A Gray Area: Foreign Investment in California’s Cannabis Industry
CaliforniaMedical MarijuanaRecreational MarijuanaUncategorized September 27, 2018 MJ Shareholders
In addition to our California cannabis business attorneys’ work on corporate, finance, and transactional issues with marijuana-related businesses, we also work with our firm’s foreign direct investment group. As California has implemented MAUCRSA since January 1 of this year, we have been getting tons of interest and questions in and about foreign investment into California’s booming cannabis industry. As would be expected, much of this interest is from Israel, Canada, Spain, Turkey, South America, the Netherlands, the UK and Germany. These investors are interested in California because of the size of the market, but also because California has no residency or citizenship requirement to invest in cannabis businesses.
In general, foreign direct investment (FDI) refers to any type of cross-border transaction where a company or investor from Country A invests money in a company located in Country B. It generally doesn’t refer to dumping money broadly into stocks and bonds — it is specifically about a concentrated, single-enterprise investment.
FDI exists in several forms. Foreign investors can start a new company and can finance and build it from the ground up. They can participate in a joint venture with U.S. partners. They can wholly or partially acquire a U.S. business. They can also take a lighter touch, where they provide primarily branding and process support while having U.S. parties take on the bulk of the financial risk — the basic franchise model.
In the marijuana industry, we have already seen large FDI projects in cannabis ancillary services (i.e., the companies that provide the goods and services that support the actual marijuana traffickers). Foreign investors have opened up domestic companies for the manufacture and import of cultivation equipment like grow lights and hydroponic equipment, processing equipment like automated trimmers and extraction machines, and associated inputs including soil, fertilizer, vapor pen batteries and cartridges, and more. We have also seen large amounts of foreign money come in for cannabis real estate projects, especially in the Coachella Valley and certain desert cities. In addition to buying the real estate, the foreign investors put money into greenhouses, grow lights, storage facilities, and more to offer turnkey cultivation and processing facilities for lease to local businesses. These companies are largely unregulated at the state level, and their foreign investment issues are similar to non-cannabis businesses, dealing with things like registering as U.S. taxpayers for partnership taxed businesses, complying with FIRPTA, and dealing with immigration issues.
For firms directly involved in the buying and selling of cannabis, state-specific restrictions become more of a concern. States like Washington do not allow anyone who is not a state resident (much less not a U.S. resident) from having any profit interest in a marijuana business. California, similar to Oregon, is extremely liberal with its cannabis regulations regarding owners and “financial interest holders.” As mentioned above, there is no residency or even citizenship requirement to participate. Still, on the whole, state regulations and state laws are typically written with U.S. residents in mind. In turn, things like criminal and financial background checks on foreigners remain a bit of a gray area (though California’s Department of Public Health, which oversees manufacturers, has accommodated the situation somewhat with an “out of state owner” background check). Ultimately though, neither state officials nor the FBI are likely to have any real information on foreign nationals who haven’t had prior contact with the United States. How the Feds will react to foreign ownership in terms of the Department of Justice (rather than via immigration through the Department of Homeland Security) still remains to be seen, though nothing’s been publicly reported that’s a red flag against foreign marijuana business ownership in California.
As far as federal laws go, the Controlled Substances Act doesn’t differentiate between activities that are international, interstate, or fully intrastate in nature. Possessing, manufacturing, and distributing marijuana are illegal federally regardless of where the company’s owners live. Still, there are a couple of criminal statutes that add fuel to the fire when interstate and international commerce are involved. 18 U.S.C. § 1952, for example, criminalizes traveling or using the mail in interstate or foreign commerce with intent to distribute the proceeds of marijuana sales.
More questions arise when considering foreign ownership in the context of the Department of Justice marijuana enforcement memoranda that cannabis-legal states are working under. The main takeaway from the August 2013 Cole Memorandum (which has been rescinded by U.S. Attorney General Jeff Sessions) was that if the states want to keep federal law enforcement away, they need to make sure their regulations prevent state licensees from violating the various federal enforcement priorities. One of those priorities was that state regulations need to prevent “revenue from the sale of marijuana from going to criminal enterprises, gangs, and cartels.” If the state and federal criminal background check databases don’t have extensive coverage on foreign crimes, how can a state, including California, have faith that the foreign investors don’t fall into one of those categories?
For now, with no broad pronouncements apparent, it appears that the federal government is taking a wait-and-see approach to foreign ownership of state cannabis businesses. That means it is up to state cannabis business participants and the states themselves to ensure that foreign owners do not violate federal enforcement priorities — starting with California.
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