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The Tax Act and Cannabis Employment Practices

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Look out for a change in tax deductions for employer provided benefits — at least for some businesses.

President Trump signed the Tax Cuts and Jobs Act (the “Act”) into law on December 22, 2017.  The Act contains several sections that will impact companies that work with cannabis businesses and provide important indications of where states might be going with taxes in the coming year. As for the Act itself, its sweeping provisions went into effect on January 1, 2018.

Note that much of the Tax Act’s deductions and credits won’t apply to cannabis businesses due to IRC 280E, but these deductions and credits are still important to many ancillary businesses that serve the industry, and which may not be subject to 280E (we recommend that anyone with questions as to where they fall seek advice from their CPA or cannabis tax attorney). If these credits and deductions prove to be popular we may see states enact similar changes that will directly affect cannabis business themselves.

On the employment front, many cannabis businesses obtain employees through staffing agencies. Those agencies should will be subject to these new tax deductions and credits. We may see an influx of agency recruits, or a decrease, depending on how the recruitment companies take advantage of these deductions and how the new laws remove deductions for benefits provided to employees.

Sexual Harassment Settlements

Prior to 2017, we didn’t hear much about sexual harassment in the workplace. One reason for this is because a majority of sexual harassment settlements contain nondisclosure agreements. A nondisclosure agreement typically prohibits the employee from discussing the sexual harassment suit, its result or even the fact that harassment was ever alleged. Currently, employers are allowed to take a tax deduction for settlements paid out for sexual harassment and sexual abuse, regardless of the terms of the settlement agreement. That’s finally changing.

Going forward, employers cannot deduct settlement payments related to sexual harassment if the settlement agreement contains a nondisclosure agreement. Employers can receive a tax deductions on sexual harassment settlements that do not contain nondisclosure agreements. Payments in sexual harassment suits can be huge–meaning the tax deduction can also be huge. (Bill O’Reilly paid $32 million to one female accuser.) This will force employers to carefully consider how sexual harassment suits are settled, which is a welcome change. States might follow suit. Plan now how to handle sexual assault cases so you don’t have to make this decision.

Paid Leave Credit

Paid family and medical leave is a significant benefit for cannabis employees. Providing paid family and medical leave can attract highly qualified employees and help retain those employees. In what has been described as the first step towards a “nationwide paid family leave policy”, the Act provides employers incentives to provide paid family and medical leave—admittedly in a very complicated fashion.

Employers can qualify for up to a 25 percent tax credit for providing paid leave for qualifying employees under the Family Medical and Leave Act (FMLA). Employers qualify for the credit by providing at least two weeks paid leave equal to at least 50 percent of the employee’s regular wages. At a minimum, employers will receive a 12.5 percent tax credit for providing paid leave. The credit incrementally increases based on the percentage of regular wages the employee receives. The paid leave credit is only applicable to employees who earn less than $72,000 and have been employed at least one year. Paid leave must be provided separately from vacation leave, personal leave, or other medical or sick leave.

The Paid Leave credit expires in 2019 unless extended by Congress. Some congressional members have suggested Congress is considering enacting separate legislation that requires paid leave. Paid sick leave requirements are already in effect in several states, including those with cannabis laws.

Pay attention to expenses related to paid leave, and consider whether this a feasible option for your cannabis business. Several states already have paid leave and more are likely to follow. If your state does not already have paid leave that applies to your cannabis business, you should assume they will enact similar tax incentives soon.

ACA Individual Mandate

The Act removes the Affordable Care Act individual mandate to purchase health insurance. At first glance, this does not seem like it would affect your cannabis business, but staffing agencies employing more than 50 full time employees. are required to purchase healthcare for their employees. Employees that are recruited to your cannabis business are considered employees of the staffing agency. The ACA’s individual mandate was designed to work with the employer mandate to provide health insurance. The employer mandate is still in place. Employers with 50 or more full-time employees are still required to provide health insurance.  Without the individual mandate, it is likely insurance premiums will continue to rise unless Congress acts to reform health care.

Further, given the mandates were designed to work together, there is a strong suggestion that Congress will start to undo the employer mandate. It will likely come in the form of fewer reporting requirements or a complete removal of reporting requirements. This means that staffing agencies may reduce the number of recruits they have out at a time to avoid the employer mandate of the ACA, meaning you will have less of a pool to pull from.

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Oregon Cannabis: Leases Galore

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Same advice for pot leases.

For any marijuana business not fortunate enough to own its land outright, there are few documents more important than the lease. Not only is the lease the only transactional document reviewed by the Oregon Liquor Control Commission (OLCC) prior to licensure, but it sets fundamental operating parameters than can determine the success –and even life cycle — of the business. Problematic lease arrangements can sink a ship fast.

In Oregon, there are four main varieties of leasehold: the residential lease, the commercial lease, the ground lease and the agricultural lease. We steer most of our pot industry clients toward commercial and agricultural leases, depending on the circumstance. That said, we have had people walk in with just about everything.

Below is a brief summary on each type of lease, what to look for, and when to use them.

Residential Lease

Do not use a residential lease for a commercial cannabis operation under any circumstances. Even if you think you can revise the lease form to suit your purposes, do not be tempted; and if your landlord insists on this form of lease, say no. We are currently aware of two pieces of landlord-tenant litigation in which the parties used a residential lease for a commercial cannabis grow: those leases were upside down on everything, including the eviction process. One goes to trial next week after thirteen months of litigation.

The only time a residential lease should involve cannabis is in the residential landlord-tenant context, discussing the right of an Oregon tenant to grow up to four plants for home use (not OLCC; not re-sale) in accordance with state law.

Commercial Lease

We have written on commercial leasing a fair bit on this blog, and we have adapted a handful of excellent lease forms for various buildings and circumstances. Generally speaking, commercial leases are broken into three categories: office, industrial and retail. The latter two are used extensively by cannabis businesses.

Prior to entering into a commercial lease, the parties will commonly run some due diligence on each other. From the landlord’s perspective, that usually means looking at a business’ operating history (if any) and financials; from the tenant perspective it’s more about local zoning laws and the space. This last piece is especially important: the lease almost always disclaims any liability for premises defects with “AS IS” language.

Prior to signing a lease, the parties will often start with a letter of intent (LOI) that nails down the high-level terms: e.g. duration, rights of renewal, rental amount, occupancy commencement, rent commencement, landlord and tenant improvements, taxes, insurance, common area maintenance, etc. Once the parties agree on these deal points, the next step is to get busy drafting. Here are some cannabis-centric things to watch for at that point.

Ground Lease

Ground leases are long-term leases (think, 20 years or more) where the parties intend for the tenant to construct a building and other improvements (think, a row of cannabis greenhouses) which ultimately become the property of the landlord. These are almost always “net rent” leases, where the tenant pays all taxes associated with the property, including taxes, insurance premiums, utilities and maintenance.

Recently, we’ve seen an uptick in multi-acre property owners choosing ground leases. In some cases, a master ground lease with a series of subleases for different OLCC licensees is used to create a complex of sorts, assuming compliance with local zoning law and the availability of water rights.

Agricultural Lease

Agricultural leases are a specialized subset of commercial and ground leases, and they are used commonly in rural cannabis grows. These agreements tend to be laced with various provisions not present in other commercial leases, like irrigation, water rights, sharing of farming costs, maintenance of equipment, etc. These leases may also be tailored specifically to the nature of the land. This means that in addition to describing the property at issue, the lease will describe buildings, structures, fixtures and other appurtenances included in (or excluded from) the leasehold.

It is important to note that although commercial and agricultural leases are related in many ways, use of a commercial lease on certain types of rural property, like Exclusive Farm Use (“EFU”) land could theoretically have disastrous effects. In Oregon, “commercial activity” is banned on EFU land. More than one attorney has speculated that use of a commercial lease on EFU land could lead to that parcel’s tax benefits being removed.

Sometimes, an agricultural lease is the only way to go.

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Oregon Cannabis: New Year, New Minimum Wage

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More for the workers, less for the boss.

It’s 2018! That means your Oregon marijuana business will be subject to increased minimum wage requirements this summer. The new federal Tax Act has everyone considering money, so now is a great time to think about how the increase in state minimum wage will affect your business expenses.

In 2015 the Oregon legislature established a progressive series of annual minimum wage rate increases. The rate increases began on July 1, 2016 and continue through July 1, 2022. On July 1, 2023 the minimum wage rate will be indexed to inflation based on the consumer price index, which is a figure published by the United States Bureau of Labor Statistics.

The location of your Oregon cannabis business will dictate the amount of increase of the minimum wage for your non-exempt employees this July. (“Non-exempt employees” are employees who must be paid minimum wage and overtime, for any hours worked beyond 40 in a given week.)

Date Standard Portland Metro Nonurban Counties
July 1, 2016 $9.75 $9.75 $9.50
July 1, 2017 $10.25 $11.25 $10.00
July 1, 2018 $10.75 $12.00 $10.50
July 1, 2019 $11.25 $12.50 $11.00
July 1, 2020 $12.00 $13.25 $11.50
July 1, 2021 $12.75 $14.00 $12.00
July 1, 2022 $13.50 $14.75 $12.50
July 1, 2023 Adjusted annually based on the increase, if any, to the US City average Consumer Price Index for All Urban Consumers $1.25 over the standard minimum wage $1 less than the standard minimum wage

The Portland Metro rate applies to all employers located within the urban growth boundary. Metro has an Urban Growth Boundary tool to help determine if your cannabis business is within the Portland Metro area. The nonurban counties rate applies to: Baker, Coos, Crook, Curry, Douglas, Gilliam, Grant, Harney, Jefferson, Klamath, Lake, Malheur, Marrow, Sherman, Umatilla, Union, Wallowa, and Wheeler. All other counties must pay the standard rate.

Both the state of Oregon and the federal government set minimum wage requirements. The federal minimum wage is and remains at $7.25. As you can tell, Oregon’s minimum wage is significantly higher than the federal minimum wage. When federal and state employment laws conflict, employers must apply whichever standard is most beneficial to employees. In the case of minimum wage, Oregon employers, including all cannabis businesses, must pay their employees minimum wage based on the Oregon rate. Start planning ahead.

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Protect Your Cannabis Business from the Bad Acts of Your Employees: Part 2

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Be thoughtful, and beware!

Sometimes, our clients are surprised to learn that a cannabis business can be held liable for the bad acts of its employees. This includes: 1) liability to the general public, and 2) state administrative sanctions, including license forfeiture. We previously discussed the importance of having a strong sexual harassment policy and action plan to avoid liability for harassment suits. But what about other bad acts committed by employees? Employers can be found liable under a few different tort theories. Today’s post will discuss the tort of negligent hiring and retention.

Negligent hiring or retention arises when an employee commits a bad act against another employee or a third party. The injured party, usually in addition to bringing suit against the bad actor, will bring a negligent hiring or retention claim against you, the employer. These claims are not always persuasive or even justified, but they can be stressful and expensive, so it is important to take precautions where possible.

To prevail on a negligent hiring or retention claim, the injured party must prove that the employer “knew or reasonably should have known” about the employee’s dangerous or untrustworthy character. For example, let’s say you are hiring a budtender who will have access to customer’s credit cards and will handle money. You find out that the applicant has a previous history of credit card fraud. If you hire that applicant and he or she later fraudulently uses a customer’s credit card, you could be held liable for the bad act of that employee. Even if you hired the employee without knowledge of the bad acts, but you easily could have found out about the bad acts, you could be held liable.

Using the same example, if you know the applicant has a history of credit card fraud, it does not mean you cannot hire the applicant. It just means that the applicant should not be placed in a position where they have access to money or credit cards. That may sound like common sense, but business owners often make these types of mistakes.

There are several easy measures you can take to ensure that you are aware of an applicant’s history and character. Pre-employment background checks can reveal past felony or conviction histories that will allow you to make informed hiring decisions. Pre-employment physicals can also be a good idea. If you are hiring for a position that required frequent lifting of heavy items, you want to ensure that the person can actually perform the heavy work. If they can’t, and they injure someone else because of it, your cannabis business could be liable.

If a pre-employment background check seems like too much, there are other less invasive ways to vet your applicants. Request references and follow up on past employment. This is an easy and efficient way to determine someone’s character and fitness for the position. Simply ask past employer’s if they would re-hire the person and if not, why not. This is not only a good idea to protect yourself from negligent hiring claims but also to ensure you are obtaining the best employees for your business. You can also validate academic credentials and places of employment to get a sense of truthfulness about your applicant.

Pre-employment background checks and thorough vetting are especially important for certain positions. Some states allow marijuana deliveries. A delivery driver is trusted with a lot: the safety of others on the road, the safety of the delivery purchaser, with product, and with money transactions. Ensuring a clean driving record could save you significant liability in the future.

Pre-employment background checks and general vetting can be done, as long as they adhere to “ban the box” requirements. Many states, including Oregon and California, are passing laws that prohibit employers from requesting information about past convictions prior to interviews or conditional job offers. If you are unsure about what questions you can ask, it’s better to reach out to someone knowledgable than to make a crucial error.

Finally, if you discover an existing employee has a history of endangering people in some way, consider whether it’s appropriate to move the employee’s position or to terminate the employment. Thorough investigation of applicants can not only protect you from negligent hiring claims, but also will result in selecting the highly qualified employees that fit your business model. After all, the last thing you want to worry about is risking it all due to someone else’s error.

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Buying a Washington Cannabis Business: The 101

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Our Seattle office often receives calls from entrepreneurs who want to operate in Washington’s thriving recreational cannabis market. Washington is not currently accepting applications for new cannabis licenses which means there are a finite number of licenses available. This leaves one option for entrepreneurs who want to operate their own Washington’s cannabis business: buy an existing licensed business. These transactions are common but can be risky if the buyer is not careful. This post outlines some of the key issues buyers need to watch out for when purchasing a cannabis business in Washington state.

1. Prepare to buy the business, not the license. 

Generally, a prospective buyer has two options in buying a business: (1) purchase the entity itself by buying all outstanding shares or membership interests, or (2) purchase the business’ assets, such as the equipment, fixtures, property, and goodwill. When buying a Washington cannabis business, purchasing only the assets is not much of an option.

The Washington State Liquor and Cannabis Board (LCB) does not treat a license to produce, process, or sell cannabis as a transferable asset. This means that a buyer must purchase the business that holds a license, rather than purchase the license itself (it is possible to buy a partial share in a business but this post focuses on scenarios where the buyer takes full control over a licensed entity). There are some exceptions to this rule. For example, when a buyer targets a sole proprietor it is possible to assume the license. However, in most cases, the buyer must purchase the entity rather than the assets.

By buying an entity, the buyer takes on all contracts, debts, and anything else registered under the business’ name. This requirement means that a buyer faces increased liability and therefore must carefully evaluate the target business.

2. Do your homework and know what you’re buying. 

As with the purchase of any business entity, a potential buyer should perform thorough due diligence before closing. (See our articles on that here and here.) Washington’s Uniform Commercial Code database is available online and can be used search what creditors have filed against a debtor in the state providing useful information about the target entity’s debts. Buyers can also perform federal, state, and county lien searches to determine whether there are encumbrances taken out against the target company. A buyer may also search a licensee’s violation history on the LCB’s website, though this information may be limited. If time permits, a buyer can make a public record’s request for the license to uncover a full history of investigations, violations, and other pertinent information.  Such requests take a few weeks or months to process so they may not be available if time is a factor.

The buyer should request all relevant seller company documents and require the seller to list all other debts that could impact the business, including wages owed to employees or debts owed on unfulfilled contracts. Once these debts are outlined, a buyer’s attorney can draft a warranty or indemnity stating that the seller will pay for any outstanding debts that arose before the sale.

3. Know what you’re paying and when you’re paying it. 

After due diligence, the parties must agree to terms of the sale, including the purchase price. For background on how to value a cannabis business take a look at the following posts:

Once the parties are settled on the purchase price, it’s time for an attorney to draft the purchase and sale agreement.

In drafting a purchase and sale agreement, timing is everything. This is because the LCB must approve of anyone who is a true party of interest in a cannabis business. The definition of a true party of interest is broad and includes the following individuals in a given entity:

  • Sole Proprietorship: The sole proprietor and his or her spouse;
  • Partnership: All partners and their spouses. This includes general and limited partners in LPs, LLPs, and LLLPs;
  • LLC: All members and managers and their spouses;
  • Corporations: All stockholders and corporate officers and their spouses. This includes both publicly and privately held corporations; and
  • Multilevel ownership structures: All persons and entities that make up the ownership structure and their spouses.

The definition also includes any person or entity that expects a percentage of gross or net profits (excluding financial institutions) or who exercise control of the licensed business in exchange for money or expertise. Additionally, the LCB requires disclosure of financiers, which includes anyone lending or gifting money to a licensed entity.

Ownership of a cannabis business must not transfer until the LCB approves of the new owner. An undisclosed true party of interest or financier is a major penalty that results in a cancellation of license. This means that the buyer will not “get the keys to the company” until the LCB signs off. To deal with this, we often recommend using a conditioned contract where payment is made in increments over time based on certain events.  Buyers may elect to put money in escrow with instructions to distribute funds upon LCB approval. However, buyers should prepare to pay the seller a fee in exchange for the option to purchase the business after LCB approval.

4. Prepare for Licensing. 

After the purchase and sale agreement is executed, the LCB will investigate the buyer to determine whether he or she is qualified to own a cannabis business. The LCB investigates the buyer’s finances, requires the buyer show proof that he or she is a Washington resident, and requires the buyer submit fingerprints for a criminal background check. In addition, the buyer must provide detailed information on the source of funds used to purchase the business. This process starts with a phone call where the buyer outlines the details of the transaction. Then the LCB sends out a document request so that the buyer can provide documents to show the details of the transaction. These document requests often require that the buyer submit the purchase and sale agreement, proof of the source of funds which can include bank statements, a list of the buyer’s previous jobs and places of residence, and other personal information.

Conclusion. The process of purchasing a cannabis business can seem difficult, but a buyer with adequate preparation and counsel can get through the process without too much of a headache. Washington’s cannabis market is booming and the limited number of licenses makes a marijuana business a potentially valuable asset. If you have questions about how the process works, contact one of the cannabis business lawyers in our Seattle office.

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Hiring California Cannabis Employees: Be Careful What You Ask

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New year, new rules for California cannabis employers.

Beginning January 1, California employers with five or more employees will be prohibited from asking about an applicant’s conviction history and cannot consider an applicant’s criminal history until after a conditional job offer has been made. A conditional job offer is an offer made contingent on the completion of a background check. Only after the conditional job offer is made, can an employer inquire about conviction history.

This all holds true for cannabis businesses as well. Do not ask a potential employee about criminal history until after the conditional job offer has been made.

If criminal history turns up after the conditional job offer is made, the employer can rescind the job offer, but only after performing an individualized assessment. An individualized assessment requires the employer to consider:

  • the nature and gravity of the offense and conduct;
  • the time that has passed since the offense or conduct and completion of the sentence; and
  • the nature of the job held or sought.

If, after individualized assessment the employer decides the conviction history disqualifies the applicant from the position, the employer must provide written notice of its preliminary decision to withdraw the job offer.

And what is required in the “preliminary notice,” you may ask? That notice must name the disqualifying conviction or convictions, contain a copy of a conviction history report (if any), and notify the applicant that he or she has five business days to respond to the preliminary decision with evidence challenging the accuracy of the conviction record, or evidence of rehabilitation or mitigating circumstances. If the applicant informs the employer within five business days of an intent to respond, the employer must provide five additional business days before making a final decision. It’s quite the process.

Ultimately, if the employer decides to disqualify the applicant based on the conviction history, the employer must also notify the applicant of the final decision in writing and notify the applicant of his or her right to file a complaint with the Department of Fair Employment and Housing. Presumably, the landing page for that will be here.

The big takeaway here is that before you begin hiring for your California marijuana business, it is important to review your job applications and ensure they do not contain any questions regarding criminal history. If you plan to conduct job interviews, review your standard questions to root out any items about criminal history there as well. And then follow the job offer process to a tee.

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Marijuana Franchises Revisited

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Who will be the McDonald’s of Marijuana?

We often work with cannabis businesses that want to license their brands to third parties. Licensing is a great way to expand the reach of a brand and make some revenue without the capital expense of funding and owning a new location outright. For states that restrict ownership of marijuana businesses to state residents, licensing can be one of the primary ways non-state residents get into the market.

But any time a business enters into a licensing deal where the licensee is in the same line of work as the licensor, challenges arise. Specifically, that licensing agreement can be interpreted by state and federal regulators to create a quasi-franchise. As we’ve written before, this can cause problems because franchises must comply with a bevy of state and federal rules with which non-franchises do not have to contend.

Just because franchises are regulated, however, does not mean they are to be avoided forever. The first cannabis company to execute on a well-planned franchise model is going to make an absolute fortune. To date, there hasn’t been a lot of movement of would-be marijuana franchisors. Part of the reason is that would-be franchisees want to see established brand and operations value before entering into a franchise agreement. To demonstrate that value, a franchisor company’s best bet is to show positive performance at multiple locations. A single cannabis retail store may do great business, but from the outside, it is hard to tell whether that store is benefitting more from its location or its local team or its marketing or its branding. But when multiple locations carrying the same branding and using the same business practices consistently put up big numbers, they become very enticing to potential franchisees.

Market consolidation is already happening — a first step in creating the types of chains that can be precursors to franchises. In Colorado, data shows that more and more retail stores are becoming part of corporate retail chains. Washington recently increased its cap on direct ownership of marijuana businesses, allowing an individual to own up to five retail licensed businesses, and has seen similar movement toward consolidation.

In looking for potential franchise locations, California’s new demand-rich market is a logical target. California also boasts some of the nation’s most restrictive franchise laws, providing significant protections for franchisees. Franchises must, of course, be registered with both the Federal Trade Commission and with the state of California. California also requires the Franchise Disclosure Document, a large comprehensive document defining the ins and outs of the franchise relationship, to be registered with the state. Franchisors are prohibited from terminating franchise agreements early without good cause, and a franchisor cannot stop a franchisee from selling or transferring the franchise to a different person that meets all of the franchisor’s current standards for new or renewal franchisees. If a franchisor wrongfully terminates a franchise, the franchisee is entitled to the fair market value of the franchised business and assets as damages.

And though California has the strongest protections for franchisees, most other states offer similar protections. A franchise isn’t a relationship a franchisor can enter into on a whim; it is a significant long-term commitment of time and money.

All that said, it’s only a matter of time until we see big movement in cannabis franchises. They represent part of the natural progression of a growing industry.

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Oregon Will Make it Easier to Find Cannabis Business Owners

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Privacy for Oregon cannabis businesses just got tougher

People who own businesses often try to keep their names off state-controlled websites and other public registries, to the extent possible. There are various reasons for this: the owners may hope to avoid receiving tax and legal documents in front of clients, may wish to avoid media inquiries, or may simply cherish their privacy. With cannabis businesses, owners have a whole slew of reasons for wanting to maintain their anonymity. In Oregon, however, that is about to become a bit more challenging due to House Bill 2191, which takes effect on January 1.

To be clear, under Oregon state law, information related to marijuana business applications and ownership has always been subject to disclosure via an ordinary public records request. Those requests are easy to make in Oregon, and almost always cheap or free. There are some exemptions to the disclosure rule, but they relate mostly to security. Business ownership status is not a security concern, according to the Oregon Liquor Control Commission (OLCC). That said, public records requests are targeted in nature to a specific business or other matter, and it’s hard to do a quick sweep if you are looking for a certain someone. The online Secretary of State business search page, by contrast, allows anyone to simply type in the target individual’s name, and get immediate results.

Most law firms, like ours, offer registered agent services for their business clients. These services come at a standard fee, and one attractive feature is that the law firm will list itself as the point of contact for official documents, thereby shielding the names of business owners. In Oregon, an owner did not have to be listed at the initial registration in the case of an LLC, historically; and in the case of a corporation, neither shareholders nor officers needed to be listed. On renewal, the standards were a bit tighter, but overall, most business owners were able to remain discrete, like in Delaware and other states. That will be harder now.

Under HB 2191, an individual with direct knowledge of business operations and activities must be identified on the articles of incorporation/organization (including amended, restated, conversion and merger filings). In the case of a corporation, that person may be a director or controlling shareholder; in the case of an LLC, that person may be a member or manager. Alternatively, either type of business can list “any individual that has direct knowledge of the operations and business activities.” Anyone forming a marijuana business and hoping to remain discrete had better find a partner who is willing to be listed.

HB 2191 also adds a requirement that any new company list its principal place of business, rather than a P.O. Box or other address, upon incorporation. This mirrors the I.R.S requirement, and the principal place of business “must be a physical street address” rather than a commercial mail-receiving agency, mail forwarding or virtual office. This new rule probably won’t bother anyone running a dispensary, but producers, processors, and wholesalers may not be so keen on the change.

HB 2191 is a rare example of an Oregon law that affects cannabis operators but did not go into effect immediately on passage. Unlike many other new laws that passed in the last session, HB 2191 is not specifically targeted toward the cannabis industry and wasn’t a “quick fix” in nature. Still, pot business owners should be aware that their information is about to become more searchable. Heads up.

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Your Marijuana Business: What’s It Worth? (Part 2)

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Finally!

In April of 2016, we covered the basics of marijuana business valuation. At that time, we were aware of just one accounting firm — or, more accurately, one accountant at one accounting firm — who claimed to have any interest in marijuana business appraisals. This was likely due to a couple of factors: 1) CPA firms were slower than attorneys to offer services to cannabis businesses, due mostly to complications with CPA ethics rules (there were no CPA firms in Oregon or Washington with cannabis clients when we started in  this  industry seven years ago), and 2) business valuation is a uniquely specialized and accredited field, even among accountants.

But things are changing fast. Recently, we were excited to see Cogence Group PC, one of Oregon’s best financial forensics and valuation firms, publish a no-paywall series of excellent articles on cannabis business valuation. The first article, “How to Perform a Business Valuation of a Marijuana Business,” gives a high-level overview of the three approaches appraisers commonly take: the asset approach, the market approach, and the income approach. Each of those approaches, in turn, comes with a dedicated article of its own. Those links are here, here and here.

In our 2016 blog post, we briefly described each of the three valuation approaches as follows:

  • The asset approach looks at the business as a sum of assets and liabilities used to determine its value. This approach asks, “what would the cost be to create another business that would produce similar economic output?”
  • The market approach looks at similar businesses, and asks “what are other, similar businesses worth?”
  • The income approach considers the expectations of someone participating in the business. This approach asks, “what economic benefit will an investor of time or money receive?

The Cogence series expands on these descriptions with valuable insights and considerations for cannabis industry entrepreneurs and investors, who may take interest in this topic for any number of reasons, including: a pot business is making an allocation of intangible assets; the business is creating an employee stock ownership plan; the business is the subject of an ownership dispute, etc. Throughout the life cycle of a pot venture, as with any business, questions of value are common.

As cannabis business lawyers and litigators, we often work closely with CPAs, alongside our in-house tax attorney. Over the past year or two, we have been encouraged to see an influx of high-level professionals and blue-chip vendors beginning to serve the cannabis industry. These service providers include not just accountants and business appraisers, but also qualified lawyers, realtors, and others. The Cogence valuation series is a good example of the expanding pool of legitimate resources available to the cannabis industry. And it doesn’t hurt that it’s free.

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Protect Your Cannabis Business from the Bad Acts of Your Employees

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Ignore harassment complaints and face liability.

If you have a successful cannabis business, you likely have employees. Whether you have a few or many employees, your cannabis business can be liable for the actions of those employees. This post (the first in a series) will explore the various ways your cannabis business could be liable for the actions of your employees and the ways you can protect against such liability.

We recently discussed the importance of your cannabis business having a sexual harassment policy. A sexual harassment policy is important to establish a workplace that is safe for all employees but it is also an important tool to protect your cannabis business from liability for sexual harassment claims.

There are two types of sexual harassment: Quid pro quo and hostile work environment. Quid pro quo harassment is committed when some type of employment benefit or employment decision is made contingent on sexual advances or favors. Examples of quid pro quo harassment are when a supervisor fires an employee after the employee refuses the supervisor’s sexual harassment or if the employee does not receive a deserved bonus after refusing sexual advances. Only supervisors can commit quid pro quo harassment. Employers are automatically liable for quid pro quo harassment that results in a tangible job detriment.

A hostile work environment occurs when there are frequent or pervasive unwanted sexual comments, advances, requests, contact, conduct, or other similar conduct. Any employee can create a hostile work environment. Unlike quid pro quo harassment, employers are not automatically liable for employee actions that result in a hostile work environment. An employer is not liable if it can prove that it (1) exercised reasonable care to prevent the sexual harassment, (2) remedied the harassment and (3) that the aggrieved employee unreasonably failed to take advantage of those preventive and remedial measures.

An employer can demonstrate reasonable care to prevent sexual harassment by having a comprehensive non-harassment policy and complaint procedure in place. Merely having the policy in place is not enough. The employer must actually follow the policy. For instance, if the employer has a complaint procedure policy that requires employees to report the harassment to a specific person but that person is never available, the complaint procedure is not reasonable.

The employer must also have taken remedial action once it knew of the harassment. Remedial action includes a comprehensive investigation into the allegation and disciplinary action to ensure the harassment stops. If these procedures are in place, but the aggrieved employee unreasonably failed to take advantage of the preventive and remedial measures, an employer may not be liable for the alleged harassment.

If an employer knew or reasonably should have known about harassment, it can be found liable even if the employee victim does not follow the complaint procedure. For example, if a supervisor or someone else with decision-making power views an employee harassing another employee and does not investigate further, the employer may be liable for the bad acts of the employee.

The bottom line is that your cannabis business should create a strong no-harassment policy and complaint procedure and carefully follow it. You also should perform investigations when sexual harassment complaints arise and take disciplinary action as necessary. You cannot control the actions of your employees at all times, but you can take steps to protect your cannabis business from the bad acts of your employees. For more on drafting a strong anti-harassment policy and following the policy, view our post here.