Q&A on Cannabis Regulation with Partner, Jennifer Gumer

January 15, 2021

Jennifer Gumer Partner Headshot

Welcome to our Q&A with partner, Jennifer Gumer!

As a partner at CGL and our Regulatory and Compliance Practice Lead, Jennifer provides strategic counseling, practical advice, and expert advocacy to clients with production needs. As an Adjunct Professor of Law and Bioethics, she is uniquely qualified to handle all interactions with federal, state, and local regulators who oversee product development, manufacturing, and marketing activities, including the FDA and Local Hemp Regulators.

Q: What are some of the major problems cannabis companies can run into if their corporate/commercial attorneys are not taking cannabis regulation into consideration?

I think it would be best if I outlined some examples of problems cannabis companies can encounter at various points in their life cycle to get a broader picture of what can go wrong if you don’t have proper representation on both the corporate/commercial and regulatory side: 

In forming an entity, you have to consider the related regulatory disclosures. So, under the regulations there is a requirement to disclose certain individuals associated with a cannabis company as either “Owners” or “Financial Interest Holders”. These disclosures require that certain information be shared about these individuals to the applicable regulator (BCC CDPH or CDFA depending on what type of cannabis operator we are talking about) including, for an ownership disclosure, background check and disclosure about criminal record; which not everyone is comfortable with. The need for the disclosure can depend upon where they sit in the organization of an entity. For example, a managing member of an LLC has to be disclosed, or board member or office of a corporation. It’s important that everyone involved in the company is aware of these facts from the outset of forming the entity to ensure 1) m individuals involved are comfortable/willing to be disclosed and 2) that there is nothing in the individuals’ background that would be ground for denials of a license because certain criminal backgrounds may prevent a license. 

Similarly, when bringing on investors/raising money there will be disclosure requirements.  These need to be done correctly because if not, there can be enforcement actions including revocation of a license. So, it’s important for corporate counsel when guiding clients through taking on investment to work closely with regulatory counsel to ensure these disclosures are done properly.  I’ve seen investors and their counsel be unaware of these requirements and once they find out, they don’t want to be disclosed, which can impact willingness to move forward. You really need make sure everyone is on the same page from the outset and again, if you are just working with corporate counsel that doesn’t have that regulatory expertise, this issue might get missed entirely or come up later in the process to throw a wrench in the deal after the parties have already invested significant time and money.

With regards to contracts, you can’t just draft a standard commercial contract given the particular legal (or in this case, not-so-legal) status of cannabis. For example, something I’ve frequently seen with contracts I’ve reviewed is that they have language requiring the parties to comply with all state and federal laws. Obviously, that would then make for an immediate breach, given that cannabis is illegal at the federal level. I’ve also seen contracts that say “all disputes must go to a federal court,” which is not great either. There are also specific regulations around defective products, returns and recalls that need to be accounted for.  Certain types of contractual relationships will also require disclosures. You need to be aware of all of these things and account for them in the contract. 

Then there are exit events, like being acquired. Clients will come to me with documents drafted from the other side–corporate attorneys that don’t have any regulator knowledge or support– unfortunately, they just don’t work for the cannabis industry because cannabis licenses are not transferable. You can’t just buy a cannabis company as you would in another industry.  The business would no longer be able to operate because it would need to first acquire a new license, which is a lengthy, expensive process with no guarantees.. There are, however, ways you can structure “acquisitions” to account for these regulatory considerations. For example, one owner can stay on the license while the new owner applies for the new license. It’s important  to structure the acquisition in stages and account for what happens if the new owners can’t get their license etc. 

So, as you can see, unless you have corporate/commercial and regulatory attorneys working in tandem on all cannabis business contracts and negotiations, there are plenty of ways things can go wrong — and quickly.

Disclaimer

The materials available at this website are for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem. Use of and access to this website or any of the e-mail links contained within the site do not create an attorney-client relationship between CGL and the user or browser. The opinions expressed at or through this site are the opinions of the individual author and may not reflect the opinions of the firm or any individual attorney.

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