MJBizMag July 2021 - 14

Trends&HotTopics | Stacie Nyborg and Airina Rodrigues
Legal Considerations for Scaling
in the Cannabis Business
T
his year's cannabis capital market
activity already has exceeded
that of 2020 as more institutional
investors and lenders are making
moves into the sector. This influx of
capital provides more opportunities
for cannabis companies to scale for
continued growth-especially as more
states approve adult-use legalization.
During this time of growth, however,
cannabis companies should continue
to keep in mind the unique challenges
facing their industry as it continues to
mature and develop.
Corporate Governance and Control
While bringing on additional investors
is often necessary to grow, cannabis
companies should think carefully
about how the new investor will
impact the management and control
of the company.
Most major investors will require
a seat on the company's board of
directors or some kind of board
observer rights, which brings
more scrutiny of the corporation's
governance and management.
Founders might be in for a surprise
when the investor that initially seemed
agreeable starts questioning the
company's management policies after
the deal closes.
To avoid this, the company should
consider establishing best practices for
issues such as hiring and compensating
personnel or making capital expenditures.
Putting these measures in place
early helps to avoid objections by new
board members or observers and also
provides existing management with a
foundation to make informed business
decisions and demonstrate they are
acting in good faith.
Getting ahead of corporate
governance issues and hiring qualified
professionals to lay the groundwork
for the company's management
and strategic vision also will help
attract funding. Before committing
to invest, institutional investors will
want to see that the company has
a sophisticated, scalable operation,
which includes having solid financials,
good relationships among the current
owners and investors and a wellrespected
reputation in the industry.
Managing Reporting Requirements
Cannabis companies should also be
aware of state and local reporting
requirements whenever a new owner
is added. In California, for example, all
owners or financial-interest holders-
including individuals and business entities-need
to be reported to the state's
Bureau of Cannabis Control.
For business entities, this might
include disclosing each of the individual
owners and entities in a multilayer
business structure as well as those
that have control of the entity. Failure
to comply with these requirements
could result in license and operating
suspensions and an administrative
headache for the company.
Real Estate and Landlord Issues
Expansion of a company's operations
often means growing into new real
estate as well. Although cannabis
might be legal in a given state, local cities
and counties often have their own
operating restrictions. This is especially
true in Massachusetts and California,
where many local jurisdictions have
put bans on cannabis businesses.
Cannabis companies should be sure
to familiarize themselves with the local
requirements before entering into any
real estate transactions.
Even if operating a cannabis business
is legal on the state and local levels,
landlords might still be unwilling to lease
to a cannabis company-especially a
plant-touching business. Landlords
that do rent to cannabis companies
often charge above-market rates
and have additional terms and
conditions designed to protect the
landlord.
The cannabis company will want
to review leases for early termination
clauses, penalties and specific payment
requirements that could allow the
landlord to terminate the lease. The
company should also keep in mind that
if a landlord receives a share of the
company's profit as part of the rent,
the landlord may also be subject to
reporting and disclosure requirements.
Brands and Intellectual Property
One way to scale a cannabis business
is to enter interstate trademark
If a landlord receives a share of the company's profit
as part of the rent, the landlord might also be subject
to reporting and disclosure requirements. "
14 MJBizMagazine | July 2021
MJBizMag July 2021

Table of Contents for the Digital Edition of MJBizMag July 2021
