By David Kerr
When a new industry starts from the ground up, like the marijuana industry in Washington and Colorado, a sort of “gold rush mentality” takes over. There are those that rush in to file their applications, there are those that sit on the sidelines and wait to see what happens, and then there are those that crawl out from under the rocks and want to take advantage of the people that rushed in early to file their applications – the Bamboozlers, Swindlers and Flim-Flam Artists.
Being an attorney, you get to see all sorts of agreements, offers, opportunities, arrangements and proposals that people bring to you. I have been amazed at the types of things marijuana entrepreneurs have been offered, are considering or have actually agreed to.
So here are some things you should watch out for, and since I am an attorney, let’s start with my profession.
Avoid attorneys that want an equity stake. There are lots of good reasons for an attorney to avoid being in the marijuana business (as opposed to advising clients on how they can comply with the laws related to the marijuana business), not the least of which is the fact that, Washington State’s initiative aside, the production, sale and possession of marijuana remains illegal under federal law.
In addition to the federal law issue, there are the ethical issues created by the conflicts that invariably arise between partners who are in business together, and one of those partners also purports to represent the legal interests of the other partner as well as their own interest. If you are considering hiring a lawyer that proposes an arrangement where the lawyer takes an equity interest, then you are going to need a second lawyer to review the proposed deal and to protect your interests. If the lawyer that proposed the equity stake deal is ethical, they will advise you of this and insist that you have separate legal representation. If they do not, or they suggest that they have it covered for both of you since they are an attorney, you should walk away, quickly.
Avoid real estate agents that demand large, non-refundable, advance fees. I have seen real estate broker agreements that require advance, non-refundable, fees in excess of $10,000 to $20,000. These advance fees are often expressly non-refundable — even if the real estate broker is unsuccessful and does not locate a viable property for your marijuana business. Traditionally, real estate brokers are paid on their successes. When they sell or lease a property, they are paid a commission on the sale of lease. That is their incentive to work hard for you. Large, non-refundable, advance fees destroy this incentive structure. Now, some brokers want to be paid for not finding you a suitable location. Seriously? $10,000 or more for not finding you a property? Shoot, I bet you can find people out there that will “not find you a property” for half that amount.
Avoid investors or financiers you find on Craigslist or at Hempfest. A lot of those people that sat on the sidelines and waited to see what would happen in this business are now looking to get into the business. Some might be legit. Many are looking to move in on your license and poetically take your business away from you. If you are considering bringing in an investor or outside financing, you need to carefully, fully and completely investigate that investor or financier before you give away equity in your company or find yourself indebted to some unscrupulous business person. I have had a number of people say to me: “I just met this person, but I have complete confidence in them.” Of course you do. That’s why they are called “confidence men” – making you feel confident and comfortable; getting you to drop your skepticism and wariness is their stock in trade.
Take your time, develop a relationship. Work with a competent attorney. Do your own criminal and financial background checks. Make your initial agreements contingent on meeting certain milestones and goals, including the approval of the Washington State Liquor Control Board. If you have to “act fast” or if there is “no time to consult an attorney” or if “all that paperwork can be done later” — those should be a big red flags. If it is not written on paper, it isn’t real. And if there is not enough time to have it reviewed and consider it carefully, then there is something amiss.
Avoid consultants, self-described experts, and fly-by-night training. There are also many folks out there that just see the emerging I-502 marketplace as an opportunity to scam some quick dollars by providing simplified training workshops, flimsy certification classes, questionable consulting services and a myriad of newly formed trade groups and associations. All of these are going to cost you money. Don’t waste it.
There are also lots of competent and qualified professionals that can help you get set up and started in your cannabis business. These include attorneys, accountants, business advisors, security professionals, building professional and many others. What makes them competent and qualified professionals is education, experience, training, background and knowledge. You are going to need and want these competent and qualified professionals working for you and with you. Meet with them, ask them questions, and see how much they are willing to invest in you (as opposed to pressuring you to write them a check). Competent and qualified professionals are in the business of building relationships with their clients. If it is more about how quickly they can get you to write checks, rather than about what you need and how you can work together, you might be wasting your money.
Attorney David Kerr serves business clients throughout the state, including an emphasis on the emerging legal, regulatory and compliance issues facing new cannabis businesses.