An Industry Wakeup Call – cannabusiness advisory

“Weedmaps”, which has been called the cannabis industry’s largest technology company, was given a fright on Halloween of last year.  Weedmaps’ parent holding company, “Ghost Management Group, LLC”, received a subpoena to testify before a federal grand jury and provide certain documents and information to the U.S. Attorney for the Eastern District of California.  The wide range of records and other items contained in the request spooked the cannabis industry, as Weedmaps was asked to share materials regarding at least 30 marijuana plant-touching companies that it does business with.  Being the so-called “Yelp of cannabis”, Weedmaps is uniquely situated in having access to a significant amount of data for a large number of retail marijuana enterprises across the country, both medical and recreational.  While the public became aware of the subpoena in early March of this year, it wasn’t until just recently that a copy of the order was made generally available, revealing the broad scope of the information being requested and containing the names of several household-name cannabis companies.

The U.S Justice Department has, since the time of the Cole Memorandum, taken a limited approach in pursing legal action against state-law compliant marijuana enterprises, instead concentrating on those operating “illicit” businesses in contravention of applicable state laws, a tack that has been echoed by U.S. Attorney General William Barr.  However, despite the Attorney General’s statements and the recent dearth of proceedings against state-law-compliant actors, recreational marijuana companies remain subject to U.S. federal law and potential enforcement action thereunder.  Thus, in keeping with the adage that “past performance is not a guarantee of future results”, the Weedmaps subpoena may be an indication that the Justice Department’s may be deviating from its establish path.

In the past, the receipt of a subpoena may not have seemed all too out of the ordinary for Weedmaps (or others in the industry, for that matter), given that they were usually only issued in connection with investigations of black-market dealings by third-parties, with whom Weedmaps may have had some interactions with.  Therefore, while the instant subpoena does indeed name several such parties with potentially non-state-compliant operations, it is distinct in its request for a wide swath of documents and information relating to a significant number of high-profile marijuana companies, which are certainly a far cry away from the black-market cannabis operators that federal law enforcement usually targets.  In addition to these well-known companies, which almost undoubtedly operate in compliance with applicable state laws, material regarding their shareholders, equity structure, corporate affiliates, and investment vehicles was also requested.

The subpoena, by including such a large number of state-law-compliant companies and seeking detailed information on their financial and corporate organizational structure, could be indicative of a general shift in the Justice Department’s strategy of marijuana law enforcement.  Granted, the ultimate goal of the U.S. Attorney’s office in this case is unknown and its reasons for issuing the subpoena remain unclear.  Nonetheless, the revelations derived from the subpoena provide a wakeup call to the industry and a reminder that, despite the increasing number of states that have legalized marijuana, it continues to remain illegal under federal law.  As such, now more than ever, those operating or investing in state-licensed cannabis companies are well advised to take proper precautionary measures (e.g. securing robust insurance and indemnity packages), to act as a bulwark and mitigate the potential downsides of federal law enforcement action.  Of paramount importance, they should also ensure that their operations maintain compliance with all applicable state cannabis laws, by implementing or updating corporate governance frameworks and compliance oversight measures, as necessary.