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10 Important Risk Factors to Disclose to Investors of Your Medical Marijuana Business (Part 2 of 2)

In the previous part of this two-part series, we discussed five special considerations that should be contemplated by emerging medical marijuana companies and their investors. In this post, we will cover the remaining five risk factors that should be disclosed in the company’s private offering materials, which consist of the following:

6. Civil Forfeiture. Federal and state agencies may bring civil forfeiture proceedings in addition to, or in lieu of, bringing criminal prosecutions, which can result in property associated with a crime being confiscated or otherwise divested from the owner and forfeited to the government. This civil penalty could potentially reach all property associated with the medical marijuana company.

7. Potential for Unenforceable Contracts. A medical marijuana company may enter into contracts with persons in other states, and such contracts may be governed by non-Ohio law. Because marijuana is illegal under federal law and certain state laws, some state or federal courts may take the position that such contracts involving medical marijuana companies are unenforceable because they concern an illegal product or activity. It is advisable to consult with an attorney experienced in these matters to avoid the possibility of entering into an unenforceable contract.

8. No Federal Bankruptcy Protection. Federal bankruptcy courts have declined to entertain cases involving marijuana companies.[1] Therefore, an Ohio medical marijuana company looking to restructure will not be afforded federal bankruptcy protection, and will instead likely rely on an untested application of the Ohio receivership statute.

9. Potential FDA Regulation. To this point we have been discussing various legal obstacles derived from marijuana being illegal under federal law. However, if the federal government legalizes medical marijuana, the industry is then likely to see a substantial increase in regulation, including by the U.S. Food and Drug Administration (“FDA”). The FDA may issue rules and regulations requiring clinical trials or other hurdles to verify the efficacy and safety of the medical marijuana. It is also possible that the FDA would require facilities where medical marijuana is cultivated to be registered with the applicable governmental agencies.

10. Opposition From Pharmaceutical Companies. A medical marijuana company could face substantial threats from the pharmaceutical industry if medical marijuana displaces other drugs or encroaches on other pharmaceutical companies’ products. The pharmaceutical industry is well-funded with a strong and experienced lobby that is capable of imposing substantial marketing and political pressure on the medical marijuana industry.

If you would like to discuss these considerations in regards to your business, please contact Chris Brinkman at cbrinkman@kmklaw.com, Mark Reuter at fmreuter@kmklaw.com, or Allie Westfall at awestfall@kmklaw.com.  

 [1] See, e.g., In re Aranas, 535 B.R. 45 (BAP 10th Cir. 2015).

Possession and distribution of marijuana for any purpose is illegal under federal law. KMK can only advise clients regarding compliance with Ohio state law on medical cannabis, specifically, Sub H.B. 523 of the 131st General Assembly.

KMK Legal Alerts and Blog Posts are intended to bring attention to developments in the law and are not intended as legal advice for any particular client or any particular situation. Please consult with counsel of your choice regarding any specific questions you may have.

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