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What You Need to Know When Buying a Cannabis Business, Part 2: The Regulatory Environment

Buying a cannabis business does not occur in a matter of days, and transactions fall apart for a variety of reasons, as we discussed in Part 1 of this blog series focused on the buy-side of a cannabis M&A transaction. In this Part 2, we focus on the regulatory environment, discussing concepts that first-time buyers

The post What You Need to Know When Buying a Cannabis Business, Part 2: The Regulatory Environment appeared first on Harris Bricken.

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Buying a cannabis business does not occur in a matter of days, and transactions fall apart for a variety of reasons, as we discussed in Part 1 of this blog series focused on the buy-side of a cannabis M&A transaction. In this Part 2, we focus on the regulatory environment, discussing concepts that first-time buyers and their attorneys should be aware of.

Navigating Through Federal Illegality

Marijuana remains a Schedule I controlled substance under the U.S. Federal Controlled Substances Act. Many states have enacted legislation and created regulatory frameworks that permit the cultivation, processing, manufacturing, and retail sale of marijuana within their borders.

However, the acquisition agreements, beginning with the term sheet (or letter of intent) and the attorney firm’s engagement letter should clearly acknowledge the illegality of marijuana according to federal law. They should also include provisions relating to future positive or negative changes in applicable laws and regulations (and their uneven enforcement) that may frustrate the entire purpose of the transaction.

Are You Dealing with Marijuana or Hemp?

The 2018 Agricultural Improvement Act (the “2018 Farm Bill”) removed “hemp” from the definition of “marijuana,” and now hemp can generally be considered a commodity much like any other agricultural crop. However, due to hemp’s affinity with marijuana, the 2018 Farm Bill also directed the USDA to develop a national hemp regulatory structure, with each state and tribe being given the leeway to develop its own hemp cultivation plan for approval by the USDA.

Because the term cannabis can refer to both marijuana and hemp, it is important to understand whether the acquisition target deals with marijuana, hemp, or both. Typically, a target company will specialize in one or the other.

Although a hemp acquisition is significantly less problematic than a marijuana acquisition, many of the considerations in this blog series should also be considered in a hemp acquisition to ensure that the target company’s lines of business are clearly delineated and adhered to. We will deal more with this in our posts on the due diligence period and in the representations and warranties sections in the transaction documents.

Can You Really Buy That Company?

Next, the buyer needs to determine what type of cannabis licensure is being acquired. Some states permit vertical integration within the industry – from plant genetics through to retail sales – while other states, like Washington, prohibit some or all vertical integration.

Other states may, for the purposes of promoting social equity or avoiding market dominance by a single company or a small group of companies (antitrust concerns), have limits on the number of licenses that can be owned. These states may also limit the types of contracts that can be entered into among licensed companies to try to promote a more free and full market environment among licensed companies.

Potential acquirors from a different jurisdiction should become aware of the regulatory limitations in the target state. State laws and regulatory regimes differ significantly across state lines, and you cannot reasonably determine the contours of a state’s marijuana marketplace just by looking at the state’s political environment.

Where Do We Go From Here?

In the following post we will do a deep dive into these parts of a cannabis acquisition:

  1. Preparing to Represent a Cannabis Client for the First Time
  2. The Letter of Intent and Transaction Structuring
  3. Conducting Due Diligence
  4. The Transaction Documents
  5. Initial Closing and the Final Closing

The post What You Need to Know When Buying a Cannabis Business, Part 2: The Regulatory Environment appeared first on Harris Bricken.

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