Domestic marijuana is the second largest cash crop in the U.S.

Over 6 million Americans age 12+ use marijuana almost daily.

Users spend $30 billion annually on marijuana.

55% of Americans support legalization of the drug.

Sources: RAND, Wall Street Journal, Forbes, CNN.

Colorado is the largest recreational marijuana market

Adult recreation marijuana will be $616.5 million.

Taxation of that market will bring an additional $101.8 million in

state tax revenue for 2014-15.

Source: Colorado Futures Center.

Marijuana to generate sizeable revenues in Washington

Officials estimate total revenue of $300 million for 2014 and $2

billion by end of fiscal year 2017.

Forecasts predict $51 million in tax revenue for 2015-2016 and an

additional $138.5 million for the following two years.

Sources: Washington Post, Economic and Revenue Forecast Council, The Oregonian.

2013 and 2014 projections for the legal cannabis market US$ millions

Sources: Wall Street Journal, ArcView Group.

State 2013 2014

California 980.2 1,127.2

Colorado 260.4 619.3

Washington 63.4 271.8

Arizona 26.9 134.6

Michigan 59.8 65.8

Massachusetts - 55.9

Oregon 29.6 37.0

Nevada 3.0 9.6

State 2013 2014

New Mexico 5.2 5.9

Illinois - 2.7

Connecticut - 2.2

Rhode Island 1.6 1.9

Maine 1.5 1.8

New Jersey 0.4 1.3

Vermont - 0.9

Washington, D.C. 0.08 0.2

*States without 2013 values have no retail market in 2013.

Medical marijuana is increasingly prevalent

Medical marijuana is legal in

21 states and Washington,

D.C.

U.S. medical marijuana

market is worth:

2011: $1.7 billion.

2016: projected $8.9

billion.

Source: Yahoo Finance, See Change Strategy.

Age limits aren’t enough to protect children

Source: 2012 National Survey on Drug Use and Health, US Department of Health and Human Services. Infographic: National Families in Action.

Five of ten new smokers are

under age 18

Eight of ten new drinkers are

under age 21

Tobacco & alcohol industries reach kids with flavored products

Source: Flavored tobacco and alcohol products advertised on the Internet. National Families in Action.

So does the marijuana industry

Source: Flavored marijuana-infused soft drinks sold in medical marijuana dispensaries and Colorado pot shops. National Families in Action.

Source: Marijuana-infused edibles sold in dispensaries and Colorado pot shops. National Families in Action.

Other ways the industry is marketing pot to kids

Source:. National Public Radio Report, April 18, 2014. National Families in Action.

Vaporizer pens help kids hide marijuana concentrate use

Children’s use doubles since drive to legalize marijuana began

3.7

8.1

11.9

7.0

18.0

22.7

0

5

10

15

20

25

8th Graders 10th Graders 12th Graders

Percent

1992 2013

Source: 2013 Monitoring the Future Survey, National Institute on Drug Abuse. National Families in Action.

Price increases for cannabis-related stocks

1.13

10.21

0.23 1.81 2.52

2.85

22.25

2.52

18.90

5.77

0

5

10

15

20

25

AVTC MDBX FSPM CANN GWPRF

US$

December 2013 April 2014

Price increases for cannabis-related stocks

0.03 0.03 0.1

0.04 0.1 0.09

0.08 0.11

0.68

0.33 0.36

0.57

0

0.2

0.4

0.6

0.8

HEMP CBIS TRTC GRNH NVLX MCIG

US$

December 2013

April 2014

Generalities

As a general matter, this discussion revolves around the business issues related to marijuana.

Omitted are specific criminal prosecution defenses, employment related issues, and details on the Controlled Substances Act.

Outline of selected legal issues: Federal Legislative Overlay

Supreme Court Cases

State specific legislation

Power of local government

Banking Guidance

Practice Tips

Federal overlay

The Controlled Substances Act (21 USC Sect. 841) makes it illegal to

manufacture, distribute, dispense, or possess with the intent to to

distribute, dispense, or manufacture a controlled substance, which

includes marijuana.

The federal government cannot force states to criminalize conduct that is

illegal under federal law nor can the federal government force state and

local police to enforce federal laws.

Since 2001, federal courts have handed down decisions in three significant

medical marijuana cases: US v. Oakland Cannabis Buyers’ Cooperative

(OCBC), Gonzalez v. Raich, and Conant v. Walters.

The Supreme Court issued opinions in OCBC and Raich. It declined to hear

Conant.

Supreme Court cases

OCBC: The Court determined that the medical necessity defense cannot be used to avoid a federal conviction for marijuana distribution.

Raich : Federal government can arrest and prosecute patients in states where medical marijuana is legal under state law. Despite issuing unfavorable decisions in both cases, the U.S. Supreme

Court did not in any way nullify effective state medical marijuana laws, nor did it prevent additional states from enacting similar laws.

Conant: The 9th Circuit Court of Appeals held that doctors cannot be prosecuted for recommending that their patients use medical marijuana. The Supreme Court chose not to hear the case, leaving the protections

established in Conant to stand.

Federalism

As a refresher, Federalism in the United States is the evolving relationship

between state and the federal government. Since the founding of the

country, and particularly with the end of the Civil War, power shifted away

from the states and towards the national government.

Marijuana regulation bucks that trend.

Although the U.S. Supreme Court ruled in OCBC that the medical necessity

defense cannot be used to avoid a federal conviction, a state may still

remove its own criminal penalties from its citizens that posses, grow, or

distribute medical marijuana.

Deputy Attorney General Cole memo

August 2013, Deputy Attorney General James Cole issues a memo

advising federal law enforcement not to target medical marijuana

businesses that act in compliance with a strong state regulatory

scheme.

The cornerstone of this policy is its emphasis on state regulation.

According to the memo, the federal government will focus its

efforts on eight enforcement priorities and rely on state law

enforcement authorities to manage areas that are not federal

priorities.

Eight priorities

Preventing the distribution to minors

Preventing revenue from the sale of marijuana from going to criminal enterprises,

gangs, and cartels

Preventing the diversion of marijuana from states where it is legal to states where

it is not legal

Preventing state-authorized marijuana activity from being used as a cover or

pretext for the trafficking of other illegal drugs and other illegal activity

Preventing violence and use of firearms in the cultivation and use of marijuana

Preventing drugged driving and exacerbation of adverse health consequences

Preventing the growing of marijuana on public lands

Preventing marijuana possession or use on federal property

Policy in practice

The vast majority of federal prosecutions took place in states that did not

provide clear and robust regulations.

By contrast, states with strong regulations for businesses saw little or no

federal law enforcement activity, including Arizona, Colorado, Maine, New

Jersey, New Mexico, Rhode Island, and Vermont.

Federal enforcement in states with clear regulations has generally been

limited to those breaking the law and making dispensaries locate further

away from schools.

State legislation

Two states, Colorado and Washington, have legalized recreational

marijuana.

32 states and the District of Columbia have laws on the books that

recognize marijuana’s medical value.

Laws vary from California, which allows for a doctor’s

“recommendation” to Maine, where 8 regulated non-profit

dispensaries are permitted.

Map: State-by-state marijuana laws in the U.S.

Source: Marijuana Policy Project, 2014

Power of the local government

State courts have upheld the power of local governments to enforce their

“police powers.”

Growers in Colorado are required to track all parts of all plants (even the

compost) from seed to sale. They have to be able to show that all parts of

all the plants they’ve handled have moved through legal channels and

that no buds or cuttings (which could be used to clone plants) were passed

on to the black market.

City of Riverside v. Inland Empire Patients Health and Wellness Center

affirmed that cities have the authority and the right to ban medical

marijuana dispensaries within their boundaries.

FinCEN Guidance

US attorney general Eric Holder recently announced that marijuana

businesses operating legally in states like Washington and Colorado

should have access to banks. “You don’t want just huge amounts of

cash in these places,” he said in a speech in January. “They want

to be able to use the banking system.”

Financial Crimes Enforcement Network (“FinCEN”) issued guidance

to give banks confidence that they will not be punished if they

provide services to legitimate marijuana businesses in states that

have passed marijuana friendly laws.

What does the FinCEN Guidance mean?

FinCEN called for due diligence by financial institutions in monitoring their marijuana customers, including, reviewing their applications for state licenses and understanding their activity, such as the types of products they sell.

There are reporting requirements that require banks to file suspicious activity reports (“SARs”) if the financial institution knows, suspects, or has reason to suspect that a transaction conducted involves funds derived from illegal activity, is designed to evade regulations under the Bank Secrecy Act or lacks a business or apparent lawful purpose.

The FinCEN guidelines have not opened the flood gates for traditional lending or banking relationships with financial institutions.

Practice tips

Know your state regulations and local regulations

Be mindful of local business taxes

Be mindful of “compliance-with-law” provisions in leases

Review loan documents for similar provisions

Not all things in this industry are regulated by the CSA:

Technology – creating technological advancements, such as LED lights

or Leafly are not prohibited activities

The Agricultural Act of 2014 recognizes hemp as a legal substance.

Federal Law now exempts industrial hemp from US drug laws.

Look to the revenue - states with regulations in place have taxed

marijuana sales

Looking to the future

While it is unlikely that federal law will change in the immediate

future, the more states act, the sooner federal law will change

How can change come:

U.S. Department of Health and Human Services (HHS) can declare that

marijuana meets sufficient standards of safety and efficacy to warrant

rescheduling

Congress can amend the CSA to either remove marijuana or move it to

a different class

Department of Justice can decide that it decides not to prosecute

under the CSA for marijuana violations