Insights for cannabis executives, investors & entrepreneurs
VOL 8 • ISSUE 2 • February 2021
Liability Cannabis executives can take a variety of steps to shield their companies from lawsuits—potentially saving millions in the process
Going Public Using a SPAC Vehicle Choosing the Best Retail Location Building Consumer Intrigue With Product Drops
Marijuana Business Magazine
38 LIMITING YOUR LIABILITY
Cannabis executives can take a variety of steps to shield their companies from lawsuits—potentially saving millions in the process
54 SPAC TO SQUARE ONE
Partnering with an acquisition company can expedite going public, but both sides will need to do their homework.
62 DROP IT LIKE IT’S HOT
Cannabis companies use product drops to build hype around new items.
From the Editor
Five Questions With Lara DeCaro
Trends & Hot Topics
Best Practices in Retail
Industry Players $12.95
Insights for cannabis executives, investors & entrepreneurs
VOL 8 • ISSUE 2 • February 2021
Liability Cannabis executives can take a variety of steps to shield their companies from lawsuits—potentially saving millions in the process
Going Public Using a SPAC Vehicle
Choosing the Best Retail Location Building Consumer Intrigue With Product Drops
On Our Cover Marijuana companies are in a precarious legal position due to the federal illegality of high-THC cannabis. Learn how to shield your business starting on page 38.
The Shryne Groupʼs Brian Mitchell shares his philosophy on retail locations, such as this downtown Los Angeles Stiiizy store, on page 68. Courtesy Photo
Marijuana Business Magazine | February 2021
February 2021 • Volume 8 • Issue 2
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Marijuana Business Magazine | February 2021
FromtheEditor | Kate Lavin
Getting the Law on Your Side
n a highly regulated field such as marijuana, nearly every job requires a degree of experience unique to the industry. Even entry-level cultivation and retail employees need to know about seed-to-sale tracking, how to legally dispose of products and, in some places, hold a state-issued license. When it comes to liability issues specific to the cannabis industry, specialized advice can mean the difference between changing a few words on your website or socialmedia accounts and owing federal regulators $85,000 in fines (yes, this is a real example). Luckily, a growing number of attorneys are starting marijuana practices, and some firms are focused exclusively on cannabis clients. In this issue dedicated to protecting yourself and your company against liability, we take a step-by-step approach to preventing and fending off the many claims that might come your way as a marijuana business executive. In a Q&A with attorney Lara DeCaro, Marijuana Business Daily reporter John Schroyer learned that under California’s Proposition 65 rules, product manufacturers can push liability onto retailers through wording in purchase orders. And while Prop 65 penalties are not incredibly expensive, the legal fees defendants are ordered to pay can top $200,000 or more. Turn to page 10 to read more of DeCaro’s advice for marijuana companies operating in California. Marijuana Business Magazine staff writer Omar Sacirbey spoke with eight attorneys whose areas of expertise range from product liability to employment law and partnership disputes for this month’s cover story. Among his findings: Marijuana operators who once worked in the illicit market might have been conditioned to avoid business contracts for fear of leaving a paper trail. But this practice can create major problems in the state-legal marijuana market when investors have expectations but no shareholder agreements have been signed. Turn to page 38 to start reading the cover package, “Limiting Your Liability.” On page 42, Asa Waldstein, a longtime dietary supplements executive, shares the hard-won knowledge that many CBD companies are starting to learn the hard way: Unless the U.S. Food and Drug Administration has classified your specific product as a drug, you cannot make health claims. That includes using words such as “inflammation” or “anxiety” to describe conditions your product addresses. Finding yourself on the wrong side of this regulation can cost tens of thousands of dollars in fines, require you to notify customers of the error and—in some cases—reimburse them for their purchases. It’s an important lesson you won’t want to miss.
Marijuana Business Magazine | February 2021
Jeff Smith, Marijuana Business Daily’s legal and government reporter, revisits the topic of RICO lawsuits on page 44. While the number of cases has declined since we first broached the topic in 2018, courts have made clear that marijuana businesses are susceptible to these claims by their very nature as a federally illegal business. The good news is: There are steps businesses can take to avoid ever having to deal with RICO suits, and the simplest is setting up shop in a cannabis-friendly area. Speaking of cannabis-friendly locations, MJBizDaily International reporter Solomon Israel’s first installment of the Best Practices in Retail series begins on page 68, and this month he addresses finding the right spot to open a marijuana retail business. Throughout the year, this new feature will touch on topics including retail design, hiring, product selection and sales tactics. We hope the stories in this issue will give you the tools you need to protect your personal interests and your business now and in the future. Sincerely,
Kate Lavin Marijuana Business Magazine Editor
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FiveQuestions | with Lara DeCaro
Getting Ahead of California’s Prop 65 Noncompliance with new labeling rules can cost cannabis companies $200,000 or more By John Schroyer
alifornia has a reputation for heavily Lara regulating businesses, and the DeCaro marijuana industry is no exception. As of Jan. 1, a mandate requires all marijuana products to be labeled with warnings about the health dangers of both marijuana smoke and THC. The regulation was established by Proposition 65, a 1986 state ballot initiative that requires warning labels for any product containing chemicals that might cause cancer or birth defects. Marijuana smoke and THC were added as “reproductive toxins” in 2020, and the new label requirement went into effect on New Year’s Day. The main problem for cannabis businesses is the enforcement of Prop 65, which historically has led private attorneys and citizens to look for violations and then file suits against the companies that produced or sold the items in question. Such actions can mean costly out-of-court settlements or even more expensive litigation for businesses. Lara DeCaro, an attorney who has represented California cannabis businesses for more than a decade, is wellacquainted with the liabilities associated with Prop 65. Marijuana Business Magazine asked DeCaro what cannabis companies can do to minimize their legal exposure.
How have you seen cannabis companies run afoul of Prop 65 requirements in the past? Many companies ignored the potential liability entirely. Sometimes it was because they had a lot going on and that seemed to be the least of their worries, but other times it seemed that they simply weren’t advised on the issue. This is what caused that glut of Prop 65 notices from a certain set of attorneys a few years ago—really starting in 2014 and again in 2017. But marijuana smoke had been (included on the stateʼs list of carcinogens) since 2009, so you could say that people had plenty of lead time to comply before those came along. There also was significant reluctance by cultivators and manufacturers to include the warnings on their products because cannabis is a product that has gained momentum specifically because of its ability to help cancer patients and others, and they are being told they must say it actually causes cancer.
10 Marijuana Business Magazine | February 2021
As of 2018, the product warnings need to be tailored to the harm allegedly posed. They need to list at least one chemical. Cannabis smoke has been listed as a carcinogen since 2009 and for developmental/reproductive toxicity as of January 2020. Delta-9 THC was added to the list of chemicals known to the state to cause developmental/reproductive toxicity as of January 2020. Thus, a proper warning on flower would clearly and easily cover both cancer and reproductive harm. Edibles, topicals and other manufactured cannabis products should include both warnings, identifying a listed carcinogen other than smoke.
How easy or hard is it to comply with Prop 65? There are a lot of possible scenarios that can give rise to liability, so it is entirely possible to miss one if you don’t have good compliance advice or stop paying attention. For example, under the current rules, the manufacturer is primarily liable for a failure to warn but can push liability onto the retailer through wording in ordinary purchase orders. This is where paying attention to your contracts becomes important—because most retailers will just sign a vendor’s (purchase order), boilerplate terms on the back and all, without really knowing what those terms say or do.
How big of a hurdle is Prop 65 in the context of all the regulations marijuana businesses deal with? This is totally an annoyance—but one that can cost a pretty penny. In 2017 alone, one of these Prop 65 plaintiffs settled five of these claims for $117,750—only $17,000 (or 16%) of which was penalty. The remainder was for attorneys’ fees and costs. The following year, that same plaintiff settled eight more claims for $233,500, only $28,500 (or 12%) of which was penalty. Considering that the law permits up to $2,500 per day per violation, the overall penalties can be high. But in most settlements, the actual fines are very low. On an operational level, the compliance is rather simple: Products need to have the warnings on their labels, signs should be posted and contracts need to be in place.
What words of advice would you offer to marijuana businesses that might get a Prop 65 violation notice? It’s best not to ignore a 60-day warning letter. The recipient should engage legal counsel to reach out to the filing attorney and the office of the attorney general or local prosecutor in connection with next steps. The recipient should also reach out to others in the supply chain to ascertain liability and work together on a resolution, if possible. Unfortunately, because there are no established safe levels of exposure to marijuana smoke and delta-9-THC, and cannabis products are not considered foods, the other statutory defenses (e.g., that the exposure is low or naturally occurring) do not provide immunity from the fine for cannabis and hemp companies under Prop 65. On June 5, 2020, the attorney general published a letter to private-sector enforcers who had filed 60-day notices in 2020 that urged private enforcers to agree to extensions of time prior to filing any legal action, but (the letter did not require an extension), so you should assume you are still under the 60 days unless you hear otherwise.
How do violations usually happen? Are we talking about secret shoppers? That’s exactly it. Like (Americans with Disabilities Act) violations, these lawsuits are instituted by civilians who were injured by a company’s failure to comply with a publicsafety requirement. People need to be injured in order to make a claim, so they go out and look for violations that could injure them. Prop 65 suits used to be based upon signage at the retailer’s location. But following the 2016 revisions, which became effective in 2018, that liability primarily fell to the manufacturer. Because that liability can be shifted, however, the civilian enforcer will likely notice everyone in the supply chain. Employees should be advised to not answer questions about Prop 65.
John Schroyer is a reporter for Marijuana Business Magazine and MJBizDaily. You can reach him at email@example.com.
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HempNotebook | Kristen Nichols
Press Play Make the news media your secret weapon to building a brand without facing liability
veryone in the hemp industry knows the story of Charlotte’s Web: A group of well-meaning brothers working under Colorado’s medical marijuana system developed a cannabis strain that worked miracles on a sick little girl named Charlotte. Word spread about the awe-inspiring results of this low-THC, high-CBD extract. CNN paid Charlotte and the Stanley brothers a visit in 2013, and the story made the brothers rich and changed minds around the world about the value of a plant formerly sneered at by mainstream medicine. It’s an inspiring story. But what many folks in the hemp industry don’t know is how it happened.
Media Might The secret behind the shocking business success of the company that became Charlotte’s Web Holdings is available to every creator in the hemp industry. It’s free and as close as your local newspaper. I’m talking about the press. As we examine liability concerns in the cannabis industry, I want to share how the media can be your secret weapon in gaining global recognition without spending a dollar on advertising or hiring a lawyer to shield you from sanctions by the U.S. Food and Drug Administration. The story of Charlotte Figi is a great example. Charlotte and her caregivers didn’t start sharing their CBD story on prime-time television. Instead, a local newspaper reporter in Colorado Springs, Colorado, was the first to tell their story. The caregivers and Charlotte’s family were completely honest about the girl’s disease and her treatment at a time when many parents would be
considered criminals for giving their children an illegal drug. And in an age when people look at the media with suspicion, Charlotte’s advocates invited a local reporter and photographer to come see her progress firsthand. What happened next was no surprise to folks who work in journalism.
Free To Tell It Like It Is The local newspaper report about Charlotte Figi caught the attention of larger newspapers in Denver. More reporters started inquiring about this little girl, and they were again welcomed to learn more and share the story. Media attention grew until the Denver correspondent for The New York Times wrote a piece about the Figis. That’s when CNN sent a team to Colorado Springs. CNN does great work, but the network doesn’t have the manpower to discover every sick child experiencing a shocking medical outcome. Global media outlets read about those cases in newspapers. You can review every news story ever written about Charlotte Figi. None of them tiptoes around CBD’s effects on the girl or use vague, lawyer-approved language such as “may help support a healthy lifestyle.” And none of the stories mentions any scary-sounding side effects of taking huge quantities of CBD.
Charlotte’s Lesson The story of Charlotte’s Web should inspire everyone making healing products from cannabis. Forget the slow-moving FDA. Forget the constant vigilance of label language and making sure customer testimonials don’t pop up on your site.
12 Marijuana Business Magazine | February 2021
Instead, when you have a patient or a client finding amazing results from your products, get those folks in touch with a local reporter. You can’t make medical claims. But reporters can share the story of your consumersʼ experiences without fear of government sanction. Sometimes those local newspaper stories turn into priceless global media exposure. Just ask the Charlotte’s Web pioneers. As you may know, Charlotte died last year. Let her story inspire you to keep seeking the healing properties of the cannabis plant—and let the Stanley brothers’ experience show you how to avoid liability concerns while still letting everyone know how miraculous this plant can be. Kristen Nichols is editor of Hemp Industry Daily. She can be reached at firstname.lastname@example.org.
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Trends & HotTopics | Matt Lamers
Will Canada Bend the Rules for Cannabis Beverages?
chorus of complaining has come from Canadian boardrooms in recent months, with executives bemoaning strict rules the country applies to cannabis beverages. The rules are to blame for the lousy performance of the category, some companies say. Without a doubt, the regulations are strict—and, in some cases, absurd. For instance, Canada allows individuals to carry up to 30 grams of dried cannabis—or the equivalent in different forms. For cannabis-infused beverages, that means consumers may purchase only 2.1 liters of product at any one time. That does not make any sense and will likely be changed at some point. But would increasing the effective purchase limit be enough to breathe life into the struggling category? And would Canadian authorities consider making those changes? To answer the latter question, take a look at why Canada opted to legalize cannabis in the first place. Health Canada says, “The (Cannabis) Act implements a new, comprehensive public health approach that will be more effective in protecting youth and keeping profits out of the pockets of criminals and organized crime.” This statement makes no mention of the job creation, tax revenue or any other financial considerations often cited as reasons for legalization. Rather, eliminating the illicit market was central to Canada’s decision to legalize cannabis. What does that have to do with beverages? There are almost no cannabis beverages in the illicit market today, while
products such as dried bud, infused edibles and vapes remain prolific.
No Focus on Beverages While Canadian regulators remain focused on the transitioning sales of popular illicit products over to the legal market, they are not focused on creating and regulating a brand-new cannabis category. So what sort of regulatory changes would be required for cannabis-infused beverages to have any significant success in Canada? The truth is, no one knows, because such a market does not yet exist anywhere in the world. High-THC beverages have not fared much better in places such as Colorado, which does not have the strict regulatory burden Canadian producers bemoan. And that’s precisely why one of the most successful brewers in Canada pulled out of its cannabis venture. “When we got to the spot where we said, ‘Let’s make sure the business case works over an extended period of time,’ it actually didn’t. The money wasn’t there,” George Croft, CEO of Ontario-based Waterloo Brewing, told Marijuana Business Daily last year. That answer will be tough to swallow for companies that already invested heavily in bottling plants and whose executives hold on to hope that the niche category will find a way forward. So, let’s speculate about what would have to happen for these beverages to be successful: • Technological advances make the onset time of cannabis beverages similar to that of alcohol.
14 Marijuana Business Magazine | February 2021
• Sales of cannabis beverages outside legal cannabis stores, such as social consumption establishments and regular bars, alongside alcohol. • Nationwide access to quick and accurate tests for cannabis impairment. • Amendment to Canada’s lame equivalency rate for beverages. That level of reform would require action from almost all levels of government. Canada’s federal cannabis regulator conducted consultations regarding the equivalency rate. It remains to be seen what changes, if any, regulators will make. Matt Lamers is the international editor at Marijuana Business Daily. You can reach him at matt.lamers@ mjbizdaily.com.
CompanyNews | U.S., Canada & International
U . S . D E V E LO PM E N T S
By Omar Sacirbey
Verano Going Public Multistate marijuana company Verano Holdings signed a definitive agreement to go public on the Canadian Securities Exchange at a value of $2.8 billion through a reverse takeover of Majesta Minerals, an existing, publicly held company in Calgary, Alberta. The move came one month after Chicago-based Verano agreed to acquire Florida-based Alternative Medical Enterprises (AltMed) and nine months after an $850 million deal with Arizona-based Harvest Health & Recreation collapsed. Verano hopes to raise $50 million-$100 million in capital from the offering, according to a news release. The parties said they hope to close the transaction in the first quarter of 2021. Verano currently is active in 12 states, including Illinois, New Jersey and Nevada, with 18 retail locations and 440,000 square feet of cultivation space.
Curaleaf Seeks Big Raise, Also Gets Loan Multistate cannabis operator Curaleaf Holdings of Massachusetts priced a new offering of 16.5 million subordinate voting shares in a bid to raise $216.6 million. The share offering was announced after markets closed Jan. 6, with Curaleaf saying the funds would be used “for working capital and general corporate purposes.” Curaleaf trades on the Canadian Securities Exchange and on the U.S. over-the-counter markets. Curaleaf also announced on Jan. 11 that it is borrowing $50 million by way of a three-year secured revolving credit facility. The loan will “fund capital expenditures to support future growth initiatives, potential acquisitions and … general corporate purposes,” Curaleaf said in a news release. The loan carries an interest rate of 10.25% and was fully drawn at closing, Curaleaf said. The loan matures Jan. 10, 2024.
Vertically Integrated MSO Acquires Delivery Business Stem Holdings, a vertically integrated MSO based in Boca Raton, Florida, completed its acquisition of Driven Deliveries, an e-commerce and DaaS (delivery-as-a-service) provider.
16 Marijuana Business Magazine | February 2021
Recent deals, acquisitions and other announcements from cannabis companies
Driven currently operates in California. The new company will be known as Driven By Stem. The company’s brand offerings will cover multiple cannabis product categories, particularly flower, extracts, edibles and topicals. The combined market capitalization of the company after the acquisition was $65 million as of Dec. 29. Shares of common stock of the new company will continue to trade under Stem’s previous symbols on U.S. over-the-counter markets and the Canadian Securities Exchange.
Schwazze Acquires Dispensaries Schwazze, a Denver-based cannabis company formerly known as Medicine Man Technologies, acquired six retail outlets from Colorado competitor Star Buds in a cash-and-stock deal worth $37.1 million. The deal announced in late December was a partial step toward completing a $118 million acquisition of all 13 Star Buds stores and a cultivation facility, all of which Schwazze agreed to in June. The purchase price breaks down to $13.9 million in cash, $13.9 million in a seller’s note and $9.3 million in stock, according to a news release. The acquisition includes storefronts in the Colorado cities of Denver, Commerce City, Longmont, Niwot, Pueblo and Pueblo West and brings Schwazze’s total retail footprint to 17 cannabis shops. The news release further noted that Schwazze expects to acquire the seven remaining Star Buds stores in the first quarter of 2021, “subject to securing the requisite financing.”
Columbia Care Buys SoCal Dispensary New York-based multistate marijuana operator Columbia Care struck a deal to acquire Southern California medical and recreational cannabis store The Healing Center San Diego for approximately $15 million. The purchase, which will expand Columbia Care’s retail presence in California, will be paid with $3 million in cash, $6 million in stock and $6 million in seller promissory notes. In California, Columbia Care now has five retail stores, two cultivation sites and one manufacturing facility. The company has been expanding its portfolio recently, including acquiring Mid-Atlantic cannabis company Green Leaf Medical for $240 million in December.
Vireo Picks Up Nevada Grow Licenses Cannabis multistate operator Vireo Health of Minneapolis finally closed on a 2018 deal valued at $4 million to purchase four Nevada marijuana production licenses. According to a news release, the permits are only for
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CompanyNews | U.S., Canada & International cultivation and manufacturing and won’t allow Vireo to enter the retail side of the Nevada cannabis market. The move gives Vireo a seventh state presence to add to its portfolio. The company, which initially launched in Minnesota, also has marijuana business holdings in Arizona, Maryland, Massachusetts, New Mexico and New York. Though the news release announcing the closing didn’t disclose terms of the deal, the purchase price was outlined in Vireo’s listing statement when it went public in 2019. Under terms of the deal, Vireo agreed to pay non refundable deposits of $550,000 to the two companies that owned the four permits. The deal calls for total payments of $1.5 million in cash and $2.5 million in convertible debt instruments.
Social Equity Mentoring in Arizona
CAN ADA DE V ELO PMEN T S
MITA-AZ, a cannabis trade association in Arizona, is offering a complimentary,
16-week Social Equity Applicant Mentorship Program sponsored by Copperstate Farms, Weedmaps and Scottsdale Community College. The program is designed to help social equity applicants secure one of the 26 licenses that Prop 207 mandates be awarded to minorities. The course covers all aspects of the cannabis industry, the license application process and the business skills needed to run a successful enterprise.
Extraction Tech Firm Changes Name Zelios Colorado, a hemp and CBD extraction company in Erie, Colorado, rebranded as Gemini Extraction and Refinement Solutions. A statement from the business said the new name reflects the company’s capabilities of both CO2 and ethanol-extraction methods as well as new refinement technologies. Gemini’s facilities are all certified by Eurofins to Current Good Manufacturing Practice standards. Additionally, Gemini has developed a 10,000-square-foot biomass storage and processing facility.
Red White & Bloom Lands $60 Million Loan, Buys Illinois Property
Aphria-Tilray To Merge Canadian cannabis companies Aphria and Tilray announced plans to merge, a transaction that would create a giant, international marijuana firm with combined equity value of approximately $3.9 billion. The merger would make the business the “world’s largest global cannabis company,” based on pro forma revenue from the past 12 months, the businesses said in a joint news release. The combined company would operate under the Tilray name. Under the deal, structured as a reverse acquisition of Tilray, each Aphria shareholder would receive 0.8381 Tilray shares for each Aphria share held, meaning Aphria shareholders would own roughly 62% of outstanding Tilray shares. The combined firm would be led by Aphria CEO Irwin Simon and a nine-person board of directors: seven directors from Leamington, Ontario-based Aphria and two from Nanaimo, British Columbia-headquartered Tilray.
18 Marijuana Business Magazine | February 2021
Toronto-based multistate marijuana company Red White & Bloom Brands secured a $60 million loan, then signed a definitive agreement to acquire an Illinois medical and recreational cultivation facility for $32.5 million. RWB said it will pay half the $32.5 million purchase price using cash from the $60 million loan. The remainder of the loan, which bears a 7% interest rate, will be used for working capital and debt payments over three years.
Decibel Raises $30 Million Decibel Cannabis Co., a vertically integrated cannabis company based in Calgary, Alberta, closed its previously announced $27.8 million (CA$30 million) debt capital financing with Connect First Credit Union, also in Calgary. The credit facilities include $22.6 million of debt and a $1.2 million authorized overdraft to repay Decibel’s existing debt of $21.2 million. The credit facilities mature five years from the funding date and amortize over a 10-year term. The proceeds will support Decibel’s continued sales growth and working capital requirements.
I N T E R N AT I O N A L D E V E LO PM E N T S
European Cannabis Company Raises $20 Million
Clever Leaves Goes Public Shares of Clever Leaves Holdings began trading on the Nasdaq on Dec. 18, making the Torontoheadquartered company the first cannabis producer with primary operations in Colombia to trade on a large U.S. stock exchange. Clever Leaves Holdings was formed by the acquisition of Schultze Special Purpose Acquisition Corp. and Clever Leaves International for approximately $205 million. Kyle Detwiler, formerly CEO of Clever Leaves International, will lead the new company.
Emmac Life Sciences, a European vertically integrated cannabis producer, said it raised $20 million via an issue of convertible loan notes. The Dec. 16 issue “saw strong support from existing shareholders, with Measure 8 Venture Partners, Emmac’s largest existing cash investor, leading the round with a significant investment,” according to a news release. Measure 8 Venture Partners is an investment firm founded by Boris Jordan, who is also the executive chair of the board of Massachusetts-based multistate operator Curaleaf. Have a company announcement you want us to consider? Send a news release or general information to email@example.com. (Note: We’re looking for news about expansions, financing, deals, partnerships and similar developments, not product-related announcements.)
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IndustryDevelopments | International & State MAP LEGEND High level of medical development/implementation Medium level of medical development/implementation Low level of medical development/implementation Other - federally illegal but unique circumstances Recreational
Countries included have passed legislation at the federal level and must fulfill at least one of the following criteria: • Cultivation, manufacture or sale of medical and/or recreational cannabis allowed. • Doctors can prescribe medical cannabis. • Import and/or export of medical cannabis allowed. High: Countries at the forefront of the global industry. Frameworks are established, and adoption is well underway. Medium: Implementation has begun but is still limited or restricted; lots of room for the market to develop. Low: Legislation has been passed, but implementation is very limited or nonexistent. Decriminalization is not included.
National & International News USDA Gives Hemp Farmers Leeway on THC and Testing but Retains DEA Requirement Hemp producers will have more breathing room under federally mandated THC levels set forth in the U.S. Department of Agriculture’s final hemp-production rules. According to the rules that take effect March 22, the margin of error will increase from a total of 0.5% to 1% THC before producers are declared criminally negligent. Hemp farmers and testing agents also will have more time to harvest plants after testing, with the harvest window increased from 15 days to 30 calendar days after sampling is completed. However, the USDA did not budge on sampling requirements and the mandate for laboratories to register with the U.S. Drug Enforcement Administration.
22 Marijuana Business Magazine | February 2021
Production rules established in the 2014 Farm Bill, under which nearly half of the states that are operating hemp-production programs are currently still working, will sunset on Dec. 31, at which point all state and tribal hemp-production programs must comply with the USDA’s final hemp-production rules.
Ontario Cannabis Stores Can Still Offer Pickup, Delivery During Lockdown Brick-and-mortar cannabis stores in Ontario are still permitted to offer home delivery and curbside pickup during a stay-at-home order enacted Jan. 14. The stay-at-home order was enacted in light of rising COVID-19 cases in Ontario and will last at least 28 days, regulators said.
© 2021 Marijuana Business Daily, a division of Anne Holland Ventures. All rights reserved. Data is current as of Jan. 15, 2021.
The Alcohol and Gaming Commission of Ontario (AGCO) advised that cannabis stores must restrict their operating hours from 9 a.m. to 8 p.m. ET and deliveries must end by 8 p.m. Store hours and deliveries previously occurred until 11 p.m. The AGCO also warned that “non-essential construction must cease,” including building and improvements on the premises of cannabis store applicants. Curbside pickup and delivery in Ontario are temporary options put in place during the pandemic.
Insurance-covered Medical Cannabis Reimbursements Decline Again in Germany German public health-insurance reimbursements for cannabis have fallen for the second straight quarter.
The cannabis flower category is declining both in terms of the number of prescriptions and the total euros reimbursed by statutory health insurers. In the third quarter of 2020, reimbursements of medical cannabis and cannabinoid-based medicines totaled 36 million euros ($43.8 million), a drop of 2%, according to the German National Association of Statutory Health Insurance Funds. During the same quarter ended Sept. 30, German pharmacies processed 82,986 prescriptions under the statutory program, a 3% increase. However, the average value per prescription dropped 5%. Reimbursed flower fell 16% between the first and third quarters of 2020, while the extracts category experienced timid growth in the third quarter.
February 2021 | mjbizdaily.com 23
IndustryDevelopments | International & State WA MT
DE MD VA
■ Medical ■ Recreational HI
Note: This map does not include states that have legalized only CBD-based oils.
© 2021 Marijuana Business Daily, a division of Anne Holland Ventures. All rights reserved. Data is current as of Jan. 15, 2021.
Arizona Arizona approved 73 dispensaries to start selling recreational marijuana Jan. 22, launching the state’s adult-use cannabis program with sales beginning less than three months after voters approved the new market. The state’s recreational market could be worth $375 million-$400 million in its first year, increasing to $700 million-$760 million by 2024, according to the Marijuana Business Factbook.
Arkansas The state medical marijuana program is offering processor and transporter licenses. Processors will be allowed to produce a variety of items ranging from edibles to vape products, as allowed under recently finalized program rules, according to Scott Hardin, spokesman for the commission. Transporters, meanwhile, may deliver product among cultivators, dispensaries, processors and testing laboratories but won’t be able to deliver directly to patients. The application fee for the new licenses is $5,000 with a $100,000 bond required for licensing.
24 Marijuana Business Magazine | February 2021
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IndustryDevelopments | International & State California Lawmakers are again faced with the question of whether to allow hemp extracts in food and beverages. In addition to allowing CBD in food and beverages, the bill also would set testing requirements for safety and ensure products don’t have more than 0.3% THC. Assembly Bill 45 also would ban smokable hemp flower—an increasingly popular and unregulated segment of the industry.
Georgia State voters elected Democrats Raphael Warnock and Jon Ossoff to the U.S. Senate in runoff races. Vice President Kamala Harris swore in the new senators Jan. 20, her first day in office. The new members of Congress equalize the Senate to 50 Democrats and 50 Republicans, with the vice president casting the deciding vote in case of a tie. Marijuana industry executives are hopeful that a Democratic Congress and White House could progress cannabis issues such as banking.
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Illinois The number of hemp processors in Illinois doubled over the past year, as the hemp industry tries to establish itself in a state with a robust agricultural sector. Illinois registered 362 hemp processors in 2020, up from 146 in 2019. Licensed growers numbered 798 in 2020, compared with 601 in 2019. Agriculture officials expect to see a decrease from the 7,141 acres planted in 2019, as growers get a better sense of how much crop they need. Hemp acreage data for 2020 is not yet available.
Indiana State regulators warned hemp farmers to watch out for predatory hempseed vendors. Donald Robison, seed administrator at the Office of Indiana State Chemist, said some farmers are paying for seed that is never delivered, while others are receiving product that doesn’t match what was promised, such as seed for plants that test well above the 0.3% THC federal limit. Robison recommends farmers growing hemp buy only from the office’s list of permitted suppliers.
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IndustryDevelopments | International & State Maine Proposed rules for Maine’s medical cannabis program would require registered MMJ caregivers to use the state’s inventory tracking system. A “limited inventory tracking” option would be available to small-scale caregivers who meet certain requirements. According to the preliminary draft rules posted by Maine’s Office of Marijuana Policy, other potential updates include “more detailed, standardized requirements regarding the packaging and labeling of harvested marijuana.”
Maryland Cannabis employees in Maryland were eligible for Phase 1A of the state’s tiered COVID-19 vaccine-distribution plan alongside traditional health-care providers. The Maryland Medical Cannabis Commission alerted more than 130 licensed cannabis companies that registered employees at medical cannabis dispensaries, labs, cultivation sites and processing centers were “registered health care providers.”
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Massachusetts Marijuana retailers in Massachusetts filed a lawsuit challenging the state Cannabis Control Commission’s rules that allow only social equity applicants to deliver cannabis for the program’s first three years. The Commonwealth Dispensary Association contends that preventing marijuana retailers from delivering cannabis under their existing retail licenses violates a state statute.
Missouri A state judge ruled to keep Missouri’s medical marijuana cultivation licensing regulations in place, dismissing a lawsuit that challenged the program’s license caps and scoring process. Paul Callicoat, a principal in the Sarcoxie Nursery, filed a lawsuit after being denied a license to cultivate medical marijuana. Cole County Circuit Judge Patricia Joyce ruled that regulators acted within their authority to put limits on the industry to protect patient safety and ordered the plaintiffs to pay court costs.
February 2021 | mjbizdaily.com 29
IndustryDevelopments | International & State Montana State lawmakers rejected a $1.35 million budget request to fund the recreational cannabis program, raising uncertainty about regulators’ ability to meet the sales launch deadline. The state revenue department had requested the money to set up a department of 20 full-time employees after Montana voters approved a ballot initiative in November to legalize an adult-use marijuana market.
New Mexico Ultra Health, the state’s leading medical cannabis company, is trying to force New Mexico regulators to increase the marijuana plant-count limit, claiming the restriction has resulted in insufficient supply and high prices. According to the latest legal filing, Ultra Health alleges that the state is violating a 2019 court order to ensure the plant-count limit is adequate and reasonable. State regulators boosted the plant-count limit from 450 plants per cultivator to 1,750 in 2019, but Ultra Health argues that the amount per patient has been mostly offset by the growth of the MMJ program.
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Oregon The Oregon Department of Agriculture sent a letter to U.S. Agriculture Secretary Sonny Perdue withdrawing its proposed hemp plan. The shift comes in response to a federal budget vote giving statesÂ until Sept. 30 to operate as pilot projects. The state agency had submitted its hemp plan in August to meet the original Oct. 31 deadline, but the plan was still under USDA review when Oregon regulators asked to withdraw it.
Rhode Island The stateâ&#x20AC;&#x2122;s medical marijuana program received 45 applications for a lottery to operate six new dispensaries, according to the Office of Cannabis Regulation. One new license is available in each of six zones across the state; a number of applicants applied in multiple zones. Only three medical dispensaries are currently licensed in Rhode Island.
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IndustryDevelopments | International & State South Dakota Gov. Kristi Noem issued an executive order that indicated she is behind the effort to overturn voter-approved recreational cannabis legalization. Noem said the recreational marijuana ballot initiative approved by voters in November “violated the procedures set forth in the South Dakota Constitution” by dealing with more than one subject. Additionally, the State Bar of South Dakota ethics committee warned attorneys in the state against taking marijuana businesses as clients.
Vermont The state will be conducting contactless inspections of hemp operators to limit person-to-person contact during the coronavirus pandemic. The Vermont Agency of Agriculture, Food and Markets said the inspections will begin with a phone call, followed by an email and an online form to gather information about the number of harvested lots, yields, results of contaminant testing and more. The state calls the new inspections format a way to “collect important industry data, gauge registrants’ knowledge of the Vermont Hemp Rules and … offer compliance assistance.”
32 Marijuana Business Magazine | February 2021
Virginia Gov. Ralph Northam’s administration announced an adult-use cannabis legalization plan that would impose a 21% excise tax and provide some licensing preferences for individuals and entities harmed by the war on drugs. Adult-use marijuana sales would begin Jan. 1, 2023, under the proposal. The measure is expected to receive broad support from lawmakers.
Washington state Cannabis regulators developed a compliance task force to assist marijuana businesses in following state laws. The team is designed to support and offer technical assistance to licensed marijuana growers, processors, retailers, researchers and transporters. The consultants will help identify compliance gaps and make suggestions about how to correct them concerns as well as assist in staff training.
Note: Entries sourced from Marijuana Business Daily, Hemp Industry Daily and other international, national and local news outlets. These developments occurred before this magazine’s publication deadline, so some situations may have changed.
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Las Vegas, Nevada | 1-888-FOHSE-77 | Founded 2016 | fohse.com
Harvest AT THE GR VE
When word got around about often Fohse’s LED cannabis grow lights were breaking harvest records around the country, folks at The Grove in Nevada took notice. Their first harvest after installing Fohse’s A3i model were so unbelievable they had to re-weigh the crop to be sure.
Image Credits : @Keene.Media
100% respectively, Howard knew he had to get Fohse lighting into The Grove ... and fast! The Grove, a vertically integrated cannabis business with dispensary, cultivation, distribution, and production licenses, has been producing, sourcing, and selling high quality edibles, cartridges, and recreational cannabis products since 2015. Their 26,600 square foot growing and production facility is state-of-the-art and ecofriendly. Their cultivators strive to recreate the conditions that
When Mike Howard (Director of Cultivation, The Grove) first caught
cannabis would find in nature, and use only all-natural growing
word of the record-breaking cannabis yields being harvested
media and inputs as well as biological measures to control any pests
regularly by fellow grow teams around the country (Lume Cannabis
or diseases. It only makes sense then that they would seek out and
in Michigan and Green Life Productions in Nevada) he knew the
select Fohse products – the best lighting fixtures in the business – to
game was changing. Once Howard dug deeper into the news, he
match The Grove’s exacting standards.
discovered a common catalyst behind the success of his peers ... both
The dry Las Vegas air makes for a challenging indoor growing
facilities were actively growing under the A3i LED grow light from
environment for cannabis, especially under HPS lamps. Fohse fixtures
Fohse. After hearing firsthand from the grow teams in Michigan
operate at much cooler temperatures than standard HPS fixtures. At
and Nevada how they had increased yields over HPS by 31% and
The Grove, this means that the humidifiers and cooling systems don’t
The A3i system generated an average of 27 percent more light as compared to the HPS fixtures. This additional light led to
AN INCREASE IN DRY YIELD HARVEST WEIGHTS BY A WHOPPING 65 PERCENT.
Image Credit: @Keene.Media
have to work as hard, and that an equilibrium between temperature
THE GROVE • NEVADA
and humidity level can be more easily achieved and maintained.
Fall/Winter 2020 Harvest Results
This factor has been one of the primary contributors to the record harvests being seen regularly at The Grove. Looking at how Fohse’s A3i 1500-watt fixtures compare to standard 1000-watt DE HPS fixtures in an “apples to apples” comparison reveals just how in sync these intelligent fixtures are with cannabis. The numbers from a recent, late fall harvest at The Grove tell an impressive tale. In the now-typical example above from Fall 2020, the A3i system generated an average of 27 percent more light as compared to the HPS fixtures. This additional light led to an increase in dry yield harvest weights by a whopping 65 percent. All of this, while using 16 percent less energy than the HPS lighting it was compared to and in the same physical footprint of space with the same number of plants. Remarkable results like those at The Grove are not a fluke or an accident and they are not restricted to Mike Howard and his team
Total fixtures Grow Area Flower Cycle PPFD (early flower) PPFD (late flower) Wet Weight Dry Weight Dry Yield / ft2 Dry Lbs. / Light* Total kWh
A3i 1500W LED
1000W DE HPS
35 1056 sf 65 days 800-820 1250-1350 1,392 lbs (631.4 kg) 223 lbs (101.3 kg) 3.4 oz (96 g) 6.57 (2.98 kg) 41,072
64 1056 sf 65 days 800-820 1000-1050 716 lbs. (324.8 kg) 135 lbs (61.2 kg) 2.05 oz (58 g) 2.11 lbs. (0.96 kg) 49,155
* Strawberry Cheesecake was the highest-yielding strain at
7.2lbs/light, while Cookies was the lowest at 5.49 lbs/light.
Green Life Production’s typical harvest under their previous lighting system was 80-90 lbs. The average harvest now using Fohse fixtures is
160 TO NEARLY 200 LBS
alone. Growers all over are finding results like these to be the new
are showing that the rules have changed and that Fohse lighting
norm, regardless of growing media and style of growing. Lume
fixtures enable previously unobtainable and unthinkable results.
Cannabis has been tracking results of their Fohse A3i fixtures for
Howard and the grow team at The Grove have achieved their
over 40 hydroponic growing cycles and across 8 different strains
amazing results by relying on the horticultural skills of their talented
of cannabis. Without fail, the team at Lume under Kevin Kuethe’s
team, and also by utilizing two of Fohse’s premier products. They
direction reports higher yields under the A3i than those grown
have predominantly been using the A3i model – Fohse’s workhorse
under HPS. For example, with Fohse fixtures they have harvested
grow light – to achieve their highest yields. The A3i is specifically
7,130 lbs. versus 5,241 lbs. with the same strains grown under HPS.
designed to grow cannabis and that is exactly what it does. Its
THC levels under Fohse lights have been 3 percent higher too; 20
spectral distribution is custom-made to address the unique needs
percent versus 17 percent on average. In other words, the cannabis
of cannabis. As evidenced in the remarkable yields outlined in the
that Lume grew under Fohse lighting netted more than 2.5 million
table above, the A3i’s output (of up to 4,970 µmol/s depending on
dollars(!) more than the cannabis grown under HPS.
configuration) can be adjusted to supply seasonably appropriate
Steve Cantwell at Green Life Productions also reports unbelievable
lighting depending on the growth phase of the crop. All of this while
differences since switching over to Fohse’s A3i and F1V fixtures as
producing up to 156 percent more light per fixture and burning
well. Green Life Production’s typical harvests under their previous
cooler (no hotter than dishwashing water) than traditional HPS grow
lighting system was 80-90 lbs. The average harvest now using Fohse
lights. This means the A3i is safer to operate for both growers and
fixtures is 160 to nearly 200 lbs pulled from his 4x8, no-till, living,
their cannabis crops.
organic soil beds. Like Mike Howard’s team at The Grove, Steve and
The A3i system is designed to handle the harsh extremes of
his team have the enviable logistics problem of figuring out where
a growing environment. The IP67-rated fixture will continue to
to put all of the bounty from these sky-high yields. All three teams,
operate at peak performance even with the moisture, dust, pests,
The Grove (coco pots), Lume Cannabis (hydroponics) and Green Life
and biological debris such as spores that are present in most indoor
Productions (live soil), are blowing harvest records out of the water
growing environments. Not many growers would expect their grow
time and time again across three drastically different cultivation
lights to still perform well after being submerged under several
styles. These highly regarded and experienced cannabis producers
feet of water; the A3i can survive such a plunge and be relied on
to deliver its photon payload as designed. Howard and his team at The Grove do not just rely on the A3i for their high yields. In their double-stack rooms they deploy Fohse’s lighter, more nimble F1V for its pound-for-pound power. Just like the A3i, the F1V fixtures rely on industry-proven Samsung LEDs for their photon delivery. While almost the same dimensions as the A3i, at 38 pounds (17.2 kg) per fixture they are almost half the weight of each A3i (70 lbs./31.75kg each). Like the A3i fixtures, their power supply rating is +100,000 hours. Depending on the needs of the grower and the ability of the existing systems, Fohse offers 420W, 600W, and 800W versions of the F1V. In his own F1V rooms, Howard has reported similarly positive results as in his A3i rooms: 60%+ yield increases, increased utility efficiencies, and better labor efficiency. The team now does not have to “chase canopy” by raising and lowering the lighting fixtures to achieve late-flower PPFD intensities like they did with the old LED lights that they were using in those double-tiered systems. Fohse lighting products outperform their competition not only at the Grove, but anywhere they have been put to the test. So why hasn’t every cannabis grower switched over to Fohse? Growers who have not yet seen the results firsthand still believe that LEDs cannot keep up with the high lighting demands of cannabis the way that HPS lighting traditionally has. The narrative had long been one of incremental change and an acceptance that two pounds of harvested yields per light fixture was the best one could expect. At the turn of the century, there was chatter that this didn’t have to be ‘good enough’. By 2015 growers both professional and amateur alike had proven that three pounds per light was achievable based on advancements up to that point, but no one thought it would ever get better than that. Until Fohse set out to prove them all wrong, and then did. They showed that higher light output does not have to mean higher heat and that Diode technology had come a long way in just a few short years. Mike Howard gives his take on this phenomenon:
“Everyone looks at LED lighting as still kind of a novelty; not something where it needs to be yet for cannabis growers.
As Mike Howard said, Fohse fixtures are engineered with a “cannabis
Having seen the evolution of LEDs that the Fohse team has
mindset”. HPS Light output has plateaued because the added heat
created because of their cannabis mindset, it became obvious
load is both detrimental to the cannabis crop and uneconomical to
that we could focus on producing healthy plants. A lot of
counterbalance. With Fohse fixtures growers can focus more on the
other grow lighting companies are still looking at making
nuances of a high-intensity light environment instead of combatting
and selling lights that can grow anything. Cannabis takes a lot of light and many companies and even growers don’t
heat. Ever since that first time Mike Howard oversaw production in the initial grow room where Fohse products were installed at the Grove, he immediately saw the results. He is now vowing to keep replacing
put enough light into commercial setups. Many cannabis
The Grove’s less efficient HPS fixtures and outdated LEDs with Fohse
growers never thought that LED technology was ever going
lighting as they continue expanding.
to make it, but the power that comes out of Fohse fixtures is insane. Fohse lighting lets the grower focus on plant health and our yields show that. With Fohse LEDs, overtaking HPS, you can really push the limits of your grow.”
Looking into LED for your cultivation facility? Find out how switching to Fohse fixtures will increase your cannabis production, learn about all of Fohse’s record-busting lighting at Fohse.com.
Liability Cannabis executives can take a variety of steps to shield their companies from lawsuitsâ&#x20AC;&#x201D;potentially saving millions in the process
38 Marijuana Business Magazine | February 2021
awsuits that can cripple or shutter cannabis businesses represent a growing problem for executives. Ditto for lawsuits that can force an executive out of a company after a partnership with colleagues or investors goes sour. Lawsuits are not a new problem, to be sure. But as the industry and individual marijuana and hemp businesses succeed and grow, so does their visibility, which can attract admiration as well as attention from unscrupulous rivals willing to destroy companies in the courtroom rather than compete with them in the marketplace. “The more popular and well known these companies become, the more they will get sued,” said Rachel Gillette, who chairs the cannabis law practice at Greenspoon Marder in Denver. Of course, not all lawsuits are frivolous. Cannabis businesses, like their mainstream counterparts, often face legal attacks because of genuine mistakes relating to product manufacturing, ignorance of labor and marketing laws as well as failure to comply with state regulations, among other issues. In the following pages, we address the most common litigation categories that marijuana companies need to be concerned about. They include: • Product liability. • Business partner and investor disputes. • Breach of contract. • Employee relations and labor law. • Workplace safety. • Racketeer Influenced and Corrupt Organization Act (RICO) lawsuits. • U.S. Food and Drug Administration and Federal Trade Commission violations. There are strategies to win these specific types of legal battles. It’s less costly and damaging, however, to avoid the legal battles in the first place—and there are strategies for that, too.
One of the growing pains of a maturing industry such as cannabis is increased litigation. But marijuana executives can work to prevent litigation with some basic strategies: • Keeping abreast of regulatory changes and manufacturing compliant products is far more cost-effective than cutting corners and paying for it later. • Many cannabis executives and investors still don’t draft contracts and other paperwork, leaving them exposed to lawsuits or other business claims. Always have a lawyer review contracts and other legal documents before signing them. • Cannabis companies need insurance coverage for issues such as product liability to help handle losses in the event of a claim. The insurance industry is getting better at serving the cannabis industry. • RICO lawsuits aren’t as common as they were a few years ago, but they remain a threat to marijuana companies. Opening your business in a cannabis-friendly location is one way to avoid such legal actions. • The U.S. Food and Drug Administration and Federal Trade Commission increasingly are cracking down on producers of CBD products for making health and disease claims. Avoiding certain language can help keep authorities at bay.
Companies that take steps to limit their liability can avoid having to open their wallets to settle lawsuits and pay penalties—as some cannabis companies have been forced to do. Strategies for avoiding and winning lawsuits are presented in the following pages with the intention of providing companies with a guide to establish legal policies and defenses to protect themselves. - Omar Sacirbey
February 2021 | mjbizdaily.com 39
Limiting Your Liability
Infused product makers should ensure the purity of their ingredients including cannabis oil, chocolate, emulsion formulas and other items.
Protect Against Product Claims Cannabis companies can shield themselves from product-liability lawsuits by keeping close tabs on their supply chains, avoiding bogus assertions By Omar Sacirbey
roduct-liability cases are among the most damaging lawsuits a business can face. The cases—often involving a defective product that causes injury or even death—can be time-consuming and costly. They also can tarnish a brand’s reputation. Yet many cannabis businesses don’t take this threat as seriously as they should, experts said. Marijuana businesses “have not given the forethought to the product-liability issue that you might see in more mature industries,” said Jesse Alderman, cochair of the cannabis practice at Foley Hoag, an international law firm based in Boston.
Product-liability law is a subset of injury law that deals with who should be responsible for defective or dangerous products. There is no federal productliability law. Instead, product-liability claims are usually based on state laws and “brought under the theories of negligence, strict liability or breach of warranty,” according to FindLaw.com, a provider of online legal information. Legal experts generally identify three types of product defects for which businesses can be held liable: design, manufacturing and marketing. Liability for a product with defects or dangers can potentially be tied to any business involved in the supply
40 Marijuana Business Magazine | February 2021
chain—from designers and developers to manufacturers, distributors, retailers and others. For the marijuana industry, the supply chain can include: • Cultivators. • Ancillary businesses that create inputs for or support cultivators, such as nutrient or irrigation companies. • Businesses that create and manufacture infused products and concentrates. • Companies that produce and sell ingredients for manufacturers of infused products and concentrates, such as businesses involved in emulsions or fast-onset technology.
• Businesses that develop, make and sell delivery devices, such as vape pens or inhalers. • Packaging companies. • Testing laboratories. • Retailers.
PRODUCTION STANDARDS The easiest way to avoid product-liability lawsuits, of course, is to design and produce merchandise that meets or exceeds your state’s cannabis compliance standards. That means ensuring you’ve designed and manufactured your products in compliance with state or international standards. And it means vetting partners who supply inputs or delivery devices—such as vaporizers—to ensure their products comply with generally accepted standards. Examples include: Cultivators: Growers should ensure nutrient mixes, soils, pest-control products and other supplies are safe for their plants and products. Cultivators also should make sure their cannabis is contaminant-free—not only when it leaves their facilities but also when it arrives on retail shelves and is used by consumers. Manufacturers: Edibles makers should regularly vet suppliers of biomass, chocolate, emulsion formulas and other ingredients to ensure they are safe. Manufacturers also should test their products to ensure they are contaminant-free, their potencies are accurate and the product is formulated in a way that THC and other cannabinoids are evenly distributed throughout. Retailers: Store operators should vet product suppliers and ensure that merchandise such as vapes and edibles have testing certificates. Vetting also should involve reviewing a supplier’s history and checking its reputation with other retailers. While a number of cannabis businesses continue to cut corners when overseeing their supply chains, the industry overall has improved in
this regard, Alderman said. “As the industry matures and consolidates, as folks become more sophisticated, I suspect there will be a greater level of diligence in a company really investigating its supply chain, the practices of its suppliers, the sourcing of its raw materials and the like,” he said.
CLAIMS AND DISCLAIMERS More common mistakes that expose cannabis businesses to productliability lawsuits have to do with false or misleading statements or inaccurate labeling. These include health claims made on websites, in advertisements or on labels. (See “Staying on the Right Side of Regulators,” on page 42.) A simple and relatively inexpensive way to reduce your risk is to draft disclaimers, which can be placed on websites, labels and in advertisements. The disclaimers can be as generic as, “This product contains THC.” Common disclaimers found on dispensary websites and cannabis products include: “There may be heath risks associated with consumption of this product,” and “Not safe for children.” “It could go a long way for people to acknowledge some of the inherent safety risks and to disclaim them,” Alderman said. “Disclaimers are an easy step to take that give you lots of protection. It’s a common practice that in certain circumstances can be helpful.”
INSURANCE AS A BACKSTOP No matter the precautions that businesses take against product-liability lawsuits, it’s impossible to guarantee they won’t be a defendant in one. For that reason, it’s imperative that marijuana businesses get product-liability insurance, experts said. Yet, while insurers offer more access to marijuana businesses than banks and other financial institutions provide,
cannabis policies do have pitfalls. Many insurers that offer cannabis companies policies provide subpar service or often don’t pay out claims, thereby undermining the trust the marijuana industry has in the insurance industry, according to Rachel Gillette, partner and chair of the cannabis law practice at Greenspoon Marder in Denver. “Marijuana businesses feel like they haven’t been served right,” Gillette said. “However, the quality of insurance service providers has gone up exponentially.” When buying product-liability insurance, don’t skimp on coverage. Get the most coverage that you can afford, attorneys advised. If a company’s product-liability insurance policy covers $1 million but the business is on the losing side of a $2 million settlement, the firm remains liable for the $1 million shortfall. And if an insurance company refuses to pay a claim, should a cannabis company challenge that refusal? Many cannabis companies fear that insurers feel more comfortable evading claims because of marijuana’s federally illegal status. Whether a marijuana company should challenge an insurer depends on the individual case, Gillette said. How big is the outstanding claim in relation to the cost it would take to recover the unpaid amount? Is the claim so small that it’s not worth the time and resources? Or is it sufficiently big enough that it’s worth pursuing? And what are the chances of success? Unfortunately for cannabis companies, the case history on such matters is lacking. “Insurance is still relatively new to cannabis businesses. There’s still not a breadth of litigation to know on what marijuana businesses can push back on,” Gillette said.
February 2021 | mjbizdaily.com 41
Limiting Your Liability
Staying on the Right Side of Regulators By avoiding health claims, CBD producers can promote their products without drawing the ire of the FDA or FTC Asa Waldstein
By Asa Waldstein
t’s the Wild West out there!” How often have you heard that statement made about health claims for products containing CBD? But here’s the thing: It’s not the Wild West, Lesley Fair, senior attorney with the Federal Trade Commission, noted in a recent blog post. Gone are the days when a CBD company could make “health claims” or “disease claims,” as they are referred to by the U.S. Food and Drug Administration, without fear of strict government retribution. The FDA does not allow disease claims such as “suggested treatment for anxiety” to be made on dietary supplements or hemp products in any form. During the past two years, the FDA and the FTC have increased enforcement actions against companies making online marketing claims in blogs, social media, websites and more.
WHAT IS A CLAIM? Before marketing a CBD product, it’s important to know what constitutes a health or disease claim. Here are a few general rules to help determine if a claim is being made: • Anything ending in “itis” refers to inflammation, such as arthritis. • Anything a drug is “indicated for,” such as Xanax being indicated for anxiety. • Anything with “anti” in the name, such as anti-inflammatory. • The name of any illness, such as depression.
To find out if the FDA already has sent out warning letters related to a health claim, search the terms “FDA warning letter + insert claim.”
WHAT CAN/CAN’T I SAY?
Topical CBD products are generally thought to carry a lower regulatory risk than ingestible products. Topicals (cosmetics) are defined as products applied to the human body for cleansing, beautifying, promoting attractiveness or altering the appearance. A common mistake companies make when marketing topicals is advertising them for inflammation, pain or any other symptomatic relief. By using claims outside of the “beautifying” definition, an otherwise-compliant topical product is turned into a drug simply by using words such as pain.
Marketing rule No. 1: Be truthful and don’t mislead the consumer; at the same time, be effective in growing the business. Since nothing in the CBD business is risk-free, it’s important to convey a marketing message in an ethical and low-risk manner. For example, a brand might feel it has competent data to make a statement about improved quality of sleep. This same message crosses the line to high HASHTAGS AND OTHER risk if it talks about use for insomnia, which the FDA considers a disease claim. CONSIDERATIONS Here are two examples: Many people enter the hemp world from other industries and might not • Using the words “pain” and understand the nuances of marketing “inflammation” are considered dietary supplements and hemp-based midlevel risks and should be CBD products. For example, standard avoided. A more compliant way to practices from tech or apparel such as state such information is to address hashtags and product descriptions do a product’s use for discomfort. not necessarily translate into compliant • CBD is widely touted for anxiety, but strategies for marketing hemp-based the FDA is likely to flag companies CBD products. using this term for making a disease Here are a few examples: claim. If accurate, replace the term Hashtags and photographs: Tagging with “happy mood support” or a photo #Relief is relatively lower risk, “balanced state of mind.” These whereas #PainRelief is risky and would phrases get the point across without shift an otherwise compliant post to an using buzzwords that might increase elevated risk level. the chance of drawing the attention Depression: A post about depression of regulators. Again, be sure to never mislead your consumer, and be ready awareness could be considered compliant, as companies have the right to substantiate any statements if to speak about issues that are important necessary.
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to their business and their customers. This same post would be noncompliant with a hashtag that promotes its product, however, such as #BuyMyCBD. If this same post had zero noncompliant hashtags but contained a product photo, this would be considered an implied depression claim. This is another reason marketing material should pass through a regulatory review before getting posted. Meta tags: SEO companies drive website traffic with meta tags. This is considered advertising and must not be misleading. I have not seen warning letters based solely on noncompliant meta tags, but they are an easily searchable red flag to authorities that might indicate deeper compliance issues. Working with a consultant to develop marketing best practices can help avoid these potentially unforeseen pitfalls.
FEDERAL RESPONSE The FDA and FTC have issued numerous warning letters to CBD companies for making health and disease claims. The letters provide specific examples of what they are enforcing, such as references to depression, cancer and inflammation. News releases sometimes accompany these warning letters and provide more context to their enforcement action. The FTC can take additional action by issuing an administrative complaint, which first happened to a CBD company in April 2020 in relation to the coronavirus. The agency announced that Marc Ching, the owner of Los Angeles-based Whole Leaf Organics, had settled with federal authorities and agreed to stop making health claims about three of his products. Previously, one of the company’s ads touted the CBD treatment as an “anti-viral wellness booster.” In December, the FTC rocked the CBD world with Operation CBDeceit by issuing fines and sanctions against six cannabidiol companies accused of misleading consumers about the health benefits of the cannabis extract.
POSSIBLE PENALTIES The most common FDA and FTC penalties come in the form of warning letters. Here are reasons to avoid these letters: • They require administrative and legal resources to respond. • Repeat warning letters can lead to injunction or seizure. One warning letter puts you on the FDA/FTC “radar.” • They alert class action attorneys who might use a warning letter as proof of wrongdoing in their lawsuit. • Your name and company become a matter of public record and are easily found in a web search. • They scare away executive talent and investors, which hurts the company’s overall value. Penalties also come in the form of the FTC’s administrative complaints, which can have serious ramifications. December’s CBDeceit crackdown included fines up to $85,000—but this was only the beginning. Companies receiving FTC penalties might be required to inform customers of the complaint via their social-media accounts, website or written notifications. This communication will require business resources and also might hurt the company’s reputation and scare away customers. The FTC also can require the company to monitor its compliance and submit reports to the agency. Companies involved in the recent FTC complaints must report on compliance for 20 years. These actions not only carry an administrative burden but can hinder future investment opportunities. They might also require refunding customers, and complaints can lead to class action lawsuits as well.
SOME GO UNPUNISHED Not every company making claims will attract trouble. FDA Principal Deputy Commissioner Amy Abernethy recently noted, “We will continue to monitor and take action, as needed, against companies that unlawfully market their products—prioritizing those that pose the greatest risk of harm to the public.”
This clearly shows the agency is taking a risk-based approach to enforcement, so knowing which high-risk claims to avoid is important. Most warning letters cite claims made online, although companies are responsible for all marketing materials, including mailers, newsletters and information distributed at trade shows. Authorities look at the 30,000foot view of a company’s total online presence, which includes videos, social media, blogs, FAQs, infographics and even podcasts. One claim might not attract enforcement action, but the combination of a claim in a video, a noncompliant hashtag in social media and a testimonial claim can elevate risk. Authorities piece together claims to create one big picture of noncompliance. They make examples of companies not following the rules—especially in areas they want to highlight, such as COVID-19, depression, opiate-reduction and claims made in testimonials—to name a few. Asa Waldstein is a 20-year dietary supplements executive now focusing on bridging the compliance, marketing and regulatory gap between the supplement and hemp industries. He chairs the American Herbal Products Association’s Cannabis Committee. Waldstein also is owner of the consulting company Supplement Advisory Group, and his Regulatory Education Series platform regularly hosts free events for the community. Learn more and contact him at AsaWaldstein.com.
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Limiting Your Liability
The 10th Circuit Court of Appeals ruled that marijuana cultivation, processing, distribution and sales meet the definition of racketeering activity because the plant remains federally illegal. Courtesy Photo
Readying for RICO Civil racketeering lawsuits remain a liability risk for marijuana businesses, but companies can take steps to head off risks By Jeff Smith
ederal racketeering lawsuits against state-legal marijuana businesses might be in something of a lull right now, but they remain a risk to be factored in with other business costs, experts agree. “We still see it as a significant risk for marijuana growers—although maybe one that is slowing a bit,” said Gerald Arth, a partner in the Philadelphia law office of Fox Rothschild and an expert in civil racketeering cases. In recent years, anti-cannabis property owners and businesses have used the federal Racketeer Influenced and Corrupt Organizations (RICO) Act in efforts to win monetary awards and shut down marijuana cultivation operations that allegedly diminish property values in their neighborhoods.
Plaintiffs bringing RICO cases generally argue that marijuana operations diminish the value of their property or business because of odors and/or security concerns.
AN ONGOING RISK Gerald Arth “If you’re looking to invest in a grow facility or acquire land, it’s one of those risk factors you have to account for,” Arth said. “You have to factor it in along with the cost of employees, environmental risks and other business costs.” RICO was enacted in 1970 to target organized crime, but it now includes drug trafficking and other federally illegal activities. Under RICO, a
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successful plaintiff can win triple financial damages. “These cases come and go,” Arth said, “but the cost of defending them, the harm to one’s reputation, the potential treble damages” all can mount. Not to mention the stress and anxiety that they can cause.
A VICTORY OF SORTS Marijuana companies cheered in late 2018, when a federal court jury in Denver rejected RICO claims against a southern Colorado marijuana grower. But as attorneys at Birmingham, Alabama-based Bradley law firm pointed out in a column after the
Colorado verdict, the 10th Circuit Court of Appeals made a troubling precedent when it weighed in on the case before sending it back to the lower court for what became a trial. The appellate court made it clear in its decision that marijuana cultivation, processing, distribution and sales meet the definition of racketeering activity under RICO because the plant remains illegal at the federal level. “The cannabis industry obviously celebrated the jury verdict,” the three Bradley attorneys wrote. “On the other hand, the Tenth Circuit’s published decision is not at all comforting to the industry.” Arth of Fox Rothschild said: “As a cannabis operation, you’ve already loaded the gun: It’s already a violation of RICO."
PLAINTIFFS FACE A HIGH BAR The U.S. Supreme Court has yet to rule on marijuana RICO cases, but it’s assumed the nation’s highest court would reach the same conclusion as the 10th Circuit, which covers Colorado, Kansas, New Mexico and Oklahoma. Federal judges overseeing the cases have issued various rulings on the issue, but in general they have set the bar high, requiring plaintiffs to prove concrete damages. That’s hard to do unless the plaintiffs are in the process of selling their property or can prove other properties in the area are selling at depressed prices because of the presence of a marijuana operation. “It’s difficult to prevail, but there’s a pathway there,” said Whitt Steineker, co-chair of Bradley’s cannabis industry team. “And in all areas of the law, you tend to see entrepreneurial attorneys who find clever ways to bring lawsuits.” Arth concurred: “Plaintiffs are going to find ways to plead the concrete harm they need to get to trial.” And, once a case does get to trial, “Certainly you can’t guarantee the outcome” seen in the Colorado case, he said.
RICO Suits From Across the U.S. While business owners from any market with state-legal marijuana could find themselves named in a federal lawsuit filed under the Racketeer Influenced and Corrupt Organizations (RICO) Act, many legal challenges have come from states where recreational marijuana is legal. Following are examples of RICO lawsuits filed against cannabis companies. CALIFORNIA A federal judge in October 2020 dismissed a $200 million RICO lawsuit filed against a Southern California marijuana grower. What made the suit different was that it was filed by another cannabis grower and involved a dispute between former business partners. MASSACHUSETTS Cambridge business owners filed a RICO case in 2017 against HealthyPharms, a medical cannabis operator, with potential damages set at $81 million. HealthyPharms had a medical marijuana processing operation that was 30 miles away. But the plaintiffs in the case argued the neighborhood dispensary caused their properties to lose $27 million in market value and profits even before it opened its doors. In late 2019, the plaintiff’s attorney reported that the case was settled out of court for a “substantial” amount. A local newspaper later reported that the settlement exceeded $1 million. OREGON State marijuana operations in Oregon have seen several RICO lawsuits, including three filed by one attorney. One especially prolific RICO suit filed in July 2018 named 226 defendants. The plaintiff lived adjacent to Oregon Candy Farm, a marijuana processor. However, the suit also named East Fork Cultivars, which cultivated marijuana for the processor but is located five hours south. In addition, the plaintiff named as defendants just about every company and individual who conducted business with Oregon Candy Farm, including store operators. The court eventually dismissed cannabis retailers from the suit, which cut the number of defendants in half. Other defendants eventually settled, with settlement amounts reportedly declining over time to about $1,000. A number of defendants refused to settle, however, and the case was dismissed in May 2020. Lawsuits can drag out over years. For example, in early 2019, Momtazi Vineyards—located in the state’s famed Willamette Valley winemaking region—filed a RICO suit against a neighboring marijuana operation called Yamhill Naturals. Momtazi argued in its complaint that it was unable to sell grapes grown on the parts of its property closest to the marijuana operation. The plaintiff claimed that one of its repeat customers canceled a bulk order and complained of wine grapes contaminated by a “pungent stench.”
Owners of a vineyard in Oregon’s Willamette Valley sued a nearby marijuana company alleging that cannabis odors tainted their grapes. Courtesy Photo
A federal judge ruled later that year the suit could proceed, and court documents indicate the case is still pending. – Jeff Smith
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As a result of the potential financial risks of a case going to trial, some defendants have chosen to settle RICO lawsuits rather than fight them out in court. “You rarely know the settlement amount,” Steineker said. Robert Mikos, a cannabis law professor at Vanderbilt Law School, told Marijuana Business Magazine: “A plaintiff might drop a suit for anything from a few million (dollars) to, well, a coupon for Arby’s.” The fact that the public rarely knows the terms of a settlement is what made a RICO case in Massachusetts unusual, Steineker noted. The plaintiff ’s attorney bragged about the settlement being substantial, and a local newspaper later reported the settlement as exceeding $1 million. “Settlements (like that) will chum the water,” Steineker said.
LOCATION IS NO. 1 Steineker said that one way marijuana business owners can reduce the likelihood of being sued is being cautious about where they choose to locate their operation. “Think about what your presence is likely to do to your neighbors,” he said. “Maybe RICO is a significant enough risk to factor in your calculus on where to locate. Do you want to locate near a brand-new development? A winery?” The owner of a vineyard in Oregon sued an adjacent marijuana processing operation under RICO, for example, claiming that it had lost sales as a result of the MJ facility. (See "RICO Suits From Across the U.S.")
BE A GOOD NEIGHBOR Legal experts also stressed the importance of being a good citizen—and being as responsive as possible to neighbors’ concerns before they reach a critical point. In some cases, that’s as simple as participating in neighborhood events ranging from barbecues to crime-watch programs.
Opening a marijuana business in a location where neighbors are unlikely to complain can potentially head off costly litigation later.
Marijuana operations A federal court jury also can try to head off found in late 2018 that potential lawsuits by CannaCraft wasn’t making sure they’ve responsible for the alleged installed the latest airdamages under RICO. But filtration systems. But even the ordeal still resulted in a that might not be enough. heavy cost to the business. CannaCraft, the southern “We were never able to Parker Walton Colorado company that recover any money—not eventually prevailed in the even one cent—for our 2018 federal jury trial, told defense,” CannaCraft Marijuana Business Magazine owner Parker Walton said. that it already had installed five He said the business incurred $15,000 air-sanitation units in each of roughly $200,000 in legal expenses. It its flower rooms as well as a $150,000 was a tough four years, he said, “but HVAC system. thankfully we’ve never been better” than After a neighbor sued the company, the company is now. CannaCraft hired an expert to conduct FEDERAL ACTION REQUIRED an odor analysis of the business. The Arth said the RICO risk won’t go away consultant conducted tests inside entirely until marijuana is removed from the property and at the perimeter the federal Controlled Substances Act. of the company’s land using a field While descheduling would be needed olfactometer. to remove the RICO risk altogether, Arth While the facility in general got a said other marijuana legislation, such clean bill of health, CannaCraft—a as cannabis banking reform, might help small-batch marijuana cultivator—tried reduce the number of RICO lawsuits. to further reduce odors by spending “The more federal loosening, the several thousand dollars installing better,” he said. air-purification units in its lobby.
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Laboring Over the Law Unions, job classifications and COVID-19 are among the employee-related legal issues cannabis companies must address By Omar Sacirbey
arijuana businesses have the same legal obligations to their employees that mainstream companies do, according to attorneys specializing in labor and employment law. That means cannabis employers must implement labor-relations strategies that will help shield their companies from employee-related lawsuits. Some common employment- and labor-law pitfalls facing mainstream and marijuana businesses include how to classify and compensate workers, sexual harassment, unionization and, more recently, coronavirus-related work issues. “Cannabis companies face the same panoply of employee issues, legal issues and the like that any other business operating in America faces,” said Jonathan Keselenko, a partner specializing in labor and employee relations at Boston-based law firm Foley Hoag. At present, perhaps the biggest employee-related legal challenges arise from labor unions and their push to represent workers within the rapidly growing cannabis industry, legal experts told Marijuana Business Magazine. “Unions view cannabis as a huge opportunity,” Keselenko said. “They have been making sort of a full-court press to get the industry organized.”
UNION ISSUES The United Food and Commercial Workers (UFCW) has been the most aggressive union seeking to organize cannabis workers in the United States, attorneys said. The union—which says it represents roughly 1.3 million workers in a range of sectors—has signed contracts
The United Food and Commercial Workers union has signed contracts with marijuana companies in several states, including Pennsylvania. Courtesy Photo
with marijuana companies in California, Illinois, Massachusetts and Pennsylvania, among other states. So, what does the union push mean for marijuana businesses? Unions are not inherently bad for a business, Keselenko said. But if businesses don’t have policies in place relating to employees and unions, they could find themselves forced into difficult situations in the future. Such scenarios could include being compelled to enter contracts that might limit a company’s ability to adjust compensation or make changes in scheduling and workplace policies. “It does operationally tie the company’s hands somewhat,” Keselenko said. “I strongly believe that when a cannabis company is opening that they at least need to take account of the issue.” That was made clear in January, when the UFCW struck a settlement with three California marijuana companies—Have a Heart, Harvest Health & Recreation and
High Times Holding—to collectively pay $75,000 to cover backpay the workers were due through their union contracts. The UFCW originally struck the settlement with Have a Heart in January 2020, but the Seattle-based company soon sold the two shops to Harvest, which then sold the stores to cannabis publisher High Times, which recently moved into retail. Harvest and High Times initially rejected the union contract, but the union continued to press both companies, and eventually they agreed to the $75,000 settlement. Other union-related issues also deserve attention. For example, a small number of states—including California, New Jersey and New York—require cannabis businesses to accept so-called “labor peace agreements,” which dictate that a company will stay neutral if a union tries to organize the workers. In other words, the companies cannot try to dissuade workers from joining a union.
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If companies are in a state where they are required to sign a labor peace agreement, Keselenko advises them to ensure the agreement is only for the state they are in and not a general pact that could follow the business to other states. Also, once unions establish themselves at a company, businesses need to be prepared to negotiate collective-bargaining agreements. As the Have a Heart case illustrates, the contract can be transferred from one company owner to the next.
CLASSIFICATIONS ARE KEY Besides unions, cannabis company owners face the regular slew of employee-related legal issues. Among the most prominent: How a company classifies its employees. That will determine how much they are paid, the benefits they get, the rights they have and other areas covered in contracts. The classifications essentially boil down to: • Whether the employees are contract workers who are paid hourly wages. • Whether they get benefits and are paid overtime. • Whether they are staff who are paid salaries. If an employer misclassifies staffers in a way that they made less money or benefits than they should have, that could spell legal trouble for the company. “If (employees) are misclassified, they could sue you for unpaid wages” said Michael Freimann, an attorney specializing in labor law at Greenspoon Marder in Denver. Moreover, cannabis companies must comply with a variety of other laws such as the Americans with Disabilities Act as well as those addressing racial discrimination and sexual harassment.
STATE LAWS, REGULATIONS States also have passed statutes and regulations governing labor and employment matters. “When states have their own laws, that can make it difficult for companies,” said Rachel Gillette, chair of the cannabis law practice at Greenspoon Marder. As an example, she pointed
to Colorado, where Doug Diaz lawmakers passed the Equal Pay for Equal Work Act in 2019. The law took effect this year. Among other things, it requires a company to tell its employees about any employment advancement opportunities and job openings, as well as the pay range for those positions. Cassia Furman, managing partner of Vicente Sederberg’s California Practice Group, noted it’s important for companies to keep abreast of cannabis regulations and general regulatory changes. “People tend to be so focused on the daily grind of keeping the operations going that they may miss some really important regulatory changes,” Furman said.
PANDEMIC RAISES NEW ISSUES The COVID-19 pandemic has complicated employer-employee relations. For example, the Families First COVID Response Act of 2020 mandated that companies give employees time off if they fear working while the coronavirus remains a publichealth issue. But the legislation expired Dec. 31, leaving its future uncertain. As a result, attorneys said it’s unclear how much flexibility or time off a business must provide. Attorneys also noted their firms have seen upticks in coronavirus-related employee litigation. When it comes to vaccinations, for example, several attorneys agreed that strongly encouraging employees to get vaccinated is a good way to proceed, although mandating workers to get the injection is also a legal option. Doug Diaz, a labor and employment attorney with Haddonfield, New Jerseybased Archer & Greiner, recommends making vaccinations voluntary while strongly encouraging employees to get the shot. The Equal Employment Opportunity Commission has noted it’s legal for
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employers to mandate workers get vaccinated, but there are limitations, including health-related concerns such as allergies or severe anxiety. Ian Meklinsky, an attorney in Fox Rothschild’s labor and employment department in Princeton, New Jersey, believes employers should require employees to provide proof of vaccination. The rationale: An employer can prove that it’s looking out for employees’ wellbeing by telling them to get the vaccine, Meklinsky said. He also acknowledges there should be accommodations, although that creates another issue. “The question becomes: What’s the reasonable accommodation? That’s where we’re going to see a lot of pushback by employees and confusion by employers,” Meklinsky said. “Those are things employers are going to have to work out.”
THE IMPORTANCE OF TRAINING The best ways to protect your company against employee-related lawsuits is to hire legal counsel to help executives both understand the law and draft policies to guard against violations. It’s also important to have an experienced human-resources staff who can train employees. This is especially true in the cannabis industry, where the workforce skews younger and is less experienced, Keselenko said. “It’s very important to have good human-resources policies, good humanresources managers. Have expectations set from the beginning. Have trained supervisors. All of that is very important,” Keselenko said. “You’re dealing with business owners for whom this may be the first business that they’ve run. So it’s really important to make sure you get professional advice and, in the beginning, to set it up properly.” Bart Schaneman contributed to this report.
Breaking Up is Hard to Do Cannabis companies can head off partnership disputes before they happen—and lay the groundwork to better manage any tussles that do arise By Omar Sacirbey
artnership disputes—whether between business partners or owners and investors—continue to be an ugly feature of the cannabis industry. Such conflicts can be costly and time-consuming; plus, they can sink a cannabis company. But there are steps companies can take to head off disputes—or at least manage them more effectively when they do happen, which is all too often. “In terms of litigation in the cannabis industry to date, the most common issue we probably see is partnership disputes,” said Cassia Furman, managing partner of Vicente Sederberg’s California Practice Group. For any business, a fight between partners can divert millions of dollars in financial resources into legal fees. That is especially true with cannabis companies. The industry is young and rife with inexperienced operators as well as friend-and-family investors who might neglect to draft documents governing their business relationships. In addition, many legal operators are former illicit-market players who didn’t draw up contracts before legalization because they didn’t want to leave a paper trail for law enforcement. Now, these owners have carried that habit over into the legal market. To avoid legal pitfalls, marijuana operators can take a variety of steps to mitigate the risk of and damage from partnership disputes. Those steps boil down to: • Vetting partners and investors beforehand. • Putting ownership, investments and other business relationships on
paper through formal contracts and agreements. • Having attorneys review those documents to ensure they don’t contain terms that could be detrimental.
MANY DIFFERENT CONFLICTS Disputes typically arise at two points in a business relationship, said Katy Young, managing partner at Ad Astra Law, a cannabis-focused law firm in San Francisco. Disputes can happen when the company is doing poorly, prompting the partners to start fighting and blaming each other. Conversely, disputes can come up when the company is making lots of money and partners get greedy and try to push others out. Young said it is also important to recognize the types of personalities and situations that can give rise to conflicts. One problem she often sees is when startup marijuana business owners overpromise the amount of money investors will earn. These investors often are friends and family, and the owner ends up owing too much money to too many people.
Another common situation is what Young calls the “absentee financier.” In this case, a financier might give a grower a large sum of money to purchase a greenhouse. Next, the investor gives the marijuana operator—who often has relatively little business experience—control of the bank account, like any other company owner. The investor takes their “eyes off the ball” for several weeks or months—only to return and find the bank account is empty and the cultivator has only excuses to show for it: The crop was stolen, for example, or bad weather damaged the plants. In other cases, Young said, partners neglect to write contracts or agreements when they tap friends and family for loans or investments, complicating the settlement of any disputes that develop. Another problem is mismatched personalities—for example, one partner funds a venture and the other puts in sweat equity and works much harder. In the end, the funder feels more entitled because of the financial risk he or she took. By contrast, the other partner feels more entitled because he or she worked much harder. “Oftentimes, we see partnership disputes arise out of half-baked partnerships, operating agreements or bylaws and shareholder agreements that do not appropriately encapsulate the relationship,” said Garrett Graff, managing partner at the Hoban Law Group in Denver.
PUT IT IN WRITING Such partner disputes can be relatively easy to avert—or at least be made easier
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to settle—without having to go through litigation if the parties formally record their relationships on paper through investment agreements, loan agreements, operating agreements, shareholder agreements or company bylaws. “At their heart, partnership disputes are contractual disputes,” Young said. Those documents govern the relationships the company has with its owners and shareholders. If those terms are breached, a lawsuit could follow. Without the documentation, individuals and the business itself are unprotected, Young said. But many groups fail to create written contracts—or, when they do, the contracts are often poorly executed. “We’re often dealing with disputes that have very little paper evidence,” Young said. When operators do have the foresight to have contracts drafted, they often do it superficially. For example, they will try to draft legal documents with the help of web-based tools or templates. But without an attorney’s expertise, such a document can omit critical terms, leaving parties to the contract without legal protections found in professionally drafted documents. Furman stressed that partnership disputes aren’t just an early stage-company issue. They can come up in more mature and growing companies, too. “You’re going to need to raise capital to scale, which is going to involve contractual obligations with the lender or investor,” Furman said. “Expanding in other states can also mean connecting with new partners—and that is another set of contracts.”
DON’T FEAR CONTRACTS State-legal cannabis business operators shouldn’t fear contracts being used against them by federal authorities. Rather, marijuana business owners should view contracts as a shield. The more seriously a business owner takes its contracts—and the more competent the lawyer who drafts them—the stronger the shield will be.
“Have a voice in it. Be active. Hire a lawyer who is knowledgeable about local and state regulations,” Young said. “Never enter a contract unless you’ve had a lawyer look at it.” Attorneys stressed that disputes turn unwieldy and ugly when there aren’t well-constructed agreements that govern ownership and how assets will be distributed when a partner exits the business, among other situations. “It’s important to hire a really good transactional lawyer to help you form your corporation right in the first place,” Young said. Indeed, dealing with these issues now can save tens of thousands of dollars in litigation later, depending on whether you’re working with a boutique law office or a national law firm. And that’s not counting additional, costly expenses such as gathering evidence to bolster your case. “If there is evidence scattered all over the internet that proves investments or loans or expenses you’ve incurred, it costs money to get vendors to retrieve that information and pay paralegals to put it together. It’s usually five or six figures,” Young said. Furman advises clients to talk about the relationship that they’re forming and what they want to get out of it before actually committing to a definitive agreement. “Come up with a detailed term sheet and actually find out if there is a meeting of minds with either the investor or the white-label relationship that you’re trying to enter it through,” she said. Beyond that, official documents such as operating or shareholder agreements
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can help push partners to consider important details that can make any future breakup less harmful to the business and the individual parties. “Not only does it set the legal parameters for how to conduct and, if needed, unwind the business, but it also forces parties to think about term sheets and where they might be in a year or two if the company is successful, or if the company is not successful. Have some of those discussions at the outset,” Furman added. “You could do all sorts of diligence on your partners, and that’s always helpful. But it’s difficult to have that crystal ball as a business owner to know how the relationship is going to develop until it’s actually tested. So, protecting your interests with contracts is certainly a recommended protection.”
FACTORS TO CONSIDER Graff said scores of issues must be considered in any agreements. These issues include: • Voting rights—such as how much do votes count for, and are they per person or per share? • The provisions governing a partnership or company’s dissolution. If one partner or shareholder wants to sell, does he or she face restrictions governing the terms of the sale or the potential buyer? The other partners or shareholders might not want shares or ownership interests transferred to a personality that doesn’t mesh with the remaining team. When drafting agreements, Graff said, lawyers should consider how the partners are working in the present and anticipate potential scenarios should they not work well down the road. “Those are tough conversations to have when the going is good and everyone is still in that honeymoon phase,” Graff said. “Of course, it becomes far more subjective and emotional when you’re in an actual dispute.”
Three Legal Issues to Keep in Mind Contract breaches, workplace safety and unsolicited texting can disrupt business operations and prove costly By Omar Sacirbey
roduct liability, partnership disputes, labor-related litigation and RICO suits are among the most common and potentially damaging lawsuits facing marijuana companies. But industry executives also should be alert to at least three other legal dangers that could hurt their businesses. These include: Breach of contract: This is among the most common violations that can kill small businesses, especially upstart grows, said attorney Katy Young of Ad Astra Law in San Francisco. Unlike product liability or RICO lawsuits, where cannabis businesses are the defendants, companies in a breach-of-contract situation tend to be the victim and must decide whether becoming a plaintiff to recover lost assets is worth the cost and effort. “The most common reason I see for breach-of-contract disputes in the supply chain is lack of money. It basically comes down to one business in the supply chain being financially mismanaged and then not being able to pay cultivators or other companies,” Young said. “Those are difficult cases because it doesn’t make sense to sue if there’s no money there. All we get is a judgment, a piece of paper that we chase somebody around with.” Cannabis executives who want to avoid being stiffed should document all transactions with lawyer-reviewed contracts, Young said. Furthermore, to avoid expensive litigation, the contracts should include clauses about trying to settle disputes through mediation or arbitration before going to court. Workplace safety: Violations that lead to lawsuits or scrutiny and fines from the Occupational Safety and Health Administration (OSHA) are
currently less common than some other legal pitfalls, but they can be expected to increase as the cannabis industry matures. “It’s simply not the case that because cannabis is federally illegal, OSHA or any number of regulatory agencies are not supposed to visit them and make sure they are in sync with federal laws,” said Jesse Alderman, co-chair of the cannabis practice at Foley Hoag in Boston. And given that cannabis cultivation and manufacturing involve large equipment and machinery, companies must ensure their work environments are safe and comply with state and federal workplacesafety regulations. “Cannabis operators that are employers really need to focus on having a thoroughly documented and compliant training program for employees. And (they need to) pay attention to what’s happening at the state level—not only with cannabis regulation but with regulatory changes in general,” said attorney Cassia Furman, who manages the California office of Denver-based Vicente Sederberg. “Since we’re in the midst of
this unprecedent pandemic, there’s a lot of new laws on a variety of topics that cannabis operators miss because they’re focused on keeping operations going.” TCPA violations: An increasing number of marijuana businesses have become defendants in class action lawsuits for allegedly sending consumers unsolicited marketing texts, which is a violation of the Telephone Consumer Protection Act. Since May 2018, at least a dozen lawsuits have been filed against marijuana businesses for alleged TCPA violations. The most obvious protection against such lawsuits is to ensure you have a consumer’s written consent to send them marketing texts or emails. However, a consumer simply leaving their contact information in a guest log or opt-in list provided by outside marketers would likely not offer sufficient protection in TCPA cases, lawyers said. “You need to obtain proper consent from recipients prior to sending your text-message marketing. And consult with counsel to understand what that (consent) needs to include,” Furman said.
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SPAC TO SQUARE
ONE Partnering with an acquisition company can expedite going public, but both sides will need to do their homework By John Rebchook
54 Marijuana Business Magazine | February 2021
Special purpose acquisition companies—better known by the acronym SPACs—are an increasingly popular way for cannabis and mainstream companies to quickly launch on a stock exchange. SPACs, so-called blankcheck companies, can bring a cannabis business public quicker and cheaper than going through a traditional IPO process. Here are some things to keep in mind if you are considering merging with a SPAC: • U.S. plant-touching companies are not permitted to trade on the New York Stock Exchange or the Nasdaq. Instead, they likely will trade on the NEO exchange in Canada. • Make sure your financial house is in order. A potential SPAC partner will want to see audited financial results, likely going back three years or more. • It’s important that your company boasts a crackerjack management team. More than anything, SPAC sponsors are investing in the people running the company. • Come in with a growth plan. SPAC sponsors want to see a concise, innovative plan about how your company will provide value to sponsors and shareholders. • Make sure potential SPAC sponsors understand the marijuana business and can assist your company’s growth by providing advice on gaining market share or through future acquisitions.
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SPAC TO SQUARE ONE
Jessica Billingsley announced in October 2018 that she was taking Denver-based cannabis technology company MJ Freeway public by merging it with a so-called “blank-check” company, she was on the vanguard of an increasingly popular way for privately held companies to begin trading on public stock exchanges.
Billingsley, the company’s co-founder and CEO, is one of several marijuana stakeholders who believe there are advantages for private cannabis companies to go public by merging with blankcheck companies, which are officially known as special purpose acquisition companies, or SPACs. Two cannabis SPACs—Silver Spike Acquisition Corp. and Subversive Capital Acquisition Corp.—recently announced deals worth more than $2 billion, providing the industry with an “injection of liquidity,” noted Mike Regan, founder of Denver-based MJResearch Co. About $3 billion in cannabis SPACs have launched since 2019, according to New York-based financial adviser Viridian Capital. That is a small percentage of the record $83.4 billion raised in 2020 by SPACs, which are publicly traded shell companies with no operating businesses, according to Chicago-based data firm SPAC Research. Part of the appeal of SPACs: Merging with a publicly traded shell company can provide a cheaper and faster way to go public than conducting a traditional initial public offering (IPO) or direct listing.
SPAC CONCERNS However, some in the industry have concerns that SPACs have raised too much money too fast and there aren’t enough private companies to be acquired by blank-check companies. The concern is true for marijuana SPACs as well as for the overall market. “History has shown that it’s not easy for a SPAC to actually deploy capital and close a transaction,” cannabis
attorney Marc Hauser told Marijuana Business Magazine. Here are some factors that make SPAC deals difficult to close, according to Hauser, vice chair of the cannabis law team for the San Francisco office of Reed Smith. • SPACs need to spend at least 80% of their cash on their first deal, so they might not be able to find an acquisition target that is the right size. • SPAC shareholders must approve the deals. • Because SPAC shareholders are able to redeem their shares, SPACs might need to find alternative financing, which isn’t always easy for marijuana businesses. • Cannabis companies aren’t ever easy to acquire because of licensing mandates—and being a SPAC doesn’t make that any easier. When Billingsley was doing her due diligence on going public using a SPAC vehicle, she learned the process could save MJ Freeway $1 million-$1.5 million compared to a more traditional IPO, and a SPAC deal could shave six months to a year off the timeline of going public. The merger with the SPAC, MTech Acquisition, closed in June 2019, and the parent of MJ Freeway changed its name to Akerna, which trades on the Nasdaq as KERN.
MORE CONTROL, BUT BUYER BEWARE A SPAC can also provide a marijuana company with more certainty of the IPO price and more control over the process of going public, according to Jordan Cohen, president and chief financial officer of Ceres Acquisition Corp., a
56 Marijuana Business Magazine | February 2021
“Thoroughly vet the quality of the individual investors in the SPAC.” - Jessica Billingsley, Akerna Los Angeles-area cannabis blank-check company that raised $120 million last March and trades on the NEO exchange in Canada. “In a traditional IPO, you publicly file a prospectus with a stated perceived value and negotiate valuation with a large number of investors during a lengthy roadshow,” Cohen said. With a SPAC, he said, “you can generally negotiate with a handful of meaningful investors.” At the same time, cannabis firms considering going the SPAC route need to be aware of red flags, experts noted.
CANNABIS SPAC DEALS 2019-20 NAME
DATE OF IPO
Dec. 23, 2020
Collective Growth Corp.
May 5, 2020
Ceres Acquisition Corp.
March 4, 2020
Feb. 11, 2020
Stable Road Acquisition
Nov. 8, 2019
Merida Merger I
Nov. 7, 2019
Merida Merger Corp. I
Oct. 9, 2019
Bespoke Capital Acquisition Corp.
Aug. 15, 2019
Aug. 7, 2019
July 16, 2019
June 19, 2019
May 13, 2019
March 7, 2019
Silver Spike Acquisition Corp. Subversive Capital Acquisition Corp. Tuscan Holdings Corp. II Mercer Park Brand Acquisition Corp. Tuscan Holdings Corp. I Source: Viridian Capital Advisors
Cannabis-Focused SPACs Can Be Hit or Miss While several high-profile special-purpose acquisition company cannabis deals were announced or closed last year, others were called off when SPAC partners pivoted to different industries.
Last spring, Bruce Linton, the founder and former CEO of Canadian license holder Canopy Growth, announced he was launching a $150 million SPAC called Collective Growth. The Austin-based company planned to target the hemp industry.
Last October, New York-based Subversive Capital, a SPAC that raised $576 million in 2019, launched a publicly traded real estate investment trust focused on the cannabis industry. The following month, Subversive announced it would purchase two cannabis companies and create a vertically integrated marijuana business in California that was projected to reach $600 million in revenue by 2022. That deal was scheduled to close in January 2021.
But with few hemp companies available, Collective Growth in December announced it would fund an entirely different industry and use the money to take Israel-based Innoviz Technologies public. Innoviz is a so-called “lidar” company that uses light waves from a laser to direct autonomous vehicles.
In December, Silver Spike Acquisition, a SPAC that raised $250 million in 2019, announced it would go public with cannabis advertising giant Weedmaps, creating a company projected to have a $1.5 billion valuation.
In 2019, Los Angeles-based SPAC Stable Road Acquisition raised $150 million to spend on a cannabis deal. Instead, it announced a plan last October to use the money to bring California-based Momentus, a space transportation company, public. That deal is expected to close in the first quarter of 2021, according to a U.S. Securities and Exchange Commission document filed in January.
But not all cannabis SPAC deals go as planned.
– John Rebchook
February 2021 | mjbizdaily.com 57
SPAC TO SQUARE ONE
Akerna, which was formed by the merger of SPAC company MTech Acquisition and MJ Freeway, celebrates listing on the Nasdaq exchange. Courtesy Photo
For example, a U.S. plant-touching company that merges with a SPAC will need to be traded on a Canadian stock exchange, because the New York Stock Exchange and Nasdaq will not list them as long as marijuana remains illegal at the federal level, Hauser noted. Here are some tips for private cannabis firms considering a SPAC merger: • Make sure you have the audited financials to qualify as a SPAC candidate. The NEO exchange, for example, requires three years of audited financials before it will list a company. That is a “box to check,” according to Cohen. • The cannabis company should be a good fit with the SPAC. For example, MJ Freeway possessed the technical know-how, while the SPAC it merged with, MTech Acquisition Corp., brought a capital structure resulting in a “classic winwin scenario,” Billingsley said. • The marijuana company’s management needs to convince the SPAC it is at the top of its game. “Quality management is always key,” Cohen said. “At the end of the day, we are partnering with company
management to drive future growth and create meaningful shareholder value, so everyone needs to be on the same page.” • Present a detailed road map to the SPAC that includes a strong financial plan, capital management, product fit, innovation, connectivity and flexibility, which are all factors that “are important to the DNA of a business,” Cohen said. He also provided Marijuana Business Magazine with a list of “red flags” for cannabis companies looking at SPACs as potential partners: Illicit-market ties: Avoid any SPAC whose sponsors have had any ties to the illicit market. Misguided forecasts: Make sure any growth forecasts are realistic once the marijuana company merges with a SPAC and begins trading publicly. Lack of details: Whether the marijuana business is in retail, product development or cultivation, avoid a SPAC whose sponsors can’t provide a specific and innovative growth plan. Financial inexperience: If the SPAC’s sponsors lack an understanding of capital management, stay away.
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Debt: Too much of it is not investor friendly.
STRIKING A MUTUALLY BENEFICIAL DEAL The right SPAC deal can be rewarding for cannabis companies. In one of the most recently completed cannabis SPAC transactions, a New Yorkbased limited partnership, Subversive Real Estate Acquisition, said in October it entered a binding agreement to acquire 15 marijuana-related properties in nine states for $182.8 million in a move to becoming a leader in the MJ real estate investment trust (REIT) sector. Subversive said it is one of the first SPACs to become a publicly traded REIT. It trades on the U.S. over-the-counter market as SBVRF. Entering the public market through a SPAC transaction “should allow us greater access to capital to continue to grow our business and deploy capital into a capital-starved industry,” Michael Auerbach, executive chair and founder of Subversive, said in a news release when the deal was announced. When Billingsley announced the MJ Freeway-MTech SPAC about two
years ago, she said it would provide the marijuana tracking company with: • Access to public capital markets. • Additional balance-sheet strength. • A combined company that would be debt-free and have a balance sheet with more than $60 million in cash to take advantage of strategic growth opportunities. “We were the first seed-to-sale cannabis tech company in the industry, and MTech was the first SPAC listed for the purpose of acquiring cannabis tech companies. It was a good fit,” said Billingsley, who is Akerna’s CEO. Although SPACs have been doing deals since the early 2000s, the investment vehicle has gained a higher profile since 2019, as well-known players such as billionaire William Ackman, former speaker of the U.S. House of Representatives Paul Ryan and former Trump economic adviser Gary Cohn have made big splashes in financial circles by bankrolling and launching SPACs. Mainstream companies that have gone public by merging with SPACs include: • DraftKings, a sports betting site. • Virgin Galactic, the British spaceflight operation headed by billionaire Richard Branson. • Liberty Media, which has holdings in the radio, sports and live events industries. Even Playboy plans to go public with a SPAC merger valued at $415 million. And basketball legend Shaquille O’Neal closed on a $300 million SPAC deal in late November. Some cannabis experts have gone as far as to say that SPACs are the “only game in town” for marijuana companies that want to go public. MJ Freeway considered more typical methods of going public, such as a direct listing or raising money through a traditional IPO, before settling on the SPAC structure, Billingsley noted. She said one important tip for cannabis companies researching a potential merger is to make sure SPAC investors are planning to be long-term partners. She noted some SPAC investors “always redeem”—that is, they cash out of the newly listed cannabis company for a quick profit. But in Billingsley’s view, it is better to merge with a SPAC that has “good fundamental investors” that plan to stick around after the cannabis company is trading on a stock exchange. “Thoroughly vet the quality of the individual investors in the SPAC,” she advised.
SPACs Still Face Securities Scrutiny The U.S. Securities and Exchange Commission (SEC) announced this fall that companies formed by mergers with special purpose acquisition companies (SPACs) cannot use short-form registrations. But even if SPACs face more scrutiny from the SEC, it likely will have little impact on cannabis firms that want to use these shell companies to go public. “Even if there were increased SEC scrutiny of SPACs, we wouldn’t expect that to have much effect on which exchange a cannabis SPAC chooses to list or which exchange will continue to list the company post-acquisition,” said Marc Hauser, a marijuana lawyer with San Francisco-based Reed Smith. Plant-touching companies, for example, aren’t allowed to list on the New York Stock Exchange or the Nasdaq because marijuana is illegal at the federal level, Hauser said. Instead, those companies would likely trade on a Canadian exchange.
SEC CHAIR SAYS SPACS NEED TRANSPARENCY SPACs have been growing so quickly in popularity that then-SEC Chair Jay Clayton told CNBC in September that he is looking at the investment vehicles very closely. He indicated that SPAC sponsors might need to be more transparent about disclosing things such as compensation and how much equity they are taking in the merged company. “One of the areas in the SPAC space I’m particularly focused on—and my colleagues are particularly focused on—is the incentives and compensation to the SPAC sponsors,” Clayton said in the CNBC interview. “How much of the equity do they have now? How much of the equity do they have at the time of the IPO-like transaction? What are their incentives?” Clayton resigned in late December. U.S. President Joseph Biden tapped Wall Street veteran Gary Gensler to head the SEC going forward. Gensler is expected to pursue “heightened scrutiny” of SPAC regulations, news outlets speculated in late January. Attorney Ari Edelman, also with Reed Smith, said concerns about the SEC scrutinizing SPACs have been overblown. The idea that SPACs are not already being thoroughly reviewed by the SEC is a misconception, he said. However, before a SPAC closes its IPO, it must file statements with the SEC detailing “a full-blown description” of the target business, including risk factors and audited financial statements, he said. At the same time, Edelman cautioned, “If there is a SPAC that is toward the end of its life that wants to buy a cannabis company, the SEC will dig down and make sure there is adequate disclosure regarding due diligence, process, valuation, fairness” and potentially other factors. Jordan Cohen, president of Los Angeles cannabis SPAC Ceres Acquisition Corp., which in June raised $120 million, is taking a wait-and-see attitude. “We will continue to monitor all SEC and other appropriate regulatory bodies as they make decisions and potential changes to any disclosure requirements in the future,” Cohen said. – John Rebchook
February 2021 | mjbizdaily.com 59
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Customers lined up out the door is some of the best advertising a cannabis company can get. Courtesy Photo
62 Marijuana Business Magazine | February 2021
Drop It By Bart Schaneman
Cannabis companies use product drops to build hype around new items
t’s every cannabis executive’s dream: a line that stretches out the door and down the block, full of customers eager to spend money on a new product. Social-media hype. Word-of-mouth buzz. And a cash register that’s about to start smoking from all the transactions. In order to generate that amount of interest, marijuana brands increasingly are employing the strategy of product drops. Cannabis companies can use drops to advertise new products, build excitement for the company’s brand, conduct market research and grow a following. The marketing technique is common in other industries, where it is used to sell sneakers, video games and music. An established brand often will collaborate with a well-known name from another sector—say, a clothing company with a famous street artist—and release a limited quantity of products for a short period of time. “Get it before it sells out” can be an effective motivator to entice consumers, marketing experts told Marijuana Business Magazine. “We work pretty diligently to keep the brands hyped up so that when we get a new product, it’s pretty well received,” said Alison Miller, director of sales and
Cannabis companies looking to drive interest in new merchandise are increasingly turning to product drops as a way to build buzz. Marijuana executives thinking about delving into this strategy should consider: Cannabis company Space Coyote partnered with the band Poolside to create an exclusive product. Courtesy Photo
marketing for Hana Meds, a vertically integrated cannabis company based in Tempe, Arizona.
Brand collaboration drives the productdrop ethos of Space Coyote, an infused pre-roll brand based in California’s Bay Area. CEO Libby Cooper said Space Coyote has successfully collaborated with concentrate companies and boutique flower growers. The collaboration element is important, she said, because it allows a brand to tap into a different demographic. Cooper pointed to a collaboration with Los Angeles-based “daytime disco”
• Partnering with brands in other industries such as music to leverage cross-promotional opportunities. • Ensuring that product delivery is consistent. • Using text messaging to get the word out since social media can be fraught with challenges for cannabis companies. • Dispensary marketing platforms can help track consumer buying preferences and identify customers to contact about drops.
band Poolside as a partnership that went particularly well. Space Coyote produced a five-pack of hash-infused joints, sourced custom artwork on the packaging, then “leaked” the pre-rolls to a few of the company’s favorite dispensaries. The joints came with suggestions about which Poolside songs to listen to while smoking.
February 2021 | mjbizdaily.com 63
Drop It Like it’s
Companies that promise to make product drops need to follow through on the commitment or risk angering their most loyal consumers. Courtesy Photo
“Bonus points if your feet are in a body of water,” the marketing materials read. “This is an incredibly limited run, so once these Daytime Disco packs sell out, you won’t be able to find these collectible tins again!” According to Cooper, the hype around the launch and the limited-release strategy worked to build the kind of buzz Space Coyote wanted. “We had created hype around this product—and when it was released, it was snatched up,” she added. During the coronavirus pandemic, Cooper said sales representatives for Space Coyote have favored using text messages and phone calls rather than in-person dispensary visits to create word-of-mouth interest. She also has found that Facebook Live videos work to the tune of 200,000 views or more—but not all of the viewers are in California, so it’s not as targeted as in-person interaction.
While generating hype around new product launches is the obvious goal for marketing teams, at Snowflake, Arizonabased Copperstate Farms, the approach is one of prudence. Allie Marconi, the company’s director of marketing, said she’s careful not to give people false excitement in case the brand doesn’t come through, which can happen with fickle products such as flower. “If we send out a message that says we’ll have an 11 a.m. drop, and we aren’t able to get our hands on that flower, we’ll have some pretty angry patients,” she added. Marconi said she uses text messaging and daily emails to get the word out and try to create a sense of “come and get it while it’s hot.” Copperstate uses dispensary marketing platform Springbig for text messaging. Marconi said the platform helps to target
64 Marijuana Business Magazine | February 2021
the company’s messaging by gathering consumer data about buying preferences. Instagram and Facebook also are valuable tools for spreading the word about a new product, Marconi said. But more than anything, she emphasized the benefits of working with a company that has similar values. The cross-promotion is that much better “if you’re working with a product that you agree with,” she added. Copperstate has partnered with DNA Genetics and Moxie Concentrates.
SUCCESS WITH TEXTS
For Lisa Gee, director of marketing at Denver-based vertically integrated cannabis company Lightshade, text messaging is the No. 1 way to get the message out to customers about newproduct drops. Lightshade is reducing its reliance on social media, Gee said, because recently more of its posts have gotten
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January 2019 | mjbizdaily.com 65
Drop It Like it’s
During the COVID-19 pandemic, cannabis companies are coming up with new ways to get products to consumers. Courtesy Photo
flagged—even though the company hasn’t been doing anything differently. “We’ve always been very mindful about not getting sideways with the rules on social media,” she said. Gee said Lightshade tried product drops with outside flower brands, but those didn’t work out very well. Now, the company is trying to build interest for its in-house flower brands. Lightshade plans to offer limited batches of three new, in-house strains at all nine of its stores in the Denver area. Similar to what Hana Meds is doing, Lightshade will decide whether to add the strains to its permanent roster depending on how well they perform during the product drop. While Gee would like to see lines out the door, she recognizes that the coronavirus pandemic has pushed consumers more toward online ordering—and they’re using digital access more often.
Camille Roistacher, CEO of Los Angelesbased flower brand Wyllow, said she
Live or Instagram Reels to talk about a product launch. Roistacher said Wyllow uses the drop strategy as it partners with different dispensaries to hype different products, build excitement and grow a following. “We see every store as a minicampaign,” she said.
LESS HYPE, MORE VETTING Camille Roistacher
measures a product’s success by if and how quickly it sells out. “If we’re launching a new strain, we’re watching the KPIs to see how quickly it moves,” she added. “If a product is sitting (on the shelf), that means a customer doesn’t like it.” To build buzz, Roistacher likes the countdown approach. For example, Wyllow will use its Instagram page to announce that in four days a certain product will arrive at a specific store. She doesn’t advise posting about actual sales but instead recommends using Instagram
66 Marijuana Business Magazine | February 2021
Kevin Hogan, president and co-founder of Bend, Oregon-based Oregrown, takes a different approach to getting products in front of customers. The company spends up to a year working on product development before it releases a new product, so Hogan said Oregrown doesn’t need to test out items with product drops. “All the hard work is on the R&D side,” Hogan said. “We’re not in the artificial hype business.” Oregrown relies on news releases and a loyal customer base to build buzz about new items, but the company isn’t necessarily trying to get people lined up out the door.
Market research is a key element to product drops. How well a brand performs and the interest it generates can help a company decide whether to include the product in its permanent lineup. Courtesy Photo
“When we release a product, we fully anticipate it will be a part of our longterm roster,” he added. “We make sure everything’s vetted.” Hogan said the company tries to manufacture enough of every product so there is enough for all its customers. “At the end of the day, it’s telling our story, it’s not modeling ourselves off of Air Jordan,” he said.
Like Marconi, Hana Meds’ Miller uses Instagram and Facebook to get the word out. She’s also found that Twitter can be a little more lenient when it comes to what can be posted. However, she advises caution when posting on social media. Advertising a sale or promotion is a good way to get an account shut down. “You have to make sure you’re abiding by each site’s rules,” Miller said. Aside from the internet, Miller works with local media outlets such as newspapers and cannabis magazines for advertising. Another benefit that drops create for the company: research and development. Miller said the company doesn’t produce enough of its new products to release them statewide. “If we have a specific product that takes off during one of these launches, we can replicate the product again,” Miller said. “It’s definitely a great way to test out products, and we’ll consider them part of the permanent line if they fly off the shelves.”
Bart Schaneman is a reporter for Marijuana Business Magazine and Marijuana Business Daily. You can reach him at bart.schaneman@ mjbizdaily.com.
February 2021 | mjbizdaily.com 67
BestPracticesInRetail | Solomon Israel
Location, Location, Location Market saturation, regulatory issues and financing are important considerations when securing the best marijuana retail site
rom mom-and-pop shops to corporate chains, everyone in the retail business knows that a carefully chosen location is key to success. Medical marijuana dispensaries and adult-use cannabis retailers are no exception. Although regulatory requirements, license availability and market demand will vary from place to place, marijuana retailers on the hunt for a killer location might benefit from: • Understanding both immediate local markets and regional trends. • Creative thinking to find underserved locations— particularly for smaller players. • Carefully considering the potential benefits and drawbacks of buying versus leasing. • Identifying future markets before local officials start writing ordinances, then engaging early.
Think Local, But Also Regional Prospective cannabis store operators need to get intimately familiar with the area where they want to open, advises Michael Lord, chief operating officer at Colorado cannabis firm LivWell Enlightened Health, which operates 22 dispensaries across the state. “Google Earth does not articulate a true representation of boots on the ground,” Lord said. “I think a lot of people are siting (stores) in areas that perhaps they’ve never visited, putting locations (based on) just what looks good on a map. “It can vary in a neighborhood from street to street. … And I think that businesses, at the end of the day, still have to have a finger on the pulse of the communities that they operate in.”
Erbn Green opened its first location in the uptown section of Toronto. Courtesy of Erbn Green
Knowing your prospective local market is certainly important, but Stephanie Goodman, CEO of Michigan cannabis real estate brokerage Bricks and Mortar Group, also recommends doing regional market research in surrounding areas. “You might think you’ve got this great spot and they’re only going to issue two licenses in the city, but immediately next door, it’s unlimited Stephanie (licenses),” she Goodman said. “Knowing those Courtesy Photo types of things helps you forecast for future sales.” Brian Mitchell, CEO of Los Angelesbased marijuana company Shryne Group, says the company sees the biggest opportunities in areas of California that still lack local cannabis
68 Marijuana Business Magazine | February 2021
Location is the foundation of any retail operation, including cannabis. But choosing the right spot for a cannabis store can be complicated by factors such as municipal bureaucracies, local opposition and increasing competition in fastdeveloping markets. To find locations that will get their businesses off on the right foot, prospective marijuana retail operators might wish to: • Get intimately familiar with the neighborhoods where they want to do business. • Seek out underserved areas with overlooked opportunities. • Think strategically about the long-term implications of buying or leasing. • Make inroads with local officials ahead of time.
retailers. More than 30 California cities and counties voted in favor of pro-cannabis business initiatives in the November 2020 election, paving the way for new stores in some places. “If I see an area that has 100,000 people, and they’re going to allow two stores, and then you have another 100,000 people in the town next door, and there’s no cannabis there, that’s a really good opportunity.”
Carving Out Your Own Niche Elev8 Cannabis founder and CEO Seun Adedeji, who opened a single dispensary location in Oregon before expanding into Seun Adedeji Massachusetts, Courtesy Photo believes smaller, less-capitalized businesses can benefit from opening in smaller towns. Adedeji focused Elev8’s Massachusetts expansion on border towns near New Hampshire, New York and Vermont, where acquiring real estate is cheaper than in bigger cities. “The beauty is, because of the limitations of licenses, each of those small towns are only giving out two recreational licenses,” Adedeji said. “So your value still increases.” Smaller towns might have their charms, but a border strategy such as Adedeji’s can also work within cities. Erbn Green Cannabis Co., a small Canadian retailer that opened its first location in the competitive Toronto market in October, found a location in the uptown area of that city. It might not be a hot address compared to the city’s downtown core, but Chief Compliance Officer Farrell Miller said the location meets demand in an underserved market near two suburbs that opted out of allowing cannabis stores. “We’ve had a lot of customers that live north of the 401 (highway
nearby), and there’s not a lot of activity north of the 401 at all. They come in and they tell us that we’re the closest one to them,” Miller said. Erbn Green’s second location is in Picton, Ontario, a small community with less competition for cannabis store licenses than in big cities such as Toronto or Ottawa. “This town is getting really known for wineries and tourism,” Miller said. “We eventually see cannabis aligning with those things.”
To Buy or to Lease? Elev8’s Adedeji got burned when the landlord for his first Oregon store declined to renew the lease and he had to find a new location. As a result, Adedeji is a strong proponent of retail operators buying real estate instead of leasing, when possible. “I would say, for anybody looking to get into a leasing option, have a 10-year lease with an option of an additional 10 years,” he said. In Michigan, real estate broker Goodman said marijuana’s federal illegality contributes to landlords’ hesitancy to lease to cannabis businesses. Property owners fear running afoul of their mortgage lenders, she explained. “We’re seeing more private funding on the purchasing side, and they’ll lease back to the operator,” Goodman said. For well-capitalized players, buying and then executing a leaseback deal can bring some advantages. LivWell’s Lord said the company acquires some properties, then sells them to partners who will lease the locations back to the dispensary operator. “That allows us to go and execute and use that capital for continued expansion rather than having it tied up in the real estate itself,” he said. Dispensaries that plan on leasing might be able to take advantage of the commercial real estate climate during COVID-19, advised Shryne Group’s Mitchell.
“We’ve shown that we’re a growing industry that’s recession- or even pandemic-proof,” he said. “It’s given us more leverage to negotiate better deals with landlords, to get market rates.”
Get a Head Start Smaller players might score an advantage in the dispensary real estate game by identifying potential markets before regulators start offering licenses, then engaging local officials early, Goodman said. “In that scenario, I’d recommend that you start working with the city before they’ve written any ordinances and then work with them to get the ordinance written for what you want to do,” she said. “We’ve seen quite a few of those work out. They do like local businesses, but it’s a longer play. It might take six to 12 months to get that done.” Goodman also recommends spending time engaging with the local community. “We’ve worked in a lot of cities where the residents are completely terrified of cannabis businesses,” she said. “But once they start to get to know you, and there’s actually a face associated with the business that wants to come in, it’s different.” If you’re looking to open a dispensary in a particularly competitive market, Goodman said, “you need to be ready to put hard money down within a week or two.” Those willing to do business in markets with lots of licenses available might have more time to shop around, Goodman added. “But generally, to get a good location, you’re going to have to be ready to commit immediately and move forward fast.”
Solomon Israel is a reporter for Marijuana Business Magazine. You can reach him at solomon. firstname.lastname@example.org.
February 2021 | mjbizdaily.com 69
IndustryPlayers | New Hires & Promotions
By Omar Sacirbey
Former Coca-Cola Exec Joins Board of Acreage Holdings
hen executive recruitment firm Heidrick & Struggles approached Katie Bayne, who spent 28 years in executive posts with the Coca-Cola Co., about joining the board of directors of New York-based multistate operator Acreage Holdings, she knew little about the cannabis industry. But Bayne was attracted to the “dynamic growth in this emerging market” and the “power of the leadership team” at Acreage, making the opportunity something she didn’t want to pass up. The position at Acreage is Bayne’s fifth board—others include The Honest Co., Jessica Alba’s beauty and baby-care business; and Ascena Retail Group, which owns Ann Taylor, Lane Bryant and other major apparel brands. When Peter Caldini, a former Pfizer executive, joined Acreage as its new CEO, Bayne said it was another big draw. (See next item for details about Caldini’s new post.) “I think he’s a terrific choice for CEO because of his relevant experience. We speak very frequently,” Bayne told Marijuana Business Magazine. Bayne plans to leverage her marketing, operations and beverage expertise in the new role at Acreage. “The potential for growth in beverages for Acreage—especially with our Canopy (Growth) partnership on brands and (intellectual property)—is unparalleled. So I’m sure that will be helpful for me to be effective as a contributor,” she said. Since the COVID-19 pandemic has scuttled facility visits for now, Bayne is learning about the cannabis business from her new Acreage colleagues. “A critical aspect of a high-functioning board is having a board-orientation process,” she said. “We’re underway there, so that you get full exposure to all of the different plans and thinking of the key leaders.”
70 Marijuana Business Magazine | February 2021
A look at some recent hiring moves in the marijuana industry
Acreage Hires Former Pfizer Exec as CEO Multistate marijuana company Acreage Holdings in New York appointed health-care and consumer packaged goods veteran Peter Caldini as its chief executive officer. Caldini served as president of Pfizer North America-Consumer Healthcare and regional president-consumer healthcare for Europe, the Middle East and Africa during his time with the pharmaceutical giant. Before joining Pfizer, Caldini held leadership positions in global markets while at Bayer Consumer Health and Wyeth Pharmaceuticals. Caldini started his career in brand management at Unilever, where he held various roles with increasing responsibility. More recently, he worked as CEO of Bespoke Capital Acquisition Corp.
Former 4Front CEO Joins Bengal Capital Bengal Capital, a team of investors and founders who have been in the cannabis industry since 2010, announced that Josh Rosen joined the Los Angelesheadquartered firm as a managing partner. He is co-founder, former CEO and current chair of 4Front Ventures, a Phoenix-based MSO. Rosen helped transform 4Front from a consulting firm formed in early 2011 into an operationscentric multistate operator, most notably with the acquisition of Cannex Capital in 2019. Jerry Derevyanny, who was executive vice president of corporate development and general counsel at Cannex Capital and then 4Front, also joined Bengal Capital as a principal. Derevyanny, who is based in Seattle, previously served as general counsel of Northwest Cannabis Solutions and subsequently helped found, take public and head corporate strategy for Cannex Capital.
Australis Taps Booth as CEO, Gets New CFO Eleven months after stepping down as CEO of the Canadian marijuana giant he co-founded, former Aurora Cannabis chief executive Terry Booth is returning to the industry to head up a U.S.-based cannabis investment firm, Australis Capital, an Aurora spinoff located in Las Vegas. Australis Capital also appointed Jon Paul as its new chief financial officer. Paul formerly was CFO at Plus Products, a publicly traded infused edibles company operating in California and Nevada.
Florida Operator Hires iAnthus Production Vet Liberty Health Sciences, a Florida-based cannabis producer, hired Darrin Potter as vice president of
operations. Potter will be responsible for leveraging Liberty’s cultivation, processing, extraction, packaging and distribution operations in addition to managing the expansion of a production facility in Gainesville, Florida. Potter previously served as vice president of production at iAnthus Capital Holdings, which has offices in New York and Toronto, and was chief horticulture officer for GrowHealthy Holdings in Florida.
New Revenue Officer for Indus Indus Holdings, a vertically integrated cannabis company in Salinas, California, appointed Kevin Lawrence as chief revenue officer. Lawrence will oversee all revenue streams for the organization, including marketing and sales operations. He most recently served as vice president of sales,
field marketing and distribution for Flora California, where he oversaw marketing, purchasing, sales and distribution. Lawrence also co-founded and managed daily operations for California cannabis brand Crown Public, growing the organization to $14 million in revenue before leaving in 2018.
DeAngelo Leaves Harborside One of the most high-profile businessmen in the marijuana industry, Steve DeAngelo, is no longer formally affiliated with Oakland, California-based Harborside, the company he helped start in 2006. Neither Harborside nor DeAngelo gave a reason for the split.
Canadian Retail Chain Gets New CEO The board of directors of Four20, a Calgary, Alberta-based chain of cannabis retail stores, hired Scott Morrow as its new president and CEO. Morrow’s career highlights include senior management roles with Shopper’s Drug Mart and Rexall as well as being former chief operating officer at Alcanna (formerly Liquor Stores North America). Most recently, Morrow held an executive role with AgMedica Bioscience, an Ontario license holder.
February 2021 | mjbizdaily.com
IndustryPlayers | New Hires & Promotions DeAngelo, who was CEO of the company for 12 years, took the formal title of chair emeritus in early 2018, when Harborside was put on a path to go public. In 2019, DeAngelo was an inaugural inductee into the MJBizDaily Awards Hall of Fame. Since stepping away from Harborside’s operations, DeAngelo has spent much of his time focusing on the Last Prisoner Project, a nonprofit working to release inmates sentenced for marijuana-related offenses.
Canadian Retailer Gets Communications Vet High Tide, a marijuana retailer that also manufactures and distributes cannabis accessories, announced that Omar Khan joined the Calgary, Alberta-based business as senior vice president of corporate and public affairs. Khan joined High Tide from the Toronto office of Hill + Knowlton Strategies, a global communications firm where he spent more than four years leading the cannabis division. Khan also has 15-plus years of experience working as a communications strategist in Canadian politics.
Hexo Names Energy Pro to Board Quebec-based license holder Hexo Corp. appointed Rose Marie Gage to its board of directors, bringing the group’s number to seven. Gage has worked for several multinational enterprises, including General Electric, Schneider Electric and Westinghouse, and held numerous executive roles such as chief marketing officer and most recently CEO of Ag Energy, a provincially licensed energy retailer. She is also an inaugural member of the Conference Board of Canada’s Centre of Excellence for Women’s Advancement and served as vice chair of the Women in Leadership Foundation.
NCIA Policy Head Departs for International Law Firm Andrew Kline left his post as director of public policy at the National Cannabis Industry Association and joined the Denver office of the Perkins Coie law firm as senior counsel in the commercial litigation practice and marijuana law industry group Before joining the NCIA, Kline was president of the National Association of Cannabis Business. He also held a variety of high-profile positions in government and the private sector. Kline spent 14 years as a federal prosecutor and worked as policy adviser to U.S. President Joseph Biden when Biden was a senator and later vice president. Kline is admitted to the bar associations in California, Colorado and Washington DC.
New York MMJ Association Announces New Board Anticipating a busy state legislative session in Albany, the New York Medical Cannabis Industry Association added new members to its executive board who will play key roles in the upcoming marijuana legalization debate. Chair: Marcia Maxwell, eastern regional director of government affairs for Chicago-based Cresco Labs. Vice president: Aquila Powell, senior director of government affairs for Acreage Holdings in New York. Vice president: Dina Rollman, senior vice president of government
72 Marijuana Business Magazine | February 2021
and regulatory affairs at Green Thumb Industries in Chicago. Secretary: Jeremy Unruh, senior vice president for public and regulatory affairs at Pharmacann in Chicago. The New York Medical Cannabis Industry Association is comprised of Columbia Care, Cresco, Curaleaf, Green Thumb Industries, The Botanist and Acreage NY, iAnthus, Pharmacann and Vireo Health.
MJ Consultancy President Gets Ownership Stake The Cannabis Business Advisors, a national consulting firm specializing in licensing, operations, mergers and acquisitions for the cannabis industry, announced that President Maxime Kot has been added to the ownership team. Formerly the company’s licensing director, Kot will oversee all firm-related activities in her new role.
Garden Care Giant Shakes Up Leadership Team The Scotts Miracle-Gro Co. in Marysville, Ohio, announced a series of organizational changes in the areas of finance, supply chain and corporate affairs. As part of the realignment, Cory Miller, previously vice president of finance for Hawthorne Gardening Co., Scotts’ subsidiary for cannabis growers, was promoted to senior vice president and appointed interim chief financial officer. Scotts will start a formal search process to fill the role on a permanent basis. Mark Scheiwer will transition from his role as controller to lead the Hawthorne finance team. Brian Herrington was promoted to vice president of external affairs at Hawthorne and will oversee all state and federal government relations activities for that business. Hired or promoted someone for a senior-level position? Send a news release or general information to email@example.com.
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