What Maryland Tells Us About the Future Of Competitive Cannabis Licenses

Several weeks ago the Maryland Medical Cannabis Commission finally announced the top scoring applicants for the state cannabis grow and processor licenses.  These coveted licenses were awarded after an unusually long selection period that left many wondering if the wait would ever end.  For a great breakdown by the Washington Post of the companies selected for licenses, check out more information here.

Maryland’s decisions reflect one of the last competitive application processes as we have come to know them.  Both Ohio and Pennsylvania are on the horizon for a competitive medical cannabis application, and Arizona is shuffling through the 750 lottery applications they received for 31 licenses, but we most certainly are at the beginning of the end.

On the heels of similar decisions in Hawaii, Florida, New York, Minnesota, and others before them, what commonalities can we see in the results?

  1.  $$$.  For starters, there is no doubt these hyper-competitive processes require significant cash.  Non-refundable application fees of $25,000 and annual licensing fees of up to $200,000 set the stage for the kinds of resources that are required.  But these fees pale in comparison to the costs of establishing large-scale cannabis growing operations that can exceed $10,000,000 per facility.  If your team scrounges up the bare minimum financial backing required by regulators, chances are you will not be awarded a license.
  2. White Males.  There is no disputing that the competitive medical cannabis states have been sorely lacking in racial and gender diversity among their leadership.  As someone that helped create scoring systems to incentivize minority ownership among applicants in Illinois, it is an issue that I care deeply about.  There is no arguing that, so far, we have collectively failed to create industry ownership that recognizes and empowers those communities most harmed by the decades-old War on Drugs, let alone reflect the populations these medical cannabis businesses serve.  Kudos to Pennsylvania for including a mandatory diversity plan in their medical cannabis law and draft regulations.  For more context about minority leadership in the cannabis industry, check this out.  Hopefully this will not reflect a long-term trend (no disrespect intended for my fellow white guys out there).
  3. Local Ownership and Local Support – Regardless of whether your core team is born and raised locally, a recurring theme across these competitive states is that local investors and local community support are mandatory.  Some states have delegated a virtual veto-power to local towns that do not want cannabis businesses in their backyard (see Massachusetts).  Hawaii was an unusually residency-centric application process, and Florida set the eligibility bar by requiring floral nurseries with 30+ years experience growing plants.  As Ohio and Pennsylvania develop their regulations, expect explicit and implicit requirements for local support.  Any applicant struggling with local zoning needs to find a new town to hang a shingle.
  4. Selection Processes Work, But Are Messy – A fundamental question government regulators face when there is a limited number of licenses to award: “how do we pick winners and losers?”  If there is a better way than a merit-based, competitively-scored selection process, I’ve never seen it.  I take issue with the lottery system used in Arizona (trust me, watch this video), which means someone, somehow has to pick something approaching 1 winner for every 10 applicants.  Others have suggested an auction to the highest bidder (see #1 and #2 for why that’s problematic).  The odds vary depending on the state, region, type of license, etc., but ultimately a process must be created for licensees to be chosen.  The best selection processes have transparency (the public is informed about the process, clear articulation of the point system, criteria are plainly identified) and do absolutely everything imaginable to protect against actual or appearances of impropriety at a time when the public automatically distrusts government and assumes shady dealings.  Each selection process going back to Massachusetts and Connecticut have drawn criticism and lawsuits, but they have also generally identified the better (if not best) applicants in the pool.
  5. Building the Most Experienced Team – One trend that has received less attention is the increasing premium placed on an exceptional team of experts.  Consider, if you will, an applicant with $5 billion in assets and billions in debt (let’s call him Blonald Lump).  Mr. Lump has a decent grower from a recreational cannabis state who has been growing cannabis “for 30 years” (you do the math) and several former Wall Street bankers.  If Mr. Lump is facing a team with $7.5 million cash on hand, deep and longstanding ties to the local community, a cultivation and processing team that has years of experience in legal markets and an unblemished record, a nationally-recognized former law enforcement officer, and business executives from multiple industries, Mr. Lump loses even though he is used to “winning.”  Applicants are increasingly becoming more sophisticated in writing a great application narrative that appeals to regulators – and it is starting to all blend together.  The narrative itself is not a great way to choose licensees – it is the substance behind the applicant, and the experience of the team members that states are increasingly using to pick the best of the best.
  6. There Is No Guarantee, No Silver Bullet – If anyone ever guarantees you a license prior to a competitive merit-based selection, run in the other direction.  Applicants that were very successful in previous medical states often fail to get a license in future states.  Consultants that work with 10 teams in a state that issues 5 licenses is not likely to win any licenses for their clients.  Each state has been unique, and you need to take the time to understand the culture of the state, the intentions behind the regulations, and the goals behind the selection criteria.  Each new state looks to those that came before them for best practices, and traps to avoid.  I spent time speaking with every single medical cannabis program that came before Illinois, and I guarantee you new regulators in developing states will do the same.  Each state puts its own stamp on their program, and what worked in one state 6 months ago very well could hurt you in the next application.

If you are looking to apply in Ohio or Pennsylvania, or any future competitive state – study the regulations, focus on your real estate, and build the strongest team that you can.  It is an exhilarating process competing for a medical cannabis license in an industry that is truly helping people, and I wish you all the best.

 

A Cannabis Program Without Lawyers. What Could Possibly Go Wrong?

This blog has documented many of the unusual and challenging aspects of the cannabis industry.  Aside from lack of banking, inequitable taxation, and constant pressure from the federal government, we are increasingly seeing state cannabis laws implemented with lawyers forced to the sidelines.

How can this be?  In an area where state regulation is what keeps the feds at bay, and the legal risks and nuances are endless, who would want attorneys to be barred from assisting?

Yet, that’s exactly where we are headed in some states.

It has become common for new cannabis states to briefly grapple with how, and when, lawyers can assist cannabis clients.  For a thorough review of the problem, see our earlier guest blog here.  Typically a professionalism board will freak everyone out and suggest that a lawyer can’t help a cannabis client on a license application, or the lawyer can’t invest in a cannabis business – only for the state Supreme Court or comparable authority find a way to let lawyers do their job.

Until they don’t.

It was a close call in Hawaii as the application date approached, and Illinois had some lawyers sweating as we awaited a change to our Rule 1.2(d).  But some states are still on the fence.

New Mexico is giving lawyers indigestion with their latest advisory opinion which seems to allow limited attorney representation of cannabis businesses nine (9) years into their program.  And Ohio has (at least temporarily) frozen out lawyers from assisting businesses applying for medical marijuana licenses.  What does that mean, exactly?  Read for yourself:

Under Prof.Cond.R. 1.2(d), a lawyer cannot deliver legal services to assist a client in the establishment and operation of a state regulated marijuana enterprise that is illegal under federal law.  The types of legal services that cannot be provided under the rule include, but are not limited to, the completion and filing of marijuana license applications, negotiations with regulated individuals and businesses, representation of clients before state regulatory boards responsible for the regulation of medical marijuana, the drafting and negotiating of contracts with vendors for resources or supplies, the drafting of lease agreements for property to be used in the cultivation, processing, or sale of medical marijuana, commercial paper, tax, zoning, corporate entity formation, and statutory agent services. See also, Colo. Op. 125 (2013).  Similarly, a lawyer cannot represent a property owner, lessor, supplier or business in transactions with a marijuana regulated entity, if the lawyer knows the transferred property, facilities, goods or supplies will be used to engage in conduct that is illegal under federal law.  Even though the completion of any of these services or transactions may be permissible under Ohio law, and a lawyer’s assistance can facilitate their completion, the lawyer ultimately would be assisting the client in engaging in conduct that the lawyer knows to be illegal under federal law.

That is the equivalent of going into surgery to have a gall bladder removed, but your physician got tied up and couldn’t make it, so you’ll just use your cousin Earl who has watched a bunch of Grey’s Anatomy.

Alas, maybe our blood pressure is needlessly rising – looks like the Ohio Supreme Court may step up to fix the problem.

Perhaps the lesson here is that we may not appreciate the value of attorneys until we’re told we can’t use them – especially in an industry as risky as cannabis.

Cannabis Stays Schedule 1 – Blame DEA, but Also Blame HHS.

As you already know, the DEA decided not to reschedule cannabis, and maintain its Schedule I status under the Controlled Substances Act.

In the coming days and weeks, there will be much analysis of the actual decisions – find them here and here.

This is certainly disappointing, albeit quite predictable.

I will be sharing more thoughts soon, but I wanted to make sure one thing is not lost: while the US Drug Enforcement Administration, Department of Justice, and Obama Administration deserve their share of blame, do not lose sight of the blame that rests with the U.S. Health and Human Services department.  HHS paved a clear course for the DEA to follow in denying the rescheduling request.  Here is their letter in full (starting on page 6):

Department of Health and Human Services, Office of the Secretary Assistant Secretary for Health, Office of Public Health and Science Washington D.C. 20201. June 25, 2015. The Honorable Chuck Rosenberg Acting Administrator, Drug Enforcement Administration, U.S. Department of Justice, 8701 Morrissette Drive, Springfield, VA 22152

Dear Mr. Rosenberg:

Pursuant to the Controlled Substances Act (CSA, 21 U.S.C § 811(b), (c), and (f)), the Department of Health and Human Services (HHS) is recommending that marijuana continue to be maintained in Schedule I of the CSA.

The Food and Drug Administration (FDA) has considered the abuse potential and dependence-producing characteristics of marijuana.

Marijuana meets the three criteria for placing a substance in Schedule I of the CSA under 21 U.S.C 812(b)(1). As discussed in the enclosed analyses, marijuana has a high potential for abuse, no currently accepted medical use in treatment in the United States, and a lack of accepted safety for use under medical supervision. Accordingly, HHS recommends that marijuana be maintained in Schedule I of the CSA. Enclosed are two documents prepared by FDA’s Controlled Substance Staff (in response to petitions filed in 2009 by Mr. Bryan Krumm and in 2011 by Governors Lincoln D. Chafee and Christine O. Gregoire) that form the basis for the recommendation. Pursuant to the requests in the petitions, FDA broadly evaluated marijuana, and did not focus its evaluation on particular strains of marijuana or components or derivatives of marijuana.

FDA’s Center for Drug Evaluation and Research’s current review of the available evidence and the published clinical studies on marijuana demonstrated that since our 2006 scientific and medical evaluation and scheduling recommendation responding to a previous DEA petition, research with marijuana has progressed. However, the available evidence is not sufficient to determine that marijuana has an accepted medical use. Therefore, more research is needed into marijuana’s effects, including potential medical uses for marijuana and its derivatives. Based on the current review, we identified several methodological challenges in the marijuana studies published in the literature. We recommend they be addressed in future clinical studies with marijuana to ensure that valid scientific data are generated in studies evaluating marijuana’s safety and efficacy for therapeutic use. For example, we recommend that studies need to focus on consistent administration and reproducible dosing of marijuana, potentially through the use of administration methods other than smoking. A summary of our review of the published literature on the clinical uses of marijuana, including recommendations for future studies, is attached to this document. 7

FDA and the National Institutes of Health’s National Institute on Drug Abuse (NIDA) also believe that work continues to be needed to ensure support by the federal government for the efficient conduct of clinical research using marijuana. Concerns have been raised about whether the existing federal regulatory system is flexible enough to respond to increased interest in research into the potential therapeutic uses of marijuana and marijuana-derived drugs. HHS welcomes an opportunity to continue to explore these concerns with DEA.

Should you have any questions regarding theses recommendations, please contact Corinne P. Moody, Science Policy Analyst, Controlled Substances Staff, Center for Drug Evaluation and Research, FDA, at (301) 796-3152.

Sincerely yours, Karen B. DeSalvo, MD, MPH, MSc Acting Assistant Secretary for Health

 

5,000 State Legislators and Staff Visit Chicago – Some to Talk About Cannabis

Starting today, legislators and their staff from state governments throughout the U.S. are arriving in Chicago.  Over 5,000 of them.

It is part of the annual National Conference of State Legislatures (“NCSL”) Summit.  State legislators from California to Maine, Florida to Washington, Alaska and Hawaii will converge on the Windy City to share best practices, listen to Melinda Gates, attend late night parties hosted by corporations and lobbying firms, and probably eat as much deep dish pizza as they can find.

There are also exhibitors at the convention hall, including, seriously, the American Association for Nude Recreation (appropriately, my firm’s firewall blocked my viewing of this site for research purposes, so click the link at your own peril).

What does this have to do with cannabis?

There will be several formal and informal meetings and panels discussing issues in the industry, notably a NCSL panel on cannabis-industry banking:

Banking Services for Marijuana-related Businesses
Summary: Alaska, Colorado, Oregon, Washington and the District of Columbia now allow the recreational use of marijuana. Twenty-five states, the District of Columbia and Guam allow medical marijuana. Marijuana businesses are struggling to find banks and credit unions willing and able to work with them despite recent federal guidance for financial institutions. Colorado tried to create a cooperative and was denied approval for deposit insurance. Bills are pending in Congress that ease federal restrictions. Hear about efforts to help the industry move beyond the cash-only model.
Moderator: Diana Clay, House of Representatives, Arizona Legislature
Speaker: Don Childears, Colorado Bankers Association
Speaker: Senator Bill Coley, Ohio
Speaker: Taylor West, National Cannabis Industry Association, Colorado
Speaker: Representative Jennifer A. Williamson, Oregon
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Great to see speakers from critical states like Colorado and Oregon working to address this issue, as well as the venerable Taylor West from NCIA.
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I will also be speaking on a panel hosted by the Marijuana Policy Project, “Medical Cannabis in Illinois – A Virtual Tour.”
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It may not be as sexy as the 4-hour session titled, “The Mason’s Manual Commission Working Group on Internal Citations”, but it is comforting to see legislatures around the country taking the cannabis banking issue seriously.  The sooner we find a national solution to issues like institutional banking, the sooner we can reduce industry-related crime, avoid irrational interest rates from private lenders, and reinvest proceeds into the community and business expansion the way normal businesses do.

Anonymous DEA Lawyer Gets It Wrong On Marijuana Rescheduling, Surprising No One

By now you have heard increased chatter that the federal government may reschedule cannabis.  I covered a sliver of the potential impact on Illinois here.

The most recent rumor was that, even though the DEA blew their self-imposed June 30 deadline, the DEA would reschedule marijuana as Schedule II (“drugs with a high potential for abuse” on August 1st.

August 1st came and went – no big DEA announcement.  Just silence.

I am annoyed that the DEA has not yet acted, but what really bugs me is that a California attorney, hiding behind anonymity, would peddle such a story when there was no truth to it.

The Santa Monica Observer claimed to have the scoop – obviously we can’t verify if the Observer did, in fact, have an anonymous DEA lawyer, or if it was all made up.  Never read the Santa Monica Observer before?  I’m not judging, but a headline story yesterday was:

Former Prison Inmate Robs WY Bank, Throws the Money in the Air, & Waits for Police

My guess is it looked something like this.

Back to the DEA, let’s suspend any doubt – What if there really is a DEA lawyer in California that sat down with the Observer on several occasions and lied about August 1st being the set date to announce a change in cannabis’ status under the Controlled Substances Act?

So what’s the bottom line? Is medical marijuana legalization really going to happen this year?

[levels his blue eyes at mine]. Yes. Because there’s too much money to be made. And because it’s an important public policy and because there are already a lot of people using cannabis. This activity is going to happen on the margins anyway. It’s unimaginable that it would just be allowed to continue forever on the margins.

This may surprise some of you, but lawyers are not supposed to intentionally lie about things.  Especially in public.  Most of all involving government actions.

Lawyers are prohibited from public misrepresentations.  Illinois attorneys cannot: engage in conduct involving dishonesty, fraud, deceit, or misrepresentation.  California lawyers will be investigated by their disciplinary agency following crimes involving “misrepresentation, fraud or deceit,” as well they should.

If a California DEA agent deliberately misrepresented August 1st as a date of government action, and then walked off into the California sun, he should be held accountable.

Now that we know it won’t be August 1st, the real question is – will the DEA reschedule or deschedule cannabis before the end of the Obama Administration?

It is possible that cannabis will be rescheduled, though much less likely that it will be taken off the US Controlled Substances Act scheduling altogether.  From a political perspective, every day that passes without DEA action makes it less likely to happen before we have a new President sworn in January 2017.  I’ll be sure to keep you posted on any news on this front, but in the meantime 1) don’t bet the farm on predictions by any “anonymous DEA lawyer,” and 2) don’t rob a bank just to throw the money in the air waiting for the cops to arrive.