It is no secret that in the past few years, cannabis has emerged from hushed conversations among friends into boardrooms filled with savvy investors. Cannabis’s evolution from contraband to capital is, in large part, a result of comprehensive state regulations that have legalized medicinal and/or adult-use cannabis in a majority of the United States.
Though reviewing these highly detailed and complex regulations can feel like wading through murky water, it is strikingly clear that regardless a cannabis business’s state or locality, compliance is the key to success and longevity. This principle holds true for both cannabis businesses and the ancillary companies that work with them but do not touch the plant. Though ancillary companies generally are not required to adhere to all the same regulations cannabis licensees must observe, they should, nonetheless, ensure the cannabis businesses with which they work meticulously comply with all applicable laws, regulations, and ordinances.
Because the cannabis industry is so highly regulated, working with non-compliant operators can lead to hefty fines and, in severe cases, company closures. Furthermore, cannabis-related revenues from non-compliant operators often intimidate banks and credit unions due to concerns they could be handling proceeds of illegal drug transactions. Working with compliant cannabis operators is a key way an ancillary company can demonstrate its cannabis-related revenues come solely from state-legal transactions. Thus, for ancillary companies, linking cannabis-related revenue to state-legal transactions is of paramount importance.
Do your research
Shaped by factors like time, money, and the type of goods or services provided, the level of due diligence used to evaluate potential and existing cannabis clients is an internal decision for every ancillary company. While comprehensive procedures may present slightly higher upfront expenditure of time and money, the long-term payoffs, including bankability for both the ancillary company and its cannabis clients, are priceless.
The first step to ensuring a cannabis business’s compliance is verifying the business’s licensure status. It is highly inadvisable for an ancillary company to work with or provide services to an unlicensed cannabis business. Most states with a robust licensing framework publish lists of the state’s licensees online, making licensure verification quick and simple. Ancillary companies also can require cannabis businesses to provide copies of their business licenses and, when applicable, license renewals. A cannabis business’s refusal to cooperate with an ancillary company’s due diligence efforts, especially after receiving an explanation of the policies behind such efforts, is a red flag that should make an ancillary company reevaluate its relationship with the cannabis business. Ancillary companies regularly should reconfirm their cannabis clients’ licensure statuses and keep clear records of such reconfirmation. It is also prudent practice for an ancillary company to require its cannabis clients to immediately notify the company of any enforcement actions or changes to licensure status.
Ancillary companies also should pay close attention to the owners of their cannabis clients. While every state has a slightly different definition of an owner for a cannabis licensee, the designation generally centers around an individual’s control over or position or equity interest in the licensed entity. Ancillary companies should collect basic identifying information about those listed as owners of a cannabis licensee and verify that such individuals 1) have not previously been denied a cannabis license or had one revoked and 2) do not have previous criminal convictions related to issues like fraud, gun violence, or drug transactions involving minors. It is also prudent practice for an ancillary company to require its cannabis clients to immediately notify the company of any owner arrests or convictions that may affect a cannabis client’s licensure status.
Success in highly regulated industries like the cannabis industry also requires thorough operational and sales records, as the records greatly help to demonstrate a licensee is operating compliantly and its revenues are derived solely from state-legal transactions. Consequently, an ancillary company should ensure its cannabis clients keep meticulous records for every batch of cannabis or cannabis product they produce, as well as every business transaction in which they participate. It is also prudent for ancillary companies to require their cannabis clients to, upon request, provide access to certain categories of business records.
One of the best ways an ancillary company can continuously verify its cannabis clients’ compliance is to require such clients to perform periodic compliance audits using a platform tailored for the cannabis industry, such as Simplifya. Ancillary companies should analyze the results of the audits to ensure their cannabis clients closely follow all applicable laws, regulations, and ordinances and correct any minor compliance issues. It is also prudent for ancillary companies to keep records of such audit results for all cannabis clients.
The cannabis compliance measures suggested above are only one variation of the many available to companies that work with cannabis businesses. While an ancillary company may implement measures that are more or less firm, ensuring the ongoing compliance of cannabis clients should be an ancillary company’s highest priority.
Sahar Ayinehsazian is an attorney at Vicente Sederberg’s California Practice Group, where she specializes in cannabis banking, intellectual property, and regulatory compliance. She also serves as the chief adviser for banking policy for the California Growers Association.
Bharat Vasan is the chief executive officer of PAX Labs Inc., where he is committed to scaling the company in a smart and sustainable way while also helping advance the legal, responsible adult use of cannabis.