We recently sat down with the Co-Chairs of the Cannabis Industry Group at Clark Hill LLP.
These gentlemen are lawyers that are leading some of the efforts in the cannabis industry. Bob has been around for a while, is well known in the cannabis circles as sort of a lead when it comes to cannabis and the law. He’s one of the first cannabis policy instructors at the University of Denver. He recently, his firm was acquired by a larger firm, and they can talk about that. Sander is in the LA office, and Bob is in Denver. Sander is an M&A guy – acquisitions, mergers, that type of activity. Welcome, gentlemen.
What are the biggest challenges you see moving forward for the cannabis industry? Of course, there’s lots of fun, but what are you guys looking at?
Well, first of all, thanks for having us on. This is Bob, and I regret that I can’t participate by video, but at this time, there are several challenges for the industry. First, when we talk about the industry from a foundational perspective, we need to clarify that the cannabis industry is technically two distinct industries.
I think Bob broke up. I suspect where he is going is the cannabis space has two industries: the hemp side of the house, the hemp CBD side. And then you also have the THC side, the what you traditionally considered the marijuana side of the house. And those, well, there’s some overlap, because of the legal regime, those industries operate in a very different manner. The licensing is different; the regulatory oversight is different.
And so, even what we do here at Clark Hill is we represent clients both on the hemp CBD side of the industry and the more traditional marijuana side of the industry. By maybe amplifying a little bit or expanding upon your intros. Bob and I are our co-chairs of the cannabis practice that Clark Hill, Clark Hill is a 650, lawyer, firm, international law firm with offices throughout the United States and a couple of international offices. I joined earlier this year, and Bob joined us a couple of months ago. And both of us joined with a particular focus to build out the cannabis practice for Clark Hill for the national firm.
We both have a vision of how a national firm like Clark Hill, a middle market-focused, full-service law firm, you know, pretty much every practice area you can think of is covered in our firm. And so it’s some in some way, at least in some office. So we have a specific vision of how a firm like ours can effectively represent clients in the cannabis space and elevate the industry simultaneously. And so we thought it would be a unique opportunity and a unique combination of both the kind of the traditional vision and kind of, frankly, the courage of the Hoban Law Group to go out and be an early cannabis firm at a time when it was pretty risky, and people didn’t know what’s going to happen to you she started taking on cannabis clients and to marry that industry knowledge with much broader skill sets of the national firm.
And as you mentioned, I’m a corporate securities M&A Capital Markets focused lawyer, and part of why I’m here is we certainly see a lot of opportunities in that in that space, not the least of which you know, you want a headline deal, you can look at Trulieve Buying Harvest. Tilray just announced a pretty significant deal with MedMen the other day, etc. So but in terms of the challenges going forward, and Bob, I’m sort of pinch-hitting for you right now. But as soon as you’re, you’re back on with audio; please pitch in. But, you know, the industry’s challenges, from the lawyer’s perspective, are going to be legal.
There are still a number of difficulties that the industries have, which are defined by the legal framework with which they operate. And, you know, for example, the FDA very recently declined to give Charlotte’s Web comfort that they could include their full-spectrum CBD product as a dietary supplement, which puts them in a bit of an awkward spot with the FDA. And I see Bob is unmuted, so maybe he can kind of pick up where I was going.
Yeah, sure, Sander. Thanks for finishing my sentences. I appreciate that. I said it better myself. But, no, I mean that that is a significant challenge. When you look at the fact that CBD products which are derived from the hemp plant and have been expressly removed from the list of controlled substances at the federal level, or at least any derivative from the hemp plant is even though no cannabinoid outside of THC was ever individually scheduled, that creates challenges, and that also draws a certain type of investor. So going to the general point of what are the challenges than like gala tea and the stigma attached to the plant, which creates misperceptions of illegality surrounding the industrial hemp side of the industry, which is federally legal, and the marijuana side of the industry using a term like marijuana, which I know is off times maligned. But, still, it is the legal terminology that I believe attorneys were bound to use here for that side of the industry. It’s illegal; it’s a federally controlled substance in the United States.
But with that said, The challenges are navigating through the stigma, dispelling the myths around the stigma of what is legal and what’s not. So, for example, we have large CPG manufacturers as clients that asked us if they could use hemp-based plastic packaging. To me, that’s a crazy question to ask. But it is in the front of the minds of these large-scale institutional companies as they begin to adopt the use of cannabis for a variety of things. The second part about what’s challenging to the industry is the industry itself. The industry’s behavior is not always befitting as a general statement of an industry that wants to be recognized and included in mainstream business. And that changes almost daily in a positive way. But it’s that, you know, increase in professionalism and the previous lack thereof that has effectively given the industry an additional black eye if you will.
And those are the main challenges, but make no mistake about it, regardless of the legal status in the United States. This is a global cannabis industry. And it’s happening daily from a global supply chain perspective. And that’s what’s exciting. So even in the face of federal legality in the United States of at least the marijuana side of the industry, and the uncertainty from a regulatory standpoint, as Sander alluded to, of the hemp derivatives in the United States. This is quite clear in numerous dozens of nations around the globe that this is a legal product and that there is a stream of commerce and a reliable established supply chain behind it. And from a lawyer’s perspective, you know, legalization, is that a ballot issue, or does it need to work its way through the courts and be challenged in the courts.
Now, here’s the sequence of events at the federal level in the United States. What you’ll see happen is the safe Banking Act or a semblance of debt banking reform bill as it relates to cannabis that will pass Congress sometime in 2022. So our best information would be in the summer of 2022. But of course, anything can change with the adoption of the Safe Banking Act that lines up mainstream capital, and mainstream capital is needed to begin to have efficacy or an effective impact in Washington DC. Unfortunately, the cannabis industry has not always been its best advocate from a lobbying perspective.
So when the Banking Act passes, it will cause mainstream companies to then not just say, Yes, we think cannabis should be legalized but actively lobby to legalize cannabis that will create a refresh of the voices that the congressional folks hear from. And they also have a conflict with these larger institutional companies and institutional entities from a capital and product production standpoint.
That will be the straw that breaks the camel’s back and pushes federal legalization. It’s not something that the courts necessarily console, and to the extent that the courts can solve it, that is inefficient. The process will take years and years and years and will not result in uniform legislation or legalization across the country because the US Supreme Court would have to take that on and make that decision for that to have an effect. So I do believe this comes to Congress; I do believe it happens in the Biden administration.
I believe that it’s effectively a no-brainer from a public policy standpoint, particularly when you examine it from an economic lens. If you want to create an economic boom in the United States, you legalize cannabis and allow the states to regulate cannabis. It’s quite simple. In a recently published article (Amazon’s Support For Cannabis Is The Missing Link For Federal Legalization), you said Amazon is on board, a significant player that will help push the legalization.
But despite that, is there a danger that cannabis will be simply become big business?
Well, I think a brief comment and then defer to Sander, and I don’t think that’s a danger. I think that’s a fact, every industry in the United States that’s achieved any level of notoriety or you know, that people can rely on for revenues from a taxation standpoint, or job creation, those industries are big business and look at big business as a positive thing, not as a negative thing, which will exist side by side with cottage elements of the industry, and craft producers and the like. So I don’t think big business or big cannabis, as we’ve heard, is a negative thing. I think it creates more jobs; I think it creates more mainstream adoption. And that’s what we’ve seen create over 250,000 jobs in the United States alone in this industry; from a public policy standpoint, we need big business to adopt this.
We’ve also seen a lot of like, especially in the licensing, where we’re looking to support people caught up in the war on drugs so that they have preferential, you know, opportunities to get these licenses. So, you know, one point we’re saying, oh, we’re going to support the local guy, the small guy, small business owner. And yet, on the other point, you know, this industry might potentially be dominated by the folks like Amazon.
Well, you’ve got, you’ve got small businesses and small business operators all over the country that will continue to operate, maybe it’ll be acquired, perhaps they’ll be aggregated. But you can’t exist alone in a vacuum as a dispensary or a small cultivation facility that services one or more small dispensers in a particular state on the marijuana side of the industry. So this is a supply chain that needs to be developed. And it’s that supply chain that requires big business to create it back in.
So yes, there are social equity provisions. And there are provisions for small business operators across the country to continue to exist. But small business operators don’t own commodity supply chains, which is what this is and what this will be. So they’re part of it. They don’t own it; they don’t control it.
So I think we’re making a judgment about big cannabis as if it’s a bad thing. It’s needed to create the commodity supply chain. And within that supply chain, small and small business operators can continue to exist, but they can’t create, develop or control the supply chain independently. They simply don’t have the resources, the bandwidth, or the internet to experience.
And when this is legalized on the federal level, how will it change the product?
That’s a great question. I think there’s a couple of things because one of the things you have to think about Patrick, which goes to Bob’s point, is legalization. It means a lot of different things to a lot of different people. And as important as the concept of legalization is, the cons are on the path to legalization.
And so, in other words, you know, Congress could pass a law tomorrow that says cannabis is legal in all 50 states, using the Commerce Clause clause to preempt state regulations say the federal government’s going to regulate it all. And they could have an import-export regime included in that bill. And they could do that very quickly.
And that would entirely change the landscape. So they’re also not going to do that, right?
So what is likely going to happen is much more of an incremental process; states will be allowed to continue doing what they’re doing, having state legal. State legal cannabis, as Bob mentioned, the safe Banking Act, if we can get it through the Senate, and he and I are both actively involved in that sort of effort, that would be, that would be a huge boost to the industry overall because it would allow some of the smaller businesses, you’re talking about social equity applicants to suddenly access the banking system that has shut them out for so long.
The bigger companies have already figured out how to access that system. So it is those little guys; they’re usually little guys, and gals usually cut out of it. And so and, and it disproportionately impacts the minority on business as well, because they’re that just, you know, they’re not as large, typically with some exceptions. And so, the state’s a state’s rights approach is probably the first step at some point; you’ll likely then allow for interstate commerce among states that have cannabis. So, you know, without talking for hours on it, I think an incremental approach is far more likely than we’ll wake up one morning and discover that cannabis is legal, you know, in every single state of the country, and also import-export.
How will it change, will result in big business?
I think we’re what Bob is saying I would certainly agree is, we already have big cannabis, and it’s already creating a lot of jobs, but it hasn’t pushed aside the smaller companies. So the smaller companies are going to exist as part of the chain, right. So in other words, social equity applicants, whether it’s Oakland, which pioneered the concept, or San Francisco or Los Angeles, or any of the other major cities where social equity is a priority, they’re probably going to continue to have those licenses and operate one piece of the chain, probably a dispensary. So there’ll be kind of the retail side of the chain.
But as this becomes more like a larger business industry, a big business industry, I suspect you won’t be seeing those folks doing their cultivation, right? You won’t be seeing them doing their own, you know, their manufacturing. As one of my clients put it to me once, he said, Sander, it’s very odd that I have to be Coca-Cola, Coca Cola bottling, and Circle K, right? I have to do all that that sort of vertical integration model implies, but no other industry operates as a vertical integration model. Right? Starbucks doesn’t grow its coffee beans. And, and, you know, with some, except some of our larger retailers, you know, go and get white label products and put their labels on it.
But for the most part, you know, a retailer doesn’t your corner liquor store doesn’t grow the tobacco for the cigarettes they sell behind the counter, right? So the supply chain, what’s likely to happen to cannabis is you’re going to see larger cultivators doing at least what you would consider being the bulk cannabis stuff that isn’t top shelf that isn’t, you know, craft, if you will, you’ll have the Anheuser Busch’s of cannabis. However, you’ll also still have the craft operators, the people targeting a niche market or a niche experience.
And, and you’ll you will probably have larger distributors that are they’re operating as distributors as opposed to just you know, folks that have a distribution license because they also have cultivation. They also have retail or dispensary licenses. And so it’ll become this global supply chain that Bob is talking about. It is probably the future. The real question is when in the future, is it two years or ten years? Right. But I don’t think it’s bad. I wouldn’t put it, as Bob says, a bad spin on it, because the folks that are in early and the folks that have social equity licenses and the smaller businesses and the minority-owned businesses, they should still have their seat at the table and have very significant businesses and be a significant part of the industry. Because they are probably going to end up with those retail licenses and some of those very valid locations with the Safe Banking Act well that address to piggyback on good.
I was going to add to that, you know, look courses control the alcohol industry, liquor stores are owned by independent small businesses regulated at the state level more often than not. The backside was produced, and the innovation isn’t this big cannabis needs. There is always room for people in the industry, but that doesn’t make those people, I guess.
I have a question about the Safe Banking Act. Will they then deal with the classification as a drug?
The safe banking act has passed through the House four different times. But, due to the efforts of a pretty, pretty, pretty persistent group of folks who lobby on its behalf, including the National cannabis roundtable liaison group, those sorts of people are constantly pounding the drumbeat for the Safe Banking Act.
The Safe Banking Act is an incremental measure. It doesn’t legalize cannabis. It allows state-legal cannabis companies to access the banking system. And it’s it says passed to the House four times. It’s been hung up in the Senate each time; it was passed through the House during the last administration. And I think if it had gone through the Senate, it would have been signed into law by the prior president.
So safe, it’s very close, but safe does not be scheduled. The Safe Banking Act just allows for banking. And so so for you, Patrick, to think about what’s going on legislatively? You have two different strategies you have. You have people who push a more comprehensive strategy, like the Schumer bill, which came out a few weeks ago.
Schumer, Booker, Wyden – I think are the primary proponents of it. And that’s more of a comprehensive, comprehensive approach. The More Act was also a more comprehensive approach to deal with more things, if you will, a much larger step towards legalization and implementation of cannabis as an industry, which does include dealing with the Controlled Substances Act, the approach that others seem to favor because it appears to be more it gets more done more quickly, politically. So it is an incremental approach.
And so Safe Banking Act followed by access improved access to the capital markets, and things like that. So that’s an incremental approach that says, fine, we’re not going to, we can’t, we’re not going to legalize quote-unquote cannabis tomorrow. So that’s a much bigger political discussion that involves a lot more in the way of stakeholders.
But we can solve incremental problems more quickly. We can have small cannabis businesses that have to deal in cash for all of their expenses and revenue. We can allow them to access the banking system so that it’s safer for them to you know, from just from a little literally from a crime perspective, you know, they’re not the drivers aren’t getting held up, and people aren’t trying to break into their to their safes, etc. You know, we can allow them to operate more like a business. And the next step is probably the same group. He’s talking about a capital markets approach, right?
So even though you have Big Cannabis right now, you have good companies that are publicly traded. Still, they’re publicly traded in Canada because the New York Stock Exchange and NASDAQ don’t allow those businesses to trade on US exchanges. So they’re only traded over the counter in the United States. And they’re traded on the Canadian markets. And so, increasing access to capital in the United States would be another incremental step.
Again, it’s not about legalizing cannabis and not dealing with the bigger issue, but it’s about solving a problem. So it’s improving the situation incrementally, and it’s, it’s getting more people invested in the industry and its success. But again, the goal ultimately for everybody in the industry is to get to that place where it operates. As a legal industry. So that it looks and feels like a much more traditional industry.
And I think that if you circle back to one of your earlier questions, then, whenever it is, cannabis will start to look like very, like analogous industries. In other words, look at the tobacco industry, look at the alcohol industry, and that will probably inform how the consumer side of the cannabis industry looks. One of the things we haven’t talked about is the pharmaceutical side. Right? And so, you know, Cannabis, a big, big driver the whole reason we have a legal cannabis industry in the first place was, you know, my state, California in 1996, passed the first medical marijuana initiative, which sort of kicked off this effort. And the medical side, the research side using cannabis in pharmaceutical products. So, you know, that’s that effort is going to start to look like for, you know, pharmaceutical companies or biotech companies, right, there’s going to be organized in that fashion.
And we’re not there yet, and it’s unclear exactly the path to get there. But Bob thinks it’ll happen in this administration. And I think he’s got a 50/50 chance of being right.
Yeah, I think, though, I would agree with you that it’s an increment. But, I mean, one of the Controlled Substances Act’s challenges is that it’s listed as such; it has IRS implications.
Right. Right. And that that’s a pretty big piece for business owners to overcome. And that’s why we understand that the Safe Banking Act is incremental. However, we still have this desire to have it declassified declassify simply for the IRS purposes so that it’s treated; it’s not treated the way controlled substances are for tax purposes. Well, to add in and related issues, those are very significant. And yes, it’s a big weight on the industry to have a section of the Internal Revenue Code that specifically says you cannot take ordinary business expense deductions as a cannabis filer.
I mean, if the effective tax rate for cannabis companies, as a result, is far higher than an identical company in a different industry and shouldn’t be that way. It doesn’t need to be that way. I see Bob unmuted himself. So I thought maybe he was going to, though I agree with everything you said, I would just, you know, I would just note that it was The More Act, which our current vice president championed, and was a bipartisan measure, at least in the House did declassify or D schedule marijuana under federal law that would remove that. Or solution would be to simply reschedule cannabis to a schedule three or below, which would remove the tax implications.
But that’s a major challenge for investors and operators in this space, as you point out. And with the capital markets with that in place, are they investing because they seek a long-term picture. Some invest because of the long-term play, but many are looking to strike it rich. I mean, there are large companies, some of which Senator mentioned a moment ago, looking to create sustainable long-term supply chain companies in this space. Then you have other companies that want to be positioned with good leadership, good structure, decent sales, a decent production supply chain so that they can, you know, realize some of the financial benefits when they have access to the northeastern United States public markets, which will make I think, what happened in Canada. The deployment of capital from those Canadian public markets looks very tiny when it occurs in the United States.
So positioning oneself for that seems to be the primary motivation of many of the actors. But again, some companies see the long-term vision and want to establish themselves as major players for the long run, whether that’s because they’d like to be acquired by the Procter and Gamble’s of the world in the future or more. After all, they think they can become the Procter and Gamble of cannabis. So all that’s to be determined. Yeah, and when we just anticipate that in the capital markets open up, then we’d see a bit of a green rush right 100% undoubtedly. However, you know it’s funny because I think you’ve seen a few mini green rushes already. Perhaps I’m speaking a little selfishly as the US corporate securities lawyer; right to see that it’s the Canadian markets that are providing the liquidity for the US industry is a little bit odd, right?
The US capital markets are, are, are usually the leading markets in the world. And in fact, the largest cannabis companies in the world are listed in the in on us exchanges because us exchanges will list cannabis companies with operations that are legal in their jurisdiction. So that’s why you have Canopy and Tilray. These companies are listed on the United States exchanges, and they have larger market caps as a consequence of that. So, you know, when capital markets do open up in the United States, you will likely see a green rush, but I think what you’ll also see is a different color, a different type of investor.
So So, you know, a lot of ink has been spilled over that, you know, the kind of folks that have invested historically in the cannabis industry in the United States. Still, you haven’t seen your traditional institutional investor because most of those groups are, are, are boxed out, if you will, from the cannabis industry, right? If you’re a big hedge fund in the United States, you have a limited partnership agreement that has compliance with law paragraph, and you, you can’t be in the weed business. It’s kind of that simple, right? And so you sit on the sidelines, looking in many of those players that their principles are very interested in it. And some institutional interest has resulted in investment.
But you know, if we opened up capital markets, that would undoubtedly be a game-changer for the industry. And do you think that the capital markets will continue to lump cannabis under one category? Because I mean, you know, whether it’s medicinal or recreational, that’s considerably different than the, you know, the sustainability aspects of cannabis, as you know, as a product as well, which is a very different market.
Will they always lump it as one category? Or do you think that we’ll finally sort of split up a little bit so they can be treated differently?
Well, I’m not so sure that they do it now; I mean, you know, look, hemp is federally legal, the derivatives from hemp are not regulated by the FDA presently for human consumption. So that creates a misperception that somehow CBD is not legal, which is just not an accurate way of saying it. Those hemp derivatives are, in fact, legal. And the hemp supply chain is being funded by public dollars. And there are many companies in the marketplace in that respect. Frankly, a number of public medical companies and biotech companies are also engaged in the development of API grade cannabinoids for ingredient formulations for Medicinal Products; those companies already exist on the exchange. The companies say that I am a cannabis company, I’m producing cannabis, I am distributing cannabis, and I’m developing cannabis products for distribution to the masses at the state level in the face of federal illegality. So it’s those companies that have the most challenges in the public markets. And I do think that those distinctions already exist.
It’s confusing to many, but those distinctions do exist. And, you know, again, there’s also this idea that these Canadian companies do cross-list in the United States. And think about this as well: What is the prohibition about a company that might be creating formulas? They’re researching in the United States, but it’s developing its entire supply chain outside of the united states and jurisdictions that are illegal?
There are several different ways to approach this. Yes, there’s confusion. Yes, there’s uncertainty. And yes, the regulators don’t always understand these things. But at the same time, there is a navigable pathway. For most of this, it’s the idea that the opening up of the public markets will create this flood this flow of cash. That’s the exciting part of the industry. But, I mean, look at what happened in Canada; the Canadian marketplace spent billions and billions and billions of dollars. Without knowing anything. I mean, zero knowledge about this industry at all, with a lot of due diligence, but it was due diligence that, frankly, did not apply to the cannabis industry, and they lost their shirts because of it.
Many of those still standing companies have assets that they spent millions and millions and millions of dollars for that have zero revenue to show. So I think you’ll see a much more deliberate, dedicated, and thoughtful approach for the dollars deployed from the US markets, but the numbers will be staggering.
And You mentioned confusion. So this seems like a good time to interject Delta-8. What’s your reaction to Delta-8?
So Delta-8 is a component that is naturally found in a cannabis plant. But in de minimis quantities. In other words, there are not, there are no commercially viable quantities in a hemp plant of delta eight. So what you have to do is you have to take delta eight, or you have to take other cannabinoids out of the plant, the hemp plant, because that’s the federally legal plant. And then, you have to synthesize, convert, use chemistry to modify those cannabinoids to turn them into delta eight. So that is where the regulatory problem sets in surrounding Delta-8 per se, a controlled substance if it was derived in the marijuana plant, yes, because of something known as the source rules.
But if it’s derived from the hemp plant in its natural state, then those cannabinoids are neither controlled substances nor are regulated explicitly by the FDA. But when you synthesize a compound, create something that is a mimic of what occurs in nature, what’s really where the problems arise, you can’t simply go out and create a new compound through synthesis through synthetic formulations, or synthetic processes, and put it into a food or an ingredient intended for human consumption.
That’s what creates the problem. So is it federally illegal?
No, but it’s also not an allowed regular regulated substance to be put into foods or supplements. And that’s really where the challenge lies. But, again, there are risk mitigation strategies for that, that we’ve seen. But companies that are betting the farm on long term Delta eight production are putting them there the business planning in serious peril because it’s not out of the question that people consumers have dealt the eight somehow become harmed not because delta eight in itself is a harmful substance or a toxic substance. After all, the processes or the chemicals found within that substance are harmful to the human body, or at least not known in terms of the long-term effects on the human body.
So that’s a quick and dirty summary of what is going on with Delta-8 and the fever for it. The sales the consumer demand is really off the charts right now, which is causing this. Still, it’s you can also argue that it was the FDA’s lack of movement with their regulations to date as it relates to industrial hemp that created the Delta-8 problem because what you found were piles of biomass on farms all across the country to the tune of hundreds of 1000s of acres of hemp biomass. And without guidance, that couldn’t be converted into simple CBD as an ingredient that we put in every single product, which will occur when FDA regulation comes around. But it hasn’t happened yet.
So American ingenuity determined that these products, this biomass from hemp, were going to be modified into something elsewhere there’s a market for it. And those things happen to be psychoactive compounds. And, you know, that’s the challenge. That is what the regulatory challenge is going to be. And it’s that idea that a synthesized compound that has never been approved, utilized, or recognized under the Food Drug and Cosmetic Act or any under any other FDA regulations is now in the supply chain. So is it an illegal substance that should send you to jail? No, but is it a substance that you can rely on for consumer safety and, you know, efficacy and non-toxicity? Not at this time because of the lack of federal regulation, even though some states Michigan’s an excellent example of that have filled the void for regulation that’s lacking at the federal level?
But I mean, one of the challenges beyond what you mentioned is, you know, this is an industry that is trying to be legit, this is an industry that is trying to overcome stigma, and then you have a product like Delta-8 come along, and does that not undermine that those efforts?
Well, certainly it gives the industry a black guy every time some teenager consumes it, and, and or somebody gets sick from those products, and it happens probably every single week. So it does, but here’s the thing that you have to understand that when the FDA regulation is enacted formally, and finally, which probably doesn’t happen until the fall of 2022, at the earliest, 60% of those players that exist in the hemp derivative of the hemp extract game today will no longer be able to be in business because they don’t have the resources, the experience or the compliance policies and procedures in place to come to the fall in line with the FDA.
So I’m not sure if those players intend to be around for the long term, but it does give the industry a black guy. What will change that is when it’s federally regulated, you’ll see every single Coca-Cola ingredient every single product from toothpaste on down to the tampons and deodorant will have CBD as an ingredient in those products. But, still, it will only be then when the FDA does it. And then it will only be those large manufacturers of CPG and personal products and consumer goods across the country. So I think the answer to the question is yes; it gives the industry a black eye.
But it will only be then when the FDA does it. And then it will only be those large manufacturers of CPG and personal products and consumer goods across the country. So I think the answer to the question is yes; it gives the industry a black guy, but at the same time, the lack of regulation is causing this uncertainty. And I don’t know how unreasonable or reasonable it is to keep reminding the FDA that back in 2018, you were charged with developing protocols to regulate CBD, and you’ve not done anything about it since that time. So that’s really what’s created the problem in the face of a much American entrepreneurial is and European practice.
Is it limited to the US is in North America? Are you global? What is the intent?
Clark Clark Hill has offices across the United States and Dublin, Ireland, and Mexico City. We utilize those international outposts to handle a lot of our finance work in the cannabis industry externally; over the last four and a half years, I have worked for over 35 countries worldwide. So at the end of the day, our practices are international in scope. Many of the funding mechanisms come from the United States, and many of the products internationally want to be introduced into the United States. So that’s where the international objective comes in.
Now, in addition, Clark Hill has a pervasive health care practice. So as we talk with our health care business unit about developing protocols and advising its clientele, but how to anticipate the use of cannabinoids, both as ingredients and formulas, and just to anticipate drug interactions and the like that that’s an exciting thing that has a tremendous bearing on international law. So at the end of the day, it’s an international practice with an international focus.
However, that doesn’t ignore the fact that at least half of our clients, if not a little bit more, are US-based clients that require very esoteric, very specific advice on regulations in state x or state why that has nothing to do with international law. And you know, you’ve been a policy leader for a long time; how much of this do you need to drive to make it happen versus waiting for, you know, regulators or the federal level stuff? That’s a great question. I mean, look at it as it relates to federal lobbying for federal policy change. That’s in good hands.
Right now, as Sander mentioned, we’re very close to that. And we have very close friends that are driving that policy debate and that government affairs activity in Washington DC, so that’s in good hands right now, the way we’ve sort of been more active as a group up my team at integrated into Clark, killing the practitioners at Clark Hill is having an impact at the very local level, state and local governments in the United States, but also just jumping over Washington DC, and saying if we can’t effectuate change across the United States, because it’s such a complex process. People seldom understand the issue in DC; let’s do it everywhere else around the world.
So that’s why we’ve been leaders in the policy debate internationally because it’s far easier to go to a country like Colombia, or Oregon, or Chile, or Macedonia, or Poland, and say, Look, here’s an economic, economic objective, that is based upon sound policy and sound science. And this will not create harmful effects in society. On the contrary, it will help society from a criminal justice standpoint, and a social justice standpoint and a medicinal standpoint, a wellness standpoint; you can go to other countries and have that change made in literally a couple of months, when in the US it will undoubtedly continue to take years, even in the face of legalization for regulations to come out.
Remember that even if there is legalization in the Biden administration, and believe it or not, Senator, I agree with you 100%. It’s a 5050 bet here, maybe a little bit closer to 60%. But it’s it is a toss of the coin. But even if the federal government legalizes it, it will take years and years and years for regulation to come that we passed the farm bill, which was the most sweeping cannabis reform bill in US history, in December of 2018. We still don’t have FDA regulations.
And here we are two and a half, almost three years later. And that’s not going to change for another year. So the point is, it’s a slow-moving process in the United States. So entrepreneurs need to act, they need to move, you need to comply with state and local regulations in the US. And they need to look for other markets around the world where things are open and very, very navigable. And that’s why we’ve leaped frogged Washington DC for our practice?
Well, I can tell you I’m in Europe right now. And I can tell you that Colorado as a case study for business, for economic development has resonated throughout Europe at least. And, is economic development a significant enough trigger that can help move this forward?
Well, sure, it certainly can. That’s why I said earlier; I don’t know if you caught that, that this was a no-brainer. It’s a no-brainer because, you know, if you legalize cannabis, it will produce economic results, jobs, revenue, tax dollars for the federal and state governments that have already occurred. So we’ve seen it, it’s tried and true. So from an economic driver perspective, I wrote the first article about the success of Colorado being a measure for the economic driver published in the University Law Review, almost eight years ago, nine years ago now documenting the distinct economic benefits of this.
But remember that every jurisdiction legalizes cannabis for different reasons; some want to do it for social justice or criminal justice reform. Some want to do it because they believe in the medicinal benefits somewhat as an economic driver.
So there is no one size fits all justification for cannabis reform. Senator, what’s your take on that?
I agree wholeheartedly; I know, Bob; I think it’s a difficult process because we’ve existed, and we’ve existed in it, frankly, longer than I expected. And I think longer than many very smart people expected, meaning that, you know, we’re in this awkward zone where cannabis is legal now in some form. And, you know, getting close to 40 states more states than not have some form of legal marijuana in the United States, you have legal weed in many countries internationally.
And so, so it isn’t, it isn’t a small effort today. And but it continues to exist in this very awkward arena where it’s still federally illegal, right? So in theory, the federal government decided to change their, their, their enforcement priorities, they could, they could arrest all of them, you know, a quarter of a million employees of all of these cannabis companies and, and decide, hey, you’re, you’re breaking federal law. And it’s not going to happen. But we’ve continued to exist for a very long time in this very, in this very odd situation.
And I would have expected it to have been resolved A long time ago. So I don’t know how long it takes in the United States. But I think the reason it takes so long, as Bob mentioned, is, you know, our political system isn’t all that great about getting things done quickly. And so, particularly if it’s a topic of that where there’s a lot of political messaging and energy behind it, and cannabis certainly has, there’s a bit of a political issue for depending on you know, which party in which candidate and which state, etc. So, I think I do think it gets legal soon.
Still, I’m certainly hoping I think the industry will benefit because it will, it will allow the industry to mature you know, as a West Coast guy, one of the analogies I make to folks is, is you know, you compare Las Vegas in the era when the mob versus today dominated it. And it’s a much different era, right? The mob wasn’t pushed out of Vegas by the police or the FBI; they got pushed out of Vegas by wall street. Right? Eventually, the money and the excitement behind the industry, in this case, the gaming industry, actually sort of overwhelmed the illicit, you know, the underbelly of the industry. And in a sense, you know it you can you people have different opinions on it. I mean, the mob created what we now see as Las Vegas out here to a large extent, at least the gaming industry. Still, it ultimately was legalized and recognized and became financed and turned into something much more traditional. And I think cannabis is going to become that way as well.
Eventually, Wall Street will come in, and they will sort of taking over its financing. They will take all the fun out of it because that’s what they do. That’s their job. Still, it will become more it will become much more efficient, it will become much more mature and, and it will employ a lot of people. It will eventually become an international supply chain—the situation on the consumer side.
And like I said before, I think I think cannabis is so there are so many different aspects to it, but each part of it, whether it’s the farmer, the farmer, the farmer, is eventually going to buy the cannabis operators that are doing pharmaceuticals, you know, the the the smokeable product, right, the flower that’s either going to be a standalone industry or it may partner to some extent with the tobacco industry or other people who know how to sell that product very efficiently. You know, the the the the the so there and then, of course, the CBD industry which is non-psychoactive that’s a whole different market, right there’s a whole lot of people that don’t want to get high. However, they still wish to benefit the plant and the therapeutic, etc., you know, those types of benefits, so the industry will go in that direction, which will probably be a good thing.
But between now and then, it’s going to continue to be this bumpy road. And as a precursor to the capital markets. Do you guys see more activity in private equity? Venture capitalists, we’re seeing more firms investing, but what kind of activity are you seeing in the private equity sector? You know a lot and increase every quarter. It’s hard. There are a few people that try to try to keep statistics on it. It’s unclear how accurate those are because it’s just again it’s such a soft money industry. They’re, you know, there’s a whole bunch of people trying to come in and add value in a lot of different ways.
So it’s hard to get really good figures in terms of the aggregate numbers of, you know, dollars invested, you know, versus say, somebody who does a Silicon Valley survey or looks at dollars invested in, you know, software unicorns or something like that. But yeah, every single quarter every single year, you know, I’ve been in this space Bob’s been in it a dozen years or more I’ve been in it for five years at five or six years.
And you know, I am like I said earlier, I’m not full-time cannabis and probably 50 60% cannabis, and I continue to do work, you know, corporate m&a, capital markets, deals, and other types of industries. But you know, cannabis is certainly one of the most exciting, if not the most exciting, but I think you continue to see these institutional players coming into the market. Private equity funds are have been out there for a long time.
And you see more; you see hedge funds that invest pretty aggressively in the space. And you’re seeing more action now from investment bankers and analysts. I mean, Cowan and company, for example, was undoubtedly one of the first major Wall Street firms to get involved at all, and Vivi Naser is probably the leading market analyst in the cannabis space at Callen, and that’s just that’s providing analysis, right? Not investment banking services or even brokerage services to us customers. But they’re very interested in the space. I know many other folks.
You know, Rob capital out here on the West Coast, we see a much more institutionalized approach to the capital markets to m&a. And, and I think you’re going to continue to see more of it, as well as some industry consolidation.
Well, gentlemen, I very much appreciate your time today; I told you I would keep it to 30 or 40 minutes; we’ve gone over that. So I don’t want to keep you longer. Appreciate your time and your insights. We will check back in a year or so, and we’ll check out your, you know, your brain, just some of your thoughts as to what will happen and when and we’ll check to see how successful you are, gentlemen, again, thank you very much. We appreciate your time, and we look forward to speaking to you in the future.
Bob Hoban sits at the center of the world’s largest commercial cannabis industry network, a cannabis industry ecosystem that he has painstakingly cultivated since 2008. Since the cannabis industry became commercialized, he has been widely credited for creating the class of lawyers now known as “cannabis attorneys.” He is known for the tremendous value that he places in his relationships and is not satisfied unless he can help his business clients thrive in this burgeoning global industry, an industry he has played a significant role in establishing. In addition, Bob has earned a reputation as a cannabis industry dealmaker representing start-ups, entrepreneurs, and companies in all stages of development. Mr. Hoban has truly transcended the practice of law and is regularly involved in assembling and structuring large-scale cannabis industry M&A transactions. Above all else, Bob is a cannabis industry expert.
Sander Zagzebski is a partner in the Corporate Practice Group and Co-Chair of the Cannabis Industry Group at Clark Hill LLP. he is a transactional corporate/securities lawyer and represents clients in capital raising transactions (private and public offerings of debt and equity, including venture capital investments and private equity investments); mergers, acquisitions, dispositions, and other change-of-control transactions; joint ventures and strategic alliances; debt restructurings and workouts; and general corporate, partnership and LLC matters.
While governments and public opinion have swayed positively toward Cannabis reform in recent years, those involved in the marijuana and hemp industries still navigate many inconsistencies between jurisdictions. Clark Hill attorneys work with stakeholders across the Cannabis industry to provide comprehensive business counsel for clients seeking to capitalize on emerging growth opportunities.
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