It’s no secret that Arizona’s medical marijuana industry has attracted significant investment from outside players. The injection of “big money” is largely due to the limited number of dispensary registration certificates (i.e., licenses) that permit a non-profit to cultivate and sell medical marijuana and related products. That limitation has resulted in large valuations for medical marijuana businesses, especially if operations consist of functional cultivation facilities and established dispensary storefronts.
In addition, the costs associated with operating cultivation facilities and dispensaries is generally high. For example, locations that are properly zoned for cannabis businesses are often difficult to find, which translates into a significant mark-up for such properties (often 2-3 times the typical price per square-foot).
So where does all this money come from? A common source of that capital can be traced to foreign investment. Indeed, since cannabis businesses are precluded from accessing traditional means of capital as well as banking services, many businesses rely on alternative methods for fundraising. Such methods include private loans with higher interest rates and/or dilutive capital. This is especially true for Arizona’s medical marijuana industry, which has seen substantial investment from our northern neighbors in Canada.
But when investing in the cannabis industry, Canadian investors may be putting more at risk than just their money. Recently, there have been incidents in which Canadian-based investors have been turned away at the U.S.-Canadian border and in some circumstances permanently banned from entering the United States.
That’s because technically marijuana remains illegal at the federal level (no surprise there). By investing in cannabis-related businesses, foreign investors run the risk of being associated with a federally-illegal activity. The theory is that by investing and/or receiving monies associated with a cannabis business, the foreign investor is enabling a federally-illegal enterprise to operate in violation of the Controlled Substances Act.
To date, there have only been a few instances where foreign investors are turned away at the border. However, given the federal policy change earlier this year (DOJ rescinding the Cole Memo), it’s something that investors and cannabis businesses should keep an eye on. With respect to the practical implications, only time will tell whether the recent instances of banning entry into the United States will have a chilling effect on foreign investment in state-legalized cannabis.
This column is intended for educational and informational purposes only. The information contained herein is general in nature and does not constitute legal advice or create an attorney-client relationship. Justin M. Brandt is a business attorney at Mesa-based Udall Shumway PLC who handles a variety of business and corporate transactions and represents clients throughout all stages of litigation. Most notably, he leads the firm’s practice group that services the cannabis industry, where he advises cannabis-related businesses regarding the unique legal and regulatory issues surrounding the emerging market.