Marijuana

Marijuana And Foreign Investment

It appears the federal government is taking a wait-and-see approach to foreign ownership of state cannabis businesses.

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Hilary Bricken

Hilary Bricken

In addition to my firm’s representing marijuana-related businesses on their corporate, finance, and transactional issues, we also handle cannabis foreign direct investment. Lately, we have been getting a lot more interest regarding foreign investment into the U.S. cannabis industry and this post is a quick primer on some of the key legal issues involved in this relatively precarious arena. As would be expected, much of the foreign country interest we are seeing is coming from Canada, Spain, The Netherlands, Israel, and Germany, with a bit from Croatia, Chile, and China as well.

What constitutes foreign direct investment? Foreign direct investment (FDI) typically refers to a cross-border transaction where a company or investor from Country A either invests money in a company located in Country B or forms a subsidiary company in Country B. It generally does not encompass putting money broadly into stocks and bonds — it is specifically about a concentrated single-enterprise investment.

FDI exists in several forms. Foreign investors can start a new company and finance and build it from the ground up. They can participate in a joint venture with U.S. partners. They can wholly or partially acquire a U.S. business. They can also take a lighter touch, where they provide primarily branding and process support while having U.S. parties take on the bulk of the financial risk — the basic franchise or licensing model.

State Cannabis FDI Issues. In the marijuana industry, I have already seen large FDI projects in cannabis ancillary services. Foreign investors have opened up domestic companies for the manufacture and import of cultivation equipment like grow lights and hydroponic equipment, processing equipment like automated trimmers and extraction machines, and associated inputs including soil, fertilizer, vapor pen batteries and cartridges, and more. I have also seen large amounts of foreign money come in for cannabis real estate projects. In addition to buying the real estate, the foreign investors put money into greenhouses, grow lights, storage facilities, and more to offer turnkey cultivation and processing facilities for lease to local businesses. These companies are largely unregulated at the state level, and their foreign investment issues are similar to non-cannabis businesses, dealing with things like registering as U.S. taxpayers for partnership taxed businesses, complying with FIRPTA, and dealing with immigration issues.

For firms directly involved in buying or selling cannabis, state restrictions become more of a concern. States like Washington do not allow anyone who is not a state resident (much less not a U.S. resident) from having any profit interest in a marijuana business. Even Oregon, which has the most liberal ownership restrictions in the country for marijuana businesses, presents some unique issues. State regulations and state laws are written with U.S. residents in mind. Though Oregon does not require state or even U.S. residency to have an ownership interest in a marijuana business, it is unclear how Oregon would deal with foreign owners who need criminal background checks. Neither state officials nor the FBI are likely to have any real information on foreign nationals with no previous contact with the United States. Questions remain regarding how states would deal with foreign owners of marijuana businesses. 

What about federal criminal law? The Federal Controlled Substances Act does not differentiate between activities that are international, interstate, or fully intrastate in nature. Possessing, manufacturing, and distributing marijuana are federally illegal regardless of where the company’s owners live. Still, there are a couple of criminal statutes that add fuel to the fire when interstate and international commerce are involved. 18 U.S.C. § 1952, for example, criminalizes traveling or using the mail in interstate or foreign commerce with intent to distribute the proceeds of marijuana sales.

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More questions arise when considering foreign ownership in the context of the Department of Justice marijuana enforcement memoranda that cannabis-legal states are working under. The main takeaway from the August 2013 Cole Memorandum was that if the states want to keep federal law enforcement away, they need to make sure their regulations prevent state license-holders from violating the various federal enforcement priorities. One of those priorities was that state regulations need to prevent “revenue from the sale of marijuana from going to criminal enterprises, gangs, and cartels.” If the state and federal criminal background check databases do not have extensive coverage on foreign crimes, how can a state have faith that the foreign investors don’t fall into one of those categories? For now, with no broad pronouncements coming out, it appears the federal government is taking a wait-and-see approach to foreign ownership of state cannabis businesses. It is up to state cannabis business participants and the states themselves to ensure that foreign owners do not violate federal enforcement priorities.

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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