We listed the Cultivator Supplement in a different thread. I thought it would be interesting just to post a teaser, a small section from the general checklist to give everyone an idea of just how complicated this stuff is. If you like what you see and would like to discuss or see some more feel free to pm me.
Cannabis Business Due Diligence Report
Corporate Structure and Debt
Owners may hold their businesses through corporate entities, but they cannot use those entities to obscure ownership and control of the business. Regulators ensure that only qualified people are involved in the cannabis industry.
Strict Enforcement of Federal Law
Has the business been contacted by any state or federal law enforcement or regulatory agencies?
Does the business have any contingency plans in the event of strict enforcement of federal law?
How easily can the business pivot to another line of business?
How many customers are from out of state?
How do you ensure that they do not cross state lines with your product?
Do you have an obligation to warn customers about this or take steps in preventing them from doing so?
As states continue to decriminalize cannabis in a variety of ways, cannabis remains a “Schedule 1” controlled substance under the federal Controlled Substances Act, alongside heroin and methamphetamines. Accordingly, businesses that engage in various forms of commerce in the cannabis industry and individuals who purchase and use cannabis-derived products remain subject to federal prosecution and seizure of assets. The main risk for the investor is that federal enforcement could lead to dissolution and total loss of investment
No Adequate Banking Solution
- How does the company do its banking?
- How will your cash flow from investing activities be impacted if no brokerage firm will do business with you?
- Does the company pay its taxes, salaries and other operating expenses in cash?
- How does the company manage the risks presented with handling so much cash?
- How is cash-flow tracked and managed?
- What expenses are associated with this issue?
Banking services are something that most entrepreneurs take for granted, but that is not the case for businesses that deal in cannabis products and services. Often cited as the biggest problem in the legal cannabis industry, banks are not yet willing to take deposits, issue credit cards, open checking accounts, or assist with payroll services. Banks have been reluctant to engage cannabis-related businesses out of fear of violating federal law and being accused of money laundering. One bank even reversed course after touting the FDIC’s “tacit” approval.
Internal Accounting Controls - Usually Lacking
Depending on what state(s) the issuer/target operates in, limited access to commercial banking will result in sales heavily transacted in cash and/or vendor payments transacted through personal credit cards. This will generally lead the investor/acquirer to perform additional procedures to gain comfort that sales and purchases are complete and accurate.
Note to issuers/targets: implement a system to corroborate cash receipts and product sales along with controls to limit manipulation. Similarly, implement systems and controls to approve vendors and limit transactions with them to the needs of the business.
Compliance with State Laws and Regulations
- Does the company participate in any industry trade associations?
- Has a lobbyist been engaged?
- How will the company respond to changes in regulations or specific laws?
- Is there pending legislation that will adversely affect the business?
- How do prices compare to black market prices?
Companies are subject to changing laws and regulations in their home states and in the states in which they do business. As the legal cannabis industry is in its infancy, participants should try to anticipate new rules and how they might affect their businesses. Rapidly changing laws can create numerous expenses for a growing business and enable “fast-followers” to gain a competitive advantage by learning from the early entrant’s mistakes. Increased regulatory compliance costs could result in lower gross margins or higher retail prices, or both, while competition from the black market looms
We have another twelve pages worth that you can read here. Let’'s hear your questions.