​On February 27, Luis presented at a seminar put on by the Columbus Bar Association examining Ohio’s medical marijuana industry from a legal perspective. Including not only statutory and regulatory issues, this seminar also looked at commercial transactions and ownership/licensure transfers. It also discussed concerns typical of any industry, such as employment issues and capital raising, but that have unique challenges when it comes to medical marijuana. They also looked ahead to discuss the possible future of marijuana in Ohio, including questions of federal regulation and recreational use.

1. Presented by Luis M. Alcalde, Lloyd Pierre-Louis,
Tod Friedman, + Justin Hunt
February 27, 2019 | Columbus Bar Association
Ohio’s Medical Marijuana
Business from a Legal
PERSPECTIVE

2. MMCP’s Regulatory
Framework’s Impact
on Licensees

3. License Structure
Operations –
Production +
Inventory Control
Quality Assurance Security

4. License Structure
UPDATE

5. CULTIVATORS
Level I – 8 of 16 provisional licensees
Level II – 6 of 13 provisional licensees

6. PROCESSORS
40 processor provisional licenses
have been awarded

7. DISPENSARIES
6 of 56 provisional licensees have
received certificate of operation

8. Testing
LABORATORIES
5 lab provisional licenses awarded,
two labs are operational

9. M
METRC
SEED-2-SALE SYSTEM
Seed/Clone
Day 1-18
Vegetative
Day 18-60
Flowering
Day 60-137
Harvest/Dry
Day 137-151
Trim/Cure
Day 151-173
Batching
Day 173
Testing
Day 174-176
Packaging
Day 176

10. The MMCP can track
every plant + product,
at every stage of
production

11. Unique Plant Identifier
Batch Number
Lot Number

12. Plant Identifier

13. Quality Assurance
MEASURES

14. Ohio’s program was
designed to achieve
consistent, quality + reliable
medicine for patients
Cultivation
Environment Product Testing Product
Preservation

15. Cultivation
ENVIRONMENT
O.A.C. 3796:2-2-01(C)
Limited application of pesticides
O.A.C. 3796:2-2-01(D)
Focus on cleanliness of environment
O.A.C. 3796:2-2-01(A)(1)
Restricted access controls

16. Product
TESTING
MMCP established a universal
testing approach for all products
Licensed labs must demonstrate
proficiency in testing + ISO 17025
Mandatory testing for cannabinoid
potency + other categories

17. Product
PRESERVATION
Tamper evident, light resistant
and child proof packaging
Compliance label must contain
relevant information
Must include product identifier
numbers and key dates

18. Product
PRESERVATION
Mandatory weekly inventory
counts + reporting requirements
Plant material expires after 1 year
from date of harvest
Inventory management and point-of-
sale systems compliance

19. O.A.C. 3796:2-2-05
Establishes a very high standard for the
security of facilities in the state
Physical Security Technology

20. O.A.C. 3796-2-2-05 +
3796:5-2-01(H)
Designates activities that only certain
individuals can execute at a medical
marijuana facility
Type 1 Key
Employee Type 2 Employee

21. Commercial Transactions
with Medical Marijuana
BUSINESSES

22. All commercial transactions with marijuana
entities need close attention and analysis
Banks, credit card companies + third-party payment facilitators
may stop payments and hold funds if marijuana is involved
Contracts with federal law compliance clauses can trigger
default if doing business with marijuana entity

23. Other Issues with Marijuana
BUSINESSES

24. When doing international transactions foreign citizens involved
in legal marijuana business can be barred entry to U.S.
How will federal courts deal with disputes
involving an “illegal business”?
SEC seems focused on appropriate disclosures
not illegality of the business
Disputes are steered toward
mediation/arbitration + “legal” states

25. Contracts with or between
marijuana businesses
All applicable regulatory requirements addressed
Marijuana entity is fully licensed in state
Acting under the protection of state law
If you are not a marijuana entity, consider
creating a Special Purpose Vehicle (“SPV”)

26. IRS Code Section
280E
No deduction or credit shall be allowed for
any amount paid or incurred during
the taxable year in carrying on any trade or
business if such trade or business (or the
activities which comprise such trade or
business) consists of trafficking in controlled
substances (within the meaning of schedule
I and II of the Controlled Substances Act)
which is prohibited by Federal law or the
law of any State in which such trade or
business is conducted.

27. Implications of
280E
Deductions for ordinary business
expenses and depreciation of assets
used in business

28. What Can Congress
TAX?
Congress can tax income
Congress cannot tax return
of capital

29. INCOME RETURN OF
CAPITAL
Gain derived from
capital, from labor, or
from both combined
Tax concept for
payments which
represent return on
original investment

30. Return of Capital for
GOODS SOLD
Embraces expenditures
necessary to acquire, construct
or extract a physical product
which is to be sold
The seller can have no gain until
he recovers the economic
investment that he has made
directly in the actual item sold

31. COGS in Marijuana
BUSINESS

32. Production
RELATED
CULTIVATORS
Rents
Utilities
Maintenance
Wages
Salaries/Benefits
Tools/Equipment not Capitalized
Indirect Material Costs
Cost of Quality Control + Inspections

33. Production
RELATED
PROCESSORS
Rents
Utilities
Maintenance
Wages
Salaries/Benefits
Tools/Equipment not Capitalized
Indirect Material Costs
Cost of Quality Control + Inspections

34. Production
RELATED
DISPENSARIES
Invoice price paid to purchase
marijuana less any trade or other
discounts
Transportation and other costs
necessary to gain possession of
the marijuana inventory

35. Documentation for
280E
Document every item of revenue
and expense no matter how
small with written receipts
Important to show where revenue
is coming from + what expenses
are COGS but also to avoid
negligence and/or fraud penalties
in filing the tax return

37. Require an employer to permit or
accommodate an employee's use,
possession, or distribution of
medical marijuana

38. Prohibit an employer from refusing
to hire, firing, disciplining, or
otherwise taking an adverse
employment action against a
person because of that person's
use, possession, or distribution of
medical marijuana

39. Permit a person to sue an
employer for taking any of
those actions

40. Prohibit an employer from
establishing + enforcing a drug
testing policy, drug-free workplace
policy, or zero-tolerance policy

41. Interfere with any federal
restrictions on employment,
including U.S. Department of
Transportation regulations

42. Affect authority of the
Administrator of Workers'
Compensation to grant rebates or
discounts on premium rates to
employers that participate in a
drug-free workplace program

44. Other Interesting
LEGAL TIDBITS
+ CASES

45. Hospitals are not prohibited
from barring their doctors
from issuing recommendations

46. Some health care systems
say absolutely NO

47. Some health care systems
say some form of YES

48. Some hospitals don’t permit
medical marijuana use, but allow
their doctors to become certified
and/or recommend

49. Some hospitals are still developing
policies on medical marijuana

50. School
POLICIES

51. Transfer of Ownership and/or
Control of Licensed
ENTITIES
Provisional License
Period
No Change
Control/Ownership
Provisional Licensees
Need Money

52. Funding Licensees During
Provisional License Period

53. Question 126
An individual has loaned the LLC money and is not
currently an equity owner of the LLC, but has rights to
convert that debt to equity at a future date. Depending
on the capital structure of the LLC at the time of
conversion, the creditor could potentially own 10% or
more of the LLC sometime in the future if the creditor
converts its debt to equity, but the creditor does not
currently own 10% or more of the LLC. Will that creditor
be subject to the tax disclosure requirements

54. No, but if triggered,
O.A.C. 3796:2-1-08 would
apply. Please see O.A.C.
3796:2-1-08*
*Cultivator Transfer of Control/Ownership Rules

55. Provisional Licensee
PERIOD

56. Great visual from Napkin.finance
Convertible Notes
Promissory Note with Equity
Conversion Option
Equity Conversion After Certificate
of Operation Granted
Equity Grant Subject to MMCP
Regulatory Approval (passing
background checks)

57. Loan Agreements
Loan Agreement combined with
Convertible Note
Lender approved budget
Budget deviations require Lender
approval
Borrower subject to “major decisions”
clause requiring Lender approval
Lender security in non-marijuana
assets

58. Balancing lender protection
+ regulatory prohibitions

59. Post Certificate of
Operation Equity
TRANSFER
Rules differ
between
regulators
Department of
Commerce
OAC 3796:2-1-08
OAC 3796:3-1-08
OAC 3796:2-12
State Board of
Pharmacy

60. Change of
OWNERSHIP

61. CULTIVATORS +
PROCESSORS
Subject to Dept. of Commerce approval
Demonstrate proposed new owners
meet all regulatory requirements +
pass criminal background checks
Change of Control = New Application
All transfers within calendar year
are aggregated for control rule

62. DISPENSARIES
Must operate for 12 months
continuously before any change
allowed
A change of ownership application is
required
Change of 10%+ in corporation
Any partnership change
Any merger, dissolution or
creation of new entity
Any sale of stock, any change in
EIN number

63. FUTURE
THE

64. THC + CBD
Tax + Marijuana
Beverage Industry
Recreational
Use in Ohio

65. The Farm Bill of
2018

66. Textiles
Paper
Building
Materials
Foods
Personal
Hygiene
Industrial
Products
Health
Products
CBD Oil

67. Legalizes cultivation + commercialization of “hemp”
Contains less than 0.3% THC
Interstate commerce allowed – USDA to enact rules
States may enact regulations not inconsistent with
federal law

68. Pending Federal
BILLS
States Act + S420

69. Luis M. Alcalde
Of Counsel, Kegler Brown Hill + Ritter
lalcalde@keglerbrown.com
614-462-5480
Lloyd Pierre-Louis
Director, Kegler Brown Hill + Ritter
lpierre-louis@keglerbrown.com
614-462-5477
Tod H. Friedman
Executive Vice President + Chief Legal Officer, Schottenstein Property Group
tod.friedman@spgroup.com
614-449-4329
Justin Hunt
Executive Vice President, Grow Ohio LLC
justin@growohio.com
216-287-5190