On-Demand: The 2021 Cannabis Landscape

Joshua Horn:Sure, good morning. As, my name is Joshua Horn, I'm a partner in the Philadelphia office with Fox Rothschild where I co-chair national/international Cannabis Law practice group. My particular area of expertise in that subject is, in the finance, M&A and, in particular, the regulatory components of both of those aspects in the space, and do that on a national and international basis.

Ben Aspir:My name is Ben Aspir, I'm a Senior Tax Manager with EisnerAmper. One of my specialties is within the cannabis industry scoop. I've had a distinct pleasure of being involved with the group since its infancy where it was just an idea five, six years ago. It's been one of the most satisfying professional endeavors I've been involved in, in my decade-plus experience.

EisnerAmper:Okay, great. The first question I want to ask, is for you, Josh. There are two main pieces of legislation out there that affect the cannabis industry. The first is the Secure and Fair Enforcement Act one, known as the SAFE Banking Act, and the second is the Marijuana Opportunity Reinvestment and Expungement Act, known as the MORE Act. How will those two pieces of legislation affect the cannabis industry?

Joshua Horn:Well, if either or both get a pass to current Congress and get signed into law, they'll have a significant impact. But I think first, let's just touch on the SAFE Banking Act, and with that, we'll be. And I think before you can really appreciate a significant, you have to understand the issues with banking in the cannabis space. As most of you may know, banking is predominantly a cash-based business because you cannot use a credit card, the card associations will not accept card transactions. And there's an issue with banks accepting the money for deposit or making loans because of Bank Secrecy Act and anti-money laundering laws which restrict banks from taking money from illicit activity, which cannabis, because it's still federally illegal, isn't illicit activity.

So in 2014, the Financial Crimes Enforcement Network division of the Department of Treasury implemented some guidelines called the FinCEN guidelines. And what those guidelines provided were basically as follows, and I'm kind of going to paraphrase it. We at FinCEN really don't think you should be banking in cannabis, but if you are doing it in the medical cannabis space, here's how you have to do. And the way you had to do it and they still have to do it is by filing a Suspicious Activity Report every time you take money from a cannabis client and you have to report that you are confirming that your client is in the cannabis space and you are otherwise compliant with state law. And there's two different other levels, including the third level of a terminating one where you're going to be involved in violation of state law.

And the reason why banks really were reluctant to even follow the FinCEN guidelines, there's only a few hundred, I think it's up there close to 700 now prevents credit unions in the country to do it basically, because the banks had become a sub regulator for the Department of Treasury in the sense that in order to take that money, part of the certification the bank would have to make would be that the money was from a cannabis operation that was running fully compliant with state law. So banks who decided to go into the space charged anywhere clients of ours from three to $10,000 a month just for the service. So that's the important context for the SAFE Banking Act.

And basically, what the SAFE Banking Act would provide would be for those states that have state-regulated cannabis programs, it would lift the banking restrictions in their states and pre-up banking for deposit and for tradition lending practices, which you don't get now, in the space. And so, if that gets traction again in this next or the future legislative sessions, I think it will have a significant impact for a number of reasons. One, you'll be able to get real traditional banking in those states so that you wouldn't have to go to alternative funding services for debt, for example. And two, there's a belief that if the monetary system is modified that you also see a broader capital market access such as getting listed on the New York Stock Exchange within us.

So none of that can happen until the monetary issue is resolved, but the belief is if SAFE Banking, which had a lot of traction in 2019, comes back to that, it can take hold. The opposition in 2019 to it when it got to the Senate was the belief that was basically legalizing marijuana and the concern that marijuana has not been adequately assessed from a scientific standpoint for potential harm to people who use it. That's the big overview of the SAFE Banking Act.

The MORE Act which actually, I think, may ultimately be tougher to pass in some respects actually has the most traction as of December when it was passed by the House of Representatives. Now, the MORE Act, what that provides, it provides for the descheduling of cannabis in the Controlled Substances Act. It also facilitate expungement of past convictions and also tax cannabis products at 5% on a federal level, excluding all the taxes that get charged in the state level to fund a criminal and social justice reform projects including an Office of Cannabis Justice within the DOJ that would administer grants to aid communities that have traditionally been impacted negatively by the war on drugs. It would also prohibit the denial of federal benefits like housing on the basis of cannabis use in states that use or possession of marijuana or otherwise, provide it.

So the interesting thing about the MORE Act is that its Senate proponent is now Vice President, Harris. And so, the belief is that this new administration, it should have a fair amount of traction. My sense is I still think it's a tough sell for a number of people in Congress that fully deschedule marijuana. But I do think we may see some aspects of the MORE Act make it through the legislative process, particularly, criminal justice reform and social equity because I don't think it's any real secret, but people of color have been disproportionately impacted by Cannabis Laws in the United States. And this is certainly further decriminalization that you get under the MORE Act is certainly a step in the direction of rectifying our past wrongs or at least making sure those past wrongs are not as much of an issue going forward.

I suspect there will be something and MORE Active will come back on the table sometime this year, probably not for some time until further assessment of the COVID situation, but it has some traction and we'll just see whether and to what extent it makes it through the legislative process. Eric.

EisnerAmper:Great, now Ben, Josh spoke mostly about the legislative impact about the SAFE Act and the MORE Act, but what impact could the passage of those two legislations have on taxation, specifically on 280E compliance? And if you could explain to the group why 280E is so important to the cannabis industry.

Ben Aspir:Sure, so as Josh said, one of the biggest obstacles for the cannabis industry is banking. So I think it's a service we all take for granted. Every company has to pay taxes, even a nonprofit, they have payroll taxes, they have real estate taxes. If there's income taxes that need to be paid, how do you pay it if you're not allowed to have a bank account? But the banks, the local banks, won't service you. So the IRS literally has cash counting rooms for cannabis businesses, as crazy as it sounds.

So if the SAFE Banking Act were to be passed without a significant change and positive development for the industry. And then as far as Section 280E, before I talk about 280E and it's probably the most widely known section of the tax code by anyone in cannabis industry, I think it's important for everyone to understand the background of 280E. So in the mid '70s, I believe in 1974, there was a drug dealer named Jeffrey Edmondson, he got arrested for trafficking methamphetamines and cocaine. And, of course, once he got arrested, the tax man came. And so, the IRS audited him and they imposed significant penalties.

Well Mr. Edmondson hadn't filed his tax returns due to the illegality of his occupation. However, as anyone knows the story of Al Capone, it doesn't matter whether legal or illegal, you still need to file your personal tax returns. So Mr. Edmondson reconstructed his tax returns to the IRS and he said, "No, I have all these deductions. I have inventory, I have rent that I should be able to deduct." The IRS understandably did not agree with Mr. Edmondson and it went all the way to the tax court. And the tax court ruled in 1981, I believe, in favor of Mr. Edmondson and they allowed him to deduct his rent, and his utilities and his inventory. And Congress was not too happy with this.

So in 1982, they passed Section 280E. And what Section 280E says is that no deduction or credit is allowed for any amount paid or incurred during the taxable year in carrying on the trader business that consists of trafficking and the controlled substances within the meaning of Schedule 1 and Schedule 2 of the Controlled Substances Act. So Schedule 1 and Schedule 2 of the Controlled Substances Act, marijuana or cannabis is a Schedule 1 drug. It's treated the same as heroin, they treat it as highly addictive and there's no medicinal use, that's what's Schedule 1 means. Schedule 2 is other drugs. And then depending on where it is on the Schedule, Schedule 1 obviously is the most severe, the law imposes the more stricter penalties for possession on the higher schedule drugs.

So if cannabis were to reschedule to below Schedule 1 and Schedule 2, it would allow Section 280E, it would get off 280E and it would significantly expand the deductions because right now cannabis companies are only allowed to deduct cost of goods sold. So even though they said no deduction or credit is allowed, they still allowed cost of goods sold. And it seems strange that they only allowed cost of goods sold, but in the committee reports and Congress, they said, "We would've disallowed everything," but they were nervous it was going to be challenged on constitutionality. So they said, "You know what, we'll throw them a little bone and we'll let them deduct cost of goods sold." Well, depending on the type of business you're in, that could be a significant tax burden.

So for a cannabis grower, cost of goods sold are a huge amount of the expenses. So yes, there's a hit on the bottom line of a company on tax expense but it's not as big as for, let's say, a dispensary. What are their costs of this role? So then it's the product they're purchasing, maybe some shipping expense and a few other expenses. But they can't deduct the salaries of the officers, of the person at the cashier, they can't deduct rent. In fact, the tax rate skyrockets and their tax bill is through the roof. 280E has been litigated in the courts' ad nauseam. The theme seems to be the same, the courts are not going to legislate, they're not going to rule on Congress' intent and they want Congress. If Congress wants to legalize cannabis, let them do it. The court has not ruled favorably in people that try to do an end around 280E.

EisnerAmper:Thanks, Ben. Just to emphasize that because of 280E, the effective tax rate for cannabis companies is so much higher than for other businesses and other enterprises. Josh, I guess since November, we've had a democratic President, Senate and House. I know you touched a little bit about it in your first response to the first question with respect to Vice President Harris. But, how do you think this democratic President, Senate and House will affect cannabis legislation, if at will?

Joshua Horn:It's a tough call, I mean, people thought there was going to be this huge blue wave. And I think if you look at the publicly traded markets in the cannabis space, the stocks are really taking off. I mean, significantly, when companies were originally getting listed predominantly on the Canadian Stock Exchange, otherwise known as the Cannabis Stock Exchange, in 2017 and '18, these companies really took off the value and then there was really a green bubble, like the irrational exuberance of the tech bubble, for most of 2018, 2019. And now, with the perception of this blue wave, it's the fall of the stocks' growth group.

So people just presume that there's really massive reform of the Cannabis Laws in the US, and I don't necessarily see it that way. I mean, one, you always have to keep in mind, when Joe Biden was a Senator, he was decidedly anti-cannabis and really was one of the proponents of the war on drugs, the failed war on drugs through the 1980s. But although, he has become receptive to the criminal reform. And I think of everything that we've talked about already and what we may be looking at in the next few years, I really think the easiest piece of legislation to get through would be some form of criminal justice reform because, as I noted earlier, the Controlled Substances Act has had a decidedly adverse impact on people of color.

We, at Fox, actually submitted an amicus brief to the US Supreme Court in supportive of Marvin Washington's appeal to the Supreme Court and highlighted the fact that President Nixon made it a point that he was using a Controlled Substances Act to focus on hippies and people of color. So I think the criminal justice reform is probably the most likely as opposed to a descheduling altogether. And people have to realize, you have to be careful what you wish for descheduling. Because it was descheduled, then there's no question you're going to come under FDA regulation once it's descheduled.

So at this point, when you're really effectively in a gray market where the FDA is not touching it, there's some people in the industry who think again, it makes no sense to have any real descheduling because otherwise, your de facto is going to be subjected to so many additional regulations. So there's two schools of thought here. One school is just we don't get descheduled altogether or rescheduled, I don't know if that's going to happen.

I think the SAFE Banking Act and some form of that, you're going to see hopefully, some reform of 280E. Because look, I mean, the whole point of the SAFE Banking Act, I mean, if you use the acronym, is to get money into the monetary system in a safe way. We had a client who's in Colorado, a rather large cultivating client who at one time when they didn't have a bank account, they had a separate warehouse, it was just full of cash. And so, that cash is not otherwise getting work into the economy. And so, that's why I think all the potential reforms, I think that is most likely.

And I think 280E is another one that I think is more likely to get addressed. As Ben was talking about, some people try to circumvent it. And one of the more popular ways they try to circumvent it is to use a management company to run the, otherwise, deductible costs outside of the dispensary, for example. But just anecdotally, the IRS has taken a rather dim view of this unless the management company is a true management company, not just servicing one dispensary. And so, I think that's the second part, I think, really, is going to be criminal justice and then secondarily, it's going to be in the financial services industry. And then with the criminal justice, I think you'll see some social equity programs.

If anyone follows what's happening in adult use space, since Illinois want adult use, and Illinois is a perfect example, what you're seeing is in these programs, very significant social equity programs in order to get these pieces of legislation passed, I suspect we may see some of that, the federal level with the criminal justice reform. So maybe descheduling, but I think more likely, in total, you're going to see some criminal justice reform, some social equity and an attack on the financial aspects to get this money into the monetary systems.

EisnerAmper:Thanks Josh. Ben, what do you see as far as cannabis being deschedulized or reschedulized during the Biden administration?

Ben Aspir:I definitely agree with Josh, I don't think it's going to happen overnight though President Biden has softened his stance on cannabis, he's not a big proponent of adult use cannabis. But I think the prospect not to be hyperbolic are the best they've been in decades.

EisnerAmper:I would think with everything going on in the country these days, I think there is enough other things going on that are probably a higher priority than descheduling of cannabis, unfortunately. So Ben-

Joshua Horn:And actually, just to take on Ben and Eric's point, I think if it's not descheduled, what I think you'll see, my gut is that the Controlled Substances Act will, at some point, in the next few years, really be a moot point. And what do I mean by that? I think when you have states like Virginia working its way through its legislative process and adult use bill, and you have more recent states who've come on from medical programs such as Missouri, such as Utah, such as Oklahoma. I mean, again, not states of the bastions of liberalism.

I mean, ultimately, maybe even Idaho, which is the most anti-cannabis state in the country, I think you're going to see more states come on online with at least some form of medical program and more states, and we're going to get to the topic on, and particularly on the East Coast, having adult use programs. And so, ultimately, you're going to have 50 states of hodgepodge laws, but effectively, the Controlled Substances Act will just be a moot point. That's what I see from a reform standpoint that maybe it doesn't get descheduled, but effectively, it won't matter.

Ben Aspir:Right, I mean, and never has dozens of states basically thumbed their nose at the federal government and said, "We're going to do what we want, we're not going to wait on you, we're just going to proceed how we feel necessary."

EisnerAmper: And we also know it's changed depending on which party is in the White House and who the Attorney General is, but the federal government has taken the approach, it seems, of recent years that, "We'll allow you to follow your state law. As long as you stay within the state guidelines, we won't go after you."

Joshua Horn:Yeah, at least under the Obama administration, that was effectively the Cole Memorandum, which were actually a series of memoranda written by Assistant US Attorney, James Cole. But interestingly enough, it only applied to the medical program, but de facto, it really applied to the adult use and medical. And so, what Cole Memorandum effectively provided was that as long as you are operating a Medical Marijuana Program under a robust state system and you're not doing one of eight things as being involved in a cartel, such as being engaged in other unlawful activities, such as selling to minors unless it's under a medical program, such as growing on federal lands, such as selling on a federal lands, the federal government was going to take a, "We're just not going to do anything about it."

And then everyone thought that the sky was falling when Jeff sessions, who was the US Attorney, and Jeff Sessions, as most of you may know, is very decidedly anti-cannabis, he tore up the Cole Memo and basically said, "Well, it's prosecutorial discretion," which in reality, it always was anyway. And so from my perspective, it really didn't change anything. But that's just the context for why the federal government basically has taken a hands-off approach. I don't see that changing now.

I mean, the cases that you do see come up with entities that are in either adult use or medical program is where you have diversion, meaning where product is taken over state lines. There was a case shortly after Trump's inauguration involving such an incidence in Colorado. And that's really what it's been limited to as opposed to an attack on the system altogether.

Ben Aspir:Like Josh said it, unless there are egregious situations, they have not gone after these state legal cannabis dispensaries. And part of it is because of the amendment to the budget, Josh, but the Rohrabacher–Farr amendment, which basically said you can't use funds to prosecute them if they're state legal, no medical cannabis dispensaries. So if you don't have the funds the of prosecutor, then it's effectively legalized, almost.

Joshua Horn:And that bunch of bill was challenged a number of years ago in the Ninth Circuit Court of Appeals which includes California, Washington and Oregon, overturned, I think, it was 44 convictions and sent them back to the district court because the people who wanted to assert the defense and they were compliant with state law and they shouldn't have been prosecuted because it was improper for the DOJ to use federal funds to prosecute them because they were in a state legal program.

And so, that law has been challenged in every budget. Since 2014, it has remained in some form, even through the Trump administration and in the emergency spending bill, it's still there. I certainly don't expect that to come off the books. So at least state legal medical programs should be left untouched through the Biden administration.

EisnerAmper:Great, Ben, besides 280E, it seems we get asked a lot of questions regarding possible qualified small business stock exemptions for cannabis companies. First off, can a cannabis company qualify for qualified small business stock exemption, and what other questions are we getting from industry with regard to cannabis and taxes?

Ben Aspir:So much like with taxation and the cannabis industry, it's a gray area, but an argument could be made, and I'll explain what it is, that cannabis companies could potentially be eligible for this qualified small business stock exemption. And what is exclusion is, is if a C corporation, if they meet all the criteria of Section 1202, you have to have the limitation on $50 million. In essence, if you hold the stock for more than five years, you could potentially exclude tax-free up to $10 million from federal taxes, the gain on the sale. So when people hear about this, they think it's, that sounds like a late-night infomercial. What do you mean I don't have to pay any taxes on millions of dollars? So it's an exclusion, it's not a deduction.

Like I mentioned earlier, 280E does not allow deductions or credits. So an argument could be made that since Section 1202 is an exclusion on the sale of qualified small business office and actually deduction. An argument could be made that the sale of the stock in a cannabis company in a corporation could be eligible, but it just, like most of other tax areas in cannabis, is far from clear.

The other significant tax benefit that cannabis companies, again, maybe eligible for is this Employee Retention Credit. It was passed as part of the CARES Act, it's a payroll tax credit, and there's a question whether cannabis companies can claim it. And it was actually significantly expanded, this Retention Credit, as part of the Consolidated Appropriations Act passed, I don't know, about a month and a half ago. There's certain restrictions but it allows a $7,000 payroll tax credit for each employee for the first and second quarters of 2021. So again, that's a payroll tax credit.

280E is binding on income taxes, whether the IRS would challenge it, they probably would because they did not look favorably on the cannabis industry. But, again, like the Section 1202 solution, the argument can be made and maybe they can claim this Employee Retention Credit which is going to be extremely lucrative.

EisnerAmper:Similar to this, I know we've talked in the past about what cannabis companies can avail themselves of and what they can't, and that PPP loans, Paycheck Protection Program loans, were really not available to cannabis programs. Maybe Josh or Ben can explain to our group as to why.

Joshua Horn:My understanding, because it's been a federal program, and you're in the space, and it's federally illegal, there was no access to it. I have heard anecdotally that some people did manage to get that type of relief. But if I recall correctly, the form itself, you had a test of whether or not you're in the cannabis business. And if you were honest, you probably wouldn't get any benefit from it.

I think companies in the hemp space got a bit more favorable treatment because in 2019, if I recall correctly, President Trump's signed 2018 Agricultural Improvement Act of 2018 which made hemp, which is Cannabis sativa L plant with a THC level of 0.3% or below federally legal. So those businesses who are in the hemp space got more favorable recruitment than certainly those in the traditional medical marijuanas or don't use marijuanas.

Ben Aspir:Right, and so with this Retention Credit, which is all part of the CARES Act as well, they didn't specifically school the cannabis industry. It could have been an oversight, we don't know. But since we had published an article saying is the Employee Retention Credit an alternative to PPP for the cannabis industry? It's that something to be thought about.

EisnerAmper:Great, now this is a question really for both of you. There seems to have been a flurry of M&A consolidation in the industry of late. Do you see this trend continuing? Josh, do you want to address us first?

Joshua Horn:Sure, not only do I see it continuing, but I see it being very difficult to keep up with. I mean, it's interesting, I think there's a number of things going on. About a year ago or through 2019, private equity and deals in the space just died for whatever reason, there was a pullback. And I think one of the interesting things that has come out of COVID, quite frankly, because cannabis was deemed to be an essential necessary, an essential item that those businesses could stay open through COVID where you had shutdowns.

And for example, I'll use Pennsylvania as a for example, because we have a state liquor system. So the liquor stores closed for a couple of months in Pennsylvania, but the medical marijuana dispensaries could stay open. And at the same time, Pennsylvania then included anxiety as one of the serious medical conditions for marijuana. And guess what? Everyone has anxiety in Pennsylvania. And so, we had a client in Pennsylvania whose revenue went up 40% a month through the summer.

And so, what I think that the fallout from all of that was you had the private capital market interest, private equity got very interested in the cannabis space again. You had companies that were cash poor becoming cash positive and looking to buy assets of those who are not succeeding. And you have a general maturation in the market where you're going to have some natural consolidation. I mean, there are multi-state operators who are looking to expand their footprint. And so, I think there are deals to be had either with cash or with the stock, public traded stock or private stock.

And we've been working non-stop one on deals for about a year now. And it had one large deal that we worked on close in the summer, and that was around $800 million transaction, a merger of two companies. So I think that trend is only going to pick up speed because you have the stock market picking up speed for cannabis, so it's easier for companies to use their equity as cash to do further consolidations. And you also have private capital coming back in the industry full-steam, and so there are plenty of deals to be done.

I mean, I don't think it's going to stop, I think it's only going to pick up speed and, in particular, with the perception that there's this blue wave and that the cannabis will be federally legal, you're going to see even more deals and you're going to see even more people, even companies try to get listed on various exchanges to develop their pool of capital to do deals. And so, I don't see it stopping and based upon what we're seeing at Fox, I can tell you it is as robust as it's ever been.

Ben Aspir:Yeah, I believe the same thing. Capital's back in the cannabis industry, it wasn't pretty the prior couple of years, but it's back. I mean, as Josh said, if anyone follows the cannabis stocks in the publicly traded market since the election, even today, they're rising significantly well. I mean, obviously, the market isn't always right, but the sentiment clearly is there.

Joshua Horn: Picking up on Ben's point, I mean, perception's a reality. I mean, we joke around that, a year in Cannabis Law is like seven years, it's like a dog year because things are just moving at such a rapid pace. And with the stock markets appreciating, particularly the Canadian Stock Exchange where a lot of large multi-state operators based in the US are traded, those stocks are going through the roof. So people looking to do deals, are they looking at the upside of a merger where they're getting the stock return, where a couple of years ago, when that market collapsed, a deal that was valued at, say, a dollar, by the time the deal closed, even valued at a penny because of the collapse of the market. And now you're seeing the opposite and it's a lot.

For those of us who are old enough to remember, it's like the tech bubble and the tech boom of the late '90s and leading to the collapse in March 2000. But I think you have a pot bubble that may or may not, but I don't think it's going to burst any time soon just because you have the change of leadership at the federal level, which is more receptive to cannabis and cannabis reform, I think it just keep exploding indefinitely.

EisnerAmper:Now, when you talked about COVID and the impact on the cannabis industry, obviously, COVID had major impact. And in fact, the issue about essential and non-essential businesses were left up to the various states, and most states deemed liquor to be an essential business, while it seems some states, in particular, Massachusetts, deemed medicinal cannabis to be an essential business but recreational to be not essential. So there was some confusion early on certainly, I think, that impacted a lot of what you're seeing here.

Joshua Horn:We had clients on the short end of that stick in Massachusetts. I think one of the things there's a misnomer about adult use versus medical, I think if you did a real study of the people who were going into adult use, that they're buying through adult use, sure, there's a lot of people just doing it for recreational purposes.

There's also a lot of people, and which is why I think they were deemed to be essential elsewhere other than Massachusetts, is there a lot of people who were using or using the adult use program for medical purposes, just really self-medicating because they don't want to go to a doctor, they don't want to go through that whole Michi gas getting a medical card, and going to a doctor, and get a certification. I mean, they just don't want to be bothered. And so, and I think that's why most states, other than Massachusetts, kept adult use as fully operational and essential during the COVID shutdowns.

Ben Aspir:And where the industry has come, and I'm sure Josh can attest this, over the last five, six years, it's really amazing to see since our group formed here probably about six years ago and where we are now today, I mean, we're light years ahead of. People we're not nearly talking about the cannabis industry as much, there was not nearly as much capital in it, so there's a lot more room to grow but there have been great strides that have been made.

EisnerAmper: If I could just get your view on this as well, I think a few years ago, landlords might've been hesitant to put a dispensary in their property because of the impact it might have on other people around it and the impact it might have had on the community. Are those views of people changing these days?

Joshua Horn:Drastically, I mean, we have real estate development clients who have real estate in New Jersey, and we'll talk about New Jersey shortly, who were calling me with some regularity asking me if I know of clients in the cannabis space who are looking for locations to have dispensaries in adult use program. I think there's still some difficulty for landlords of, say, strip malls because of their financing, how they're financed. If they're financed through a traditional bank, it's not in who's not, I will say, knowingly in the cannabis space. Every bank in this country is touching cannabis in some way, maybe some are just doing it with their blinders on.

But the problem you run into, and we had this with a client in the Midwest, was that their financing source was anti-cannabis. And so, if you don't want to be in default on your credit facility, you needed to not rent your property to a cannabis business. So I think that will still keep going until we have, again, something like the SAFE Banking Act. But certainly, it is very attractive.

And there's a publicly traded company that's very active in this space called Innovative Industrial Properties, it's a publicly-traded REIT, and one of the things they do are sales and leasebacks. And if you look at their stock, I think their stock is up 800% in the last year because that's what they do, that is their business model. And it's fascinating because they charge whatever rent they charge and its way of alternative financing. And again, I see that's just another indication that the land use space in this is probably one of the most profitable ventures that people can get into.

EisnerAmper: For our audience, before we finish, we are going to leave some time at the end to answer some of those questions that you may have posed in the question and answer section of the screen. The next question for both of you relates to New Jersey. New Jersey was the first Mid-Atlantic state to approve a referendum to legalize adult use recreational cannabis. What does this mean for New Jersey and what does it mean for the neighboring states of New York, Connecticut, and Pennsylvania, and what do we expect from those states, and other states?

Ben Aspir:Well, I love my home state of New Jersey, the way they pass law is the most New Jersey way they could do it. So they said, "We're going to legalize New Jersey." But on the ballot it was legalized but they didn't have a framework that "Okay, where do we go from here?" So now, there's obviously a lot of haggling going on in Trenton, some of it is very legitimate concerns. So I do believe New York has come out and the governor has clearly stated he's very for legalizing cannabis.

And I think, especially in up here in the Northeast, once one state, so-to-speak, falls and completely opens it up, I think all the other dominoes are going to fall, they're not going to want to watch all that tax revenue, people driving over the bridge or overstate lines to purchase cannabis and paying sales tax, their excise taxes. So I think the dominoes are going to fall.

Joshua Horn:I mean, just using New Jersey as an example, I mean, they was very close to passing legislation two years ago and they just pulled the legislation and they have the votes. From where I sit, it's a little disappointing they can't get their Act together because they were so close with the legislation and now, they can't seem to quite get there. And I know there's been some back and forth, even this week, on the legislation. But people are rushing to buy real estate or rent real estate just off of the George Washington Bridge. I mean, you understand it, people are just going to drive over from Manhattan and Long Island, get their cabins and drive back. But I still think New Jersey will get it done before the other states.

Last year, Governor Cuomo in New York was historically, decidedly, against cannabis. And last year, he came around that. And part of the budget bill that he wanted to work through last year was to put in the budget provisions for adult use. Now, that didn't get the traction that he wanted, but I think New York, he's definitely focused on it. And I think it was this past summer, the governors from the Northeast, I think it was Massachusetts, Connecticut, Rhode Island, New York, Pennsylvania and New Jersey, maybe Delaware, Maryland, they met because they wanted to make sure when you don't use programs, it gets rolled out in the Northeast, that there is effectively some synergies between them, so they just rolled out in some logical manner.

Being from Pennsylvania, I fully anticipate that Pennsylvania is screwing it up. The joke is that in Pennsylvania, when gambling came to Wenx city in 1978, everyone said that Pennsylvania would have gaining months thereafter. Well, 20 plus or minus years later, real gaining finally came to Pennsylvania. Same with alcohol, alcohol is a state-run thing in Pennsylvania. Historically, until the liquor system was improved, we'd drive over any one full bridge to go to New Jersey or Delaware to get a decent bottle of wine.

I mean, the revenue that it will be lost by not having an adult use program is tremendous. And if you think about it, using, again, Pennsylvania as an example, there's projected to be a $6 billion budget shortfall because of COVID. Well, there's only a couple of ways to raise revenue. One is to tax the crap out of your citizens, which I don't think anyone's going to be really be in tune for, and the other is the tax advice, like gaining alcohol or cannabis. And so, you think if you were to ask any citizen in any one of the states in the Northeast what they would rather do, they would rather have cannabis be legal and taxed than having to pay more real estate tax, for example.

And it's interesting what we're also seeing is this isn't limited to just the Northeast. I mean, just this past week, there's been legislation proposed in Virginia. I know that there's legislation being proposed in Maryland. So we have more conservative states really considering going online with an adult use program. As Ben said, once New Jersey goes, they're not going to have a choice, they're just not going to have a choice and there's just too much revenue for the states to be making that they're losing by not having a robust regulated adult use program that's taxed accordingly.

EisnerAmper: Great, and I did see recently that Andrew Yang, who is now running for Mayor of New York City, is one of the most pro-cannabis candidates I've seen in quite some time. We've received a number of questions from the audience, so I'd like to turn to those questions. The first question is the money that's being used to do acquisitions, where is that coming from? And do you expect to see tobacco and spirits companies join the acquisition craze?

Joshua Horn:So where's the money coming from? A lot of it is coming from private equity, family offices, in particular. And for those companies that are traded on, say, the Canadian Stock Exchange, they're using their paper as cash, which I think is when you look at some of the bigger transactions, multiples of hundreds of millions of dollars, you're seeing the use of stock as really the cash driver in the deal. And Big Tobacco is already in it. Altria invested I think four and a half billion dollars, and has a 45% interest in a company called Cronos, the Cronos Group, which is probably the second-largest cannabis company in the world and it's based in Canada, and its business is only in Canada, but that's it. So Big Tobacco is already engaged and Big Beverages as well.

And you have a Constellation Group who's a significant investor in Canopy Growth. And Canopy is the largest cannabis company in the world, also based in Canada with only Canadian operations. I think it may have some hemp operations in the states. So those are two examples of Fortune 50 companies who are looking actively to get into the space and they're just being creative with how they're doing it since they can't do it here in the states directly because if they're publicly traded on, say, New York Stock Exchange, they could have a listing issue with being involved if they invest in traditional cannabis touching businesses in the US.

And we have a client in California who has an arrangement with Lagunitas. Lagunitas is a craft brewer on the West Coast. And our client has an arrangement with them that they're infusing beer with THC, they're deriving from your traditional cannabis operations. So I think that's only going to happen more, and more and more. And I think ultimately, there is descheduling altogether, you'll see Big Pharma jump into it completely.

Ben Aspir:And if you look at the investment allocation of the major cannabis ETFs that are publicly traded, they have a decent size allocation in investment in tobacco companies, so they already have a foot in the space.

EisnerAmper: Good, we've had a couple of questions dealing with transporting cannabis. I know that's a big issue that the two of you can address. As far as the problem with transporting cannabis from state to state, and what issue that creates for companies, and is that also an issue for New York and New Jersey and us in the metropolitan area?

Joshua Horn:Well, the simple answer is it's illegal because-

Ben Aspir:A big no-no.

Joshua Horn: Yeah, a big no-no because, look, the thing is, I'm not going to be naive and say it doesn't happen all the time. I mean, you go into McCarran, or you go airport in Las Vegas, or you going to the airport in Denver, there are signs that say, "Oh, by the way," if you're coming into the airport. And you go into the men's room before you go through security, it stinks like a cultivation facility. But the thing is that's really the diversion issue of going over a state line, runs a foul of federal law.

Look, state run programs run a federal law, but as we talked earlier, the federal government's taken a hands-off approach on state run legal cannabis businesses, but the second they try to over state line, all bets are off either for businesses or for individuals. So notwithstanding the fact that people will drive over the George Washington Bridge, you do so at your own risk.

I use the Pennsylvania example as well, there was a period of time that police officers would be staking out liquor stores on the New Jersey side of the bridge and looking for people with Pennsylvania license plates. You may see that again. So that is illegal to do and you're operating your own risk to do it. In that case that I talked about in Colorado a few years ago, the situation there was allegedly, a growth facility was moving cannabis that they're growing under the Colorado state legal program to another state, and that was a no-no.

EisnerAmper: Great, there's been a lot of press of late of the stock market and, in particular, two stocks that I'll mention, GameStop and AMC. Those are stocks have received quite a lot of commentary in the press these days. Do you think the values of these cannabis stocks are being impacted similar to the way those stocks are being impacted?

Joshua Horn:Well, I think that's probably some of it, I mean, but I think much larger is this whole notion of the blue wave because you have a democratic controlled White House, the Senate in Congress that, again, perception is that there's going to be a massive reform at some point in the next four years, and I think what's driving up the value. I mean, because the issue, and one of the things is if you live in the United States, it's not necessarily very easy to invest in or trade in cannabis stocks in Canada because you need to find a broker is willing to do it, so that presents a challenge.

And so, there are alternatives that people invest in such as ETFs and actively traded mutual funds. There's one actively traded mutual fund that I'm aware of in the space, although that's specifically designated to cannabis, there are others that do cannabis stocks and there's ETFs in the space. So I think the massive inflow of money into those investments, I think, is also driving up the value of the cannabis stocks. I think part of its irrational to brands is well because of the perceived blue wave, but I think it's here to stay for the indefinite future.

EisnerAmper: Okay, we're talking about cannabis stocks. With cannabis still being illegal for federal purposes, where are these cannabis stocks being listed?

Joshua Horn:So it depends, and so, if they are a US, what we call flower touching business, meaning a US company that either grows pie, cultivates pie, processes pie or sells pie, you have to be listed on the Canadian stock District, and then you get a dual listing here in the US on the Pink Sheets. And the reason why that is, is because you can't be listed on the New York Stock Exchange or Nasdaq, if it's a federally illegal business. Similarly, you can't be listed on something like the Toronto Stock Exchange because it too has similar requirements to be federally legal. And if it's not federally legal in the US, they're not going to let it be listed on the Toronto Stock Exchange.

So you see, are a lot of the companies such as MedMen and Cresco, I think GTI, Curaleaf, True Leaf and big cannabis companies with operations in the US are all listed on the Canadian Stock Exchange with two listings in the US, and it's for that reason. And I think until there's real financial reform, again, like the SAFE Banking Act that opens up the monetary system, I think that's the way it will be, at least, in the short term, until some folks challenge to get listed on a US Exchange.

Ben Aspir:And much of the M&A bonanza probably about two and a half, three years ago was Canadian money, it was a large Canadian operators making acquisitions in the US.

EisnerAmper:Good, Ben, you spoke earlier about the problems that New Jersey is having moving forward with its adult use recreational cannabis legislation. When do you think we'll be able to go to a store in New Jersey and buy cannabis? When will that happen? And by that, I mean adult use recreational cannabis?

Ben Aspir:I think it's going to be awhile, definitely not next month or two months from now. I would think potentially, by the end of 2021, probably into 2022, it's going to require some patience. I mean, I think the way the law is written now, technically, if you're allowed to hold Cannabis purchased in New Jersey, but if it's purchased from outside of New Jersey, it's illegal, there's a lot of kinks to work out. It's going to be awhile; I would think it's going to fall into 2022.

EisnerAmper:It is my understanding that a lot of the hold up on that law, and I know it’s being discussed and it might've been resolved, was how to handle minors, when minors are purchasing, or caught holding or using with adult use recreational cannabis.

Joshua Horn:Yeah, I think that has been in is the big a sticking point. I know there were some efforts this past week on that very issue, but that will remain the big sticking point. And I agree with Ben. Because well, once they finally reach an agreement on the law, you then have to have the regulations and they're not always a full package-

EisnerAmper:And taxation.

Joshua Horn:Right, and so, if you don't have the regulations pre-packaged for how the adult use program will be administered, rolled out and regulated, you'll always know you're not going to be behind the adult use cannabis in New Jersey. And look, Illinois did an amazing job because when it passed its law I think in December of 2018, they were taking applications in early 2020. And if you were an existing medical program in Illinois, it was called co-locating and you could have an adult use dispensary within your medical dispensary. So, I mean, that would be the quickest route for New Jersey to get adult use product available to the public. And it's just one of the things that's to be worked out.

Ben Aspir:Yeah, and I think the current situation in New Jersey, the current operators, and there's about 12 licenses, they're easily going to have a leg up on anyone starting from scratch in the state in New Jersey. Medical cannabis has been legal in the state probably for, I don't know, about a decade, maybe more so. So those operators, it was the original six, and now they issued new licenses, I don't know, probably two years ago. So there's a lot of big players, a lot of big money with the current operators, so I would think they have a huge leg up once it's fully expanded.

Joshua Horn:Yeah, and not to use a terrible pun but it's growth business and I don't see the growth, I don't see it stopping. There's too much revenue for states to make and there's too much revenue for people. And look, don't get me wrong, it is a very, very sophisticated capital-intensive business. And people who have green dreams of just showing up, getting a permit and printing money, you are sorely mistaken, but there's real opportunity and it's not going away.

EisnerAmper:We only have a few minutes left before we finish, but I guess the last question I wanted to ask you is if you could just briefly touch on this. There are a number of states, I think almost probably 95% of the states in the United States have passed some sort of a legalization of cannabis, whether it be medicinal or recreational, and it's obviously much smaller number that have passed on adult use recreational. What do you see on the horizon for those other states? Do you think things are going to move more to a state legalization model and are more states are going to move forward that way?

Joshua Horn:I think so and I think it's already happening because we saw them in Virginia this past week. I know from work I do in Maryland, the legislation for adult uses is on the table. I don't think it's going to stop and I think, anyway, as you see, Florida is probably one of the next ones that's going to go and I just don't see it stopping. Like I said earlier, I just think the states will effectively moot out the Controlled Substances Act by adopting more medical programs and ultimately, adult use programs. I mean, if you look, you have South Dakota who duly passed medical and adult use in last election, and it's South Dakota, again, not the bastion of liberalism. So it's the trend, it's not going away, it's here to stay.

Ben Aspir:Yeah, I mean, there certainly could be a couple of holdouts, but like Josh said, states that you would never guess would pass any form of legalization have been passing it. So I think you're going to have, and we already have, but you're going to have even an overwhelming majority of some form of legalization.

Joshua Horn:I mean, even Idaho is talking, and Idaho is like the most anti-cannabis state in the country.

EisnerAmper:That's great. Well, thank you for participating in this conversation, and for everybody attending today's presentation. You can visit eisneramper.com/cannabis and foxrothschild.com/cannabis-law for more information. Thank you to our speakers, and everyone, have a great day.

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