MED Eliminates Face to Face Meetings

It has been a strange few weeks for the industry. MED policies are changing quickly and the obligations for the businesses are ever increasing.

Of particular concern is the newfound zeal in the financial investigation area. PEI investors are experiencing extreme and, in my opinion, unnecessary scrutiny. It is no longer enough to show proof of funds that match the intended investment. Instead, the investors are required to prove the source of all of their money, investments, and other sources of income. In one case, a client worth several million dollars was required to show the sources of all of the money even though only a few hundred thousand dollars were to be invested and proof of those funds was provided. Wealthy investors typically have many layers of financial intricacy including trusts, investment accounts, rental income and other complex vehicles to diversify their money. This is posing a very significant burden on any anticipated investor.

Next, MED is prohibiting any interim use of money by a potential buyer of a cannabis business. Many of the businesses being sold are in distress and having trouble making rent, payroll and paying their taxes. Traditionally, we have used interim loans to cover the shortfalls so that the asset still exists at the end of the approval process.  It is unclear whether any such lending will now be permitted by MED.

Finally, MED has now eliminated face-to-face meetings with the investigators and is requiring all applications be submitted at arm’s length. This is problematic because the investigators often head off issues at the application meeting that would not otherwise be anticipated due to constant rule changes. The businesses will now be “flying without a net” and it is imperative that great care be used in preparing any application. This works a particular hardship on the less wealthy entrepreneurs who cannot afford the luxury of legal services and were accustomed to working directly with the investigation team on their applications. But, like always, we have to comply first and complain later. We’ll see how this all shakes out.

House Bill 18-1381

The legislature finally eliminated the requirement that medical marijuana businesses be vertically integrated and sell at least 70% of the cannabis they produce through their designated centers.  House Bill 18-1381 phases out vertical integration and the 70/30 rule in two stages.  A copy of the bill can be found here: https://leg.colorado.gov/bills/hb18-1381

Effective immediately, medical marijuana businesses are only required to sell 50% of the medical cannabis it produces through their designated centers.  Effective 7/1/2019, the medical marijuana centers will no longer be required to produce any of their own medical cannabis.  Carrying the dual burden of a retail store and cultivation operation has been devastating the medical cannabis businesses.  Hopefully, leveling the “playing field” with recreational cannabis businesses will help medical cannabis thrive and continue to focus on and support the medical marijuana patients they serve. It is not yet clear how plant counts and other inventory tracking will be handled since medical cannabis businesses currently cultivate medical cannabis based on the patients who assign the medical marijuana center as their primary center.  I suspect that it will be handled by the tier system currently used for recreational cannabis, but stay tuned.

Hemp and CBD Legality

After counseling several clients on the legal use and production of cannabidiol (CBD), it has become apparent that there is still a lot of confusion surrounding the issue. To help dispel some of the misunderstandings, especially in relation to last month’s 9th Circuit Court of Appeals ruling in Hemp Industries Assoc. v. U.S. Drug Enforcement Administration, we have compiled an overview of the case and its implications on local hemp businesses. The case may raise some concerns about the future of federal hemp and CBD legality.

The case brought by the Hemp Industries Association (HIA) asked the court to review a 2016 Final Rule enacted by the Drug Enforcement Administration (DEA) that may be read to classify CBD as an illegal drug under the Controlled Substances Act (CSA) because it is extracted from marijuana flower. The HIA argued: (1) that the DEA overstepped its authority in making this change; and (2) that because CBD can be extracted from hemp flower, and industrial hemp with less than 0.3% THC is lawful, CBD production is protected by the 2014 Farm Bill and beyond the reach of the DEA.

In the opinion, the 9th Circuit judges dismissed the HIA’s claim on a technicality, stating that because the HIA failed to actively participate in the DEA’s rule-making process they lacked standing to the bring the current challenge. The court, though, did clarify that the DEA’s “marijuana extract rule” does not apply to hemp or hemp-derived products produced in compliance with the Farm Bill. Therefore, hemp producers may continue to extract and sell CBD where it is permitted under state law.

Ultimately, CBD production and the DEA rule can coexist where hemp is grown and processed pursuant to the Farm Bill. However, outside of this interpretation, no formal legal protections have been afforded to CBD and hemp production. The circuitous path of legal precedent surrounding CBD and hemp products raises concerns as to the questionable legality of hemp and CBD. Producers should be cautious and remain vigilant of new developments in this area of the law.

The most recent effort to ensure the future of CBD extractions in the Hemp Farming Act of 2018. Passage of this law would permanently remove hemp and hemp products from the umbrella of the CSA.  However, until that time the future of hemp and CBD production remains uncertain.

If you have any questions regarding hemp extraction or CBD production, or would like to learn more about Hemp Industries Assoc. v. U.S. Drug Enforcement Administration, please do not hesitate to contact our office.

Respecting the Corporate Form for Marijuana Businesses

One of the main reasons we recommend our business-owning clients incorporate their business or form an LLC is for the personal asset protections these business models provide. However, in my years of practice, I have witnessed an alarming number of clients jeopardize their personal assets by failing to adequately separate their business activities from their personal endeavors. When this happens, owners risk “piercing the corporate veil” – meaning they risk losing the liability protections that having an LLC or a corporation provides them. If a business’s corporate veil is pierced, a judge may order the owners’ personal assets be used to satisfy their business’s debts and liabilities. To avoid this unfavorable outcome and maintain your limited liability protections, it is important to abide by the key responsibilities outlined below:

  1. Undertake the Necessary Formalities. Businesses must complete any annual filings required by the state to protect and ensure the longevity of the company. This includes obtaining all applicable permits, licenses, or approvals necessary for legal compliance. All businesses should also create and regularly update their bylaws or operating agreement, and hold annual meetings of the members/shareholders and managers/directors.
  2. Avoid Under-Capitalization. Under-funded businesses have a higher risk of veil piercing because creditors may argue the business exists solely to shield the owners’ assets. Businesses should be equipped with enough resources to both start and continue operations. Funding may come through the owners’ own money, outside investors who become owners, or business loans. Regardless of the method used to accrue capital, the money should be designated to the business, not the owners personally.
  3. Maintain a Written Record of Business Decisions. All business meetings should be documented through meeting minutes, emphasizing any major business decisions reached in the meeting. Additionally, all formal contracts entered into by the company should be signed and kept for at least seven (7) years. These records protect the corporate veil by evidencing the business’s separate existence and operation outside of the owner(s).
  4. Do Not Comingle Business and Personal Assets. Whether arising from loans, shared bank accounts, shared tax returns, or personal use of business assets, failing to separate business assets from personal assets negates the business’s separate identity. All business owners should, at minimum, set up a business checking account and a business credit card, and only use these for business expenses. It is also important to keep business assets, like property and equipment, separate from personal assets. Notably, businesses should not be used as a lender for their owners.
  5. Make Your Business Status Known. Create business cards and email addresses using the business name, and make purchases or receive payments through the business bank account. It should also be made clear when the business, not an individual owner, is acting. When the business enters into an agreement, use the company name and have the owner(s) sign with reference to their corporate designation. By clarifying when the business, not an individual owner, is acting, the corporate veil becomes more resistant to attack.

The most important thing to remember is that there must be a clear distinction between what assets and activities are attributable to the business and which are attributable to the owner(s). If owners cannot prove that the above steps have been followed, it may be determined that the business is operating as a sole proprietorship or general partnership, in which case the owner(s) would lose the limited liability protections inherent in an LLC or a corporation and the corporate veil may be pierced.

Research shows that approximately 50% of “piercing the veil” court cases succeed because business owners fail to follow the corporate formality requirements above. If you have any questions about respecting the corporate veil or what your business can do to ensure it is protected, please let us know.

Marijuana and Parenting

In the past few months we have received numerous inquiries into the crossroads of marijuana use and parenting, especially in relation to child custody issues. Below you will find research and guidance from the Boulder County Child Protective Services on the issue. However, if you have questions regarding marijuana use and parenting in your local community outside of Boulder County, we would be happy to meet with you about information specific to your community.

Caseworkers at Boulder County Child Protective Services receive training on issues involving marijuana use and parenting through https://www.illuminatecolorado.org/dec. Illuminate Colorado is a non-profit company that handles various child abuse problems, including those involving drugs and alcohol, through their program, Smart Choices Safe Kids. This program aims to serve as an educational resource guide for families, individuals, and professionals with funding through grant awards from the Colorado Department of Human Services Children’s Justice Act and the AJL Charitable Foundation.

Marijuana-related recommendations from the Smart Child Safe Kids Programs include:

  1. Not using drugs of any kind while taking care of children in case of emergency;
  2. Never smoking around children;
  3. Keeping all drugs, including medical marijuana, locked up and out of reach of children, while being particularly being careful of edibles and items in refrigerators;
  4. Following state law regulations for home grow operations; and
  5. Never permitting dangerous manufacturing such as hash oil labs in a home where children are present.

While Boulder County Child Protective Services does not take a strict prohibitionist stance on using marijuana in the home, parents should be sober whenever they are responsible for the care and well-being of their children.

If you have more specific questions regarding the crossroads of marijuana use and parenting, please contact us for further information. We wish you all a happy and healthy spring season.

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