Marijuana

Harshing Your Mellow: Top 10 Red Flags In The Marijuana Industry

Be careful, and know what to look for to protect yourself or your marijuana business client.

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Over the past five years, I’ve had my fair share of experiences with both the good and the bad in the marijuana industry. As is the case in any industry, if something seems too good to be true, it usually is. This is even more likely to be the case in the marijuana industry, which far too many view as the “green rush.” So, I think it time I share with you my Top 10 Marijuana Industry Red Flags so that you know what to look for to protect yourself or your marijuana business client:

  1. Marijuana real estate agents. Locating commercial properties that both comply with state and local laws and that have landlords willing to rent to marijuana businesses can be difficult. A good realtor can help find what is needed, but it is the rare “marijuana realtor” who can be trusted. Few “marijuana realtors” know anything about state or local marijuana laws relevant to using a property for commercial cannabis use, but this virtually never stops them from claiming otherwise to net a client.

I also commonly see cannabis realtors who claim to side with the marijuana business, but whose sole goal is to assist landlords in gouging marijuana tenants for above-premium rates. In vetting your realtor, be sure he or she knows both the state and local laws as they relate to real estate and any local land use and zoning regulations. Lastly, it is no secret that landlords bear great risk in the marijuana industry, so if your realtor does not know that from the outset, no matter what side of the leasehold you are on, you should seek a replacement.

  1. Anyone claiming to be the “next big thing” in the marijuana industry. The “green rush” gives rise to many who will do nearly anything to make a dollar. You need to be wary of anyone whose goal is to sell you on his or her ability to make it big in this industry or who guarantees that they can get you or your client a marijuana license in such-and-such state.

We are always advising our cannabis clients to stay away from those who desperately pitch themselves as part of “big marijuana,” and you should too, whether it’s a security company, a marijuana consultant, a software company, or even (especially) an investment banker. You know the type: people who will promise you everything but get really vague when you ask them to explain how it is that they work their “magic.” My personal favorites are the companies that brag about the number of operational licenses they were able to secure for companies in the states where the licensing process is completely random. Be on particular guard for these people because they like to charge premium fixed fee prices even before — especially before — the licensing process in their state is finalized.

  1. Marijuana “management” companies. It is difficult to operate a business when banks and credit unions refuse to take you on as a client. Eventually things will improve as more financial institutions slowly take on cannabis clients as a result of the FinCEN guidelines. In the meantime though, the marijuana industry has been nothing if not creative, sometimes to its own detriment. Exhibit A, creating marijuana management companies to obtain bank accounts.

Running your cannabis money through a management company and then using that company to obtain a bank account is a very bad way to obtain banking services. Using a management company to set up your bank account will attract the attention of both the bank’s fraud department and federal law enforcement, and it could lead to civil liability, federal charges of laundering “drug money” through the management company, and federal law violations for having lied to and seeking to defraud a bank. Do not waste your money (or your freedom) on this kind of management company. Be honest with the bank and try to be patient. And run – don’t walk – away from anyone who suggests that setting up such a management company will solve your banking problems.

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  1. Ragged and rampant trade organizations. New marijuana trade organizations keep popping up as legalization increases. The problem is that most of these new organizations are inert and unorganized, and some are flat out corrupt. Many of these groups have been formed with the primary goal of leeching fees from members without pursuing any meaningful action. Please do not misunderstand me — trade organizations are amazing tools for policy, progress, and protection. But some of the marijuana trade groups of late are incapable of doing anything but taking and wasting people’s money.

You need to vet your trade groups thoroughly. Who is really in charge? What is their goal? What will you really get for your membership dues? What is the group’s track record on achieving its goals? How loud will your voice be in the group? Who exactly are its members? If you cannot get these questions answered, you should probably decline that membership invite. We have found the best groups to be those with a legitimately national presence as well as the small local ones that were formed organically by its marijuana business members to achieve particular and well-defined goals.

  1. Publicly traded marijuana companies. Though I have already written about the many perils associated with such companies, I cannot resist again emphasizing how careful you or your client need to be when contemplating investing in a publicly traded marijuana company. Virtually none of the publicly traded marijuana companies are anywhere near to being profitable and it seems like every week the media comes out with a new revelation about the sordid background of a public company founder. You have been warned.
  1. Anyone who doesn’t know what the “Cole memo” is. There are certain things that instantly tell me I am dealing with someone unfamiliar with this industry, and having no clue about the Cole memo is one of those things. The August 2013 Cole memo gives critical insight into the federal government’s marijuana enforcement strategies under the current administration and for someone not to know this is quite telling. Even more so if they do not even realize that marijuana is still illegal under federal law. These people usually talk about doing business between states as though the federal government is irrelevant or try to pitch me on grandiose visions of “big marijuana” that are legally impossible. These people are a “pass” for my law firm as clients and they should be for you as well.
  1. Marijuana airport seminars, consultants, and “colleges.” I routinely hear horror stories from people who have attended these “institutions” of “higher learning.” My firm spends an inordinate amount of time with new clients cleaning up messes these companies were told to create by these colleges and consultants. Having run a pot delivery service in California or having worked at a dispensary in Colorado does not make one an “expert” in anything or everything related to pot in a given state, and if the faculty of the “institution” or “seminar” faculty is made up of such individuals, you should question its validity.

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  1. Anyone who claims they can get you a “regional trademark.” A brand is often a company’s most valuable asset and the best way to protect that brand is usually by securing a trademark for it. But because the federal government does not generally allow federal trademarks for marijuana products, trademarks — which are complicated enough — become ever more so. Since marijuana branding is a hot topic, far too many lawyers are talking about trademark law in the context of cannabis, wrongly claiming and selling their clients on the concept that a trademark in one state will automatically protect you in other states within the same “region.” This is just incorrect and if you want to be assured of protection in any given state, you should either register for a federal trademark for your ancillary marijuana products and if available, register for a state trademark for your marijuana brand in each state in which you operate. Period.
  1. Criminal lawyers turning into “marijuana business lawyers” overnight. Would you have your business lawyer argue your DUI case? Probably not. Using a criminal defense lawyer to do your business work is equally as questionable. Criminal law and business law have a completely different set of laws and one is typically done in court (criminal) while the other is typically done in an office (business).

Good criminal lawyers are still valuable in this industry but mainly as criminal lawyers, not as freshly minted business lawyers who are seeing their bread and butter practice of defending marijuana defendants evaporating. Call a criminal lawyer if you are raided by the feds, but for something like your company formations, investment, trademarks, real estate transactions, employee contracts, or your safety compliance, seek out an experienced business lawyer.

  1. The federal government. The federal government is the biggest red flag in the industry. Despite the progress being made by the states, the Feds still loom large as marijuana remains a federal crime. Though the Cole memo provides valuable context to the Feds’ enforcement of federal drug laws, you should avoid those who tell you not to worry about federal laws because the Feds are inactive or unwilling to enforce. Marijuana remains a Schedule I drug and possessing or selling it remains a federal crime. If you do not comply with all state and local laws or you are operating in a state without “robust marijuana regulations,” your risk of being raided, arrested, and ultimately convicted in a federal court increases exponentially.

Hilary Bricken is an attorney at Harris Moure, PLLC in Seattle and she chairs the firm’s Canna Law Group. Her practice consists of representing marijuana businesses of all sizes in multiple states on matters relating to licensing, corporate formation and contracts, commercial litigation, and intellectual property. Named one of the 100 most influential people in the cannabis industry in 2014, Hilary is also lead editor of the Canna Law Blog. You can reach her by email at hilary@harrismoure.com.

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