The likelihood of marijuana’s federal reclassification to Schedule III status has Big Law leaders eyeing opportunities to expand relationships with clients who have historically lacked the same tax benefits and bankruptcy protections as other sectors.

Despite the growing number of states legalizing cannabis for recreational and medicinal use, the nascent legal cannabis industry has been hobbled by lack of traditional bank financing and a federal tax code prohibiting expense deductions enjoyed by most other sectors.

While the DEA’s reclassification of marijuana as a Schedule III drug won’t bring state-legal cannabis businesses into federal compliance, it has the potential to infuse the industry with millions in reinvestable capital, resulting in transactional and financing potential, lawyers say. Rescheduling could also provide cannabis clients with protection in the bankruptcy courts, which historically has been a hostile environment for distressed cannabis businesses.

“What makes reclassification a watershed event is that it frees up capital and allows for more growth and allows for potential consolidation and more successful companies, more competition with respect to multistate operators and get back to a place of equity investment,” said litigator Seth Goldberg, co-chair of the cannabis industry group at Duane Morris.

“We have been preparing for that, and lawyers in each of our practice areas—whether IP, corporate, employment—who have cannabis practices are already thinking about how they‘re going to advise clients in the cannabis industry and also outside of the cannabis industry with respect to how reclassification impacts that type of law,” Goldberg said.

Under cannabis’ current Schedule I status, Section 280E of the tax codes prevents businesses from deducting expenses involving the “trafficking” of Schedule I or II substances, restricting the amount of operating capital. […]

The combined impact on cannabis businesses of tax liabilities and lack of access to financing “can’t be overstated,” Goldberg said. Removal of 280E “will have an immediate impact on operator balance sheets,” he said.

“With the operators performing better, they can reinvest in the industry and more folks will invest,” he said. “A firm like Duane Morris will continue to do what it is doing, but now you have cannabis companies with hundreds of thousands of employees, and that raises the same level of labor and employment and union issues that every industry is dealing with. As the cannabis market starts to perform better, our services across our entire platform should be in greater demand.” […]

Risks of Dabbling in Cannabis for Lawyers

The development of cannabis practice groups in Big Law firms […] provides a view into how large firms expand an industry-focused practice area based on client needs.[…]

In the early days of Duane Morris’ cannabis industry group in 2015 and 2016, lawyers helped clients secure licensing and equity investment and, as the industry has grown, the firm has pivoted toward providing clients with debt financing and tax advice, Goldberg said.

“For the types of issues and questions that come up in the application for a cannabis license, there are a number of solo practitioners and industry consultants who have created cut-and-paste templates for applications,” Goldberg said. “It’s not the type of work that you would go to a large law firm for. What we do and where our clients find value is how do you set up the corporate structure so we can apply for the license.”

Opportunities to Expand Client Relationships

Lawyers are anticipating marijuana’s reclassification to entice clients from other industries to finance marijuana businesses or open product lines that would have otherwise been restricted, such as marijuana-infused beverages.

“We’ve had dozens and dozens of companies—consumer products goods companies, financial institutions, banks, lenders—who have been very anxious to get into the cannabis industry but have been reluctant to do so because of the Schedule I classification,” Goldberg said. “When reclassification happens, I think it’s reasonable to plan for a number of those kinds of folks who have been sitting on the sidelines to get involved in the industry in some way.”

One form of the industry’s legitimization would come in the restructuring process for distressed cannabis companies, who currently are unable to obtain protection through the bankruptcy courts, lawyers said. […]

Goldberg […] also pointed to the food and beverage market as an example of an industry looking for regulatory relief and certainty before developing cannabis product lines.

“In different parts of the country, cannabis beverages are becoming more popular,” Goldberg said. “It’s a really interesting segment of the cannabis industry, because people are more comfortable consuming beverages, so it might create more consumers of cannabis.”

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