With temporary licensing on the horizon, California’s cannabis industry is obviously on the cusp of really big things. With this green rush, our California cannabis business attorneys have been brought on to work on all kinds of merger and acquisition (M&A) deals and a bevy of MAUCRSA and local law regulatory compliance issues. These projects have exposed us to many who pitch various and sundry goods and services, claiming to offer “new paradigms” and “value adds,” but actually offering little to nothing.
Here are the five most common predatory practices we’re seeing in the Golden State cannabis industry so you can spot them when they’re coming at you and be able to avoid them.
- Brokers. Whether it’s for M&A, financing, or finding real estate, many brokers are all too willing to sell cannabis companies down the river when it comes to compliance and just plain common sense. Far too many brokers neither know nor care about local or state law and they work only at cramming a deal down the parties’ throats to ensure they get their coveted commissions. Far too often we are getting brought into deals that involve unenforceable contracts or situations that will get one or both parties in trouble for failing to comply with local or state licensing, permitting, or operational laws or regulations.
- Lawyers. California cannabis businesses need to be careful in choosing their cannabis regulatory or business counsel. For 20 years, there’s been no government oversight over medical cannabis operators and this has allowed some attorneys to unduly profit at the expense of their clients and their own ethical duties. And just because regulation is coming does not mean that some of these attorneys will stop their reckless, unethical, or incompetent ways. I’ve written before about how to avoid “OG legal advice,” but it goes further than that. If your cannabis attorney is willing to take a financial interest in your business but is not providing you with the requisite conflict waiver and opportunity for you to consult with outside legal counsel, that should be a huge red flag. If you know more about state and local regulations than your cannabis lawyer, that’s another red flag. If your cannabis attorney is trying to “lock” you into a long-term fee agreement that you can’t cancel at any time, that’s a massive red flag (yes, I have seen at least one self-proclaimed cannabis attorney with this sort of fee agreement). If your cannabis lawyer is encouraging you not to be transparent or not to get things in writing, or is steering you away from basic business and corporate duties to try to hide things and/or assets, this is yet another red flag. These predatory attorneys will eventually be knocked out of California’s cannabis industry one way or the other, but until then it’s buyer beware.
- Consultants. Out of all groups on this list, this one is generally the worst. Not only is it increasingly difficult to determine the value most cannabis consultants provide, there are way too many cannabis consultants running rackets because they themselves are blocked from pursuing licensure with the state or a given city or county. We also have seen more than our share of consultants trolling for cash by playing off the naiveté of would-be cannabis licensees. I recently reviewed a proposed agreement with a consultant who wanted seven figures per year for getting a company “through the political process” to receive a cannabis license, yet didn’t include any enumerated services nor any end date. Seeing as how California’s Bureau of Cannabis Control has made clear that state licensing procedures will not be a difficult undertaking, the idea of politicking for licenses makes no sense, and paying for such politicking makes even less sense. Don’t be fooled.
- Accountants. There’s nothing like talking to a would-be client who has no clue what 280E is yet is working with an accountant/CPA who claims to know cannabis taxation issues and charges premium rates for that “specialized advice.” You need to make sure your accountant/CPA truly knows how to navigate 280E, but above all, you want your accountant to be a competent tax professional. All too often we run into accountants who claim to be experts for cannabis businesses that do shoddy jobs on standard accounting, or are impossible to reach when their clients need them. In other words, choose your accountant/CPA wisely.
- Cannabis conferences and trade groups. Every time we turn around, there’s a new cannabis conference or trade group in California. Folks have figured out that they can make serious money off the “green rush” by throwing events in major cities without much knowledge about anything cannabis-related, or that they can better market themselves and their personal agendas through setting up trade organizations. Few of these conferences have any educational value and most choose their speakers based on who pays for “membership” or “sponsorship.” Having paid to play, the speakers use these conferences mostly just to shamelessly pitch themselves or their products. We have heard of many expensive yet wildly disorganized conferences with speakers who were super stoned and conveyed nothing of value or importance. On the trade group front, watch where you put your money since many of these organizations are neither unified or even organized when it comes to any kind of meaningful mission for change. Be especially wary of self-appointed and deceptively misleading “task forces” that are not actually compiled and appointed by a given city or county, but rather set up to showcase the goods or services of the person or people who formed them. In other words, do your due diligence.