Cannabis companies need regular corporate and commercial guidance from attorneys, just like any regular business. But, because there are specific regulations that come into play, standard contracts just don’t fit in the cannabis industry.
The problem with the current legal environment is that many BigLaw firms only offer corporate and commercial assistance, and no regulatory support.
One slight mistake could lead to a magnitude of repercussions. (Think denial of your license or breach of contract.) You can’t afford to overlook the slightest thing – hence, the need for a holistic legal counsel.
The Impact of Regulations on the Cannabis Business
To begin, certain individuals associated with a cannabis company as either an owner or a financial interest holder are required to be disclosed. This means presenting background check results, as well as criminal or civil records (e.g. fraud suits, etc.). Not everybody is comfortable subjecting themselves to that kind of scrutiny.
Any additional owner you bring on needs to be subject to similar disclosure. So, you need to know what the disclosure requirements are when you’re bringing on new team members. Investors need to be disclosed as either owners or financial interest holders as well. So, it’s really important for corporate counsel to understand the regulatory implications when guiding clients through investments in the cannabis industry.
The Need for Phased Acquisition
Cannabis licenses are not transferable, so at least one original owner must remain on the license otherwise you can’t operate anymore. That’s not to say acquisition cannot happen, instead you must go through phases where you allow time for new acquirers to apply for a new license. Then, once the new license is granted, the original owners can leave the business.
Important Considerations When Drafting Contracts
You can’t rely on standard commercial contracts, given the particular legal landscape that cannabis companies find themselves in.
These are some of the common issues we see when corporate counsel attempts to rely on standard form contracts:
- The cannabis industry is illegal at the federal level. Contracts that say they require all parties to comply with the state and federal law in the context of cannabis indicate a breach of contract.
- All cannabis products must be moved through the state by licensed distributors.
- There are specific regulations for defective products, returns, and recalls.
The magnitude of repercussions from the use of standard commercial agreements used without regulatory input are significant. It’s important to have a regulatory attorney to provide guidance about these regulations and spot any potential problems that may otherwise look innocuous in these standard contracts. Failure to redraft could void the contract or leave you in breach of the contract.
If you want to learn more about the impact of regulations on the cannabis business, check out https://cgl-llp.com/podcasts/cgl006.
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