As we enter Q2 of 2025, the cannabis industry has become increasingly pessimistic about the elimination of Section 280E of the Internal Revenue Code, whether via rescheduling or otherwise. Rescheduling appears unlikely in the foreseeable future, and certain members of the Senate have filed a bill that would make 280E continue to apply even if rescheduling were to occur
Cannabis ESOPs (employee stock ownership plans) can provide a structure to avoid 280E, as well as federal and state income tax, entirely.
For a long time, social consumption lounges have been a sort of “White Whale” in the adult-use cannabis industry, murmured about and pursued but rarely spotted. Luckily for us Captain Ahabs, a number of state legislatures have begun taking action on developing a licensing and operational framework for social consumption lounges and cannabis events permitting consumption. The Cannabis Control Commission of Massachusetts issued its proposed rules and licensing structure at the end of 2024 (see Social Consumption Lounges in Massachusetts: Proposed Rules for more information). Most recently at the end of January, Maryland’s house and senate also took action by introducing two complementary bills to establish rules and to regulate the hosting of events permitting cannabis consumption in the Old Line State (Legislation – HB0132 and Legislation – SB0215). Connecticut, New Jersey, and New York have also recently taken steps towards developing and enhancing the social consumption lounge regime in their respective states.
Both Maryland bills remain under review of the respective finance committees, but here is a quick hitter summary on the contents.
Initially, the state would accept applications for 15 licenses that would permit the serving of single-serving, infused beverages and edibles sourced from third-party operators.
Neither the smoking of cannabis nor the infusion of foods and beverages on-site would be permitted.
Licensed locations would provide the Maryland Cannabis Administration at least 60 days advance notice of an event involving cannabis consumption. Therefore, this license type wouldn’t operate as a social consumption lounge, but would permit a location to host a temporary cannabis event where the consumption of cannabis products is permitted.
As you can see, the proposed bills are quite restrictive, but I choose to view progress as is and take solace in the old adage, “Rome wasn’t built in a day.”
Last week, the Massachusetts Cannabis Control Commission (“CCC” or the “Commission”) released new resources for navigating the rocky waters of community impact fees (“CIFs”) and host community agreements (“HCAs”). This announcement likely comes in response to the ruminating and yearning for additional guidance by operators and municipalities following the CCC’s release of new regulations and host community agreement template last year. See our prior blog post, “CCC’s Model HCA & Approval Process,” for more information on those regulations and HCA template.
This new release details several new resources available to cannabis businesses and their host communities in Massachusetts. Kimberly Roy, the Commissioner and Chapter 180 Working Group HCA Co-Chair stated, “[t]hese guidance documents are meant to serve as compliance tools to help clarify and streamline the new processes. As we approach the one-year mark in March of the new HCA requirements, the Commission continues to exercise its statutorily given authority to review and approve Host Community Agreements to ensure these contracts are compliant with current law.”
In the latest development in a road to rescheduling cannabis from Schedule I to Schedule III under the Controlled Substances Act (“CSA”), on January 13, 2025, in the Matter of Schedules of Controlled Substances: Proposed Rescheduling of Marijuana, DEA Docket No. 1362 Hearing Docket No. 24-44, Chief Administrative Law Judge (“ALJ”) John Mulrooney cancelled the January 21, 2025 hearing on the merits of the Drug Enforcement Agency’s (“DEA”) proposal to reschedule cannabis from Schedule I to Schedule III.
After a request by two private movants (the “Movants”) to remove the DEA from its role as proponent of the proposed reclassification rule was denied, the Movants filed a motion for the ALJ to reconsider its denial of this request. On January 13, 2025, ALJ Mulrooney (i) denied the motion for reconsideration but (ii) granted leave for the Movants to file an interlocutory appeal on the merits of ALJ Mulrooney’s refusal to remove the DEA as proponent of the reclassification. While this Order opens the door on appeal to potentially enable to a private actor to replace the DEA as proponent of the reclassification, the January 13 Order will surely cause further delay in the process of potential rescheduling, evidenced by ALJ Mulrooney’s ordering the Movants and the Government to provide a joint status update 90 days from the issuance of the Order, and every 90 days thereafter.
For those hoping that cannabis would be reclassified before the Trump administration enters office, this is a major disappointment. For those who have been paying attention, this is no surprise, and more of the same.
In a constantly evolving and [still – very] nascent industry like the cannabis industry, one truth has remained: it is a fools errand to try to predict if, when, and how regulatory changes and developments will occur at the federal level. For years, there have been similar questions floated and discussed amongst advisors, operators, and investors in the cannabis industry: “when will cannabis be legalized?”,“when will the SAFE act pass”, “surely Congress will do something, right?”.
Federal action is largely an issue of legislative and regulatory priorities (or, as we have seen, a lack-thereof). Folks can talk and pontificate all they want, but the reality has remained the same: States (at this point, 39 in total, having already passed laws allowing medical marijuana use) are left to fend for themselves, as are the businesses trying to operate with one (if not two) arms tied behind their back.
When President Biden requested in October 2022 for the U.S. Department of Health and Human Services (“HHS”) to “initiate the administrative process to review expeditiously how marijuana is scheduled under federal law”, there was tepid excitement. Hey – the White House is asking HHS to look into this… progress! Then, in August 2023, HHS issued a recommendation to the DEA that cannabis be reclassified from Schedule I to Schedule III under the CSA. At this point, industry participants started to cautiously buy in – maybe – just maybe – this will be the time something actually happens. After all, for business operators, a reclassification to Schedule III under the CSA, would have potentially huge implications – potentially rendering §280E of the tax code inapplicable to cannabis businesses, opening the door for cannabis businesses to deduct various business expenses like any other businesses complying with their state and local laws. And yet, here we are, almost two and a half years later, and the industry is still hoping for change at the federal level.
For operators and investors alike, the reality is simple. Now is not the time to focus on what could happen – or what we hope will happen – at the federal level. Industry participants must continue to focus on what they control: increasing operational efficiency to achieve and maintain profitability.
At the formal meeting of the Massachusetts Cannabis Control Commission (the “CCC”) on December 17, 2024, the CCC introduced proposed rules to govern cannabis consumption lounges. It has long been understood that, as the adult use cannabis market matured, the CCC would revisit the sparse regulations governing social consumption lounges and develop a licensure process.
Below is a summary of the three proposed license types and the draft regulations, which are open for comment from stakeholders until 5 p.m. EST on Thursday, January 23, 2025. Following this initial comment period the proposed regulations will be published to solicit public comment. All capitalized terms used herein shall have the meanings given to them in the proposed Adult-Use Regulations (935 CMR 500.002), which are available here.
License Types
The following licenses will be exclusively available to Social Equity Businesses, Social Equity Program Participants, Certified Economic Empowerment Priority Applicants, Microbusinesses, and Craft Marijuana Cooperatives for an initial period of 60 months, an extension of the current exclusivity period of 36 months.
Our Cannabis Industry Group would like to thank our clients—major cannabis market leaders—for yet another successful month, trusting us to close several notable and newsworthy deals across various practice areas and industries in November 2024. Our team of dedicated attorneys provided strategic counsel on complex transactions, including banking and finance, mergers and acquisitions, workouts and receiverships, and public securities, showcasing our commitment to delivering exceptional results for our clients. These achievements underscore the strong partnerships we have with our clients, as well as our firm’s extensive experience and collaborative approach to navigating intricate legal and business landscapes while servicing major market leaders in the cannabis industry.
We’re looking forward to welcoming experts and industry leaders from across the country to our Eighth Annual State of the Cannabis Industry Conference next month, where we’ll learn from their unique strategic insights, experiences, and expertise on the cannabis industry.
As the conference draws closer, we are featuring a series of interviews with several of our panelists. These conversations will provide a glimpse into their diverse backgrounds and perspectives, and give our readers and conference attendees a preview of the compelling topics we will be showcasing at the conference.
For our latest interview, we sat down with Jacques Santucci, President of Opus Consulting.
We are looking forward to welcoming experts and industry leaders from across the country to the Eighth Annual State of the Cannabis Industry Conference. Our panelists and speakers will offer their unique strategic insights, experiences, and expertise on the cannabis industry.
To continue our interview series, we are featuring a new interview with banking industry veteran James Daley, Senior Vice President and Director Structured Finance at Needham Bank. The new Structured Finance team provides customized financing solutions of $10 million or more to support the growth plans of businesses headquartered primarily in Massachusetts.
Can you describe Needham Bank’s role in the cannabis industry and your role at Needham?
Needham Bank is providing senior secured debt facilities, ranging in size from $3,000,000 to $75,000,000. This capital is used by both direct and indirect cannabis companies for a variety of applications.
At Needham Bank, I manage all of Commercial and Industrial Banking (lending and treasury) and all of Cash Management for the Bank. Cannabis lending rolls up through one of my teams, Structured Finance.
Does Needham Bank target particular cannabis businesses to lend to? What are some common features of the businesses that Needham invests in?
For lending inquires we are focusing on Multi State Operators (“MSOs”) and large regional direct and indirect cannabis companies. We are staying away from Single State Operators. For treasury opportunities, the Needham Bank team is looking to support operators that have an up-and-running business, slightly past the infancy stage, with a primary focus similar to the lending strategy for large scale, regional, and MSO operators.
What are some subtle “red flags” that might deter you or your team from investing in a potential opportunity?
When we see business plans that set unrealistic expectations. Many operators new to the industry think they will be profitable overnight. That is hardly the case.
What would our readers find surprising about lending to cannabis businesses?
The debt instrument is really basic and straight forward. It is not complicated at all.
What are some important lessons you’ve learned as a lender in the cannabis industry, and how have those lessons impacted your team’s current strategy?
Don’t overspend! Operators are spending way too much money to get their business off the ground. Keep plans simple. Focus on operations, focus on margins. These facilities are NOT real estate loans. They are operating businesses that require constant production, oversight, and management. We look at construction budgets very closely, and we upgraded our construction engineer program to take a finer look at budget and building processes to ensure clients are not overspending, are staying on budget, and to ensure they are staying on time.
Register now for Blank Rome’s 8th Annual State of the Cannabis Industry Conference!
Join us in person or via live stream on October 21, 2024. RSVP here: bit.ly/3AJprRA
We are looking forward to welcoming experts and industry leaders from across the country who will offer their unique strategic insights, experiences, and expertise on the cannabis industry.
In anticipation of the conference, we will be featuring interviews with several of our panelists. These conversations will provide a glimpse into their diverse backgrounds and perspectives, and give our readers and conference attendees a preview of the compelling topics we will be showcasing at the conference.
For our first interview, we sat down with Patrick Kim, co-founder and managing director of a leading provider of capital to the cannabis industry, Altmore Capital. Prior to founding Altmore Capital, Patrick was a partner at the Williams & Connolly law firm in Washington, D.C. At Williams & Connolly, Patrick represented a variety of major financial institutions and investment funds, including several top-tier private equity firms, in a range of commercial litigation matters and government investigations. Patrick offers a unique perspective on financing within the cannabis industry due to his legal background.
On June 10, 2024, Associate Justice Jeffrey Karp, of the Massachusetts Superior Court, Essex (the “Court”), issued an important—and, to many licensed cannabis businesses in Massachusetts, surprising—ruling in the case of Haverhill Stem LLC vs. James J. Fiorentini, that the new Host Community Agreement regulations (See Chapter 180 of the Acts of 2022, “An Act Relative to Equity in the Cannabis Industry” (the “New HCA Law”)) promulgated by the Massachusetts Cannabis Control Commission (the “CCC”) do not apply retroactively to the Host Community Agreement (the “Stem HCA”) entered into in 2018 between the City of Haverhill, Massachusetts, (the “City”) and Haverhill Stem LLC (“Stem”), a licensed cannabis dispensary.
Therefore, the Court held that the Stem HCA is governed by the language of G.L. c. 94G and 935 CMR 500 et seq. as in effect at the time of entry into the Stem HCA (the “Old HCA Law”), such that the Stem HCA is not governed by the New HCA Law.
