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Coming immediately around the bend at California’s cannabis operators is a massive onslaught of regulatory detail that will require millions of dollars to navigate to compliance. Regulators seem to think there’s plenty of cash in cannabis to make this happen from the “starting line” regulations they have crafted. To be honest, I’m not so sure.

Marijuana Business Daily’s Factbook 2016 reports less than 25% of cannabis businesses are funded by outside money; that leaves 75% of all cannabis businesses as self-funded! And more than 50% report they need capital within the next year to survive. While news media insists on showing fluttering cash machines with each cannabis story, it’s my opinion that our industry is gravely underfunded to meet “starting-line” regulation. There is a clear disconnect between the perception of this industry’s wealth and reality; the reality is money is scarce and difficult to shepherd into this industry.

The lack of investment is hardly surprising; here’s a sneak-peak at what investors face: Few cannabis companies have historical performance data (in a black market, data is evidence of illegal activity.) Few cannabis operators use contracts (in a black market, the courts won’t enforce them.) Similarly, few have expertise in scaling business growth (in a black market, scaling invites law enforcement attack.) Say, did I mention the abject lack of banking or credit line access? It’s easy to see why capital is not just pouring into our state’s industry.

Sadly, the fact is that investment capital is critical to the success of our industry meeting “starting-line” regulations. The lack of capital to meet regulatory burdens just reinforces the continued proliferation of the black market. Period. End of sentence. Full stop.

Our government leaders must learn that “more carrot, less stick” is the smarter policy choice for an industry that has for years blossomed in the dark under threat of intense criminal prosecution. What we need are policies that encourage a new investor class; policies that acknowledge investor economic risk is critical to our state’s successful transition from a policy of “ban and imprison” to “tax and regulate.”

There is a clear disconnect between the perception of this industry’s wealth and reality; the reality is money is scarce and difficult to shepherd into this industry.

Some Pre-Dawn Advice

Just before the dawn of California’s regulated cannabis environment a lot remains uncertain, but one thing is dead certain, a great number of today’s operators will not survive these next few years of transition – not because they can’t produce great product, but because they don’t know how to meet the administrative demands of a regulated industry.

While California’s operators are cannabis production leaders par excellence, one thing we are not is administratively prepared. Regardless of how the Sacramento battles resolve over issues of self-distribution, vertical markets or the definition of “ownership” – our industry veterans are just months away from the harsh reality of triplicate forms, detailed process standards and arrogant inspectors. Let me give you a little example of what’s in store for you:

Sometime in 2015, after I had co-founded a high profile California cannabis company, we boldly invited a public health regulator to tour our multi-million-dollar edible manufacturing plant, designed and created to meet the highest food manufacturing safety standards. Before the tour, our industrial chef co-founders stapled an 8.5×11 sheet of paper on a big empty wall. I asked him, “what’s that?” to which without a smile he responded, “our visitor’s policy.” I laughed thinking it absurd. So later, this regulator comes, and tours the facility – seeing state of the art food manufacturing equipment at work producing highest quality cannabis edibles. We were so proud. At the end of the tour as we’re seeing him to the door, he stops and coyly asks if he can take a photo. We say, “sure.” And what’s he do? He shyly walks right over to that silly piece of paper on this huge empty wall and takes a photo of our “visitors policy.” That’s what excited him.

So how do we adequately prepare for this Kafkaesque future of ours? Along with legal counsel, hire administrative support immediately – and I don’t mean your ex-partner’s sister’s friend who just finished a business class at community college. I mean hire an expert in business processes – someone with experience in how to build business processes, how to document those processes and most importantly, how to implement those processes. Processes (a.k.a “SOPs” or Standard Operating Procedures) are critical because at a minimum processes and systems ensure consistency, which in turn promotes employee and consumer safety.

The good news about compliance processes is that it’s not hard. The bad news is that it’s painfully tedious and is a cost center that won’t drive revenue. For those reasons it’s so is often ignored until it is too late. Remember – regulators could give a rat’s ass about your revenue, your high quality product or your marketing brilliance. What excites regulators are written processes that are well implemented. To their mind, if your processes are in place and followed, their departments goals of promoting employee and consumer safety is accomplished.

The reason I seize on processes is because above all else, thinking about processes will force you to think in a way that regulators think, which is the first step to maturing into the post regulation environment.

If you don’t know anything about business processes, you would do well to read up on the subject now – as they take a lot of time to develop, and you don’t have a lot of time. Here are a few resources to orient you to this subject that will be so critical to your surviving this transition to a regulated market:

For Entrepreneurs

Most cannabis entrepreneurs share three core desires: (a) to further compassionate care & patient marijuana access, (b) to pursue social justice goals, such as dismantling the violent Prison Industrial Complex, and (c) to play a meaningful part in building an entirely new American industry from scratch. All of us share these desires and each core desire shows up as primary at different times in our entrepreneurial lives, as well as at different times in the evolution of our industry.

It’s critical to understand how our industry is decidedly different and why it attracts a different breed of entrepreneur. Our industry did not arise from the easily understood commercial desire for wealth or technological evolution. Rather our industry was born from the activism of the LGBT community’s response to the institutionally ignored AIDS epidemic of the 1980’s and 90’s. Medical Marijuana was and is instrumental in easing the suffering of Americans living with HIV and AIDS. This tragedy energized California’s Prop 215 and became the catalyst to opening up the conversation on bringing an end to the long failed drug war waged against the American people.

These roots characterize our emerging industry, inform how we treat each other and with compassionate intelligence guide our future endeavors. Few of us will again likely have an opportunity to build an entire industry from the ground up. Therefore, it is imperative we do so thoughtfully and with conviction. Along this path, we are fortunate to have business leaders and professionals to support this difficult effort and tremendous growth.

WHAT KIND OF LAWYERS?

Criminal lawyers are different from Commercial Lawyers. Criminal lawyers assist individuals caught up in law enforcement actions. Commercial lawyers assist entrepreneurs build sound business structures to avoid personal liabilities. Due to the drug war, Criminal lawyers were the first on the scene and instrumental in carving out the court cases that defined the early shape of our California industry. Commercial lawyers came later, Gavin being one, and helped early entrepreneur’s efforts survive law enforcement encounters and legitimize their commercial endeavors for the benefit of patient collectives.

Contact us if you are seeking a commercial attorney with cannabis related expertise or want a referral to a criminal attorney with cannabis related expertise in your area.

WHAT KIND OF ACCOUNTANTS?

Again much like lawyers accountants are often specialists, and those who are well versed in the intricacies specific to our industry are better able to serve cannabis entrepreneur needs. First and foremost is circumventing the application of Internal Revenue Code Section 280(e), a left-over from the cocaine-high days of the 1980’s. Section 280(e) essentially strips cannabis entrepreneurs from being able to write off their expenses, thus rendering such business endeavors in the red and leaving entrepreneurs financially crippled. IRS Code Section 280(e) and the Federal government’s threat to banks willing to handle cannabis financial transactions are the two key weapons used to injure and inhibit the inevitable growth of the cannabis industry. Like commercial attorneys, accountants can manage your needs remotely.

Contact us for a referral to a qualified cannabis accountant serving your needs.

WHICH CANNABIS CONSULTANTS?

Consultants generally have expertise in specific areas of our industry and thus require a bit more care in selection. For example, an indoor cannabis grow expert may not be the best fit for an endeavor seeking to build out greenhouse operations. Similarly, a business start-up has different needs than an established company solving growth problems. We’ve assembled a team of consultants in different areas that commonly serve my client’s needs:

  • Banking
  • Indoor, outdoor and hybrid grow operations
  • Business plan development & implementation
  • New business financing
  • Edible development & production
  • Extraction business models
  • Marketing
  • Political Advocacy

Contact us if you would benefit from consulting services in any stage of your business development.

Cannabis Conflicts 101

With our industry roaring forward into 2016 under the new Medical Marijuana Regulation & Safety Act (the “Safety Act”), there is a literal frenzy of partnerships, licensing relationships, distribution deals and all manner of business relationships being struck throughout the state. I know because I’ve struck some of those deals, and guided others.

With lovers, friends and business partners, you are first met with a “best face” and over time – true faces are revealed. Unfortunately, the disappointment arising from such revelations can lead to conflicts. These conflicts aren’t just between cannabis operators, they are often between cannabis operators and non-cannabis businesses like landlords or vendors.

READ THIS: no matter how righteous your position in a dispute – a cannabis operator cannot count on a fair shake in our judicial system at this time in history.

Prohibitionist ideology is absolutely up there among the black birds sitting on the wire watching our “pot” frenzy below – just waiting for a dispute to bubble up to their courts. How fair do you think your fight would be in a court battle with your traditional commercial business? Also, It is well known among attorneys that judges and juries can often punish both sides of a dispute if they don’t like either of them. The way that looks is both parties spend in excess of $100,000 each fighting a court battle and in the end the winner is granted $1.00 in damages.

The point is important for two prime reasons: (1) your business interests could be unjustly crushed because of prejudice at court; and (2), judges often follow decisions made by judges in other courts concerning similar disputes. Put differently, prejudiced courts not only threaten you unfairly, they unfairly threaten our burgeoning industry in its infancy.

So, my form of advocacy on the subject is to encourage us all to add mediation and arbitration clauses in our business contracts until our culture and its judiciary matures on the subject of cannabis.

A mediation clause in a contract requires the disputing partners to submit the dispute to a professional (usually a retired judge or lawyer) skilled in the art of helping disputing parties come to a settlement between themselves. This professional does not decide who is right or who is wrong; rather, the professional helps the parties negotiate between themselves an agreement that avoids court. Mediation is successful 90% of the time, so it’s worth considering.

A “binding” arbitration clause in a contract requires the disputing partners to submit the dispute to a professional private judge (usually a retired judge or lawyer). In arbitration, the parties elect and privately pay for the professional judge – and in that way, can ensure their judge is not prejudiced against cannabis. The decision of the professional judge becomes a judgement that the courts must then enforce. While courts can exercise their prejudice at that stage, I believe the risk is greatly reduced, at least certainly in terms of influencing other court decisions down the road.

Mediation and or arbitration are typical contract clauses, and it is quite normal to have one or the other or sometimes both. In our case of cannabis, I suggest both, where the parties agree to first mediate and if that fails, then arbitrate. This is particularly so if one of the parties is a non-cannabis party and has the unfair advantage at mediation to threaten prejudice at court if the mediation negotiations stall.

One last point here for my young community: a contract that addresses dispute resolution does not equate to distrust. I was shocked to once have a sophisticated business person state we probably shouldn’t contract in the first place if I felt there was a need to discuss dispute resolution. Obviously I won’t say who, but suffice it to say the statement ignores the fact that most relationships, business or other, run into troubled waters at some point and a sound dispute resolution policy can keep the wheels on the deal.

In my view, given the infancy of our industry, keeping our disputes out of court is paramount. Dispute resolution discussions are probably the best tools to accomplish that goal. If you won’t include these discussions for your own safety, at least consider it part of your duty to advocate for the safety from prejudice in our courts.