Don't Be a Dope About Maine's Cannabis Laws

Legal tips to avoid risk while running a New England cannabis business

By Trevor Kupfer

Maine voters passed the Marijuana Legalization Act in 2016, which became law in 2018. Within a year, businesses were already starting to sprout up. But those interested in making a quick buck may want to seek other ventures, says Hannah E. King, a cannabis attorney with Drummond Woodsum in Portland, who also helped draft the legislation. Though legal cannabis has proven to be successful since 2012— when it was first legalized in Washington and Colorado—the industry remains highly regulated, volatile, difficult to navigate and, more than anything, risky.

“The first thing I say to any potential client is marijuana continues to be a Schedule I drug under the federal Controlled Substances Act, and the attorney general could wake up on the wrong side of the bed tomorrow and decide to crack down on these state-legal businesses. There would be nothing that we can do,” says King, who also advises businesses in Vermont, New Hampshire and Massachusetts.

Because cannabis remains illegal at the federal level, King notes that it’s extraordinarily important to have an attorney. “To mitigate your liability, you need to be sure you’re in full compliance with the state law and you’re not stepping over boundaries in any way.”

When an entrepreneur or investor comes to her, among the first questions King asks are:

- Are you interested in being fully compliant with state and municipal laws?

- Do you have the capital necessary to operate in the marketplace?

Municipal Laws

According to King, everything needs to start at the local level: “Most municipalities have a lot of authority to dictate whether they will allow marijuana businesses and, if they are, what types of businesses and where will they be allowed.”

Currently, there is a presumption that all towns in Maine have banned commercial marijuana businesses unless they pass an ordinance to allow them. “And in order to have a state license, you first need municipal approval,” says King. “So, one of the first things to think about it real estate. ‘Can I find it in a community that is going to allow commercial operations?’”

King works with town attorneys to draft and present ordinances for community approval, and also pursues the necessary permits and licenses on behalf of clients. “In Maine [as of April 2019], there are about 10 towns that have passed, or are in the process of passing, ordinances to allow adult-use marijuana,” she says. “There will probably be 15 to 20 around the state by the end of the year.”

From there, “it all depends on the company’s business plan,” she adds. “Is the intention to be vertically integrated—to cultivate, process and retail? Do you just want to operate in one sector? That will dictate the amount of capital, the licenses to apply for, and the tax considerations.”

The Capital

It can be extraordinarily expensive to start a cannabis business—more so than your average startup, because the same rules don’t apply.

For example, if you’re planning to work with a bank—say, for a loan—you may need to think again. “Banks can have depository and lending relationships with state-legal businesses, but they don’t have the capacity to complete the due diligence,” says King. “In my experience, they’re very skittish and not willing to have a relationship. It’s all private equity right now.”

Renting a space can be tricky for the same reason; most of King’s clients own the real estate. “One of the reasons is there is a separate federal law making it a crime to rent to someone you know is trafficking in a controlled substance. So, it’s hard to find a landlord willing to put themselves at risk,” she says. In the rare cases where they find a landlord willing to take the risk, King helps work on cannabis-specific provisions in the lease documentation.

Of course, given that these businesses deal with a federally illegal product, certain tax breaks don’t apply. “280E of the federal tax code is a provision that prohibits anyone trafficking in a controlled substance from deducting ordinary business expenses—including state-legal cannabis,” King says.

Even after a business receives its state and municipal licenses, more may be needed. “For example, 45 to 60% of the market are value-added products such as concentrates and edibles made from extracts. There are various ways to extract THC and CBD from marijuana, and some involve inherently hazardous substances with different regulations and licenses involved,” says King. “You need to know the industry.”

Of equal importance is working with legal counsel that is well-versed in cannabis. King sometimes relies on colleagues at Drummond for their expertise. “In terms of categories of practice, there’s the regulation overlay, there’s land use and zoning, there’s IP for state cannabis trademarks and the brand, we’re doing entity formation and capital raising, tax work, and we’re already seeing litigation for noncompete in employment and cease-and-desists for trademark infringement,” she says.

The goal is risk prevention, and though that risk can’t be fully eliminated until it’s legal at the federal level, a reputable attorney helps. “All along the way, there are considerations that will have a huge impact on your ability to be successful in the long run—that really require an attorney with cannabis industry-specific knowledge and expertise,” says King.

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