Cannabis Musings - July 8, 2024
Good advice is hard to find.
Friends, last week, we talked briefly about the demise of the Chevron doctrine, in the context of challenging 280E. My takeaway advice was to not succumb to temptation:
As much as I think you shouldn’t try to play amateur tax lawyer (unless you actually are a tax lawyer) to try to understand the chances of success of the 280E refund structures, you definitely shouldn’t try to play amateur administrative law lawyer (again, unless that’s your actual job).
I made a similar, broader point on LinkedIn last week:
Warning - avoid bad #cannabis x Chevron takes! If someone says something about it, the first (and only) question you should ask is "does this person *actually* know what they're talking about?" Chances are, they don't, unless they're steeped in this very narrow area of the already nichey administrative law.
I wrote this missive after reading way too many very underinformed, yet breathlessly confident, opinions about the possible impact of Loper Bright Enterprises v. Raimondo, the Supreme Court case overturning the Chevron doctrine, on cannabis rescheduling. Without naming names, these yammerings generally came from lawyers who clearly have no experience with administrative law process, consultants and analysts who act like they understand the law, and CEOs who like to sound off on everything. Smart people, for sure, but people who, when asked their opinion, should have responded with a simple “I don’t know.” Maybe it’s a product of the times, where the ease of access to opinions through social media has inured us to the idea that everyone’s opinion is valid and thoughtful. But call me an old man yelling at a cloud, I’m still in favor of gatekeepers. Particularly when it comes to arcane areas of law.
[For the record, I recognize the subtle irony of suggesting that readers to listen to my advice that they shouldn’t listen to anyone other than a qualified professional about Loper Bright, but remember that this is a free newsletter that disclaims all reliability for everything anyway.]
My warning to the LinkedIn community resonated broadly, reminding me of a more general problem that has plagued the cannabis industry for a long time – a dearth of sophisticated, specialized service professionals, and then a lack of willingness or capacity (read: money) on the part of cannabis operators to hire those that do work within the industry. It’s one of the many things that have held back the industry.
I noticed this problem when I first started working with the licensed cannabis industry back in late 2017 (which somehow makes me both a veteran and a newcomer). I met a criminal defense lawyer who built a career getting cannabis cultivators out of jail in Northern California, working on documenting a Series A capital raise for their client. I was honestly shocked. Criminal defense law is about as far away from venture capital/private equity/securities law as you can get (maybe admiralty law – the law of the sea – is further?). It’s like a dermatologist performing a colonoscopy – they could probably figure out how to get it done, but should they really?
For better or for worse, lawyers specialize for a reason – you need years of experience and depth of training to truly protect a client. Despite most client’s understanding of the way law is practiced, you can’t just change a few names in a contract and be done. There’s an ocean of knowledge needed to make sure the client is being protected not just from what’s in the contract, but also from what’s not in the contract. I still seriously doubt that criminal defense lawyer had ever heard of Blue Sky laws (state securities laws that need to be analyzed, and usually there’s a filing, when you do a private placement of securities; they usually get ignored, or forgotten, but that’s never the right answer (not legal advice)).
But it’s not just the lawyers. Consider the 280E management company structures that were peddled by cannabis industry accountants back in the 2017-18 era. In short, the idea was to create a management company that would provide services to the plant-touching, license-holding company, outsourcing employees and similar costs in exchange for periodic payments. The management company could then take advantage of a plethora of usual operating deductions (e.g., salaries, beneifts) that were otherwise prohibited to the plant-touching company because of 280E. Sure, the operating company and the management company were owned under the same umbrella, and sure, the management company only really provided services to the operating company, but they’re separate entities, so of course the IRS would be cool with that, right?
Well, it wasn’t, but until the IRS knocked down this and other creative structures to avoid 280E, this was a very popular approach pushed by some industry accountants while underplaying the risk of rejection by the IRS. And then there weren’t enough tax lawyers in the mix to play skunk at the picnic (my favorite job) and question these prevalent structures.
There’s plenty of other blame to throw around – consider also the investment bankers who shoved giant piles of money in 2016-19 in the form of initial public offerings towards an industry that was (and mostly remains) ill-equipped for public ownership. But I think you get the point.
In my observation lo these past 6 years, it’s gotten better. I’ve met many smart, sophisticated, talented service professionals across the years who remain dedicated to continuing to improve the quality of the industry. They’re not just at large firms – plenty of solo practitioners and small firms provide strong, sober advice.
And yet, the problem remains. I think there’s a number of reasons for this:
The industry is used to taking outsized risks. I mean, operators are already breaking the law, so what’s wrong with breaking a little more law?
The industry still has a rogue mentality when it comes to business. It’s a loner. A rebel. That perspective is driven by the ethos of the subculture, for better and for worse. Most entrepreneurs don’t like the typically conservative, measured advice given by their lawyers, accountants, consultants, and the like – cannabis entrepreneurs even less so.
The industry doesn’t have the money to pay outside professionals. Sure, most businesses don’t like to pay their lawyers – who does? But when capital is tight, which it always is in cannabis, payables to outside professionals are the easiest to stretch.
This has also led to many services firms pulling back from the industry. We’ve seen this happen with investment banks, but I’ve also personally seen law firms, accounting firms, and other financial services firms quietly reduce their exposure to industry work, after going deep during the salad days of 2016-19.
Many more professional services firms remain on the sidelines, still unwilling to take the risk of working with the industry.
I suppose that my point is that the industry still doesn’t have enough specialists to help cut through the noise, manage expectations, decipher reality, assess risk, and make long-term decisions. That’s not to say that they’re not out there – they just take more work to find relative to most other industries. And yet, it doesn’t take a lot of effort or diligence to ask the question “does this person really know what they’re talking about?”
Az me fregt, blonzhet men nisht. (“If one asks, one does not err.”)
Be seeing you!
© 2024 Marc Hauser and Hauser Advisory. None of the foregoing is legal, investment, or any other sort of advice, and it may not be relied upon in any manner, shape, or form. The foregoing represents my own views and not those of Jardín.