In the Turbulent, Young Cannabis Industry, Legal Veterans Provide a Steadying Hand

Frank Segall and Scott Moskol, co-chairs of the Cannabis Business & Law Advisory Group at Burns & Levinson, discuss the current and future state of legal cannabis – and the pioneering work their firm has done in the industry.

CCBJ: Burns & Levinson was the first major Boston corporate law firm to develop a cannabis business practice. That was more than six years ago, long before other law firms embraced the industry. What inspired you to do that?

Frank Segall: We saw a huge opportunity to bring our sophisticated corporate expertise to this emerging market. Our first client was a group in Rhode Island that was applying for a medical marijuana license, and we helped them structure all of their corporate governance documents and drafted the requisite documentation in conjunction with their $3.2 million capital raise. We knew that cannabis would rapidly grow into a multibillion dollar industry, and it was exhilarating to be part of launching an entirely new industry from the ground up.

While we have continued to represent local, regional and national operators, our practice has greatly expanded over the years to leverage our decades of corporate and finance expertise. We represent companies through their entire life cycle, from the initial startup phase to a structured liquidity event, whether that exit involves a public offering, roll-up or sale. We have also formed and represent various lending and venture capital funds seeking to provide debt or equity capital to the cannabis and hemp industries, and we take an active role in structuring and documenting secured loans and equity infusions into cannabis- and hemp-related companies. Additionally, we have been called upon by many publicly traded companies, some in the Fortune 500, that are seeking legal counsel about how to take advantage of the growing marijuana and hemp industries.

We are fortunate to have started this practice when we did, and we are now among the most experienced and sought-after law firms in this space.

You both are playing major roles in bringing much-needed banking services to the cannabis industry. Tell us about this work.

Scott Moskol: The scarcity of banks and credit unions providing depository services, never mind lending, to cannabis businesses is still a huge problem in the industry. Since the beginning of 2017, we have been representing Safe Harbor Private Banking, which is a division of Partner Colorado Credit Union, to bring their cannabis banking programs to other financial institutions across the country, as well as to advise them on the myriad associated issues. These services are not limited to banks and credit unions. We are often called upon by broker-dealers, merchant processors and other money transmitters to review and improve upon the requisite internal compliance programs these entities need in order to participate in the cannabis industry.

For example, last year, one of our clients, GFA Federal Credit Union, partnered with Safe Harbor to become the first financial institution in Massachusetts to accept adult-use marijuana clients. At present, we are working with GFA to establish a cannabis-related lending program, which would make real estate loans to select businesses in the industry. GFA announced the pilot for this program in July 2019, and it’s the planned first step to one day making direct loans to cannabis businesses. We have also represented many non-regulated financial entities in making secured loans to the cannabis and hemp industries. While there is a long way to go until there are enough banks, credit unions and other covered financial institutions to meet the needs of the cannabis industry, there has been significant progress, and we are proud of our work in moving the banking industry forward.

Cannabis companies also have a hard time accessing dedicated sources of institutional capital. How are you helping to change that?

Segall: We have significant experience raising capital both inside and outside the cannabis industry, and we use these well-established contacts to help our clients succeed. We view our cannabis clients as our partners, and we are in the trenches with them, so to speak, introducing their deals to our private equity and venture capital contacts and other prospective investors. For us, raising capital from private sources isn’t about drafting a private placement memorandum or a subscription agreement – it is about finding holistic solutions to our clients’ financial challenges. Our clients hire us because we know how to navigate these incredibly complex financial issues, and because we have deep expertise and connections on the lending side.

Most companies take it for granted that they can have a simple bank account or access capital to grow their businesses. Why is it taking so long to bring these services to the cannabis industry?

Moskol: Given that cannabis is not yet legal at the federal level, many financial institutions have stayed on the sidelines to avoid the risk inherent in taking cannabis-related deposits. But as the industry continues to gain credibility, more financial institutions are taking the time to understand the legal framework by which they can be more active in the cannabis markets, whether by taking deposits, lending, or selling other bank products and services. It has been a slow and oftentimes frustrating process for many cannabis entrepreneurs who’ve had to create complicated systems to manage multimillion dollar, all-cash businesses. We aren’t at a place where every cannabis business that wants a bank account can easily get one yet, but these sources of depository and treasury services are opening up, and we expect many more positive developments over the next few years.

What is the M&A outlook in the cannabis space, and what trends are you seeing?

Segall: Because of the complexities in each state and the lack of uniformity of laws in the industry, the M&A market varies from state to state. So understanding the local landscape is vitally important when navigating this space. There is a lot of activity at the local level with respect to investing in projects and one-off sales of locations and licenses, and I expect this activity to continue. On the national level, major deals have slowed down because valuations are still inflated. Investors are no longer buying into the euphoria; they are becoming more realistic, which makes accessing the capital markets, especially the public markets, more difficult. But the multistate operators need to grow, and local players will want to be part of a bigger exit, so the two will continue to flow into each other. And my team and I will continue to help our clients successfully navigate these waters.

Hemp and CBD (cannabidiol) seem to be the hot new product categories. What opportunities are you seeing in this market segment, and do these companies have the same banking and financial challenges?

Moskol: The Farm Bill that passed in December 2018 descheduled hemp and CBD (when it contains less than 0.3 percent tetrahydrocannabinol, or THC, the main active ingredient in cannabis), and many industry players were hopeful that hemp and CBD businesses would no longer face the same hurdles as the marijuana industry. To date, these hopes have not come to full fruition. Per the Farm Bill, we are waiting for the U.S. Department of Agriculture to issue a regulatory framework for the commercial growth and sale of hemp and CBD products. Banking and lending still remain problematic, although there are signs that that might be changing.

The real issue right now is that the Farm Bill states that the regulation of hemp and CBD still falls within the jurisdiction of the Food and Drug Administration (FDA). And the FDA has clearly stated that, for the time being and until new guidelines and/ or protocols are promulgated, it is unlawful to sell CBD-infused foods, drinks or pet food via interstate commerce. Additionally, the FDA has similar prohibitions on any CBD products – even topicals or creams – that make unsubstantiated health claims. This has created some uncertainty and frustration in the industry, especially given that, to this day, hemp/CBD businesses are still having issues accessing bank accounts. We do believe, however, that in the next few months we should receive some guidance from the federal government, and hopefully that will promote the rapid expansion of the CBD consumer market.

What is your best advice for cannabis companies and investors looking to become players in this industry?

Segall: There are land mines in any industry, but in an industry like cannabis where everything is constantly shifting, you don’t want to hire the newest cannabis law firm on the block. We took risks and put our reputations on the line when we became one of the first law firms nationally to establish a cannabis corporate practice. We are not just now getting up to speed on this industry like other firms – we are sincerely leading the pack. We will continue to assist our clients in innovative ways as this industry continues to change and grow.

Moskol: While the industry is still young, at some point in the not too distant future, the barriers to entry will be removed, and investors and entrepreneurs will see decreasing opportunities to achieve the large returns many of these deals now provide. My best advice is to make sure you have sophisticated corporate counsel with years of extensive cannabis industry experience.