Foreign Financing Understanding the intricacies of foreign direct investment in the cannabis industry

As states continue to legalize cannabis, there has been increasing interest and questions in and about foreign investment into the U.S.’s booming cannabis industry. As would be expected, much of this interest is from Israel, Canada, Spain, Turkey, South America, the Netherlands, the United Kingdom and Germany. These investors are interested in certain states in particular, like California, because of the size of their markets, but also because certain states have no residency or citizenship requirement to be able invest in cannabis businesses.

 

In general, foreign direct investment (FDI) refers to any type of cross-border transaction where a company or investor from Country A invests money in a company located in Country B. It generally doesn’t refer to dumping money broadly into stocks and bonds—it is specifically about a concentrated, single-enterprise investment.

 

FDI exists in several forms. Foreign investors can start a new company and can finance and build it from the ground up. They can participate in a joint venture with U.S. partners. They can wholly or partially acquire a U.S. business. They can also take a lighter touch, where they provide primarily branding and process support while having U.S. parties take on the bulk of the financial risk—the basic franchise model.

 

In the cannabis industry, there are already large FDI projects in cannabis ancillary services (i.e., the companies that provide the goods and services that support the actual cannabis plant-touching businesses). Foreign investors have opened up domestic companies for the manufacture and import of cultivation equipment like grow lights and hydroponic equipment, processing equipment like automated trimmers and extraction machines, and associated inputs including soil, fertilizer, vaporizer batteries and cartridges. There have also been large amounts of foreign money invested into cannabis real estate projects.

“These investors are interested in certain states in particular, like California, because of the size of the market, but also because certain states have no residency or citizenship requirement to be able invest in cannabis businesses.”

 

In addition to buying the real estate, the foreign investors put money into greenhouses, grow lights, storage facilities and more to offer turnkey cultivation and processing facilities for lease to local businesses. These companies are largely unregulated at the state level, and their foreign investment issues are similar to non-cannabis businesses, dealing with things like registering as U.S. taxpayers for partnership taxed businesses, complying with the Foreign Investment in Real Property Tax Act and dealing with immigration issues.

 

For firms directly involved in the buying and selling of cannabis, state-specific restrictions become more of a concern. States like Washington do not allow anyone who is not a state resident (much less not a U.S. resident) from having any profit interest in a cannabis business. Contrast that with California and Oregon, which are extremely liberal with their cannabis regulations, and there is no residency or even citizenship requirement to participate. Still, state regulations and state laws are typically written with U.S. residents in mind.

 

In turn, things like criminal and financial background checks on foreigners remain in a bit of a grey area. Ultimately though, neither state officials nor the Federal Bureau of Investigation are likely to have any real information on foreign nationals who haven’t had prior contact with the United States. How the U.S. federal government will react to foreign ownership in terms of the Department of Justice (rather than via immigration through the Department of Homeland Security) still remains to be seen, though nothing’s been publicly reported that’s a red flag against foreign cannabis business ownership in states that don’t have resident or citizenship requirements.

 

As far as federal laws go, the Controlled Substances Act doesn’t differentiate between activities that are international, interstate or fully intrastate in nature. Possessing, manufacturing and distributing cannabis are illegal federally regardless of where the company’s owners live. Still, there are a couple of criminal statutes that add fuel to the fire when interstate and international commerce are involved. 18 U.S.C. § 1952, for example, criminalizes traveling or using the mail in interstate or foreign commerce with intent to distribute the proceeds of cannabis sales.

 

More questions arise when considering foreign ownership in the context of the Department of Justice cannabis enforcement memoranda that cannabis-legal states are working under. The main takeaway from the Aug. 2013 Cole Memorandum (which has been rescinded by U.S. Attorney General Jeff Sessions) was that if the states want to keep federal law enforcement away, they need to make sure their regulations prevent state licensees from violating the various federal enforcement priorities. One of those priorities was that state regulations need to prevent “revenue from the sale of marijuana from going to criminal enterprises, gangs, and cartels.” If the state and federal criminal background check databases don’t have extensive coverage on foreign crimes, how can a state, including California, have faith that the foreign investors don’t fall into one of those categories?

 

For now, with no broad pronouncements apparent, it appears that the federal government is taking a wait-and-see approach to foreign ownership of state cannabis businesses. That means it is up to state cannabis business participants and the states themselves to ensure that foreign owners do not violate federal enforcement priorities.

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