United States: Investments In The Marijuana Industry Hold Potential For Significant Growth, Despite Some Uncertainty

Investors in marijuana-related companies witnessed several key developments in 2015 as the industry worked around initial obstacles, states refined regulatory frameworks, American public support of legalization increased, and banks and other service providers increasingly did business with marijuana companies. However, marijuana remains illegal at the federal level, and many investors will remain hesitant about making investments with growers in the U.S. until the federal government clarifies its position. In the meantime, many investors remain focused on businesses that provide products and services to growers or businesses in the Canadian market. That being said, with the market expanding as quickly as it is, even ancillary businesses have potential for significant growth, and investors and the media continue to closely monitor regulatory and other industry developments.

Developments at the Federal Level

Marijuana remains illegal under federal law, and while Congress and the executive branch have not legalized marijuana or rescheduled it from Schedule 1, they have taken steps to divert resources away from prosecution. In the Cole Memorandum of 2013, the Department of Justice ("DOJ") instructed federal prosecutors not to prosecute marijuana cases in states whose regulatory schemes meet specified regulation priorities. During 2014, when some federal prosecutors continued to pursue actions against vendors of medical marijuana in states that had legalized such sales, Congress included the Rohrabacher-Farr medical marijuana amendment in the end-of-year omnibus budget bill that stopped federal funds from being used to prevent states with medical marijuana programs from "implementing their own State laws that authorize the use, distribution, possession, or cultivation of medical marijuana."

In April 2015, a DOJ representative announced that the department interpreted the amendment to mean only that it was restricted from prosecuting states and that it did not forbid prosecution of individuals and medical marijuana companies. Representatives Rohrabacher and Farr disagreed, and the federal District Court in the Northern District of California in October held that the DOJ may not prosecute marijuana companies operating in compliance with state medical marijuana laws. The Cole Memorandum and Rohrabacher-Farr medical marijuana amendment are widely viewed as important steps toward legitimizing the industry, but do not resolve the ongoing conflict between state regulation and federal prohibition of marijuana. There were hopes that the budget bill for 2016 would take further steps to scale back federal prohibition. While it eliminated certain prohibitions on the hemp industry and re-enacted the Rohrabacher-Farr medical marijuana amendment, which had been set to expire, the bill failed to satisfy other hopes. For example, it did not end the ban on veterans affairs physicians discussing medical marijuana with veterans, nor expand the Rohrabacher- Farr medical marijuana amendment in a similar way to protect sales of recreational marijuana in states with established regulatory regimes, nor clarify banking access by state-regulated marijuana companies.

Developments at the State and International Levels

Notwithstanding the obstacles, marijuana legalization continues to spread, though the lack of uniformity among the state regimes is clear. For example, in Colorado, an entity that grows marijuana can, but is not required to, sell it via retail; in Washington state, one cannot do both; in New York state, retailers of medical marijuana must grow their own product (which may not be smoked); and in Washington, D.C., it is forbidden to sell marijuana directly.

California: With record-high support for legalization in California, the state is mobilizing for a legalization vote on recreational marijuana in 2016. In 2015, efforts focused on increasing regulation of the state's legal medical marijuana program, which dates back to the 1990s. Historically, California has not successfully limited access to those holding marijuana licenses, but in October, the state passed the Medical Marijuana Regulation and Safety Act. "This new structure will make sure patients have access to medical marijuana, while ensuring a robust tracking system," Gov. Jerry Brown stated. "This sends a clear and certain signal to our federal counterparts that California is implementing robust controls."

The new regulations are noteworthy from an investor's perspective because, among other reasons, for-profit companies may now obtain licenses to grow and sell medical marijuana, and cities and counties may now ban medical marijuana within their borders. The latter regulation originally had a March 1, 2016, deadline for localities to ban medical marijuana, causing a stir of activity throughout the state, this deadline has since been removed. As these new regulations take effect, California is also approaching a November 2016 vote for the legalization of recreational marijuana, and support is gathering around the initiative, named the Adult Use of Marijuana Act.

Ohio: In November, Ohio could have become the fifth state to legalize marijuana for recreational purposes, but voters rejected the Issue 3 referendum by a wide 64% to 36% margin. With estimates of potential sales reaching $1.1 billion, it might have been the biggest legal market yet in the U.S. The referendum faltered in part because of a controversial feature that would have created a monopoly for 10 marijuana providers. The organization ResponsibleOhio, which spent millions of dollars to support Issue 3 behind contributions from the 10 listed providers, introduced a campaign mascot named Buddie, raising concerns among voters that the industry would target children. Aiming to stop Issue 3 even if Ohioans had voted for it, dozens of state legislators supported Issue 2, which, by imposing additional burdens on any referendum that would create a monopoly, would likely have conflicted with Issue 3 had both passed. Ohio voters passed Issue 2, 52% to 48%. The stage is now set for another legalization attempt in 2016, with signatures being collected for the next ballot initiative.

Canada and Mexico: The northern and southern neighbors of the U.S. also made headlines in 2015 relating to recreational marijuana. Canada has had medical marijuana regulations since 2003, prompted by the Supreme Court of Ontario ruling that patients with certain medical conditions had the constitutional right to medical marijuana. Important for investors and the industry, Canada's regulations have been enforced in a relatively clear manner. In October, with the election of Prime Minister Justin Trudeau, who has repeatedly called for the end of prohibition, Canada increasingly appears to be on the path to full legalization of recreational marijuana.

Meanwhile, on Nov. 4, the Mexican Supreme Court ruled that growing, possessing and smoking marijuana recreationally is legal under a theory of individual autonomy. This does not mean that marijuana is now widely available in Mexico. The ruling was limited to the named plaintiffs, and Mexico has not legalized medical marijuana, so it has no regulations yet in place. But the court decision offers one potential path for expanded access as discussions increase worldwide.

Banking Developments

Following guidance by the Treasury Department's Financial Crimes Enforcement Network ("FinCEN") that banks could offer services to marijuana companies whose activities were considered low priority, marijuana companies have had slightly improved access to banking services, although as a general matter continue to have difficulties maintaining accounts. In the absence of more definitive federal action, some states have drafted legislation to enable marijuana credit unions. Such legislation, however, has so far failed to overcome federal restrictions on providing either FDIC insurance or a Federal Reserve master account to financial institutions servicing the marijuana industry, without which marijuana companies are unable to access check clearing, electronic fund transfers and other interbank services. Indeed, Marijuana Business Daily reported in December that 70% of plant-touching businesses do not have a bank account, and accounts are frequently terminated. A Freedom of Information Act request revealed that, as of January 2015, 3,157 marijuana-related Suspicious Activity Reports had been filed by 374 individual financial institutions, with nearly half being "Marijuana Termination" reports indicating closure of an account. So while at least some established banks — possibly regional banks and credit unions — are providing services to marijuana companies, until the government acts more definitively, banking access will continue to be limited.

Insurance Developments

It appears from media reports that some carriers are already providing commercial coverage in this space. Although the FinCEN guidance to financial institutions described above does not apply to insurance companies expressly, it is possible that the federal government could expect insurers to be guided by it, and a number of the principles set forth in the guidance have analogues in the insurance business.

We are not aware of any particular legal guidelines — whether from the federal government, any state insurance regulator or any standard-setting body such as the National Association of Insurance Commissioners — governing the provision of insurance to businesses engaged in legal marijuana-related activities. In the absence of such guidance, and with marijuana remaining illegal in many states as well as at the federal level, it is possible that an insurance policy written to a policyholder in the U.S. purporting to cover risk associated with marijuana-related activities would be determined to be unenforceable or even unlawful under the laws of such states or of the U.S. However, notwithstanding the challenges, the development of the industry (and therefore data that can be used in making underwriting determinations) and the pricing power in a less competitive market suggest the trend toward provision of at least some types of coverage may continue.

Intellectual Property Developments

Companies have continued their efforts to build and defend their brands by utilizing both federal and state protections. Trademark applications that include the term "marijuana" in the goods and services description have risen from 20 in 2012 to 200 apiece in 2014 and 2015, while issued registrations have correspondingly risen from 12 to 33. States where marijuana has been legalized have also seen an increase in trademark applications. In Colorado there are approximately 700 trade names and 200 trademarks registered that include the word "marijuana" or a synonym. Additionally, the USPTO has not rejected and continues to review multiple marijuana plant patent applications that have been submitted.

Looking Ahead in 2016

Companies — and their investors — continue to face a myriad of risks associated with uncertainty over future regulatory developments concerning the marijuana industry. Companies with SEC-registered securities frequently reference risk factors, including ongoing federal prohibition; potential criminal and civil penalties; a reliance on additional states legalizing medical and recreational marijuana; increasing mobilization of groups and individuals opposed to legalization; banking difficulties; difficulties accessing bankruptcy courts; the rapid changes in the industry; and lack of access to adequate capital — most of which apply equally to privately held companies.

Notwithstanding the risks, investment in the marijuana industry has continued to escalate. It remains to be seen how much will be clarified through 2016, and the federal issues will depend in no small part on the U.S. presidential election. As large states like California and Ohio prepare for legalization initiatives, it is clear that there will be increasing pressure on the federal government to clarify its position on issues such as banking access. As these issues become incrementally clearer, and barring any significant policy change at the federal or key state levels, the trend toward increasing liberalization and associated comfort levels of investors seems likely to continue, with the tipping point still being the resolution of the federal-state conflict.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.