Key Cannabis Risk Categories to Address Before DEA Rescheduling

As the DEA rescheduling of marijuana approaches, cannabis business owners should assess their readiness for potential investors. According to an article by the law firm McGlinchey Stafford, investors evaluate businesses based on various cannabis risk categories to determine investment value and potential. It is crucial to address these risks now to avoid missing out on future opportunities.

The article highlights the following cannabis risk categories:

Corporate Risk: Investors scrutinize the quality of a company’s internal governing documents. Essential documents include operating agreements, bylaws, and shareholders’ agreements. Investors ensure these documents cover key topics like fiduciary duties, equity issuance, and capital calls. Compliance with these documents and state laws is crucial to avoid legal claims from minority owners for breaches of fiduciary duties.

Securities Risk: This involves reviewing how a business has raised capital and issued equity. Equity is considered a “security” under federal and state laws, subject to numerous regulations. Investors ensure all equity is documented and that the company has complied with reporting and notification requirements. Failure to adhere to securities laws can result in government enforcement and private lawsuits.

Regulatory Compliance Risk: Investors review a business’s compliance with state and federal regulations. The cannabis industry is heavily regulated, with strict penalties for violations. Investors assess any past violations or investigations and their resolutions. Ensuring compliance is critical, as enforcement actions are costly and disruptive.

Labor and Employment Risk: This involves evaluating compliance with state and federal employment laws, including the classification of independent contractors. Investors examine employment contracts, payroll policies, handbooks, and compensation schedules to ensure compliance. Non-compliance can lead to employee lawsuits and significant financial penalties.

Intellectual Property Risk: Protecting intellectual property (IP) is essential in the competitive cannabis market. Investors assess how well a company has protected its IP from infringement. This includes reviewing trademark registrations, licensing agreements, and measures taken against copycat tactics. Inadequate IP protection can diminish a company’s value and competitive edge.

Addressing these risk categories can significantly enhance a cannabis business’s attractiveness to investors. With the impending rescheduling of marijuana, now is the time for cannabis business owners to mitigate these risks and position themselves for high-value investments.