High Times for the Cannabis Business
Sam Gandhi and James Cole
April 2020
Sam Gandhi:
The cannabis business is booming. Social acceptance of marijuana has led jurisdictions to legalize its sale and use for both medicinal and recreational purposes. Companies see enormous business opportunities in it, but marijuana is still illegal under federal law and the political landscape about its regulation is complicated. What should companies know about the opportunities and risks in the marijuana business? We’ll find out in today’s podcast.
We have a situation now where most states in the United States have made marijuana legal in one form or another, and that’s a conflict that exists in the law. It is still very illegal under federal law. The question the business really has to ask itself is, What’s the risk/reward? The risk of prosecution is low, but it’s not zero, and they’re making an informed judgment as to whether or not they want to go into this business. And a number of companies are doing that.
James Cole
Sam Gandhi:
From the international law firm Sidley Austin, this is the Sidley Podcast, where we tackle cutting-edge issues in the law and put them in perspective for businesspeople today. I’m Sam Gandhi. Hello and welcome to the podcast. Today, we focus on the exponential growth of the cannabis industry and the opportunities and risks of getting into this market. I’m joined by Sidley partner James Cole. Jim is the former deputy attorney general of the United States, where he was the primary author of a Justice Department memorandum regarding the prosecution of federal laws prohibiting the sale and distribution of marijuana, appropriately called the Cole Memo. Jim is the global co-lead of Sidley’s White Collar: Government Litigation and Investigations practice. His practice includes the full range of federal enforcement and internal investigations, with a particular emphasis on cross-border and multijurisdictional matters. Jim joins us from Washington, D.C. Jim, it’s great to be speaking with you.
James Cole:
Sam, good to see you, too.
Sam Gandhi:
While we’re doing this remotely, we’re not in the office, but I can see you and everyone can hear you on this podcast. The legal status of cannabis is pretty complicated, so let me ask you a question. Is pot actually legal?
James Cole:
That is a complicated question. Under federal law, the short answer is, no, it is not legal. It is still a Schedule 1 controlled substance, which is the highest category there is. But we have a situation now where most states in the United States have made marijuana legal in one form or another. Either medically legal or adult use, what’s otherwise known as recreationally legal, and that’s a conflict that exists in the law. And even though a state like California or Massachusetts may have legalized marijuana under state law, it is still very illegal under federal law, and all the federal laws that would apply to something like that are still in effect.
Sam Gandhi:
And what’s the difference between medicinal and recreational use? That line has been blurred, it seems, over the last few years with the legalization at the state level with marijuana.
James Cole:
Well, it really has, and in fact the history of the legalization of marijuana under state laws in this country really goes back into the ’90s, when it first started to become legal for medical uses in a number of states. California may have been the first one in the mid-90s, and in truth and fact, back then it was really an excuse to allow people to smoke marijuana, because there wasn’t a lot of medical diagnosis going on. You would go to a doctor, and you might go to the doctor and say, You know, Doctor, every time I breathe in, I feel like I have to breathe out. And the doctor would say you need marijuana, and you’d get a recommendation. You could go to the marijuana store in California and buy it legally under state law. There was no controls, no regulation, nothing.
That’s very different than what we have, for example, under the FDA rules about how you qualify a pharmaceutical drug that’s really medicine and the kind of testing that goes into it, and the clinical trials that go into it. None of the states under their state law requires that kind of regimen or that kind of care. There is right now one product that is approved by the FDA for medicinal use, and it’s to treat juveniles with serious epilepsy issues. Other than that, there are no pharmaceutical drugs that have been approved. So really what you have with medical marijuana in the states is a palliative. It could be used for fighting nausea. It could be used as a pain reliever. It could be used as a calmer. It’s in many respects like a dietary supplement or a food supplement. It’s not particularly tested, there’s no particular science behind it, and most of the benefits are anecdotal right now.
Sam Gandhi:
And is the United States from a regulatory standpoint very different than other countries with respect to the use of marijuana?
James Cole:
Some countries are starting to legalize it, and, most notably, Canada has fully legalized marijuana throughout the country. They used to be like us—a country that had made it illegal across the board as a very serious, hard-core drug. It is now fully legal in Canada but regulated, and it can be used for medicinal use, it can be used for recreational use—there’s not much of a distinction right now. But that’s probably the closest country we have to us who has gone kind of full bore on a federal level making marijuana a legal substance.
Sam Gandhi:
Given that there are questions about the legality of marijuana, what should companies know in terms of corporate or even personal liability for those companies engaged in the cannabis industry?
James Cole:
I’m going to put this in a technical sense of what the law provides. Right now, legally, if a company is engaged in the marijuana business or it is supporting the marijuana business, even if it’s not directly engaged in it, it’s technically in violation of the Controlled Substances Act. And not only the company but the individuals in the company who are engaged in that business could be subject to prosecution under the Controlled Substances Act. That means felony prosecutions. It has penalties, which includes prison time, big fines. You can be involved in money-laundering charges as well, forfeiture charges as well—all of that is available. Now, it’s not to say that I’ve been seeing a rush of cases by any stretch of the imagination. There have really not been a lot of cases from the federal government in this space, but as a technical matter, it is illegal under federal law, both corporate and individually for the people who are engaged in the business.
Sam Gandhi:
But there are U.S. businesses engaged in the cannabis industry. So how does a business with a marijuana-related business really have a compliance function if it’s illegal under federal law?
James Cole:
Well, a number of factors come into this. First of all, it is illegal under federal law. A number of these companies that are engaging in the business are really doing a risk analysis. What is their risk appetite? How comfortable do they feel, depending on where their risk appetite lies, with engaging in the marijuana business? There’s a number of downsides that they have to contend with, like it’s difficult to get banking, it’s difficult to get loans, it’s difficult to get insurance. Things like that make it very, very difficult to run a business.
And in addition to that, under the IRS code, you cannot deduct your expenses if you are in the marijuana business on your taxes. So any of your expenses are just gone, and you don’t do net. It’s all gross. So these are some serious impediments for a business, but the question the business really has to ask itself is, What’s the risk/reward? Do they think it’s something that they are comfortable going into understanding that technically it’s illegal? The risk of prosecution is low, but it’s not zero, and they’re making an informed judgment as to whether or not they want to go into this business. And a number of companies are doing that.
Sam Gandhi:
So I want to talk to you a little bit about the reference to this business. There are some companies that are not directly in the cannabis business, but they’re in a related business, such as a landlord who owns commercial real estate that leases to a company in the cannabis industry, or somebody who’s providing materials to a cannabis company. What are their risks and liabilities?
James Cole:
Generally, those are the same as the people who are in the business itself. The key is going to be whether they are aware of the fact that the business they are helping serve and facilitate is, in fact, a marijuana business and if they, through their work with that business, intend to help it conduct that business itself. So, if you’re selling a marijuana business some scales so that they can weigh things, and you know they’re going to use them to weigh the quantities of marijuana to sell, or you’re selling them fertilizer, knowing they’re using it to grow marijuana plants, or you have a REIT that’s designed to sell or lease land to marijuana companies that want to grow marijuana—anything like that. Even packaging—if you know the packaging is going to be used for the marketing and sale of marijuana, you’re facilitating the marijuana business and you’re guilty under the law the same as if you were a principal running the company itself.
Sam Gandhi:
You are listening to the Sidley Podcast, and we’re speaking about the opportunities and risks in the cannabis industry with Sidley partner Jim Cole. Jim’s the former deputy attorney general of the United States and global co-lead of Sidley’s White Collar: Government Litigation and Investigations practice. Jim, I want to talk to you about the time when you were deputy attorney general and you authored a series of memos in 2013 and ’14 that provided that given federal resources, the federal government was not going to enforce federal prohibitions against marijuana sales in those states in which it was legal, so long as there was robust enforcement of state regulations. Those memos were rescinded by the Trump Administration in 2018. So, again, you’ve talked a little bit about the relationship of companies to federal compliance, but what’s the current guidance for businesses in terms of what the federal government is actually going to do?
James Cole:
I’d say it’s a little confused, but if you look at what’s happened, things don’t seem to have changed very much from when the memos that I had offered were in effect. They were rescinded in 2018 when the most recent attorney general came into office, Bill Barr. He was asked about that during his confirmation hearing, and he said that if a company had been doing business in compliance with the Cole Memo, he wasn’t going to be prosecuting them. Now, the general rule at the Justice Department right now is each individual U.S. attorney can decide whether to bring a case or not. There’s not an overarching policy in the department that’s been formally issued, like had been the case from the memo that I wrote, but you’re not seeing prosecutions in any large measure different than what you saw when the memo I wrote was in effect.
It is still illegal, but it seems that the discretion of all the prosecutors and U.S. attorneys in the country is that it’s not worthwhile for the Justice Department to go after these otherwise state-legal marijuana businesses as long as they’re complying with the principles that were in the Cole Memo. And the Cole Memo really set out that there were a number of harms—public interest harms—that we had identified that if those were being violated, they should expect us to come in and prosecute. Selling to minors, having it be some sort of screen or mask for other illegal drug cartels to be involved in. If those cartels were involved in the business at all, we would prosecute it. If it was being adulterated, if there [were] environmental issues that were coming from it. Things like this were very important to us and were specifically highlighted as areas that we would prosecute.
We were relying on the states to put in enforcement, and we said if the states enforce, we’re going to leave it alone. We’re going to let them be in charge of what is going to happen in the marijuana business under their own laws as long as they protected the interests that we thought were important. I think one of the issues we came upon was the reality with the legalization, was that people were going to smoke marijuana and we weren’t going to be able to stop that very effectively. So the question became, Where were they going to get it? And if we didn’t allow that industry to get formed, they were going to get it from the drug cartels or they were going to get it from gangs, and that would create all the problems that we really didn’t want to have existing in this field.
Sam Gandhi:
Let’s focus on that, because the global legal marijuana market is expected to reach about $145 billion by the end of 2025. And as you said, there was a view about the inevitability of the marijuana industry back a number of years. The political realities of it is that even though that memo was rescinded, where do you think enforcement goes from here? And where do you think the political realities are of cannabis reform going forward?
James Cole:
You know, there’s a real movement to try and fix a number of the areas that are really confusing and really, I think, confounding in this legal space. There’s a couple of bills that are going through Congress right now trying to either deal with the banking issue as a singular issue or more broadly with the legalization of marijuana under state law by saying if a state has a law that legalizes marijuana and they’re enforcing it and you’re in compliance with that law, the Controlled Substances Act—the federal law—won’t apply. That’s one bill. Another says that if you meet certain guidelines for banking and you’re in compliance with state law, it won’t trigger money-laundering statutes. These have been running through Congress for quite a while. Some have actually gone through committees and been voted out. Others are still rattling around in the various houses of Congress.
The problem is Congress doesn’t have a very wide bandwidth in doing things. I’m not sure this is the first thing they’re going to be dealing with right now, particularly with all the issues that are present for them, so it could take a while. It’s also a complicated issue. There are some members where their constituencies don’t think this is a good idea and they may not vote for it, and they may be in charge of key committees. There are others who have constituencies where this is very important. My general view is it needs to be dealt with by Congress. That’s the only way we’re going to start making any sense out of this and have some sort of regularized business environment. But if you have your business plan resting on action from the United States Congress, my advice has always been get a new business plan, because that’s not always a reliable factor to count on.
Sam Gandhi:
Many companies are still transacting in the cannabis business with Canada and where there are generally far fewer rules and regulations, as you said. What’s the guidance for U.S. companies who want to transact in the marijuana business with Canadian companies?
James Cole:
Well, this is an interesting aspect of it. In Canada, it’s fully legal as long as you comply with Canadian law, and from a U.S. perspective, as long as there’s no intention—and it doesn’t even have to be an action, merely an intention—as long as there’s no intention to sell the marijuana into the United States, it’s legal. Your investment in a Canadian company is not going to violate U.S. law, and the proceeds of your investment in a Canadian company won’t trigger the money-laundering statutes under federal law, because it’s not proceeds of criminal activity under federal law. So you can, as long as you do the appropriate due diligence, invest in Canadian companies and you can repatriate the money from Canadian companies, as long as you’re making sure that they are in compliance with Canadian law and no aspects of it are going to be sent into or marketed into the United States.
Sam Gandhi:
Jim, during the COVID-19 crisis that we’re going through right now, a number of these executive orders around the States have made the cannabis industry an essential business. That sounds like a pretty good business to invest in. Can I invest in a cannabis business?
James Cole:
You can invest in a cannabis business if you’re willing to take the risk that some federal prosecutor may prosecute you for doing that. At this point, it would be a very confused prosecution, obviously, but it’s technically illegal under federal law. The orders making it an essential business—basically, recognizing that there is a pain relief and a palliative aspect to it, there is a calming aspect to it—that, the States recognize. And I think a lot of these orders that you’re seeing are probably state orders as opposed to federal orders, because they’re the ones who are really denominating businesses as essential or not.
Sam Gandhi:
We’ve been speaking with Sidley partner James Cole, the author of the Cole Memo and the former deputy attorney general of the United States, and global co-lead of Sidley’s White Collar: Government Litigation and Investigations practice. Jim, thanks for sharing your insights into the cannabis industry.
James Cole:
Sam, it’s been a pleasure talking with you.
Sam Gandhi:
You’ve been listening to the Sidley Podcast. I’m Sam Gandhi. Our executive producer is John Metaxas. You can hear more episodes at sidley.com/sidleypodcast, or subscribe on Apple Podcasts or wherever you get your podcasts.
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