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Medical & Recreational Marijuana Part 6: Legal Issues, Operational Challenges and Regulatory Hurdles That Marijuana-Related Businesses Frequently Encounter

PART 6 of 6:  Issues That  Cannabis Investors Should Consider Before Investing In A Cannabis Startup

This article is the sixth and final part of a six-part series discussing the legal issues, operational challenges, and regulatory hurdles that marijuana-related businesses (MRBs) frequently encounter. The first article discussed the various fire, health, and safety risks that MRBs encounter while growing and cultivating marijuana plants inside large, indoor, commercial spaces. The second article discussed the three most common extraction methods that MRBs use when processing cannabis plant material to extract cannabinoids, terpenes and other components from the plant; the fire, health, and safety risks associated with each cannabis extraction method; the National Fire Protection Association’s (“N.F.P.A.”) rules and regulations that govern cannabis extraction; and the Occupational Safety and Health Administration (“OSHA”) rules and regulations that MRBs must comply with in their extraction facilities. The third article discussed the lack of national standards for laboratories that test medical and recreational marijuana products, and how it adversely impacts the public health of consumers, and the marijuana industry. It also discussed the various methodologies, approaches, and equipment that laboratories should be required to use to test marijuana products, and it presented specific, proposed national standards that the federal government should consider implementing to protect consumers who purchase marijuana products. The fourth article discussed the various legal issues, operational challenges, and regulatory hurdles that marijuana dispensaries frequently encounter, including the various terms of commercial lease agreements that could affect a marijuana dispensary’s operations, and the various operational issues that marijuana dispensaries frequently encounter. The fifth article discussed the substance and status of marijuana-related legislation currently pending at both the federal and state level, and it discussed the various, cannabis-related bills and constitutional amendments that were on state ballots in at least seven different U.S. states (possibly eight if you include Idaho) during the 2020 general election cycle.

This sixth and final article discusses the various types of information that investors should understand and consider when trying to decide whether to invest in a cannabis start-up business, which include cannabis production facilities, cannabis processing facilities, and cannabis dispensaries. As a preliminary matter, cannabis investors should first research and understand the uses and benefits of the various compounds found in the cannabis plant. They should then thoroughly research and understand the cannabis industry as a whole at both the federal and state level, including the specific state where the target company is planning to operate. Cannabis businesses include cannabis grow facilities, cannabis extraction facilities, and cannabis dispensaries, and each of these different operations has different risks, benefits, and challenges. Cannabis investors therefore should fully understand the type of cannabis business that they are investing in, including any operational risks associated with any such operation.

Cannabis investors should also carefully evaluate the target company’s internal protocols, processes and procedures to confirm that they are designed to help the company comply with applicable federal, state and local laws, rules and regulations, and to help the company operate in a safe, effective and efficient manner that consistently results in the production of safe and effective cannabis products. In addition, investors should research the backgrounds of the target company’s management team and staff level employees to confirm that they possess the requisite skills, education, and experience to successfully set up and operate a cannabis startup business. Finally, cannabis investors should determine if the target company, its management, or its staff has been sued or are currently involved in litigation, and if so, determine the issues involved in the litigation, the current status of the litigation, and whether the company could be liable for any adverse judgment entered in the case.


As a preliminary matter, anyone considering investing in a cannabis startup business should conduct detailed research and due diligence about the cannabis plant, including its potential uses and health benefits, and the cannabis industry as a whole, including an evaluation of federal and state-related legal and operational issues.

Regardig the science behind the cannabis plant, investors should understand that cannabis contains over 500 distinct compounds, which include cannabinoids, terpenoids, flavonoids, and omega fatty acids.[1] They should also know that cannabinoids are compounds unique to cannabis, and there have been over 100 different cannabinoids identified.[2] The most well-known cannabinoid is delta-9-tetrahydrocannabinol (THC)—the drug responsible for the “high” of cannabis, which can affect the user’s perception, mood, emotion, cognition, and motor function.[3] But, investors should know that there are other cannabinoids, like cannabidiol (CBD), which are non-psychoactive yet have been demonstrated to possess medically useful properties.[4] Investors should also understand that studies have shown that terpenoids, which are responsible for the aroma of cannabis and other flowering plants, have diverse physiologic effects and may contribute to the observed effects of cannabis on humans.[5]

With respect to the federal government’s current view of marijuana, cannabis investors should know that marijuana is still considered an illegal drug under federal law. Despite the widespread legalization of marijuana by state governments for medicinal purposes and the ever-increasing acceptance and use of the drug to treat a wide variety of diseases and conditions, the federal government still classifies it as a Schedule I narcotic under the Controlled Substances Act (CSA).[6] Under this classification, the federal government still views and treats marijuana as an illegal drug with no currently accepted medical use, a high potential for abuse, and a lack of accepted safety for use even under medical supervision.[7]

Cannabis investors, however, should also understand that the cannabis industry has experienced tremendous growth over the past decade. For instance, after the 2020 general election cycle, 42 states, the District of Columbia, Guam and Puerto Rico have passed legislation legalizing cannabis for either recreational or medicinal use.[8] In 2019, the total number of registered U.S. medical marijuana patients is projected to reach 2.4 million, up 26% from 1.9 million patients in 2018.[9] And, in 2019, recreational marijuana sales were up 45% at $8.9 billion across the U.S.[10] Medical marijuana sales were up even more, rising 54% year-over-year to $6.2 billion.[11]

Cannabis investors should also recognize that the cannabis industry still has potential to experience even greater growth in other countries. For example, while the U.S. may be dominating global marijuana sales right now, some cannabis experts expect that, over the coming years, the sector will become more balanced, as markets like Canada mature, and as Europe and other international markets either open up or mature.[12] As a result, they anticipate that global cannabis sales will experience massive growth.[13] In 2019, for example, global cannabis sales increased by almost 50%, and the cannabis industry is still in its infancy.[14] By 2024, global cannabis sales are projected to cross the $43.0 billion mark.[15] That represents an astounding, compound annual growth rate of 23.5%.[16]

Finally, cannabis investors should become familiar with the following federal, marijuana-related bills that were introduced and/or are currently pending in Congress that, if passed by the U.S. Senate, and signed by the President, could have a tremendous impact on the cannabis industry: (1) “Secure and Fair Enforcement (SAFE) Banking Act” (S. 1200 & H.R. 1595); (2) “Regulate Marijuana Like Alcohol Act” (H.R. 420); (3) “Small Business Tax Equity Act of 2019” (S. 422 & H.R. 1118); (4) “Strengthening the Tenth Amendment Through Entrusting States (STATES) Act” (S. 1028 & H.R. 2093); (5) “Ending Federal Marijuana Prohibition Act” (H.R. 2012); (6) “Marijuana Justice Act of 2019” (S. 597 & H.R. 1456); (7) “Responsibly Addressing the Marijuana Policy Gap Act of 2017 (RAMP)” (S. 421 & H.R. 1824); (8) “Marijuana Revenue and Regulation Act” (S. 420 & H.R. 1120); (9) “Veterans Medical Marijuana Safe Harbor Act” (S. 445 & H.R. 1151); (10) “VA Medicinal Cannabis Research Act of 2019” (S. 179 & H.R. 712); (11) “The Sensible Enforcement of Cannabis Act”) (H.R. 493); (12) “Medical Cannabis Research Act of 2019” (H.R. 601); (13) “Compassionate Access, Research Expansion, and Respect States Act of 2019” (H.R. 127); (14) “Restraining Excessive Federal Enforcement & Regulations of Cannabis (REFER) Act” (H.R. 1455); and (15) “Marijuana Opportunity, Reinvestment, and Expungement (MORE) Act of 2019” (H.R. 3884).

At the federal level, cannabis industry observers say that, while it’s unlikely the Republican-controlled Senate will pass a major piece of marijuana reform in 2020, they expect continued momentum towards that ultimate goal in 2021.[17] Indeed, in 2019, the full U.S. House of Representatives overwhelmingly passed the SAFE Banking Act, and on December 4, 2020, the House of Representatives voted to approve the MORE Act.[18] Both bills are currently pending before the U.S. Senate.

In addition, cannabis investors should appreciate the potential significance of the two, U.S. Senate run-off elections in Georgia between David Perdue (R) and John Ossoff (D), and Kelly Ann Leffler (R) and Raphael Warnock (D). The run-off election will be decided on January 5, 2021. If the two Democratic candidates (Ossoff and Warnock) are able to win both U.S. Senate seats in Georgia, the U.S. Senate will then have an equal number of Republican (50) and Democratic (50) senators. Then, if the Senate has a tie vote regarding a bill, including any pending cannabis legislation, Vice-President-elect Kamala Harris, a Democrat and former California U.S. Senator, will be the tiebreaker. It is a well-known fact that Vice-President elect Harris is a strong supporter of the cannabis industry. Consequently, if any cannabis-related comes up for a vote before the U.S. Senate, the vote will likely be split equally along party lines with the Democrats voting in favor of the legislation and the Republicans voting against it resulting in a 50/50 tie. If that occurs, Vice-President elect Harris, the tiebreaker, will almost certainly vote in favor of the legislation sending it to President-elect Joe Biden, a Democrat, to be signed into law.


Cannabis investors should also spend a considerable amount of time and effort understanding all aspects of the target cannabis company’s proposed operation to confirm that will be able to comply with all applicable federal, state and local laws, rules and regulations. In this regard, investors need to understand that there are different types of cannabis companies, including cannabis grow facilities, cannabis extraction facilities, and cannabis dispensaries. The issues that these companies face will differ depending on the type of company it is. The following is a discussion about some of the various issues that cannabis investors should understand about each of these three different types of cannabis business.

  1. Cannabis Grow Facilities

Cannabis grow facilities are essentially very large, highly sophisticated structures that are designed to grow cannabis plants. They utilize a variety of different techniques to maximize plant growth while simultaneously preventing pest infestation and avoiding contamination. Many cannabis grow facilities also utilize an array of specialized, automated equipment including built-in hydroponic (watering) systems, specialized lighting systems that help the plants grow all year round, and high-end HVAC systems that maintain a constant temperature and moisture level inside the grow space.

With respect to cannabis grow facilities, state, county, and city governments typically rely on the requirements set forth in the state’s existing building, fire, plumbing and electrical codes to establish specific rules and regulations concerning growing and cultivating marijuana in large, indoor, commercial spaces. For instance, in most states, building permits and inspections by local building officials are required for all legal, commercial marijuana operations regardless of whether the facility is new construction or a remodel of an existing building.[19]

Also, in most states, cannabis grow facilities are required to comply with all applicable fire and safety codes, including the International Building Code (IBC).[20] In most states, grow facilities are also subject to the International Plumbing Code (IPC). Under the IPC, grow rooms must contain floor drains to remove spilled water and nutrient solutions, and the drains must be trapped and equipped with screens to catch any plant material or other debris.[21] The IPC also requires that any water supply lines that grow facilities use for irrigation purposes contain back-flow preventers to protect the domestic water supply from contamination.[22]

Further, in most states, cannabis grow facilities are required to comply with the National Electric Code (NEC).[23] The facilities’ electrical systems must be sized and installed in accordance with the NEC as they use grow lights, air conditioning units, and other equipment that require large amounts of electricity.[24] The NEC and applicable fire codes also prohibit the use of extension cords or power strips as permanent wiring for equipment, lighting, fans, etc. located inside the facilities because over-loaded electrical wiring can cause fires.[25] In addition to ensuring that the electrical system is designed and installed properly, the NEC also requires evaluation of the electric service entry equipment and conductors for the building.[26] If the facility was created as a remodel to an existing building, the electric utility company may need to upgrade the conductors and/or the transformer serving the building.[27]

In most states, cannabis grow facilities that violate any of these regulatory codes could be cited for the code violations by the regulatory agency responsible for enforcing the code potentially resulting in substantial monetary fines, and in the most egregious cases, the enforcement agency could even close the facility until it becomes compliant with the applicable code. Moreoer, if someone suffers a personal injury while in a cannabis grow facility that is in violation of one or more of these regulatory codes, the owner could be held liable for any such injury under a negligence per se standard potentially resulting in costly litigation and the payment of monetary damages.

Given the numerous fire, health and safety hazards associated with growing and cultivating marijuana in a large, indoor, commercial space, cannabis investors should ensure that target, startup cannabis companies they are considering investing in have created and implemented protocols and systems designed to address and/or alleviate these various issues. Investors must also confirm that the target companies have purchased sufficient insurance coverage to protect their property, equipment and inventory from loss or damage caused by these types of risks.

2. Cannabis Extraction Facilities

Cannabis investors should understand that extraction facilities are designed to extract the various components from cannabis plant material that are then used to manufacture cannabis products.[28] They primarily use three extraction: (1) Ethanol (or Alcohol) Extraction; (2) Hydrocarbon Extraction; and (3) Supercritical Carbon Dioxide (CO2) Extraction.[29] In all three methods, cannabis plant material is subjected to a solvent that removes active compounds from the plant matter, which is then filtered to yield a solution of the solvent with plant extracts.[30]

Cannabis investors should take the time to understand the technique involved in and the science behind any extraction method that the target cannabis startup company proposes using. They also need to understand that each extraction method involves some level of risk that could cause bodily injury and/or property damage, including fires and/or explosion, and they need to make an effort to understand what those risks are and how they can be reduced or prevented.

a. Ethanol (or Alcohol) Extraction

Ethanol extraction, also commonly referred to as alcohol extraction, is one of the most efficient and commonly used extraction methods to process cannabis plant material.[31] The Food & Drug Administration (“FDA”) classifies ethanol as “Generally Regarded as Safe,” or GRAS, meaning it is safe for human consumption.[32] As a result, ethanol is commonly used in everyday consumer product as both a food preservative and as an additive in everything from the cream filling in your donut to the glass of wine you enjoy after work.[33]

Ethanol, however, is also a potentially dangerous chemical.[34] Ethanol is highly flammable depending on its purity.[35] The flash point temperature of ethanol increases as it is diluted.[36] For instance, the flash point of one hundred percent (100%) pure ethanol is just 61.88°F, which is often lower than normal room temperature; ninety percent (90%) ethanol has a flash point of 63°F; sixty percent (60%) ethanol has a flash point of 72°F; and ten percent (10%) ethanol has a flash point of 120°F.[37]

In terms of overall scalability, ease of post-processing, and energy efficiency, room temperature ethanol extraction appears to be superior to its hot and cold extraction counterparts.[38] The room temperature ethanol extraction method involves submerging cannabis plant material in a vat of room temperature ethanol solvent.[39] Once the cannabis plant material is removed, the resulting ethanol/cannabis oil solution can be gradually heated to remove the solvent leaving behind a highly pure cannabis oil containing the most common cannabinoids, including CBD and THC.[40]

b. Hydrocarbon Extraction

Hydrocarbons, as the name implies, are very non-polar compounds made up of only hydrogen and carbon.[41] Almost all hydrocarbons are manufactured by the petrochemical industry, and are components of natural gas, diesel fuel and gasoline.[42] They are highly flammable compounds, but they are also highly efficient and effective at extracting cannabinoids from cannabis plant material.[43]

All hydrocarbons could potentially be used for cannabis extraction, but in practice, only propane and butane are used because they work well and they evaporate very easily, which simplifies the recovery of the dissolved cannabinoids.[44] Propane and butane are also fairly selective for the non-polar cannabinoids, so they leave the colored pigments and chlorophyll in the cannabis plant material behind.[45] They are therefore able to extract a greater variety of terpenes than ethanol extraction.[46] For products such as vape oils or oral tinctures, where the cannabis extract is unlikely to be masked by other flavors, preserving these terpenes helps to give the extract flavor and aroma.[47]

Propane and butane, however, are volatile, highly-flammable solvents.[48] By necessity, hydrocarbon extraction is a very hands-on process that is rarely automated, so there is almost always a human worker in close proximity to the extraction vessel.[49] Consequently, hydrocarbon extraction presents serious fire, health and safety risks to cannabis workers who handle the propane and butane during the process. Therefore, for safety reasons, hydrocarbon extraction is typically done on a much smaller scale than ethanol or CO2 extraction, but the relatively high overall output achieved from the speed and efficiency of hydrocarbon extraction still makes it suitable for large-scale operations.[50

c. Supercritical Carbon Dioxide (CO2) Extraction

Supercritical Carbon Dioxide (CO2) extraction is a relatively new extraction method in the cannabis industry, but it has been used for decades in numerous other industries to process commonly-used consumer products such as coffee, tea, vanilla and perfumes.[51] CO2 extraction, which is already a popular choice among many cannabis companies, utilizes specialized pressure and temperature control equipment to convert gaseous CO2 into a supercritical fluid, which is then used to extract plant waxes and oils from cannabis plant material.[52]

Perhaps the most common criticism leveled at CO2 extraction is that the high, upfront cost of the highly specialized equipment needed to convert gaseous CO2 into a compressed liquid can be cost-prohibitive for start-ups or small businesses.[56] Also, because of the extreme pressures involved, CO2 systems must be made of pressure-rated steel, which increases the upfront costs for startups and dramatically increases the need for diligent, routine preventative maintenance.[57]

However, some industry experts believe that the efficiency and safety advantages of using the CO2 extraction method far outweigh the high upfront costs.[58] First, liquified CO2 is a much safer material to use than ethanol, propane or butane because it is not flammable.[59] In addition, CO2 is a highly tunable solvent, so during extraction, cannabis companies can pull unique compounds from cannabis plant materials at different pressures and temperatures, which allows for a great deal of creativity in the extraction process.[60]

d. Fire, Health and Safety Risks Associated with Cannabis Extraction

Cannabis investors should become very familiar with the fire, health and safety rules and regulations that the target cannabis startup company has created and implemented to protect its property and its employees, and they should become very familiar with the fire, health and safety rules and regulations established by the state where the target company proposes to operate.[61] In Colorado, for instance, following a troubling increase in the number of extraction-related explosions at cannabis facilities, fire officials there persuaded the N.F.P.A., which promulgates and governs the national fire code in the U.S., to amend its rules and regulations to specifically address the unique fire, health and safety hazards associated with cannabis extraction.[62] In response, the N.F.P.A. created N.F.P.A. § 38.6.1, which establishes the various fire code rules and regulations that govern cannabis extraction across the country.[63]

N.F.P.A. § governs the construction and operation of extraction rooms and facilities.[64] N.F.P.A. § provides that extraction rooms and facilities must be “constructed in accordance with the [applicable] building code and [the N.F.P.A. Code].”[65] N.F.P.A. § provides that any extraction method, other than CO2 extraction and any other “nonhazardous extraction process”, must be performed in a “room of noncombustible construction dedicated to the extraction process and the room shall not be used for any other purpose.”[66] N.F.P.A. § prohibits cannabis extraction in any building containing “assembly, educational, day care, health care, ambulatory health care, residential board and care, residential, or detention and correctional facilities.”[67] N.F.P.A. §, titled “Means of Egress,” provides that any extraction rooms that involve the use of “hazardous materials” must have at least one exit access door that complies with the following:  “(1) The door shall swing in the direction of egress travel; (2) The door shall be provided with a self-closing or automatic closing device; and (3) The door shall be equipped with panic or fire exit hardware.”

N.F.P.A. § governs the training of extraction facility staff.[68] For instance, N.F.P.A. § provides that the extraction process must be continuously staffed, except for approved, unattended extraction processes.[69] N.F.P.A. § provides that the extraction facility must train any of its staff that monitors the extraction process regarding the following: (1) the extraction process; (2) the transfer of solvents, where applicable; and (3) all relevant emergency procedures.[70] N.F.P.A. § provides that the extraction facility must also maintain all of its staff training records on-site and make them available to the Authority Having Jurisdiction (“AHJ”) upon request.[71]

N.F.P.A. § governs the training of extraction facility staff who actually operate cannabis extraction equipment.[72] In addition to the basic staff training outlined in N.F.P.A. §, MRBs must also train any of their extraction facility staff who operate cannabis extraction equipment about how to safely operate the equipment, and the MRBs must maintain records of any such employee equipment safety training on-site and make the records available to the AHJ upon request.[73]

N.F.P.A. § governs the installation and operation of extraction gas detection systems in extraction facilities.[74] N.F.P.A. § requires MRBs to provide an approved extraction gas detection system in their extraction facilities.[75] N.F.P.A. § provides that the “approved continuous gas detection system” must be able to alert the extraction euipment operator in an approved manner at a gas detection threshold no greater than twenty-five percent (25%) of the corresponding gas’ Lower Explosive Limit/Lower Flammability Limit (LEL/LFL).[76] N.F.P.A. § provides that gas detection systems must have “constant non-interlocked power”, and N.F.P.A. § provides that the facility must feature an automatic suppression system “within hoods or enclosures, including ductwork,” in accordance with the following: (1) an automatic water sprinkler system that meets all applicable requirements of N.F.P.A. 13; (2) a carbon dioxide extinguishing system that meets all applicable requirements of N.F.P.A. 12; (3) a dry chemical extinguishing system that meets all applicable requirements of N.F.P.A. 17; and (4) a gaseous agent extinguishing system that meets all applicable requirements of N.F.P.A. 2001.[77]

N.F.P.A. § governs cannabis extraction facilities that utilize flammable and combustible liquid solvents (e.g., butane and propane) as part of the hydrocarbon extraction method, and N.F.P.A. § 38.6.4 governs the process of using compressed, liquified CO2 as part of the CO2 extraction method.[78]

Given the risks associated with cannabis extraction processes, cannabis investors should ensure that any cannabis startup company that plans to perform cannabis extraction at its facility has promulgated and implemented comprehensive fire, health and safety rules and regulations that are designed to reduce and/or alleviate the various risks associated with any cannabis extraction method that they use. For instance, the investor should confirm that the company has created a fire safety policy that incorporates the various fire safety requirements set forth in N.F.P.A. § 38.6.1, which establishes the fire code rules and regulations that govern cannabis extraction across the country. In addition, the investor should confirm that the company has created a safety and health policy and protocol for all of their workplaces and operations that complies with all applicable OSHA safety and health rules and regulations.[79]

Finally, in case a fire, explosion, or other work-related incident at a cannabis extraction facility results in an injury to one or more of the company’s employees, cannabis investors should confirm that the company has sufficient amounts of general liability and property and casualty insurance coverage to cover any loss. More specifically, cannabis investors should review the target company’s general liability and property and casualty insurance policies to ensure they contain adequate amounts of coverage to protect the company’s employees, property, equipment and inventory against work-related fire, health and safety risks associated with certain cannabis extraction methods.

3. Cannabis Dispensaries

Cannabis dispensaries are retail stores where cannabis products are sold to the general public. Because marijuana is still considered an illegal drug under federal law, cannabis dispensaries, which are often located in commercial, retail shopping centers, routinely encounter an assortment of real estate-related issues including geographic restrictions established under state, county, and local law, complicated commercial lease agreements, as well as banking, insurance and marketing challenges.

a. Geographic Restrictions

Cannabis legislation in each of the states that have legalized cannabis typically contains geographic restrictions that limit where cannabis dispensaries can be located. For instance, in Michigan (a state that allows both recreational and medicinal use), cannabis retail businesses may not be located in areas zoned exclusively for residential use or within 1,000 feet of any school for grades K-12.[80] Local municipalities are allowed to reduce the distance requirement or impose additional location requirements for cannabis retailers.[81] In Illinois (another state that allows both recreational and medicinal marijuana use), the state government opted to divide the available cannabis retail licenses between 17 regions identified by the Bureau of Labor bStatistics (BLS).[82] So, marijuana dispensaries in Illinois must be located within the BLS region noted on the operator’s cannabis retail license application.[83] Illinois law also requires that marijuana dispensary locations must be suitable for public access; have a layout that promotes the safe dispensing of cannabis; and be sufficient in size, power allocation, lighting, parking, handicapped accessible parking spaces, accessible entry and exits as required by the Americans with Disabilities Act, product handling, and storage.[84] Additionally, the location must not be within 1,500 feet of an existing marijuana dispensing location.[85] In Minnesota (a state that only allows medicinal use), marijuana dispensaries may not be located within 1,000 feet of an elementary or secondary school, daycare, or church.[86] However, local governments may increase or decrease the allowed proximities to schools, daycares, and churches.[87] Finally, in Georgia (a state that only allows medicinal use), marijuana dispensaries may not be located within a 1,000 foot radius of a public or private school; an erly care and education program as defined in O.C.G.A. § 20-1A-2; or a church, synagogue, or other place of public religious worship, in existence prior to the date on which the dispensary license was issued.[88]

In addition, most states that have legalized cannabis have left it up to local governments, either at the county or municipal level, to decide whether they’ll allow cannabis companies, such as marijuana dispensaries, to operate within their jurisdictions.[89] Cannabis investors should therefore confirm that cannabis dispensary operators have the county, city, or town in which the target cannabis startup operates allows cannabis dispensaries to operate there.

b. Commercial Lease Agreements for Cannabis Dispensaries

Leasing commercial retail space to sell products derived from cannabis entails a myriad of legal issues that cannabis investors must consider before investing in a cannabis dispensary startup. Under the federal law known as the Crack House Statute,[90] it is a felony to knowingly open, lease, rent, use or maintain any place for the purpose of manufacturing, distributing, or using any controlled substance. Despite this federal law, hundreds of property owners lease or operate property to cannabis dispensary operators to sell cannabis products.[91]  However, cannabis investors should carefully consider the following legal issues that property owners and cannabis dispensary operators will have to deal with when negotiating and complying with lease agreements for cannabis dispensaries.

c. Banking and Payment of Rent

Assuming a property owner is willing to consider leasing space to a cannabis dispensary operator, one of the first issues that the property owner must consider is whether there is a mortgage on the property securing bank or other institutional financing.[92] If there is, most bank loan agreements contain a provision requiring the borrower, the property, and its use comply with “all applicable laws, rules and regulations.”[93]  If so, most property owners will refuse to lease their property to a cannabis dispensary operator because doing so would violate federal law, and very few, if any, banks are willing to allow a borrower to lease space secured by a bank loan to a business that violates federal law.[94] Moreover, if a property owner leases space to a cannabis dispensary, it will likely be unable to obtain conventional financing on the property from a bank as long as that lease is in existence.[95]

An additional area of concern involves the financial covenants contained in the property owner’s loan documents. Financial covenants outline the financial metrics designed to measure things such as a borrower’s cash flow, leverage, liquidity, or net worth.[96] Commercial financing loans are secured primarily by real estate and related assets owned by the property owner (debtor). Accordingly, sophisticated lenders recognize that leases that support financial covenants such as those relating to loan-to-value ratio, debt service coverage ratio and the like in their loan documents may be at risk where a property owner’s (debtor’s) tenants are in the legalized marijuana business.  And, lenders are wise to focus on this risk as regulators conducting loan reviews have been known to fully excluded income from marijuana-related businesses from cash flow calculations, thereby effectively throwing a borrower into immediate covenant breach, and thereby creating a loan default.[97]

On the other hand, if a property owner does not have a mortgage on their property and are still willing to lease space to a cannabis dispensary operator, there are still several issues for the landlord and the tenant to consider.[98] First, the parties must consider whether the dispensary operator intends to pay their rent in cash.[99] As discussed below, most banks refuse to provide banking services to cannabis companies, including cannabis dispensaries, because cannabis is still considered an illegal drug under federal law and any money derived from the sale of marijuana is therefore still considered proceeds from an illegal activity.[100]  If the dispensary operator pays their rent in cash, this may raise questions with the property owner’s bank.[101]  In fact, banks have been known to “fire” customers who have any connection to cannabis businesses, whether the customers, themselves, are in the business or not.[102]

d. Computation of Rent

Another issue that the parties must consider is whether the rent will be fixed or a percentage rent.[103] If the latter, the bank may view the landlord’s acceptance of percentage rent as the functional equivalent of  being “in the business” of selling cannabis, which may increase the risk that the bank will “fire” the property owner, or that the bank will subject the property owners bank account to greater federal scrutiny.[104]

e. Licensing Contingency

Depending on applicable state law, the parties may also have to consider whether the prospective tenant has obtained the necessary state or local license to operate its cannabis dispensary in the area where the subject property is located.[105] In many jurisdictions, an applicant for a cannabis dispensary license must secure a location before applying for the license.[106] Prospective cannabis dispensary tenants should seek to secure a lease that contains contingency provision allowing the tenant the option to exit the lease if they fail to obtain a dispensary license.[107] Cannabis investors should be familiar with local and state laws to determine whether to invest in a cannabis dispensary startup that enters into a contingent lease agreement.

 f. Zoning

Another critical issues for both property owners and tenants to consider is whether the prospective tenant’s marijuana dispensary complies with local zoning laws.[108] Given the controversial nature of cannabis companies, local jurisdictions often place geographical restrictions on where cannabis dispensaries may be located (as discussed above).[109] An cannabis investor must therefore confirm that the proposed property is located within a zoning classification that allows cannabis dispensaries, and what specific geographic restrictions apply to such businesses in that area.

 g. Inspection Rights

Leases typically allow a landlord the right to inspect the premises at any time.[110] While this is a standard contract provision in most commercial leases, in the case of cannabis dispensaries, the landlord’s access rights must be consistent with local cannabis laws.[111] For instance, given the highly sensitive nature of the sale of cannabis products, local cannabis law may impose restrictions on third party access to the business that are not typical for most commercial uses.[112] Cannabis investors should therefore confirm what the landlord’s inspection rights provision in the lease agreement with a target cannabis dispensary startup comports with local cannabis law.

 h. Availability of Insurance

While insurance for the cannabis industry is becoming more widely available, an insurance company may deny an insurance claim if it determines that the claim arises out of an illegal use and is therefore not covered by the insurance policy.[113] Cannabis investors should therefore consult with the target cannabis dispensary startup’s insurance carrier confirm that there is appropriate insurance available consistent with the lease, and that the insurance company is aware that the insurance is for a cannabis-related business.[114]

i. Subleasing and Assignment of Lease

Many lease agreements contain provisions allowing a tenant to sublease the premises or assign its lease, but these provisions typically only allow the tenant to enter into a sublease with the landlord’s consent.[115] These provisions also provide that the landlord agrees not to unreasonably withhold its consent.[116] This language, of course, begs the question what constitutes an unreasonable withholding of consent in the context of a MRB such as a marijuana dispensary?[117] Given the fact that cannabis dispensaries are a relatively new industry, the rules are still being written. Thus, if the target cannabis dispensary startup’s lease allows subleasing or assignment, cannabis investors should confirm that they understand the operative language, including the conditions under which the landlord agrees to gives its consent to a sublease request.[118]

 j. Termination Rights; Security Deposit

Due to the constant evolution of laws related to cannabis operations and the uncertainty of federal enforcement, early landlord termination rights are a critical issue to address when drafting a lease with a cannabis dispensary operator. Cannabis investors should determine if the landlord has the right to terminate the lease if the target cannabis dispensary startup receives any notice from federal, state, and/or local authorities that it is being investigated or legal action is being pursued against it. Investors should also determine if the lease requires dispensary operators to covenant that they shall, within a specified time after receipt of said notice, forward to the landlord copies of all permits and any notices from federal state and local authorities related to the company’s operations at the premises. Investors should further determine if the landlord has the right to terminate the lease if the dispensary operator falls out of compliance with any applicable state or local laws necessary to continue legally using the space as a cannabis-related business.

Practically all landlord lease forms require the tenant to furnish a security deposit or some other form of collateral that secures the tenant’s performance of its obligations under the lease. Due to an evolving legal landscape and the uncertainty of annual license renewals, cannabis dispensary operators pose a higher credit risk than a typical commercial tenant. Security deposits related to lease agreements with cannabis dispensary operators can be particularly critical should a company fail to restore the premises to an acceptable condition once a lease term expires. Cannabis investors should determine if the lease contains language that allows the landlord to retain the security deposit or such other forms of collateral for a specified period of time after the lease expires until the landlord has inspected the premises to confirm that the tenant has conducted a proper clean-up, disposal and removal of alterations at the premises, including if applicable, the removal of all cannabis products and cannabis residue.

 k. Lease Guaranty

The risk that a cannabis dispensary operator may lose (or fail to successfully renew) its state license, or may have issues with law enforcement, creates a much greater potential for abandonment of the premises and a lease default. Of course, there is the threshold legal question as to whether the “illegality” of the underlying business that is the subject of the tenant’s operation from the premises would impair the enforceability of a lease guaranty. However, the lease guaranty is very important to the landlord with respect to a cannabis business. Guaranties are intended to reduce the risk of the creditor and increase the likelihood of payment and performance. Cannabis investors should confirm that a target cannabis dispensary operator that signs a lease guaranty has the financial wherewithal to cover the monthly rent payments in case a default occurs.

l. Banking Issues for Cannabis Dispensary Operators

Because the U.S. federal government still views cannabis as a Schedule I narcotic, most banks refuse to provide banking services to cannabis businesses, even if cannabis is legal in the state where the cannabis business operates.[119] Without access to banking services, cannabis businesses are left without the ability to process credit card payments, deposit cash, write checks to suppliers, and much more.[120] In addition to the logistical challenges and inconvenience associated with operating a business on a cash-only basis, businesses run entirely on cash are vulnerable to internal and external theft and major accounting errors.[121]

Cannabis investors much understand that most banks refuse to handle financial transactions for cannabis dispensaries because federal anti-money laundering (“AML”) laws make it a crime for banks to conduct a financial transaction with proceeds that they know were derived from “specified unlawful activity,” and they make it a crime for banks to transport, transmit, or transfer funds, including internationally, for the purpose of promoting a specified unlawful activity, even if the funds are derived from a legitimate source.[122] In addition, the unlicensed money-remitter statute makes it a crime for banks to transport or transmit funds that they know derived from a criminal activity or that they know are intended to be used to promote or support unlawful activity.[123]

Until the federal government changes federal banking law to make it easier and less risky for banks to provide banking services to cannabis dispensary operators, cannabis investors should ensure that any target cannabis dispensary startup that they are considering investing in has created and implemented business practices that help address and alleviate some of the issues caused by the lack of access to banking services. For instance, investors should confirm that the companies are able to provide cash-only reminders on their websites, on social media, and in local listings, so potential customers are aware of the policy.[124] Also, the companies should provide an on-site ATM to give customers instant access to cash, if necessary.[125]  Investos should also confirm that the companies have created and implemented a secure, off-site location to store their cash, preferably inside a metal safe, and that they have retained a bonded cash transportation services to transport the cash to this secure, off-site location at different times, on different days, using different vehicles and routes to get your cash to their safe storage site.[126]

m. Insurance

Like the banking industry, most insurance companies refuse to provide insurance coverage to cannabis dispensary operators because marijuana is still illegal under federal law. According to a report by A.M. Best’s titled, “Cannabis: New Opportunities for Insurers, But with Burgeoning Risks,” approximately 25 insurance carriers (mostly non-admitted) provide coverage for cannabis businesses in both the U.S. and Canada.[127] For instance, the Lloyd’s Market offers coverage in Canada but doesn’t offer coverage to cannabis businesses in the U.S., because the federal government still considers marijuana illegal.[128]  Insurance carriers in the U.S. that have entered the market are typically partnering with “agencies and producers that have a better understanding of the industry and the needs of cannabis businesses.”[129] For instance, Topa Insurance Group insures Cannasure, an Ohio-based MGA and wholesale brokerage solely focused on the cannabis industry.[130]

In the U.S., insurance carriers that have entered the market typically offer basic policies that typically cover the following risks: commercial general liability, with limits of $1 million per occurrence/$2 million aggregate; property liability and product liability, both with limits of $1 million per occurrence/$2 million aggregate.[131]  Depending on the size of an operator’s marijuana dispensary, these policy limits may not be sufficient to adequately cover the company’s risks.

n. Marketing

Cannabis investors should also understand that, generally speaking, state laws require cannabis dispensaries to limit their marketing efforts to their state borders.[132] They should also understand that state laws typically require that cannabis dispensary ads avoid targeting children.[133] For instance, in Illinois, marijuana dispensaries may not engage in advertising that:

  • Is false or misleading;
  • Promotes overconsumption of cannabis;
  • Depicts the actual consumption of cannabis;
  • Makes any health, medicinal, or therapeutic claims about cannabis;
  • Includes the image of a cannabis leaf or bud; or
  • Includes any image designed or likely to appeal to minors, including cartoons, toys, animals, or children.[134]

Additionally, in Illinois, cannabis dispensaries may not advertise cannabis or cannabis-derived products in any form:

  • Within 1,000 feet of a school, playground, recreation center, child care center, public park or library, or game arcade allows persons under the age of 21;
  • On or in a public transit vehicle or public transit shelter; or
  • On or in publicly owned or publicly operated property.[135]

Finally, under Illinois law, cannabis dispensaries are also prohibited from promoting the sale of cannabis products by giving away products, conducting games or competitions related to consumption, or by providing promotional materials or activities that would be appealing to children.[136]

Under Michigan law, cannabis dispensaries may not advertise their products in a manner that is visible to members of the public from streets, sidewalks, parks, or any public place.[137] They also may not market or advertise their products to minors aged 17 years or younger.[138] Further, marijuana dispensaries in Michigan may not advertise their products on any television program, radio program, internet website, or print publication unless there is reliable evidence that 70% of the audience is reasonably expected to be 18 years or older.[139] Moreover, any such cannabis products advertised in this manner must bear a state-approved warning label.[140] Also, cannabis dispensaries in Michigan must market their products as “medical marijuana” for use only by registered qualifying patients or registered primary caregivers.[141]  Finally, Michigan-based cannabis dispensaries may not refer to themselves as a “dispensary” and may not use the word “dispensary” in their advertising.[142]

Under Minnesota law, cannabis dispensaries are allowed to their business name and logo on medical cannabis labels, signs, website, and informational material provided to patients.[143] The business name or logo must not include: (1) images of cannabis or cannabis-smoking paraphernalia; (2) colloquial references to cannabis; (3) names of cannabis plant strains; or (4) medical symbols that bear a reasonable resemblance to established medical associations, including, for example, the American Medical Association or the American Academy of Pediatrics.[144]  Also, cannabis dispensaries in Minnesota are allowed to display signs on their facilities, and they are allowed to maintain a business website that contains the following information: (1) the medical cannabis manufacturer name; (2) the distribution facility location; (3) the contact information; (4) the distribution facility’s hours of operation; (5) the medical cannabis products provided;

(6) product pricing; and (7) other information as approved by the commissioner.[145]  Finally, Minnesota-based cannabis dispensary operators must arrange their displays of merchandise, interior signs, and other exhibits to prevent public viewing from outside their facilities.[146]

In Georgia, medical cannabis dispensaries are prohibited from advertising or marketing their products to registered patients or the public, but they are authorized to provide information regarding their products directly to physicians.[147]

III. Thoroughly Research the Target Company’s Management Team and Structure

Before investing in any cannabis startup company, prospective investors should thoroughly research the background of each member of the target company’s management team. When evaluating a management team, cannabis investors should look for people who clearly work well together, have some track record of success, and ideally have a history of producing financial returns for investors in the past.[148] Cannabis investors should also obtain copies of any and all background checks on the company’s employees.[149]

Cannabis investors should also obtain and review a copy of the target company’s state-issued cannabis license to confirm that it authentic, to determine what rules the company has to comply with under the license, and to confirm that the company is prepared to meet all of the operational requirements that the state requires under the license.

Finally, cannabis investors should determine whether the target company, the management team, or staff have been sued, or are currently involved in any litigation, concerning the company’s planned or existing cannabis operation. If so, investors should confirm what issues were involved in the litigation, and what was the final result of the litigation (if it has already ended). In particular, investors should confirm whether any such litigation will adversely affect the company’s business or expose the company to liability to cover any monetary judgment entered in the case.


All investments come with some amount of risk. Generally, the higher the potential return of an investment, the higher the risk, but there is no guarantee that an investor will actually get a higher return by accepting more risk. While cannabis investors tend to have a relatively high tolerance for risk, they still have the ultimate goal of obtaining the greatest rate of return possible while taking as little risk as possible.

Investing in a cannabis startup company presents even greater risks. Indeed, when trying to decide whether to invest in the marijuana sector, even seasoned investors are often left with more questions than answers when analyzing the numerous local, state and federal rules and regulations as well as the legal implications affecting cannabis businesses. For that reason, cannabis investors must take the time to complete substantial amounts of research and due diligence about the uses and benefits of the various compounds found in the cannabis plant, about the cannabis industry as a whole at both the federal and state level, and about the target company that they are considering investing in.

First, investors must also understand the risks and benefits associated with the cannabis industry. Cannabis businesses consist of cannabis grow facilities, cannabis extraction facilities, and cannabis dispensaries, and each of these different types of business operations has different risks, benefits, and challenges. Cannabis investors therefore should fully understand the type of cannabis business that they are investing in, including any operational risks associated with any such operation. Cannabis investors should also carefully evaluate the target company’s internal protocols, processes and procedures to confirm that they are designed to help the company comply with applicable federal, state and local laws, rules and regulations, and to help the company operate in a safe, effective and efficient manner that consistently results in the production of safe and effective cannabis products.

In addition, investors should research the backgrounds of the target company’s management and staff level employees to confirm that they possess the requisite skills, education, and experience to successfully set up and operate a cannabis startup business. They should also determine if the target company, its management, or its staff have been sued or are currently involved in litigation, and if so, determine the issues involved in the litigation, the current status of the litigation, and whether the company could be liable for any adverse judgment entered in the case.

In Case You Missed It

PART 1 of 6: The Various Fire, Health, and Safety Risks Associated with Growing and Cultivating Marijuana in Large, Indoor, Commercial Grow Facilities

PART 2 of 6: Fire, Health, and Safety Risks Associated with Cannabis Extraction Methods, and the Rules and Regulations Designed to Address Such Risks

PART 3 of 6:  An Overview of How the Lack of National Standards for Laboratory Tests of Marijuana Products Affects the Public Health and the Marijuana Industry

PART 4 of 6: Medical and Recreational Marijuana: An Overview of the Various Issues Involved in Starting and Operating Marijuana Dispensaries 

PART 5 of 6: Medical and Recreational Marijuana: An Overview of the Various Federal and State, Marijuana-Related Legislation Currently Pending Before the U.S. Congress and on U.S. State Ballots for the 2020 General Election


[1] See

[2] Id.

[3] Id.

[4] Id. quoting ElSohly MA, Mehmedic Z, Foster S, Gon C, Chandra S, Church JC. Changes in Cannabis Potency over the Last Two Decades (1995-2014) – Analysis of Current Data in the United States; Biol Psychiatry (2016).

[5] Id. quoting Russo EB. Taming THC: potential cannabis synergy and phytocannabinoid-terpenoid entourage effects; Br J Pharmacol (2011).

[6] See Schedule 1 drugs also include much more dangerous and potent street drugs such as heroin and lysergic acid diethylamide (“LSD”). Oddly, the federal government classifies other equally dangerous and highly addictive drugs such as cocaine, methamphetamine, methadone, fentanyl, and oxycodone as Schedule 2 drugs—a lower drug classification than marijuana.

[7] [7] See

[8] See

[9] Id.

[10] SeeGlobal Cannabis Sales Grow 48% to $15 Billion in 2019,” Business Wire, January 16, 2020.

[11] Id.

[12] See

[13] Id.

[14] Id.

[15] Id.

[16] Id.

[17] See

[18] Id.; see also

[19] See

[20] Id.

[21] Id.

[22] Id.

[23] Id.

[24] Id.

[25] Id.

[26] Id.

[27] Id.

[28] Many cannabis grow facilities often contain both growth and extraction capabilities and functions in the same building effectively creating a turnkey, cannabis production facility.

[29] See

[30] Id.

[31] See

[32] See

[33] Id.

[34] See

[35] Id. A “flash point” is the minimum temperature at which the vapors of a material can create an ignitable mixture in the air near the material’s surface. A low flash point means a material is easy to ignite.

[36] Id.

[37] Id.

[38] Id.

[39] Id.

[40] Id.

[41] See

[42] Id.

[43] Id.

[44] Id.

[45] Id.

[46] See

[47] Id.

[48] Id.

[49] Id.

[50] Id.

[51] Id.

[52] Id.

[53] See

[54] Id.

[55] Id.

[56] See

[57] See

[58] See

[59] Id.

[60] Id.

[61] Id.

[62] Id.

[63] N.F.P.A. § 38.6.1 (2018).

[64] N.F.P.A. § (2018). Extraction Rooms.

[65] N.F.P.A. § (2018).

[66] N.F.P.A. § (2018).

[67] N.F.P.A. § (2018).

[68] N.F.P.A. § (2018). Staffing.

[69] N.F.P.A. § (2018).

[70] N.F.P.A. § (2018).

[71] N.F.P.A. § (2018).

[72] N.F.P.A. § (2018). Operator Training.

[73] N.F.P.A. § (2018).

[74] N.F.P.A. § (2018). Extraction Room Gas Detection System.

[75] N.F.P.A. § (2018).

[76] N.F.P.A. § (2018).

[77] N.F.P.A. § and N.F.P.A. § (2018).

[78] N.F.P.A. § and N.F.P.A. § 38.6.4 (2018).

[79] If the company fails to do so and an OSHA inspector determines that they are in violation, the company could be assessed substantial monetary fines.

[80] See

[81] Id.

[82] Id.

[83] Id.

[84] See

[85] Id.

[86] See

[87] Id.

[88] See O.C.G.A. § 16-12-215(a) (2019).

[89] Id.

[90] See 21 U.S.C. § 856.

[91] See

[92] Id.

[93] Id.

[94] Id.

[95] Id.

[96] See

[97] See

[98] Id.

[99] Id.

[100] See 18 U.S.C. §§ 1956 and 1957; 18 U.S.C. § 1960.

[101] See

[102] Id.

[103] Id.

[104] Id.

[105] Id.

[106] Id.

[107] Id.

[108] Id.

[109] Id.

[110] Id.

[111] Id.

[112] Id.

[113] Id.

[114] Id.

[115] Id.

[116] Id.

[117] Id.

[118] Id.

[119] See

[120] Id.

[121] Id.

[122] See 18 U.S.C. §§ 1956 and 1957.

[123] See 18 U.S.C. § 1960.

[124] See

[125] Id.

[126] Id.

[127] See

[128] Id.

[129] Id.

[130] Id.

[131] Id.

[132] See

[133] Id.

[134] See

[135] Id.

[136] Id.

[137] See

[138] Id.

[139] Id.

[140] Id. “For use by registered qualifying patients only.  Keep out of reach of children.  It is illegal to drive a motor vehicle while under the influence of marijuana.  National Poison Control Center 1-800-222-1222.”

[141] Id.

[142] Id.

[143] See MINN. STAT. 4770.0800 (2018).

[144] Id.

[145] Id.

[146] Id.

[147] See O.C.G.A. § 16-12-215(b).

[148] See

[149] See

Reggie Snyder

Reggie Snyder

Reggie Snyder is a partner in the Atlanta office of Taylor English Duma LLP. Snyder is an experienced trial lawyer with more than two decades of experience managing a wide range of litigation matters for clients in Alabama, Georgia and Texas. He can be reached at [email protected].


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