David Feldman, Partner, Duane Morris LLP
David N. Feldman concentrates his practice on corporate and securities law and mergers and acquisitions, as well as general representation of public and private companies, entrepreneurs, investors, and private equity and venture capital firms. Mr. Feldman also advises emerging growth companies with regard to alternatives to traditional financing through initial public offerings. He is also considered an authority on public offerings through the recently implemented SEC Regulation A+. Mr. Feldman also represents investors, social media sites, public and private issuers and applicants for grow and dispensary licenses in the emerging cannabis industry.
Mr. Feldman has authored four books on finance and entrepreneurship, and contributed to three other books. His latest book, Regulation A+ and Other Alternatives to a Traditional IPO (John Wiley & Sons), was published in March 2018. His popular blog at http://www.davidfeldmanblog.com/, focusing on entrepreneurship and the regulatory environment, has been recognized by LexisNexis as a Top 25 corporate law blog, and his videos appear on his YouTube channel, The Entrepreneur’s Advocate. He also pens a monthly column on cannabis regulation for Honeysuckle magazine.
[00:00:01] You're listening to Thinking Outside the Bud where we speak with entrepreneurs investors thought leaders researchers advocates and policymakers who are finding new and exciting ways for cannabis to positively impact business society and culture. And now here is your host Business Coach Bruce Eckfeldt.
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[00:01:06] Welcome everyone. This is thinking outside the bud brew sexual on your host and our guest today is David Feldman. And David is a partner at Duane Morris focusing on cannabis and cannabis law. We're going to talk a little bit about the history of cannabis. We're going to talk about kind of the legal complexity that we're in. David has also written several books most recently on regulation a plus and other alternatives to traditional IPOs. So I'm sure we'll talk a little bit about that as we go. But a well recognized leader in the legal aspect of cannabis and mergers acquisitions and venture capital. So with that David. Welcome to the program.
[00:01:40] Thanks so much for having me on your checks in the mail.
[00:01:43] Yes we do everything by wire now. So Bitcoin Exactly. So I always like to start with the guests just giving a little bit of professional background and particularly like how did you get into the cannabis space like why cannabis. How did it come up and why has it been a focus for you.
[00:02:02] Well I will jokingly note that I was with a few friends from high school that I haven't seen in a while and they said Is anyone surprised that David Feldman is a lawyer for the cannabis industry now.
[00:02:12] And of course I deny any illegal activity of course but now it happened because I'm a securities lawyer and I helped take companies public and I represent them once they are in my first two books were on something called reverse mergers which is a way to go public by combining your private business with an already existing public vehicle that's basically empty it's called the shell company and the reverse mergers were the popular way for the first hundred or so U.S. cannabis companies to go public around 2011 and 12. And I inherited a few of those because of my experience in reverse mergers after my prior law firm turned down over a million dollars business and finally said OK let's try. And so I started to develop business I started going to conferences I started getting a few speaking engagement inquiries and then when I came to this firm Duane Morris which is an 800 lawyer global firm I just assume three and a half years ago that there was no way this giant firm is doing this. But I was very surprised and pleased to learn that they had just finished a year long analysis at that point and decided to start accepting clients in space. And so you know I got into it for my purchase a securities lawyer and now as team leader of our 50 plus lawyer interdisciplinary cannabis group here in at Wayne Morris we're really covering every aspect of the industry.
[00:03:26] Tell me about the analysis I mean you know win win stuff first client coming up like what are the considerations for a law firm in terms of getting into this.
[00:03:33] Is this about image is this about legal risk. I mean what were the what were the factors that a company that a law firm needs to look at before they start dealing in cannabis related businesses.
[00:03:42] Well the first question is will our clients be going to jail. And the second question. Because our clients always come first is are we going to go. Yes.
[00:03:51] And they managed to get past that by realizing that even when federal enforcement was very active in the Bush administration and even in the early Obama administration it was never against service providers or equipment providers or so on it was only going against people who were operating dispensaries or grow facilities that were state legal. But even then they didn't generally arrest people in the absence of other potential crimes. They just kind of shut them down. So we didn't perceive much risk in terms of our firm and really also generally our clients because they called them on other things. But we did have issues like we had to make sure our malpractice insurance carrier was covering us what they do and we had this firm has no long term debt.
[00:04:29] But we do have a line of credit and we had to call the bank and say well we're thinking of doing this. Does this violate any of our covenants. And the bank said well yes but then they said but we'll change it. Okay really. And then they I guess we're a big customer and they decided to change it. And so that went away and really you know the process of selling is the process of overcoming objections and that's what Jeff Goldberg who founded our practice here in this firm was able to do before I got here.
[00:04:57] Yeah good. So let's talk a little bit about the history of cannabis from a legal point of view because I think we kind of glossed over it a little bit but you know I think it's important understand or important to appreciate in this industry that whatever one hundred years ago you know cannabis was just one one of many kind of remedy you know things that doctors prescribed and people took for all sorts of daily ailments. What changed how did it come to be where it is now in terms of a scheduled substance.
[00:05:23] Well many people don't realize that we should go all the way back to hemp and cannabis derived products have been around. Centuries it was very big in China. Back way. You know even before in the B.C. era and even in the US colonial times it was not only popular there were there was a requirement in places like Virginia to grow hemp in order to help make rope and sales and other things and help with the revolutionary war effort in fact at George Washington's Mount Vernon hemp was the primary crop. Thomas Jefferson also grew hemp as well. And in fact they recently started regrowing hemp at Mount Vernon primarily just to show visitors how they used it and what they did with it. And so in the early nineteen hundreds however there was a kind of big Mexican immigration and the Mexicans brought quote marijuana which was obviously the Spanish term for cannabis. And that began to lead to kind of racist anti immigrant anti Mexican backlash that the federal government seemed to want to participate in. In addition we had business interests like William Randolph Hearst who owned significant newspapers but also had big timber interests. So that hemp could be a competitor to him because hemp could be turned into paper. So he was writing horrible terrible articles in his newspapers about the dangers of the evil weed. And then you had companies like DuPont who had just patented nylon and they saw hemp as a potential competitor to that. And then you had people running the National Drug Policy Control Department in the federal government with incredibly nasty quotes about you know very racist comments about how this will make white women want to have sex with black men and cannabis will kill you.
[00:07:05] Cannabis will make you crazy it'll make you kill your brother. And so all those factors came together in order to initially cause cannabis be illegal in the 1930s and then in the late 1960s activist Timothy Leary was arrested for cannabis and he thought the constitutionality of that law and took it all the way to the Supreme Court in 1969 Supreme Court declared the 1930s laws unconstitutional. And so the Nixon administration had a problem. They wanted to keep this from from becoming legal and they sat down together and there was a quote by one of his top aides that you can find on YouTube now that he he did. Many years later after he went to jail for Watergate. And he said you know in the late 1960s coming into the 72 election we had two enemies the Nixon campaign hippies and black people. And we felt that we couldn't make it illegal to be a hippie or to be black. So instead we decided we would vilify them by making by tying black people to cocaine and hippies to marijuana and making both of them very illegal and then arresting the heads of their groups and coming after them at their houses and vilifying them on the evening news. And then he said did we know we were lying about the drugs. Of course we did. And they went ahead has the Controlled Substances Act and Substances Act to drugs into different schedule schedule one being the most dangerous and it made cannabis schedule one just as dangerous as heroin and LSD even though there was absolutely no scientific evidence to back that up.
[00:08:37] No. So so were that was the scheduling process in place before this and they just used it or did they come up with a scheduling process for this particular kind of political move that controlled substance that created the scheduling which has now been used by many other countries in the World Health Organization and so on.
[00:08:53] And you know the hope some people talk about rescheduling cannabis versus the scheduling for example the FDA just approved a drug called APA dialects which CBD based drug and the DEA following that said All right this drug and any other cannabis based drug that the FDA approves. We're going to move to schedule five and schedule five is basically the same as codeine cough syrup. So you still have to go to the pharmacy and your stuff to get a prescription but it's obviously much easier to get.
[00:09:24] Yeah. So. And that's so that's rescheduling that's moving it from one to five. So I guess what does that really mean. So the DEA saying if if the FDA a and when the FDA approved. I mean that's basically going through the entire FDA health safety welfare effectiveness kind of process. Where are they. I mean you've got to go through clinical trials and the FDA said. Right. Like any new drug. So basically treating as a drug and if it passes FDA they said they will move it to to fight but that's on a case by case basis. That's not saying THC in general. That's just saying any particular formulation that includes THC that gets passed will be scheduled but that doesn't open the door for CBD or even CBD because the drug they approved is just a CBD based drug.
[00:10:06] There's not even any THC in the dialect.
[00:10:08] I mean right now CBD is scheduled is it scheduled. Yeah it's scheduled as well.
[00:10:14] There's that we just passed it as you may know the farm bill in 2000 December 2013 included thanks to Mitch McConnell wanting to help farmers in Kentucky. They passed the legalization of. Him which also includes CBD which is derived from hemp however and big big however in order for all of that to be implemented the USDA has to set up a regulatory structure for individual states to apply for their state to have a federally legal hemp and CBD production program.
[00:10:47] And states can then apply once that regulatory process is in place. Some states make can choose to opt out in which case you will not be able to be legal in those states at a federal level. Or if a state does nothing then individual companies will be allowed to apply to the USDA for rights so CBD derived from hemp will be legal at the same time the FDA has said they kind of ruined everybody's party right after the farm bill coming out with a statement that said if you've got a CBD based food or beverage that's sold in interstate commerce you still need to come to us for approval and the. But they just recently announced that they're going to hold hearings in April to discuss how they're going to do that.
[00:11:31] Ok. Yeah. Because I mean it it gets confusing. I mean you can't keep keeping track of what's legal and what's not in the different from a state point of view and the federal point of view and the interstate commerce. So I guess is the I mean it's this typical. I mean I guess looking at other industries and stuff you know how how is the situation really kind of unique or particular when it comes to kind of the government the federal regulation or the federal government's regulation of an industry or a product or something like this. I mean is this campus cannabis really its own thing or is this what happens in a lot of places.
[00:12:04] Well a lot of people kind of try to analogize to prohibition of alcohol but but it's it's similar and also different to that in the ultimate legalization of cannabis. You've got not only something that people just enjoy to relax. It's something that has real medical benefit. And those benefits are being shown to be scientifically proven more and more by by the week by the month as countries like Israel are doing groundbreaking research that's proving that. And so you've got both the medical side of the industry and also the what we call the adult use. Other people call recreational side of the cannabis industry and on the second part the adult use part. There is a lot of thinking that in fact there's a bill pending in Congress that's that's getting a lot of traction that's called regulate cannabis like alcohol. And the idea being it's exactly what it sounds like you know whatever we do for alcohol we're going to do for adult use cannabis whatever that means and both federal and state regulation. And in terms of limitations on advertising. And so there are a lot of people getting behind that idea there.
[00:13:11] And where do you think that would work and where do you think that's problematic. Are there other reasons that it kind of makes sense and reasons that it would be an issue.
[00:13:19] Well it's really going to be state by state and even in alcohol. You know that there are certain states that kind of are a bit anti alcohol and that the Southern states where they have dry sundaes or where they try to make the sale and use of alcohol more difficult. And that may happen as well with adult use cannabis. I think again that medical marijuana is going to be much more available. There's very little opposition even among the most conservative folks about medical marijuana. The president has said he's 100 percent in favor of medical cannabis. And so that I think is not going to be an issue. Adult use is going to be allowed in some places might be not allowed in other places even within states like New York State is about to fully legalize adult use probably this year. And it's given large counties and cities the right to opt out and several already have. California same thing. You know places like Beverly Hills that have voted to say no cannabis of anything is allowed in Beverly Hills.
[00:14:16] So it's the federal kind of sort of cleans it up nationally but then does leave a lot a lot of rights the state and the counties and the local governments.
[00:14:25] And so much like alcohol you'll have regulation at both levels now except for a cannabis company whose is operating you know quote unquote legally at a state level. What what are the potential implications or where do they run risk in terms of you know if federal legislation passes and does kind of change the landscape a little bit like what happened to the mirror or where do they run amok in terms of how they've been operating or what they've been doing or not doing competitively.
[00:14:54] Well there are definitely kind of winners and losers upon the end of cannabis prohibition. And some of the smaller operators are more at risk in my opinion the same way when Lowe's and other giant hardware stores came in they killed these decades old local hardware stores that just couldn't compete on price or availability and so on and these larger multi-state operators of dispensaries and grow facilities have more marketing muscle have more economies of scale and are going to have the ability to really compete possibly very effectively against some of these smaller. Operators who have not grown quickly enough and one of the reasons you're seeing tremendous consolidation going on in the U.S. cannabis industry is in preparation for legalization because the expectation is that big alcohol Big Pharma Big Tobacco are all going to get into the industry much as they have in Canada already where it's legal and the way they're going to do it. Everyone assumes his by buying the biggest operators. And so you've got you know these 10 15 20 large multi-state operators most of which have now gone public and they are all trying to get it get as big as they can as fast as they can so that they'll be the most desirable target.
[00:16:05] Got it. And so you mentioned Canada I mean a show is this I guess how much can we learn from what's happening in Canada and applying to the states and how much is it just because they're different country a different kind of fundamental structure at some level. I guess what are we seeing in Canada.
[00:16:19] A what's what has been kind of happening now that they've gotten legal and then B what are the takeaways or lessons learned to apply to us.
[00:16:25] Sure. It's a great question and we can learn a lot. That's both good and bad. Yeah. From what's happening in Canada. But the most important thing to say is that once U.S. prohibition ends we most of us believe that Canada is going to be essentially an asterisk in the cannabis legalization story. Canada is has less population than California and so they're relatively small. The only reason they're getting all this attention is because they did it first and they went and did a full federal legalization but candidate likes to be sort of paternalistic in how it oversees and regulates everything in a business world. And in particular something like this. And so they are going to have a very strict regulatory regime. It's going to be very province specific. And the.
[00:17:11] It's taking a while to really roll out things up in Canada. And you've got companies that have gone public up there that operate here because they felt that there was a way to raise money more easily up there and the valuations the public valuations of companies that are trading up in Canada tend to be better generally although again that will probably change upon legalization here.
[00:17:33] And so I think the important thing is that there needs to be a proper balancing between the need to properly regulate this industry and the need to let market forces take control.
[00:17:44] I mean I think the Canada kind of model it has been interesting in terms of sort of seeing how the provinces play out. But yeah it's definitely it's definitely been slow. I mean a lot of the folks that I talked to you know it's is a very phased approach. You know the provinces still have to put in a lot of a lot of legislation and they need to figure out a lot of logistics.
[00:18:01] I mean do you think that the I mean I'm curious on the capital raising side on the on the market side. I mean it's part of why we've we've seen all these kind of somewhat astronomical actions from the Toronto exchange just because of supply and demand like it's because there's so few places that you can actually raise capital on public markets.
[00:18:18] Just put a lot of pressure and therefore raise the valuations on these things supply and demand issue is is more affecting things like retail prices of the product which which it has. But the valuations tend to be driven by just your typical frenzy that occurs when a bubble happens in stocks when people just get crazy and excited. Same way we had this reminds me a lot and this is not a good thing. You know the Internet stocks in 1998 which about a year and a half later you know all crashed. And at the time all you had to do was say dot com in the name of your company even if you were a brand new startup written written on a napkin and you've got a ridiculously high valuation. And in 2000 all these stocks crashed but that didn't end the Internet and it didn't end being public as an Internet company. It just killed a bunch of companies that probably shouldn't have been public in the first place. But these valuations were unrealistic. They were too high. Most of the stock watchers are saying take profits now because the valuations are very high. Others are saying no there's way more to go because the US hasn't even legalized yet. And then things are going to go to the sky. But when people say things like let's ignore normal metrics of how you value a company because this is different that's frankly when I tend to run to the hills as an investor. And so I think that doesn't mean you can't still make a ton of dough. And as we know our former House Speaker John Boehner is on TV promoting these seminars where he says YouTube can be a marijuana millionaire. And so I caution people to be very careful about investing in these stocks. And at a minimum don't limit yourself to just sort of one company. If you're going to do it make sure you really diversify and go across a group of businesses.
[00:20:03] So let's talk a little bit about where the market is now and where you know where these things kind of may go. So we've got the state by state legalization. No federal agency regulation comes in all of the potential scenarios in terms of timing and how it impacts you know some of the different sort of solutions industry like we've got all these cultivators out there right now we've got this this MSO is coming in. I mean we're going to see continued growth at the MSM. Market I mean what's the what's your kind of prediction in terms of how this stuff plays out.
[00:20:33] Well a lot of the growth is going to come from more states coming online. There's probably I think five or six states now that look like they're moving towards legalizing adult use within the next year. New York and New Jersey being pretty much the most prominent of those. Both of those are expected this year at least to approve their plan and their you know their legislation. But and the growth of the industry will continue but doesn't have endless growth within a particular state. I think one of the things we're seeing in states that have been legal for a while is in the state for example like Washington where they've just issued a ton of licenses for people to grow and sell and the supply is growing very fast and even faster than the demand and that's causing prices in Washington state to drop significantly.
[00:21:23] Whereas a state like New York we have only 10 medical licensees who have very limited supply. The prices here are very high. And so I think we will continue to see substantial growth. I think there are a lot of people in many states that are still kind of waiting for it to be fully legal before they start using the product. There is still a challenge from the black market in many states where prices are lower and so on pay tax but more and more people are realizing that to get state legal product is a lot safer and so on especially when you're talking about medical use and making sure that it's been properly checked and tested and so on.
[00:22:03] Got it. And do you think I mean I guess the 1 1 dynamic that I've kind of pondered I'm curious to get your take on it is you know as a lot of this has driven out a lot of the current situation is driven by the fact that you can't have interstate commerce right.
[00:22:14] Like if you have to grow process sell all of it within state limits which creates this funny situation of your growing cannabis in states that are not necessarily ideal agricultural states.
[00:22:27] So with federal legalization and you know opening up of interstate commerce I mean that I mean for me then the question that the dynamic becomes well well now I can start importing cannabis from Washington state to New Jersey I don't have to grow in New Jersey anywhere like that's going to that's going to be a huge shock to the system now. I mean what's what. I guess people how are people kind of preparing for that or what is the take on it.
[00:22:50] They're preparing it in a variety different ways and we haven't even begun to talk about the global market which when you talk about importing yeah you could be at some point importing from Israel or from Canada or from Mexico which also looks like it's about to legalize adult use as well. And we have a number of other players who are in places like California where the growing conditions are very good and they're saying we don't even need to be anywhere but California because once legalization happens we'll just ship the whole country from here. Whereas in a state like New York where I am you've got you know not great growing conditions or a limited growing season and so most growing occurs indoors or in greenhouses and that's more expensive and that creates more cost and overhead. And so that is part of what you're going to see.
[00:23:32] But I think we may see sort of incremental steps to legalization where the first step may not be full interstate commerce available so for example the the most likely bill the one that's got the most support right now and that Trump said he would support is called the states act and that would not fully legalize but it would create basically let things be decided by the states so that if a state legalizes cannabis then within that state it would not be deemed to be a schedule one controlled substance and no federal enforcement would be allowed that still wouldn't allow interstate commerce unfortunately. But again remember we're still going to have Hampton CBD interstate once the USDA sets up their regulatory regime. So it's only going to be mostly the THC products that will still be stuck at state by state and it is an issue because you know you have all these states where it is difficult to grow.
[00:24:25] Yeah exactly what. I mean I think within all this you know it's both sort of high risk and sort of volatile and I think as business folks you know that that can be daunting.
[00:24:36] It can also be opportunity I guess where do you see it like you know in terms of you know speaking to the business folks listening like you know you know in terms of general areas that you see you know opportunities over the next year or two you know for innovation for new businesses new products or new strategies where where do you kind of look at or where do you see the the biggest potential returns.
[00:25:02] Well I've been talking to a lot of people about the real estate opportunity for example. I think that is one of the most attractive ways to get involved in the industry. I mean investing in real estate in general is is is is often an attractive investment. And in cannabis what's good is that if you buy a piece of property where there's going to be a grow facility and then enforcement returns or things change and it becomes more difficult to be in the industry well then you have. Said that you can repurpose for something else whereas if you're in the business of you know supplying unique cannabis equipment into the industry you have more risk of that going away. If the industry disappears and plus real estate purveyors if they're smart they can without. As we say touching the plant they can work a deal with a tenant where they say all right I'm going to at least do this warehouse. You can grow cannabis and I'm going to finance your build out. And in exchange you give me a share in your revenues. And so the landlord's able to get some upside beyond just getting rent without having to actually be in the business of growing or selling.
[00:26:05] Got it. Got it. Yes I think that's a smart move. Yeah. It seems like a lot of these kind of growth areas or opportunities are kind of these ancillary products services you know adjacent industries that are needed to support this kind of growing cannabis is kind of a sell pickaxes and shovels. Exactly.
[00:26:21] That's right. If you're going to say the gold rush analogy definitely applies. And I think that's beginning to happen again because this is a unique industry. We're seeing the awakening of the biotech sector of of cannabis and you're seeing folks I've known for years that were biotech investors and so on saying Hey I want to get involved in this. Now that the FDA has approved the first CBD based drug I now realize the Federal Government's willing to do that. Therefore and again unlike the attitudes of these big operators who are rushing to get as big as they can as quickly as they can. These biotech folks are saying yeah we're fine with our normal seven to 10 year cycle of going through all the clinical trials and so on to get a new cannabis based drug approved.
[00:27:06] Yeah yeah I think it's really been kind of interesting with New Jersey potentially coming on and the propensity of pharmaceutical companies. I think it's I've seen a lot of activity a lot of interest from folks a lot of professionals a lot of people coming out of these other spaces and coming into the cannabis with with their expertise and knowledge and networks and then setting up shops you know candidates related or kind of specific businesses as an offshoot to their previous professions. I think that's been an interesting case. I would say the one thing that I found is culturally it's quite different. So I still find that there can be a little bit of shock. Some of these professionals coming out of these other industries and getting involved in cannabis and just kind of dealing with the chemicals industry and culture. So I think that's that's still a barrier.
[00:27:49] But absolutely it's still a very new industry and you know whenever you meet people at industry conferences the first question is always you know where did you come from you know. And everyone comes from somewhere else. And when I first started being involved in this around 2011 and 12 which is like ancient times in the industry you know I would go to a conference and it would be 30 20 somethings who were just high at their booths selling some bay products or something else. And now you have still some of those people some of whom have made great successes with their business and also a lot of more experienced gray hair many who don't even use the product who had you know some relative that that used it for a medical reason and that got them excited about it or they learned about it in some other way or they see a business opportunity. And so you're seeing an interesting mixture of folks but there's no question it is a unique culture within this industry. And you know fun is definitely a nice byproduct of being in and around these folks.
[00:28:52] Yeah definitely definitely. So we're going to have time here if people want to find out more about you about the work that you do. What's the best way to get that information.
[00:29:00] Well you can go to DuaneMorris.com which is our Web site my blog which talks about cannabis and reggae which is the other stuff I'm doing with taking small companies public through streamlined simplified IPO process. That's DavidFeldmanblog.com. And you know when you go to Twitter and Morris you can just search the word cannabis and you'll find our cannabis landing page and see a lot about our capabilities and experience and our blog and our webinars that we've done and so on.
[00:29:29] Awesome. I'll make sure that those are in the show notes here so people can click through. David thank you again. This was this is great. I learned a lot. I appreciate the time.
[00:29:36] Absolutely my pleasure. Thanks flappers.
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