BFD Alert: Coronavirus Cannabis Scams and Pitfalls

The rapid and devastating proliferation of COVID-19 has affected businesses worldwide, and cannabis is no exception. Here in California (and in other states), the state announced that medical cannabis dispensaries are essential and may remain open as part of the state’s Stay-At-Home order. The medical cannabis businesses that supply those dispensaries are also essential under that order. In addition, certain cities in California (like Los Angeles and San Francisco) have their own shelter-in-place or stay-at-home orders that also identify medical cannabis businesses and the businesses that supply them as essential. Unless a city or a county says otherwise, the state’s Stay-At-Home order protects the operation of medical cannabis businesses throughout the state.

With medical cannabis businesses allowed to stay open and operational across the country during COVID-19, sales of medical cannabis to consumers has been on a tear. While increased medical cannabis sales and production is a great economic boon to the industry in a time where most businesses are suffering or are on the road to disaster, it’s not all roses for the cannabis industry.

COVID-19 is breeding all kinds of scams and pitfalls for the unwary. From defective medical equipment (like the coveted N95 masks) being imported into our borders, to unscrupulous actors running “COVD-19 Cure Scams,” certain people and entities are trying to take full advantage of consumer and business vulnerability. Cannabis is included in that circle, unfortunately. In addition, there are still many triggers for economic and operational instability that cannabis businesses should avoid.

We already let you know what we think you should be doing with your cannabis business right now to survive during COVID-19, as well as what forms of federal economic relief may be available. While taking those important steps, please also be on the look out for the cannabis COVID-19 scams and traps set forth below.

Cure claims and snake oil. There is absolutely no proof or substantiated science indicating that somehow either cannabis or hemp cure or mitigate COVID-19. While people may have anecdotal success with cannabis products in treating various sicknesses and ailments, consumers and cannabis businesses need to be on the look out for snake oil cures and/or curative claims being shamelessly pedaled across the cannabis and hemp (and very specifically hemp CBD) industries during this volatile time.

Compliance is suspended. This is a definite “no way.” In all of the states and cities that pronounced medical cannabis as essential, regulators have made clear that the ability to remain open also hinges on total compliance with few concessions made around the rules to better enable effective social distancing and flattening the curve (like around curbside pick-up and delivery). Just because medical cannabis businesses are “essential” does not mean that they also have free reign to ignore the bevvy of regulations with which they must continue to comply. And don’t forget that remaining open also means total compliance with any COVID-19-related operational emergency regulations.

Financing. One of the first impacts of COVID-19 on the cannabis industry was to destroy pending financing for cannabis businesses. Investors are obviously spooked by the effects of the pandemic and are likely anticipating a recession of some sort. So, instead of making a relatively risky investment in cannabis (which is a volatile, cottage commodity that remains federally illegal), they’re taking their cash to safer pastures. What’s on the increase then is more vulture investing. While seemingly ominous, vulture investing (commonly known as debt financing for a distressed business) is not unusual in certain markets. Right now though, cannabis businesses need to proceed with caution as they may get sucked into overly aggressive terms and conditions for (in the end) expensive debt.

Adult-use businesses are essential. This is a “maybe”. Certain states, like California (as of March 22), determined per their stay-at-home orders that medical and adult-use retailers (and the businesses that supply them) can stay open. Other states, like Massachusetts, decided that adult-use businesses are not so essential during this pandemic. Also remember that cities and counties have their stay-at-home or shelter-in-place orders that can be even more restrictive than the state orders and if they never allowed adult-use businesses in the first place, you have your answer there. If you’re an adult-use cannabis business that must shutter during any stay-at-home order because you haven’t been deemed essential (or if you’re just a medical cannabis business that’s struggling because of COVID-19), be sure to explore your options in at least your commercial relationships under force majeure (if and as applicable).

Cannabis industry will not get any financial relief from the CARES Act. In response to COVID-19, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The CARES Act provides limited financial relief to individuals and businesses to try to remedy the financial havoc caused by the pandemic. Specifically, CARES Act provides $2 trillion in funding to businesses and individuals affect by COVID-19. Namely, $500 billion will be allocated to large corporations and $350 billion will be given out in the form of small business loans geared towards maintaining employment numbers and economic stability. There’s also billions of dollars in debt relief for existing business loans. Where cannabis businesses remain federally illegal (because cannabis is a Schedule I controlled substance under the Controlled Substances Act), they are not eligible to get any benefits under the CARES Act. Additionally, federal illegality prevents Cannabis businesses from receiving newly created “disaster loans” from the U.S. Small Business Administration (SBA) under the Coronavirus Preparedness and Response Supplemental Appropriations Act (the SBA back in 2018 already determined that cannabis businesses (and certain cannabis ancillary businesses) wouldn’t be eligible to receive federal loans). Notably, where hemp is no longer a Schedule I controlled substance, those businesses are likely free to take advantage of the foregoing federal relief (though it’s dicier for hemp-CBD businesses that violate the Food, Drug & Cosmetic Act).

Cannabis businesses are flush right now. It may not last though. Cannabis businesses need to be very careful and intelligent about production and sales levels right now and should just assume that there’s going to be a steep drop off in sales post-COVID-19 or even sooner where the untaxed and immediately available illegal market is still alive and well and where shoppers may be stockpiling large amounts of cannabis to sustain them for weeks or months inside their homes as social distancing continues. To plan the year’s budget and financial projection on COVID-19 numbers is a big mistake as it represents an economic blip that’s not sustainable beyond the pandemic, and neither businesses nor investors should be sucked in by these inflated numbers.

Employees. Employee health and safety should be top priorities for essential businesses that remain open during COVID-19. Every cannabis businesses need to follow very closely state law and policies around employee treatment during disasters and specifically as things change and evolve around COVID-19. As we mentioned recently:

If you haven’t yet issued guidance to your employees, you are behind the curve.  If you have a payroll system, employee handbook or other policy that does not accommodate paid sick leave, consider axing that. Allow or require everyone to work remotely if possible. And depending on the type of business you have and evolving relevant guidelines, consider suspending operations. Excellent guidance exists on what you should be doing today, including at the federal level (CDC; OSHA) and by states and counties (cf. California Labor & Workforce Development Agency). Note that under Section 13 of the OSHA Act, you cannot force an employee to work if they believe they are in imminent danger. Most situations don’t yet rise to this level, but it’s something to monitor. The National Labor Relations Act also extends broad protections to union and non-union employees to engage in “protected concerted activity for mutual aid of protection.”

Note also that both hemp and cannabis businesses will have additional employee related obligations related to sick leave and FMLA leave. We covered that here.

Most non-essential local government services are off limits right now. Unless it’s providing an essential service right now, lots of local government functions are at a standstill. This is hugely important for cannabis businesses that, nine times out of ten, have to maintain the local approval of their city or county to continue to operate. If you needed to pull a permit to finish a build out or submit an application by a deadline during this time to remain open or move forward in the licensing or permitting process, you absolutely need to check in with government authorities to see what’s going on. If needed, extensions may be available so that you can map out a delayed timeline and act accordingly.

Tough times abound for everyone right now, and lots of unpredictability looms on the horizon. Cannabis businesses, like any other business, need to take extreme care to protect themselves and their employees as COVID-19 evolves. Be careful out there, folks!