12 Legal Considerations For Potential Cannabis Production

If you are reading this, you are possibly interested in either becoming a grower of cannabis (sometimes also referred to as a producers or cultivators) or you are already profiting from cannabis production. With the constantly changing political and legal environments surrounding medical marijuana, here are some legal issues to keep in mind as you consider expanding your business through cannabis cultivation.

First and foremost, the federal government treats cannabis as a Schedule I substance, which makes cultivating, distributing or possessing it illegal. A Schedule I substance is one defined as having no demonstrated medical benefit and being highly addictive, such as LSD and Heroin. So there is no coherent federal policy governing or regulating cannabis producers.

The Schedule I classification also impacts opportunities to obtain banking services since on a federal level the proceeds of the sale of cannabis are deemed to be criminal proceeds. Even state banking institutions, such as MBank and Four Corners, which had initiated banking for cannabis industry participants, were eventually forced to jettison that business line due to regulatory pressures.

However, on a positive note with respect to obtaining banking services, growers may be able to utilize some corporate structural advantages by forming a subsidiary of an existing parent grow company. On a federal basis, the taxation of cannabis-related profits is severely unfavorable due to cannabis being treated as proceeds of a criminal enterprise. So there will be accounting issues to be addressed, as well.

Now our attention turns to examining state legislation for prospective cannabis growers. Twenty-three states have legalized medical marijuana, and four states, as well as the District of Columbia, allow for recreational adult use. Each jurisdiction has its own regulations and requirements for licensure. Not only that, but there may also be local ordinances to comply with. Based on your proposed growing location, the applicable rules and regulations can vary greatly. The regulations may also differ, based on whether the proposed growing operation is intended for medical or recreational production.

In the cannabis industry, regulation is a product of state and local agencies. As it would be impractical to discuss each states’ regulatory scheme, please be aware that state cannabis legislation is constantly being amended and is subject to further change at any time. Here are 12 of the key issues broadly found throughout the grower licensing process.

1. Location. In some cases you will need a location prior to application, so be sure to check local zoning laws. You will need either a cannabis-friendly landlord or the ability to purchase the property. as well as insurance from cannabis-friendly underwriters.

2. Indoor vs. Outdoor. Some states may require only inside growing, while others will be indifferent. There may be other regulatory differences based on selection. Production caps might be in place in order to try and stabilize price and avoid over-production being diverted to the black market.

3. Water. There may be riparian right issues, or in other words, watering restrictions and requirements.

4. Traceability. There may be a requirement for governmental seed to sale tracking, which would require compliance with numerous governmental reporting and tax requirements.

5. Business Structure. There may be requirements regarding vertical or horizontal integration. Must a grower be associated with a single dispensary, only affiliated dispensaries, or can a grower be free to distribute to multiple dispensaries?

6. Limits. Is there a cap on the amounts of plants a cannabis grower can produce?

7. Regulation. Are there testing requirements for molds, pesticides and other impurities?

8. Licensing. The cost of licensure can range from a few thousand dollars to hundreds of thousands of dollars. Are there caps on the number of state licenses issued?

9. Prerequisites. Are there any provisions, as in Florida, requiring a grower to be established for a substantial amount of years prior to licensure?

10. Security. What are the security requirements, if any? Consider the cost and additional maintenance of video cameras, alarms, surveillance, identification, access, etc.

11. Planning. Do you have a well thought out and written business plan?

12. Finance. If you are in need of financing, how will you will raise capital? Reg A? Reg D? Crowdfunding? A Simple Agreement for Future Equity (“SAFE”)?

These are not all the issues that a potential cannabis producer will have to consider, but it is a good foundation to earnestly begin the process of investigating the opportunity. Although there is a lot of complexity and there are several dynamic regulatory requirements, the growing of legal cannabis provides an excellent opportunity to a well-funded and forward-thinking organization. It is also important to conduct thorough due diligence and have a qualified consultant or attorney help you every step of the way to decide whether it makes sense to be, or not to be, a cannabis grower.