Advising the cannabis client
Brief Overview of the Current Status of Cannabis Law Since the enactment of the CSA in 1970, cannabis has been considered a schedule I drug, and the use, possession or distribution of cannabis remains subject to criminal penalties.[1] While the federal law itself hasn’t changed, the federal government’s stance on enforcement has taken many turns. In the most recent turn, Jeff Sessions, then acting as Attorney General, released a memo rescinding the “Cole Memo”, which had previously limited federal intervention in state-authorized cannabis activities. The Sessions Memo decentralized federal marijuana prosecution by giving greater flexibility to each individual prosecutor. Even in the face of unfavorable policies, the number of states legalizing cannabis continues to grow. According to Business Insider, 32 states have legalized medical marijuana, 11 states have legalized recreational marijuana, and several other states are expected to vote on the legalization in 2020. With the states and the federal government at odds with one another, serious uncertainty looms over the cannabis industry and everyone involved in it. So what does this uncertainty mean for attorneys wishing to enter this space and represent businesses in a state-legal but federally-illegal industry? It means that an in depth look at the rules of professional conduct and other rules is not only prudent but necessary. The Professional Ethics of Advising a Cannabis Client While no two state’s rules of professional conduct are exactly alike, almost all of them have a rule similar to Rule 1.2 of the ABA’s Model Rules of Professional Conduct. Rule 1.2 provides in relevant part that a lawyer shall not counsel a client to engage, or assist a client, in any conduct that the lawyer knows to be criminal or fraudulent. Rule 1.2, when read in isolation, seems to preclude attorneys from assisting cannabis clients at all while the substance is illegal under federal law. Consequently, some states have started to modify their professional rules, either by adding official commentary and issuing binding ethics opinions, or by announcing a policy to permit counseling a cannabis client.- For example, the Colorado Supreme Court provided comment [14] to Rule 1.2 which permits Colorado lawyers to counsel and advise clients participating in legal cannabis business operations provided that the lawyers also advise the clients of the risks under federal law.
- As of this writing, 23 other states have provided guidance – either in the form of an ethics opinion or a rule change – on the professional ethics of advising a cannabis client.[2]
- Limit the scope of your engagement to specific state law For example, if a client comes to you seeking your help with issues related to his Colorado-licensed dispensary, you should state in your engagement letter, in no uncertain terms, that you will provide advice on the lawful sale of cannabis only in Colorado (or other state where you are licensed and cannabis is legal). Failure to make this clarification could cause many issues, as “lawful sale of cannabis” may not exist under other law.This consideration is also specifically relevant when rendering legal opinions as to whether a company is validly existing and in good standing. Under various state’s laws, including Delaware, entities may be formed for “any lawful purpose.”[4] While cannabis is legal under some state’s laws, it is not lawful under Delaware law, a popular jurisdiction for forming entities. Thus, using a Delaware entity for the operation of a cannabis business would likely be understood to violate the entity’s Delaware charter, and therefore, no legal opinion could be given as to the valid existence and good standing of such entity. In order to avoid pitfalls down the road, specific attention must be given to the state law of the organizational jurisdiction.
- Make sure the client fully understands (1) that cannabis is illegal under federal law and (2) all the related consequences In a perfect world all clients seeking to enter this industry would have done their research and know all about the status of cannabis law. Unfortunately, in reality many may not fully grasp the law or the consequences at issue. We suggest conveying this information to the client as early as possible by including a disclaimer in your engagement letter that provides “acts of possessing, using, distributing and selling cannabis are federal crimes and punishable as such.”An attorney should expand this disclosure where the cannabis client is seeking to raise capital in private placements. Risk factors to consider include not only the normal business risk factors, but also risk factors relating to the status of cannabis under federal law, the risk posed by other states where cannabis is not legal, the existing banking issues because many banks will not handle funds derived from cannabis, and other issues unique to the cannabis industry. Additionally, cannabis clients and their counsel should be aware that there are many people out there who will happily charge a fee to help cannabis businesses raise money in violation of state and federal broker-dealer registration and licensing requirements.
- Know your client before taking the risk Before agreeing to assist a client in a potentially risky area of law, make sure you really know the client. Ask yourself, “is this client worth the risks I am taking or is this client trying to use the legal system to commit improper acts?” Be very wary of the unworthy client, for the unworthy client is a significant risk to us all.