Foreign investors (often in countries that prohibit cannabis) are eager to invest in burgeoning state cannabis markets in the U.S. This can often go very wrong, especially if the investor gets bad legal or tax advice. Our cannabis attorneys and our foreign direct investment team have seen these problems crop up again and again. Today, I want to address four key considerations for foreign investors looking to make foreign direct investments in cannabis.
#1 State cannabis regulations may require foreign direct investors to live in the U.S.
As we’ll see below, simply investing money in a cannabis business can render the investor an owner of the business in some states. Some states (like Washington) have residency requirements for owners, whether or not they such requirements are federally legal.
If an investor fails to consider this up front and does not live in the target state, that can lead to a loss of licensure for the cannabis business in which they just invested. Obviously, this is not a good situation and so investors making foreign direct investments in cannabis businesses stateside need to study up on residency requirements at the outset.
#2 Foreign direct investment almost always requires disclosure to cannabis agencies
As noted above, all states that regulate cannabis require disclosure of certain owners, financial interest holders, true parties in interest, or investors. Each state defines these things very differently. But the bottom line is that there’s a pretty good chance that a person who funds a cannabis business will need to be disclosed. And that chance is almost guaranteed if the person gets an equity stake in the business.
Disclosure requirements vary from state to state and depending on different relationships. For example, a person with 20% or more of the equity of a California licensee would be considered an “owner” needing to undergo background checks, while a person with 1% equity and no management role in the company may be considered a “financial interest holder” with lesser disclosure requirements.
The point here is that when making foreign direct investments in U.S. cannabis businesses, investors should keep these disclosures in mind as it’s very, very likely that some degree of disclosures will be required.
#3 Foreign direct investment in cannabis can lead to immigration and naturalization barriers
A person who invests in a cannabis company – even one that complies with state law – risks federal bans on entry to the United States, getting a visa, obtaining citizenship, and so on. We write about cannabis immigration issues regularly. It’s a pretty unforgiving area of the law with very few loopholes. And it hasn’t gotten any better even with a Democrat president. We’ve seen and heard about some pretty devastating things happen to people over the years and so this is something that any investor will need to consider.
#4 Cannabis is federally illegal, which makes foreign direct investment in cannabis much more difficult
A lot of people forget that non-hemp cannabis is still federally illegal. Foreign direct investors may not even be aware of the nuances between state and federal law. These kinds of nuances may not even exist in their home countries. Getting advice from a good cannabis lawyer is key on this point, because the impact of federal law can be far reaching. Everything from taxes, to ability to maintain banking relationships, to immigration issues (discussed above) are far more difficult due to federal illegality. This is 10x the case for persons making foreign direct investments in cannabis.
I don’t mean to give the impression that there are only four legal considerations for foreign direct investment in U.S. cannabis. There are many more than this and foreign investors would be wise to think through them all in detail with competent cannabis counsel. That said, in our experience working with lots of cannabis foreign investors, these are some of the key investment issues that come up time and time again and can gum up what would otherwise be normal cannabis transactions.