New York Cannabis: Lawyers Can Consume, Advise Businesses and Own Them (if They Dare)

In the continuing trend of normalizing the cannabis industry for practical reasons (a topic I will be discussing with New York City Council Member Keith Powers on August 17 at this free webinar), the New York State Bar Association’s (NYSBA) Committee on Professional Ethics issued Opinion 1225 (the Opinion). In short, the NYSBA now expressly permits lawyers to represent clients in New York’s recreational cannabis industry.

The NYSBA actually issued 3 separate determinations, each of which is incorporated into the New York Rules of Professional Rules of Conduct for attorneys:

First, attorneys may now ethically provide legal services to assist clients in compliance with New York’s recreational marijuana law (the Marijuana Regulation and Taxation Act). The NYSBA, in the context of Rule 1.2(d) which prohibits assisting clients to violate the law, adopted its prior opinion with respect to New York medical cannabis legislation to the recreational cannabis industry.

The NYSBA provided four reasons for its opinion:

  1. In light of the federal government’s continued decision not to prosecute state-legalized medical cannabis, attorneys are provided “cover” to practice cannabis law: “Inasmuch as 17 states, plus Washington, D.C., and Guam, have now legalized recreational use of marijuana in some form . . . it seems fair to say that for nearly a decade of federal forbearance in the enforcement of federal narcotics laws has been equally applied to state laws legalizing recreational marijuana and to state laws legalizing medical marijuana.”
  2. The MRTA’s robust licensing and regulatory system is what is intended by federal enforcement policy to be the object of federal forbearance.
  3. Clients need legal advice in applying for and navigating the MRTA, and without such advice, New York’s recreational cannabis industry will likely break down.
  4. This situation is unique in that the interplay between federal and state law is not what was intended by Rule 1.2(d)’s prohibition on lawyers assisting clients when the lawyer knows the client is engaging in illegal conduct.

The NYSBA’s second determination is that attorneys can partake in the use of cannabis, own cannabis businesses, and grow cannabis plants as permitted by the MRTA. Again, the NYSBA relies on federal forbearance policies in explaining that use, ownership in a cannabis business, or home cultivation is permitted.

Third, NYSBA expressly permits attorneys to accept an equity interest in a client’s cannabis business as compensation for providing legal services. The Opinion recites the rules that apply to equity interests generally, as well as cautionary language regarding violating the MRTA and engaging in interstate commerce.

It is the last part of the Opinion that we at the Canna Law Blog find VERY interesting. We have long been vocal about the risks associated with choosing the wrong attorney for a cannabis business (here and here). We have also heard a number of anecdotes from clients about New York “cannabis” attorneys requiring an equity interest as part of their representation.

In light of the NYSBA’s opinion, the practice may now seem acceptable. But we strongly caution anyone to agree to give up equity without asking a few questions, chief among them, what about the MRTA itself?

The MRTA’s adult-use cannabis provisions expressly prohibit the following in the context of the prohibition on vertical integration: (i) having direct or indirect ownership interests in multiple licenses in each license type; (ii) having direct or indirect ownership interests in multiple license types (with limited exceptions); and (iii) having any ownership interest in a retail dispensary if said person or entity has an ownership interest in a cultivator, processor, and/or distributor licensee.

At a minimum, asking for equity as part of legal representation at this point (i.e. prior to issuance of the actual rules and regulations) reflects a fundamental lack of understanding or concern about the MRTA itself. The obvious risk is that the law firm’s or attorney’s ownership interest in the applicant will disqualify the applicant from being eligible for an adult-use license.

You might then wonder if you can ask the law firm for a list of its cannabis investments on the off chance that you are the only client that has been asked to provide an equity interest. You should, but not so much for the answer, but to see how seriously your prospective attorney treats client confidentiality.

We think it is pretty obvious that an attorney taking an ownership interest in a New York client’s potential cannabis business is a very tricky proposition at this point given that the MRTA expressly prohibits vertical integration and having a direct or indirect interest in multiple licenses. To that end, even asking for an equity interest at this stage of the rule making process (in that the rule making process has not even started) is a red flag in and of itself.

In short, we caution any prospective applicant to think long and hard before agreeing to give up equity to its attorneys. And not so much from a business perspective, but because of the potential ramifications on the license application. If your attorney does not have good answers to the questions raised here, well, you may want to consider how well your attorney really knows the MRTA.

Read More

Licensing, New York