Cannabis founders often know the plant and how to sell it like no one else. But that passion doesn’t always translate into expertise in all the finer points of running a fully compliant and lawfully strategic business.
The smartest thing operators can do to protect their business investment long-term is to head off vulnerabilities from the start. The last thing you want is to make a mistake on a key contract or license application that could negatively impact how your business takes shape and grows in the future—especially with the SAFER Banking Act and federal rescheduling in play.
One of the first steps any cannabis founder should take—before ever putting pen to license application—is to map out which legal services they will need, and in what order. Here’s my expert advice:
1. Corporate Legal Services
The cannabis licensing process is a crucial step to bringing your vision to life. But first, you need to incorporate and structure your business. It’s important not to skip over the details of founder agreements, establishing corporate governance and filing articles of incorporation. You’ll also need counsel to review investment paperwork, draft bylaws and shareholders agreements or an operating agreement and articles of organization, facilitate negotiations, and file tax and legal paperwork. Remember, the corporate structure and operating or licensed entity you choose can have a big impact on how your business runs and can grow.
2. Licensing and Regulatory Services
Cannabis has an additional layer of oversight from regulators that requires one to be extra scrupulous about licensure documents, leases, deeds, securities and all the other legal requirements for the license application. Even determining which type of licenses you might qualify for as a founder and which fit the type of business you’re hoping to build can require careful consideration.
Social equity applicants must fit specific criteria that can vary from state to state. In New Jersey, for instance, disabled veterans, women and minorities are considered social equity applicants. Meanwhile, New York does not currently include disabled veterans in their social equity licensing program. Some jurisdictions like Denver take their social equity commitment even further by only granting dispensary licenses to social equity applicants, making such licenses extra competitive at both the application stage and later as a target for mergers and acquisitions.
Licensing complexity doesn’t stop with the application, either. Friction between state and local regulations is an additional challenge as founders build their businesses. Take Colorado’s cannabis market, for example. Although it’s relatively mature, the state’s second-largest city of Colorado Springs continues to opt out of adult-use sales in favor of a medical-only market.
3. Real Estate
Leasing or purchasing a space for your cannabis business is more complicated than simply finding a physical location. Plant-touching businesses, in particular, face strict zoning regulations. In Denver, all newly licensed cultivation operations, for example, must be at least 1,000 feet from schools and residential areas. Prospective licensees looking at locations that fit this criteria might still find themselves boxed out by regulations that cap the number of cannabis businesses in a given neighborhood.
Some states like Minnesota outline a number of different cannabis license categories, some of which come with specific real estate parameters and differing regulatory constraints and benefits. Microbusiness licenses in this state—which cap indoor grow space at 5,000 square feet and outdoor grow space at half an acre—have some operational advantages that other license types don’t, like the ability to “establish a venue where edible cannabis products and lower-potency hemp edibles are consumed onsite.”
It’s also important to keep in mind that cannabis operators must meet a high bar for securing a lease or mortgage. Financing is typically difficult for cannabis founders to access, in large part due to federal prohibition. And operators are often required to provide a personal guarantee to secure a commercial lease. Legal counsel may also be required to negotiate terms with prospective landlords who aren’t familiar with the cannabis industry or are hesitant to enter into a contract with such businesses.
4. Trademarking and IP
Although adult-use cannabis has been legal in some states for over a decade, it is still an emerging industry. There’s still a lot of new territory to cover in terms of patents, proprietary technology, trademarking and other intellectual property. Of course, it’s worth noting that because the U.S. Patent and Trademark Office (USPTO) is a federal agency, federal prohibition remains a stick in the spokes for cannabis brands seeking IP protections.
Federal trademarking standards for legal “use in commerce” look different in cannabis than in other industries, as well. Founders should get familiar with legal plays like filing “intent to use” applications in anticipation of eventual federal legalization. Companies that may eventually be (or already are) operating in multiple states should also weigh the pros and cons of state-registered trademarks. Many companies generate revenue by entering into various licensing agreements, such as white labeling of cannabis products, celebrity endorsements or manufacturing agreements. A good attorney will be able to help cannabis founders navigate the IP, trademarking and licensing landscape.
5. Employment and HR
Every business needs to take a meticulous approach to their employment contracts, benefits and HR policies. While it can be tempting to focus on the more positive aspects of founding a cannabis business, leadership should always plan ahead for the possibility of things like discrimination and wrongful termination suits, sexual harassment claims, workmen’s comp filings and other legal exposure.
Heading off those possibilities by proactively building a positive and inclusive workplace with a competitive benefits package can be more complicated in cannabis, however. For example, it can be difficult for cannabis businesses to offer 401(k) benefits because of the barriers to financial services that federal prohibition creates. Even a function as essential as compensation can be challenging for cannabis companies, as many payroll companies won’t work with the industry.
The SAFER Banking Act, a bill that moved through the U.S. Senate in the fall of 2023, specifically includes provisions for retirement plans and insurance offerings in addition to extending access to other banking and financial services for cannabis businesses.
Every cannabis company needs excellent, cannabis-fluent legal representation. But the best piece of advice I have for cannabis business owners is that legal counsel—however qualified—isn’t a replacement for knowing how and when to speak up for yourself. Cannabis is a complex and challenging industry, and you should always feel empowered to self-educate and self-advocate no matter how qualified the team is that has your back.
Alyson Jaen provides legal counsel at Messner Reeves law firm, where she specializes in corporate and business law for cannabis brands, including licensing and regulatory compliance. In addition to serving as legal counsel for operating businesses and advising public and private companies about how to operate in the space, she has represented clients before a variety of regulatory and enforcement authorities.
