strategies. At the same time, however, they should not neglect the trademark basics. For a primer on those basis, check out our post here.
Many states require some form of insurance or bond to be secured by cannabis licensees. At a minimum, licensees are often forced to get commercial general liability policies. There’s so much more protection though now for cannabis licensees than there was ten years ago. And given the rapid pace at which cannabis companies move and shake, they should now consider and secure those additional policies, riders, or protections that will insulate their businesses and investments from disaster. This may even include insurance for theft in transit and financing in some cases.
3. Recall plan
Yes, cannabis companies are 100% subject to recalls, both voluntary and mandatory. Still, way too many cannabis companies don’t have solid recall plans, protocols, or procedures to protect them in the event it happens– and that’s despite the fact that almost all states have some law or rule about recalls on the books. We’ve written a lot about cannabis recalls and the consequences and what to do if you find yourself in one (see also here and here). Also, importantly, don’t forget to examine getting products liability insurance because you may well need it at some point in the life of the business when making and selling consumer goods.
4. Compliance team
I’m still shocked by the number of potential clients who come to us that don’t have a built out compliance team. Sure, if you’re a start up and don’t have the immediate cash to piece one together, that makes sense. But to continue to forego staffing out a full-blown compliance squad, or failing to hire a compliance officer or manager at a certain point, is a very large and costly mistake. We often end up acting as outside GC to 90% of the cannabis companies we represent. We almost always encourage them though to start searching for a compliance squad so that they can internalize compliance priorities accordingly. To not have a compliance team in 2022 definitely makes you an industry outlier at this point.
5. A sense around M&A
Let’s face it, the cannabis industry has also seen as much consolidation as it has new blood over the past decade. Given the barriers to entry to licensing in certain states and cities as well as the advent of MSO expansion, industry M&A is at an all time high. Therefore, cannabis businesses of all sizes should get to know the basics of cannabis M&A, in case they find themselves offering to buy or sell a cannabis business.
Of course, the rules around changes of ownership will vary in every single state and there are other insidious guidelines and regulations that are attendant with things like license transfers and approvals of new owners. For more on cannabis M&A, see here, here, and here.
6. Understanding of taxes
I am floored when I still see pitch decks or pro formas for cannabis companies that completely fail to mention IRC 280E or the generally high state tax burden born by cannabis companies. I think folks still get caught up in the exciting swell of becoming the next Jack Daniels as federal legalization looms, and they completely forget about the insanely onerous impact of cannabis taxation at the federal (and even state) levels. It’s 2022, folks–IRC 280E isn’t going away without federal reform, and state cannabis taxes are not going down. Do your homework and don’t get caught with your pants down on the cannabis tax burden.
People forget that FinCEN issued guidance to financial institutions in 2014 about how to bank the industry. In all reality, if you’re in a state with “robust regulation” and you have a license, there’s likely a financial institution that will bank you that’s following those guidelines.
If you’re not able to get a bank account at this point, you should be asking yourself if you’re doing everything you can around compliance and/or if you’re in a state that doesn’t scare off financial institutions because their rules are just too loose around licensing and compliance. It certainly can be done otherwise.
8. Understanding of contracts
If you’re still doing handshake deals for your commercial cannabis contracts, you’re in the dark ages. At the inception of medical cannabis, lots of interesting legal advice was given around keeping things verbal in order not to exacerbate creating a criminal record. It just isn’t the case anymore that that’s a serious risk given state legalization and the fact that the feds are hands off.
Without written agreements in place, we often see incredibly bad behavior between licensees and third parties. There’s also little to no chance that you’ll get any real kind of investment in your cannabis company without written contracts. Do yourself a favor then, and get it in writing (and be sure to avoid the boilerplate, too).
9. Litigation prep
No industry is safe from litigation. Whether it’s partnership disputes, infringement cases, contract breaches, or personal injury, all businesses must face the prospect of taking or going up against legal action at some point in their life cycle. Cannabis is clearly no different.
Over the past decade, we’ve seen and litigated a multitude of commercial disputes, from ownership fights to land use issues to landlord/tenant disputes and even administrative litigation against state licensing regulators. Just like the recall planning, cannabis businesses need to be mindful of commercial litigation. Licensees should realize that just because cannabis is federally illegal does not in any way mean that you can’t otherwise be successfully sued.
10. Advocacy and government relations
Cannabis has really become like other industries in some ways. And because it’s highly regulated, it interfaces with state and local governments daily. This means cannabis companies also need to invest in advocacy and governmental relations a good amount of the time.
Regulators have immense power to change, create, and eliminate regulation, which means that private interest lobbying can be done, for better or worse. Whether you care about social equity, changing prohibited products, advertising and marketing, license caps, or anything else, cannabis licensees should know where and when to pull political levers in 2022.