Cannabis investments are difficult enough when the investor is a U.S.-based person or entity. But things can get immensely more complicated when foreign investment is on the table. Today I want to highlight some of the top considerations for foreign investors and U.S. cannabis companies alike.

1. Legality could cause serious headaches

To this day, cannabis remains federally illegal. State legality has zero effect on federal law. Even the possible rescheduling to schedule III of the Controlled Substances Act (CSA) will not make cannabis federally legal. Things are clearly a mess.

In our cannabis team’s experience, a huge number of foreign investors do not appreciate the nuances between state and federal law and how it could effect them. For example, federal tax laws are unforgiving and don’t allow standard deductions for marijuana businesses. Additionally, federal illegality means that businesses will be siloed without interstate commerce, can’t get access to banking, can’t get access to basically anything for market rate, and so on.

All of these things mean that investments are simply unlikely to net big returns. Sadly to say, lots of investors end up writing off their investments. While federal legality alone isn’t the only reason that businesses, and by extension foreign investments, fail, it’s certainly a big one.

2. Cannabis investment may not be compatible with home country laws

This is actually probably more important than point 1. Cannabis is still illegal in most places in the world. There are still places where possession of cannabis can lead to the death penalty. While possession in a such a country is different from investing into the U.S., the governments in those countries may not see eye to eye, and such investments could lead to a host of different penalties. I’ve spoken with attorneys and business people from other countries who have said that foreign investment directly into a cannabis company is simply not possible.

What this can often lead to is investment into adjacent or ancillary companies in overly complicated deals. And when something is ancillary to the industry and/or a deal is overly complicated, netting a healthy return on investment is even more unlikely.

3. The cannabis industry and immigration law do not mix

Probably the first issue that comes up when looking at foreign investment is immigration and visa status. Immigration law is the province of the federal government. That means that it does not mix well with cannabis. If you’ve been in this space long enough, you’ll have heard of things like denial of naturalization petitions, denial of visas, arrests, and even lifetime bans on entry into the states. So for foreign investors who plan on relocating to the U.S. or even visiting to see the company they are investing in, there are huge risks.

4. Disclosure will likely be required

All states with legal cannabis markets require disclosure of certain people affiliated with a cannabis business. In many states, this includes investors, lenders, or people with other financial interests. Sometimes, the disclosures can be relatively benign, and in other cases much more aggressive.

For reasons expressed in points 2 and 3 above, a lot of foreign investors aren’t exactly thrilled to learn that they have to give personal data (and maybe undergo background checks) over to a state agency. This is yet another reason why foreign investments are often made into ancillary companies — to avoid disclosures. But even that isn’t always likely to fix the issue, and again, overly complicated investments into ancillary companies aren’t necessarily great.

5. Investment targets may get things wrong

Foreign investors often make a critical mistake in assuming that their targets know what they are doing. I’m not talking about operational issues — though a lot of companies clearly need help there — but about legal structures. It’s not unheard of for an investor to want to invest into a company that promises something it legally cannot do — like sell stock to a foreign investor in a state with a residency requirement. Yet things like this do happen from time to time, and once a foreign investor gives money over, it’s a lot harder to get it back.

Foreign investors who know what they are doing usually work with lawyers or other professionals experienced in their target jurisdiction, not only to diligence the target’s operations, finances, etc., but also to make sure that the fundamental aspects of the investment won’t trigger massive legal liabilities.

For some of our older posts on foreign investment in the U.S. cannabis industry, see below:

The need for social equity in cannabis programs

As adult-use cannabis legalization sweeps across the country and America confronts the toll of previous, draconian cannabis policies, one of the best attempts to right abject wrongs is social equity programs within state cannabis industries. Unfortunately though, social equity programs are easily exploited and “loopholed.” Licenses have even been discreetly purchased by multi-state operators (MSOs) in some cases, or other entities that should not qualify as social equity applicants. Regulators are getting wise. One such example is Missouri, where concerns have been raised about the authenticity of social equity applications, leading to the revocation of several licenses. This highlights the need for robust oversight and accountability to ensure that social equity programs fulfill their intended purpose of fostering diversity and economic empowerment within the cannabis industry.

Missouri’s social equity initiatives: a closer look

One example of a state regulatory agency having to revoke a considerable number of social equity licenses is Missouri, one of the newest states to legalize cannabis. Based on sales figures, the Missouri cannabis industry has already become a raging success, selling over $1.4 billion in the first year. Moreover, the Missouri Department of Health and Senior Services created an innovative micro license program to serve as a smaller scale, but expedited, process for social equity business ownership. Nearly 150 guaranteed micro-business licenses are guaranteed over the next three years.

Concerns have arisen among certain Missouri legislators though, most notably State Senator Karla May. In October of 2023, May sent a letter to the Director of the Missouri Division of Cannabis Regulation formally requesting that the authenticity of the social equity program be investigated by regulators. May’s concerns were well founded, as the 2023 Activity Report from the Chief Equity Officer confirmed that an astonishing number of social equity applications were connected to multi-state operators or other out-of-state business entities or LLCs.

Addressing exploitation: lessons from Missouri

The widespread ramifications of Missouri’s damning report are coming to fruition, as the Missouri Division of Cannabis Regulation recently announced that 9 of the initial 48 social equity applications would be unconditionally revoked. Not too surprisingly, the series of licenses that were ultimately revoked were due to the exact, defined list of issues documented by the 2023 Chief Equity Officer report. In December, the Missouri Division of Cannabis Regulation also issued eleven Notices of Pending Revocations (NOPR) to social equity licensees.

In total, eight of the revoked licenses were originally in possession of out-of-state entities. As the social equity program heavily focused on Missouri-based residents and aspiring business owners, all the out-of-state entities were excluded and licenses revoked. The startling number of applications that these groups were connected to was troubling. Notably, 118 of the 1,625 total applicants were entities from California, while another 110 social equity applications were filed from operators hundreds of miles north, in Michigan– a state with an a robust program.

Most egregious of all, an Arizona-based entity called Cannabis Business Advisors filed 400 social equity applications in Missouri. All six licenses that the group received have been revoked. Apparently, the application listed majority business owners that had little knowledge of who was operating these licenses, and who couldn’t recall the true applicants’ names who applied on their purported behalves. The Director of Division of Cannabis Regulation, Amy Moore, explained in a March 27, 2024 press release:

“While owning and operating a license may include contracting for management services or consulting services, the lack of knowledge, control, agency or decision-making demonstrated by the individuals whose information was used to meet eligibility does not meet even the most generous interpretation of owning and operating a business. These circumstances do not meet the intent or meaning of the requirement in Article XIV that microbusinesses are operated by eligible individuals.”

Advancing social equity in the cannabis industry

The implementation of social equity programs in state cannabis industries represents a crucial step towards rectifying the injustices of the past. However, as demonstrated by the challenges faced in Missouri and other states, these programs are often subject to exploitation and loopholes. The case of Missouri highlights the need for stringent oversight and accountability to ensure that social equity programs truly benefit those they are intended to help. While the road ahead may be fraught with challenges, addressing these issues is essential to ensuring that the cannabis industry becomes a force for positive change, fostering diversity and economic empowerment for all.