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Why Explosive Applications Create Bulletproof Marijuana Businesses

In 2019, legalized Marijuana’s domestic sales reached $11.7 billion, and grow, processing and dispensary licenses were valued at (and, reportedly, sold for) over $20 million dollars.

Licenses are granted by the respective 33 states with Marijuana programs, most of which impose an arduous competitive application process and deny 91% of the submissions.

Like any other contest, the competitive process for obtaining a license to grow, process and sell Marijuana is won before the application is submitted but can also yield a blueprint for launching a lucrative, compliant and saleable Cannabis business.

Legalized Marijuana’s Risk and Scope

Those cultivating, processing, infusing, transporting or dispensing Cannabis are deemed to be a “plant touching” Marijuana related business (“MRBs”) and, despite being legal in the majority of American states, Marijuana remains federally illegal.

The Comprehensive Drug Abuse Prevention and Control Act of 1970, 21 U.S.C. §§ 801, Et. Seq(1970) (“CSA”) currently lists Marijuana next to heroin as a Schedule I controlled substance having “a high potential for abuse” and for which there’s “no currently accepted medical use in treatment” and “a lack of accepted safety for use”  “under medical supervision”.  21 U.S.C. §812(b)(1).  The CSA prohibits Marijuana’s cultivation, distribution, dispensation and possession and, pursuant to the U.S. Constitution’s Supremacy Clause, state laws conflicting with federal law are generally preempted and void.  U.S. Const., Art. VI, cl. 2; Wickard v. Filburn, 317 U.S. 111, 124 (1942)(”[N]o form of state activity can constitutionally thwart the regulatory power granted by the commerce clause to Congress”).

Those cultivating, processing, transporting, distributing, or dispensing Marijuana, (i.e., literally touching Marijuana at some point along the supply chain), are deemed “Plant Touching” enterprises. “FIN-2014-G001: BSA Expectations Regarding Marijuana-Related Businesses,” FinCEN, February 14, 2014.  Licensed and regulated by the state, Plant Touching MRB’s include those planting, cultivating, harvesting, processing/extracting, testing, packaging, disposing, transporting, and dispensing MarijuanaId.; U.S. Senate, “S. 1726: Marijuana Businesses Access to Banking Act of 2015,” July 9, 2015; Representatives, H. R. 2076, April 28, 2015.  Further, any entity having a financial or controlling interest (regardless of ownership percentage) in a Plant Touching MRB, including “investment” or “management” shell companies, are deemed Plant Touching MRB’s. “FIN-2014-G001: BSA Expectations Regarding Marijuana-Related Businesses,” FinCEN, February 14, 2014.

Thirty three (33) states currently have “medical” marijuana programs (purchasable only with a state-issued card to treat resident’s statutorily defined “covered medical condition”), 11 of which  also have “adult-use” programs (purchasable by anyone over 21 with a valid identification).

Whether medical or adult use, Cannabis takes four (4) forms: “flower” that is smoked; “oils” ingested by vaporizing; “concentrates” only consumable after being heated to a high temperature; and “infused” products ranging from eye drops to “edibles”.

Building An Unbreakable Marijuana Related Business

The aspects of a winning license application also form the steps to swiftly launch a lucrative, compliant and saleable Cannabis business.

  1. Select Growing, Processing and Dispensing System

Choosing from cultivation’s dizzying array of components is the first and hardest step. Will grow be dirt, aeroponic or hydroponic, what unique construction issues impact facility, and what equipment will be required (i.e., lighting, irrigation, drainage, ventilation, nutrients and fertigation, heating, venting and irrigation, pest and environmental controls, and plant holders).  Is extraction carbon dioxide, ethanol, hydrocarbon or butane, and what energy demand and safety risks will system impose. Will dispensary require an “enclosed loading dock” and how will compliant security equipment and a safe be installed?

  1. Zoning, Construction and Buildout

Planning is construction’s cornerstone, nothing gets built without zoning and local approval, and obtaining designs and schematics is just the beginning.  Meeting with architects and builders to update and modify plans and grasp facility’s operational needs and output enables “putting shovels in the ground” upon license’s award.  Hiring a designer or cabinet/shelving company to supplementing an architect’s floorplan schematic and determine layout, workflow, materials, cost, and production time is critical.

Similarly, lining up state and local agencies’ zoning and other “approvals”, and establish electric, sewer, water, gas, and sanitation accounts, provides a terrific head start.

  1. From Where is Equipment Sourced and Shipped

While quality, price and availability carry great weight, sourcing equipment from overseas may derail deliveries’ timeliness, predictability and completeness.  For example, if purchasing equipment from China, tariffs, pandemic, and unrest may impose open-ended expense and obstacles which prevent being operational within the statutory deadline.

Ascertain from where equipment is being purchased, determine manufacturer or wholesaler’s precise shipping location, and confirm that piece (and necessary components and replacements) is in stock and swiftly deliverable.  If sourced from overseas, corroborate region’s commercial and economic stability and have “boots on the ground” in case things go awry.

Determine whether structuring payments, use of escrow services, or demanding a performance bond justifies paying a higher purchase price.  Similarly, because competitive license awards are a “crap shoot”, develop strategy of whether pre-license purchase makes sense and negotiate “award contingency”, and method by which payment and equipment will be returned, into purchase agreement.

  1. Strains, Seeds and Clones

What Cannabis strains will be grown, how much of each, and what unique growing issues does each strain impose?   Craft grows are generally unable to cost effectively compete with larger cultivators capable of offering wholesale prices on tried and true strains.  Seed and strain “genetics” and production quality create a competitive advantage leveling the playing field.  More modestly scaled cultivators should focus either on a unique strain (to which others lack access) or forging a popular strain’s variation like “Girl Scout Cookie Number 7”.  Successful craft grows often target a specific market segment, like high-end connoisseurs, willing to travel and pay a premium price.  Popular strains are like Miller High Life Beer (on sale at every bottle shop in limitless quantities) while boutique strains mirror pricey craft brews for which people stand in line.

To commence planting immediately following operational approval, the source of seeds and or “clones” (a genetic copy of a young female mother plant with stable genetics and established characteristics) must be locked in.  Strain choice determines the requisite growing conditions to implement including environment (ex., temperature and humidity) and lighting type (ex, Light Emitting Diodes) and amount.

The strain choice also determines what “grow schedule” ensures plants’ constant budding (and prevents grow cycle gaps) and fortifies regular harvests and shipping.

  1. Forge Vendor Relationships

Cannabis starts and ends with personal relationships, and learning who the players are, forging relationships and avoiding “bad eggs” is a constant.  From day one, prospective growers, processors, and dispensaries need to be negotiating product types, supply lines and pricing structures.  Because goal is enticing consumers to search out its products (and avoid whatever strain the “local” dispensary is hawking), developing a workable and compliant brand-building-marketing-plan is a constant priority.

  1. Banking, Finance and Professional Services

Cannabis boils down to money.  Before dollar one rolls in, systems must be established to fundraise, manage cash, deposit and make payments (ex., payroll, taxes, utilities and vendors).  Designing and implementing an internal system requires robust relationships with bankers, accountants, and payroll services capable of cost-effectively servicing a MRB’s needs.

To obtain an account, a MRB must be current on all its filings.  Although banks are often interchangeable, an introduction to the right C-Level executive can prevent account closure, ease cash management, and, ultimately, credit line and mortgage loan access.

Because operating capital enables paying construction costs and purchasing equipment, fundraising strategy and documentation (ex., Terms Sheets, Operating Agreements and Capitalization Tables, Subscription Agreements and Offering Memorandum) needs to be locked-and loaded.

Similarly, an accountant seasoned on industry tax issues like Section 280(e) helps both dodge landmines and maximize every federal, state and local tax law. Because tax planning should occur before revenue is generated, retaining an experienced Cannabis accountant at the outset enables structuring an enterprise in the most advantageous manner.

  1. Seed to Sale Tracking System and Security

Because no MRB may operate without a state compliant seed-to-sale tracking system, purchasing, installing, training team on, and achieving operational status could not be more critical.

Among construction’s final aspects, no MRB can be “green lit” without an operational security system which requires all necessary equipment to be installed, integrated and functioning.  Beyond creating a more immediate launch and revenue generation, having security components ready to swiftly install helps achieve a “first to market edge” over competitors.

  1. Human Resources

While applications often list master growers and C-level executives, few provide budtender, sales team or sanitation crews’ names.  Because staff are what makes a business run, human resource needs and operations should be tackled beforelaunching the facility.  This includes drafting a detailed organization chart and fully defining each job’s title, duties and qualifications.   Once completed, the next step is developing a hiring and compensation plan (covering benefits and remote working options) and determining whether recruiting will occur in-house or be outsourced.  Before the first hire, a MRB must have an employee handbook and policies in place along with an arsenal of employment documents (including standard employment, noncompete and “intellectual property protecting” agreements).

  1. Community Outreach

Escaping past prejudices, bettering communities, and enhancing patients’ lives is Cannabis’ foundation. With hospitals, houses of worship and other businesses, each MRB is in a community serviced by police, firefighters, sanitation workers and utilities. Meeting informally, and controlling perception and messaging, eliminates static, garners support and, ultimately, increases the bottom line.

Presentations to chambers of commerce, attending and sponsoring civic and school events, targeted contributions and submissions to local newspapers craft how a community perceives new businesses and industries.  Key introductions to influencers like local politicians, police chiefs, school principals, and fire company heads removes obstacles and forges sustainable working relationships.

  1. Packaging/Labeling

Packaging and label design encompass vendor andpurchaser satisfaction, brand building, content compliance and quality control.  Will it be done in-house or outsourced?  Is special equipment required and, if so, how do present needs align with expansion of sold items’ number and array?  Where within facility will equipment be located for maximum efficiency?

  1. “Application Denial” Appeals, Flipping Licenses and Obtaining Distressed Assets

Because 91% of applications are denied, and resources amassed during process have tremendous value in future application rounds and to competing applicants, a strategy to flip a license, prepare “license denial appeal” arguments and grab “distressed application assets” is essential.  Does jurisdiction allow license transfer, what is dormant license’s valuation, and can licenses be combined to create verticality (i.e., a grower, processor and dispensary).

If application is denied, will health department debrief on application’s strengths and weaknesses, is an appeal merited and what are the strongest arguments (ex., mathematical error, failure fully review or adequately grade submission package, or application process’ unconstitutionality or unfairness).

If applying in future rounds, can real estate, investors, assets and team members be repurposed and may assets be poached from failed applicants (ex., zoned real estate and equipment).

Reprinted with permission from the November 03, 2020 edition of The Legal Intelligencer © 2020 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or [email protected].


Steven SchainSteven Schain

Steven Schain

2019 National Law Journal “Finance, Banking, & Capital Markets Trailblazer” award winner, Steve Schain is Senior Counsel at Smart-Counsel, LLC, a 100% female owned boutique Cannabis law firm.  Steve  represents entities, governments and individuals in litigation, regulation and compliance, financial services, license applications and entity formation. Reach Steve at [email protected]

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