Buyer Beware: Pot College and Cannabis Industry Consultants

As with any new and burgeoning market, the legalized marijuana industry is fertile ground for bad operators and scams. Chief among them are many (most?) of the “colleges” and “institutes” promising to educate patients, growers, dispensers, processors, employees, or some combination thereof on how to grow, sell, use, or provide counsel about marijuana. Add to that the many “consultants” that promise to take a prospective dispensary or cultivator from application to the business’s opening day, holding your hand every step of the way. Our cannabis business lawyers have fielded many calls and emails about these operators lately (from various states).

Below are some of the points we try to stress in those discussions.

The reasons such colleges, institutes, and consultants exist are many. First, there is so much opportunity because there are so many people interested in getting into the marijuana business who need real help. Entrepreneurs of all types and experience levels are interested in getting into this market and many figure that a crash course is worth a few hundred bucks and a day’s time. Those that want to go to the next level and actually apply for a marijuana license are willing to consider hiring a consultant and pay fees in the tens, if not hundreds of thousands of dollars to have their license application and the required security, inventory and other plans all wrapped up for them in a nice neat package.

Second, the relative newness of most markets lends itself to these kinds of outfits. It is easy to accept your local consultant or canna college does not have a storied past since in most places marijuana has been legal only a couple years, or even months. Then again, we are aware of a number of these consultants and groups that claim licensing success based on nothing more than some of their clients having won a licensing lottery by pure chance.

Third, this industry is difficult. There are many tricky issues – complying with complex state and local regulations and burdensome federal tax schemes, running an all cash business, trying to keep your product out of the wrong hands. Not to mention that you must be constantly mindful of federal prohibition. No wonder budding marijuana entrepreneurs seek assistance.

We typically recommend that our clients work with specialized consultants. We feel they are far better served dealing with individuals who truly do have expertise in security or taxation or horticulture or management or law instead of paying a huge sum to a one-stop-shop that may (and even sometimes may not) have true expertise in some percentage of these things.

If you are considering attending a marijuana “school” or “conference,” please do your due diligence. Find out all you can about the operators and their “instructors” or speakers. Do they have actual experience, relevant college degrees, etc.? Is it registered as a business in your state? Who are the principals? Take all claims of “expertise” with a healthy helping of salt, particularly in areas where cannabis was recently legalized. (For example, here in Illinois, I’d be highly skeptical of anyone purporting to be an expert, since no cannabis business is even open yet.) Are you provided with any written materials?

If you are considering entering into a consultancy agreement, we strongly suggest you consult an attorney before signing. Pay particular attention to the fee provisions. Are they requiring that you pay everything up front? Is the fee reduced if your application is not successful? Are you sure that company will be around to give you that refund? Are you sure that company even exists now? We have seen fee agreements that provide for refunds if the consultant is at fault for the failure to secure a license, but what does fault even mean in that situation? If any percentage of your revenues or profits are owed as part of your fee, how long does that obligation continue and are you sure you want someone you do not really know taking ten percent of your revenues forever? And revenues from what? Your first shop or anything you ever do related to cannabis? Take note of how long you are obligated, as such provisions could significantly affect your bottom line for years to come. Here in Illinois, where cannabis has only been legalized for medicinal purposes as part of a four-year pilot program, make sure you are not obligating yourself past 2017, just in case the pilot program is deemed unsuccessful. The last thing you want to do is be required under your consultancy agreement to operate a dispensary and share profits with your consultant, but be prohibited by the state from operating. The list of concerns goes on: what are your confidentiality obligations under the agreement? What materials or information are you required to return to the consultant when your relationship ends? What branding or licensing would you lose upon terminating the agreement?

One other big issue is exclusivity. If your consultant is working for you and for another company and you both are seeking the only license that will be granted in a particular area, you should be concerned that your consultant has charged the other company way more than you and is only “working” for you to lose so that its other client can win (keep in mind, consultants don’t have to abide by any ethics rules). Why are you so convinced that the promise or provision of exclusivity will be followed? How will you ever know that it wasn’t? Don’t assume the possibility of a future lawsuit would be enough to deter the consultant from taking on clients with competing interests – those types of suits are hard to win, and damages difficult to prove.

Certainly there are reputable consultants out there, as well as individuals running helpful clinics and instructional courses on different aspects of the cannabis industry. We will not name names here, good or bad (though I can tell you that in our experience the bad outnumber the good by about a ten to one ratio), but we are going to plead with you to be careful out there and not just blindly sign on the dotted line.

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