It appears the federal government is taking a wait-and-see approach to foreign ownership of state cannabis businesses
Our California cannabis business have been getting tons of interest and questions lately about foreign investment into California’s booming cannabis industry. As would be expected, much of this interest in foreign direct investment is coming from Israel, Canada, Spain, South America, The Netherlands, the UK, and Germany.
Foreign direct investment (FDI) generally refers to a cross-border transaction where a company or investor from Country A invests money in a company located in Country B. FDI exists in several forms. Foreign investors can start a new company and finance and build it from the ground up. They can participate in a joint venture with U.S. partners. They can wholly or partially acquire a U.S. business. They can also take a lighter touch by, for instance, providing branding or process support while having the U.S. party take on the bulk of the financial risk.
In the marijuana industry, we have already seen large FDI projects in cannabis ancillary services (the companies that provide the goods and services that support the actual marijuana growers, processors and sellers). Foreign investors have started companies in the U.S. for the manufacture and import of cultivation equipment like grow lights and hydroponic equipment, processing equipment like automated trimmers and extraction machines, and associated inputs like soil, fertilizer, vapor pen batteries and cartridges, and more. We have also seen large amounts of foreign money come in for cannabis real estate projects, especially in the Coachella Valley and certain desert cities. In addition to buying the real estate, the foreign investors put money into greenhouses, grow lights, storage facilities, and more to offer turnkey cultivation and processing facilities for lease to local businesses. These companies are largely unregulated at the state level and their foreign investment issues are similar to non-cannabis businesses — dealing with things like registering as U.S. taxpayers for partnership taxed businesses, complying with FIRPTA, and dealing with immigration issues.
State-specific restrictions are more of a concern for companies directly involved in buying and selling cannabis. States like Washington do not allow anyone who is not a state resident (much less not a U.S. resident) from having any profit interest in a marijuana business. Even Oregon, which has the most liberal ownership restrictions in the country for marijuana businesses, presents some unique issues. California, similar to Oregon, is extremely liberal with its cannabis regulations regarding owners and “financial interest holders,” and it has no residency or even citizenship requirement to participate in the industry. Still, state regulations and state laws are typically written with U.S. residents in mind. In turn, things like criminal and financial background checks on foreigners remain a bit of a gray area (though California’s Department of Public Health, which oversees manufacturers, has accommodated the situation somewhat with an “out of state owner” background check). Ultimately though, neither state officials nor the FBI are likely to have any real information on foreign nationals with no prior contact with the United States. How the Feds will react to foreign ownership in terms of the Department of Justice (rather than via immigration through the Department of Homeland Security) remains to be seen. I note though that we have yet to hear any negative reports regarding foreign marijuana business ownership.
The Federal Controlled Substances Act doesn’t differentiate between activities that are international, interstate, or fully intrastate in nature. Possessing, manufacturing, and distributing marijuana are illegal federally regardless of where the company’s owners live. Still, there are a couple of criminal statutes that add fuel to the fire when interstate and international commerce are involved. 18 U.S.C. § 1952, for example, criminalizes traveling or using the mail in interstate or foreign commerce with intent to distribute the proceeds of marijuana sales.
More questions arise when considering foreign ownership in the context of the Department of Justice marijuana enforcement memoranda under which cannabis-legal states are working. The main takeaway from the August 2013 Cole Memorandum (that’s since been rescinded by U.S. Attorney General Jeff Sessions) was that if the states want to keep federal law enforcement away, their regulations must prevent state license-holders from violating various federal enforcement priorities. One of those priorities was that state regulations need to prevent “revenue from the sale of marijuana from going to criminal enterprises, gangs, and cartels.” If the state and federal criminal background check databases don’t have extensive coverage on foreign crimes, how can a state, including California, have faith that foreign investors don’t fall into one of those categories?
For now, with no broad pronouncements coming out, it appears the federal government is taking a wait-and-see approach to foreign ownership of state cannabis businesses. It is up to state cannabis business participants and the states themselves to ensure that foreign owners do not violate federal enforcement priorities.