Could Sessions' Cancellation of the Cole Memo Actually Solve Marijuana's Money Problem?
If Sessions' announcement pushes Congress to act, then canna-businesses may get more bank loans than V.C. investments in the future.
Published on January 15, 2018

Image via Israel_Patterson

Since U.S. Attorney General Jeff Sessions' latest announcement to rescind the Cole memorandum — Obama-era guidance directing federal attorneys to lay off state-compliant canna-businesses — the industry is once again dealing with a renewed degree of uncertainty. While at the surface, it may seem like rescinding the Cole Memo would bring the cannabis industry's fast-moving progress to a halt, many industry folk are brushing it off. In fact, some argue that now may be a better time than ever to invest in cannabis.

"The announcement from Jeff Sessions threw shock waves through the industry, but as the smoke clears, it’s evidence this may be the boost we needed," says Jesse Peters, CEO of Eco Firma Farms in Oregon. With legalization in California and the industry already supporting more than 200,000 jobs, it's already too late to turn back, he adds. Peters predicts that rescinding the Cole memo will force Congress to act and craft legislation to protect the cannabis industry and end prohibition more quickly.

After all, the Cole memo was not a piece of legislation, but only guidance. It didn't carry the same weight and authority of actual law. With midterm elections coming up next November, cannabis legalization will increasingly become a mainstream political issue, forcing politicians to take a stand. As we've already seen in New Jersey and Virginia, where successful gubernatorial candidates Phil Murphy and Ralph Northam came out in favor of cannabis reform (without first having to be asked about it), cannabis now has the potential to moreover become an integral issue on presidential campaign platforms for 2020. And with more than 60 percent of the country in support of legalization, campaigning against it carries the risk of political backlash.

There are two types of investors out there, says Peters: Those who'll get too scared and divest from the industry ("that's part of the purpose of a pronged attack from Sessions," he reasons), and then those who see this as the last best opportunity to invest. "Trying to pull the Cole memo to influence investment to stop this industry entirely is like shooting a BB gun at a freight train," argues Peters.

When Congress passes laws to protect the industry, then institutional lending can kick in, and canna-businesses can finally qualify for large business loans from traditional banks, rather than continuing to heavily depend on deep-pocketed investors. "There will be no more getting in for a couple million here, a couple million there, at least for the well-established companies, unless you're joining a fund," says Peters.

For more predatory investors, this is the last opportunity to take advantage of needy canna-businesses, says Peters: Extreme scenarios — such as where investors ask for total debt repayment after a year, plus 30 percent equity — will be few and far between when entrepreneurs can get better deals via bank loans if and when federal law changes. At this point in history, investors will also need to consider the length of their investment returns. If the return on investment won't kick in until after federal law changes, it's probably not worth it, Peters suggests.

Regardless of your investment strategy, however, you'll still need to consider the legal risk involved, and that risk depends on which state you're in. "What Jeff Sessions did was ripped up the Cole memo and then gave that prosecutorial discretion to each state's U.S. Attorney," says Oregon-based marijuana attorney Bradley Blommer. In Oregon, for instance, U.S. Attorney Billy Williams suggested his priorities haven't shifted with regard to marijuana law enforcement, while in Massachusetts, U.S. Attorney Andrew Lelling said he wouldn't provide any assurances.

"There's nothing that prevents them from prosecuting state-licensed marijuana businesses, they absolutely could at any time begin a crackdown," says Blommer. "But the political ramifications of that would be huge. These U.S. Attorneys often have political ambitions. Especially in states with recreational marijuana programs, for them to go against clear public sentiment would not be the smartest political move."

If, hypothetically, federal attorneys did prosecute canna-businesses, investors (for starters) could lose their investments. "It depends on what they charge them with, but potentially, if they charge them under the RICO statute, which is criminal conspiracy, then anyone who knows anything out it or contributed to it could be prosecuted and potentially go to jail," Blommer says.

In general, there's no real change in the way the industry needs to respond, whether the Cole memo is in place or not, according to Evan Eneman, managing partner at Casa Verde Capital, a venture capital firm focusing on the ancillary cannabis industry [disclosure: Casa Verde Capital is an investor in MERRY JANE]. "It wasn't policy and it wasn't required to be followed," he says. If anything, the slight increase in uncertainty might upset the balance of valuation. "You might see valuations [of cannabis companies] come down a little bit in the near term," he says.

But regardless of the Cole memo, companies should aim to remain compliant. "You have the highest likelihood of success and navigating the regulatory environment if you ensure robust compliance with respect to regulations and laws," Eneman says. "So maybe now there's a slightly higher level of risk, and maybe there will be a short term chilling effect, but in the long term, I don't see it having a meaningful impact."

Madison Margolin
Madison is a New York/Los Angeles-based writer who specializes in cannabis coverage. Her work has been featured in Playboy, the LA Weekly, and other publications.
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