Too many hardworking small business owners fall victim to false beliefs and rumors about the law and wind up risking everything.
I have other helpful resources about workers compensation insurance to share once we know what applies in your specific situation. Reach me through the contact information at tonynovak.com.
This week Acreage Holdings, one of the world’s largest vertically integrated international marijuana companies, said it was buying “100% of the equity interests” in Compassionate Care Foundation in Egg Harbor in anticipation of the New Jersey’s intention to legalize cannabis for adult recreational use. Compassionate Care Foundation’s vertically integrated operations include licenses for cultivation, manufacturing & processing, and three regional retail dispensaries.
Acreage Holdings already bought a 135,000-square-foot orchid greenhouse in Sewell last year to convert it into the largest cannabis cultivation facility on the East Coast. The company is formed in Canada, with shares traded on the Canadian stock exchange, and has its headquarters in New York City. The company’s chairman announced “This reorganization will result in increased access to affordable medical cannabis for New Jersey’s existing patients in short order. Moreover, we have long believed that upon adult-use legalization, the New England and Mid-Atlantic regions will be the preeminent cannabis market in the U.S. and Acreage is best positioned of any U.S. cannabis company to benefit.”
Acreage Holdings is one of the most politically connected companies in the U.S. It’s board members include former Speaker of the House John Boehner and former Massachusetts Governor and presidential candidate William Weld. Last year the company retained the services of Philip Norcross’ lobbying firm, Optimus Partners, for consulting services. Norcross is the strongest Democratic power broker in south Jersey politics.
Closing of the new purchase agreement is subject to New Jersey state approval. It is unclear how the deal will work, since Compassionate Care Foundation is a nonprofit. Nonprofit businesses do not have shareholders but typically have a provision that remaining equity interests revert to public benefit.
@potCPA is a brand of Tony Novak CPA that supports smaller independent companies and individuals related to the cannabis industry. While we have no opinion of this specific proposed consolidation deal with Acreage Holdings, we generally believe that it is better to keep local marijuana businesses independent for the benefit of the south Jersey community.
Here’s where we are with the insanity and injustice of cannabis law in our part of New Jersey right now.
The state’s next dispensary will open in about a month here in Vineland. Initially the facility will be open for training; its locally grown cannabis supply won’t be available until next year. The facility is financed and supported by some of the area’s most well-connected community leaders.
The state legislature in Trenton is again trying to decriminalize cannabis this month. The effort seems doomed to fail. Some legislators want to delay the decision until after the question is addressed in the 2020 election. New Jersey voters overwhelmingly support decriminalization but have not yet actually voted on the issue.
Meanwhile someone is arrested on cannabis charges every 14 minutes in New Jersey, according to a new analysis by the American Civil Liberties Union of New Jersey. Most of those arrested are minorities. Local police activity reports show that cannabis possession arrests are still common and Cumberland County Prosecutor’s Office continues to prosecute cannabis cases as crimes. Legislation to end the 30,000 annual cannabis arrests is eventually expected to also expunge the records of those convicted in the past.
CPAs in the cannabis industry are not being candid, honest and straightforward in talking about the cannabis industry. While I’m not suggesting that there are any easy corrections available for current positions, I do think that it makes sense for us to address the facts directly and honestly.1
A headline in a CPA newsletter today caught my attention: “CPA Andrew Hunzicker Creates Course in Cannabis Accounting: ‘This industry is very underserved by accountants.'”2 I strongly disagree; that position is not supported by evidence. In my Delaware Valley region (southeast Pennsylvania, southern New Jersey and northern Delaware market) the industry is already oversaturated. The CPA industry serving legal cannabis is overcrowded here with more well qualified CPAs than there are firms with cannabis licenses.
The cannabis specialty interest group within the New Jersey Society of Certified Public Accountants has over a thousand members. A recent local industry convention had four larger CPA firm exhibitors at a time when there was only six cannabis licenses issued so far in the entire state. CPAs are flocking to the field en masse while regulators are growing the legal cannabis industry at a snail’s pace.
To gain any meaningful insight into the industry trends, we need to consider the illegal cannabis market.
The truth is this:
1) 100% of the cannabis industry is still illegal under federal law. That includes derivatives like CBD used as food additives that are not approved by the Food and Drug Administration.
2) Close to 100% of the cannabis industry is illegal under state laws. Even in California that has the largest legal cannabis industry, almost 90% of the industry is still illegal.
3) Trends in decriminalization are causing the illegal cannabis industry to grow. The largest growth will come in illegal operations, not in licensed legal ones.
4) Despite licensing and decriminalization, the large majority portion of the cannabis industry will remain illegal.
5) The needs of the illegal cannabis industry are underserved. Economic profits are not certain, either for the legal or illegal cannabis industries.
6) The risks of serving the illegal cannabis industry clients are substantial. Legal, financial and professional constraints dominate.
7) CPAs don’t even want to talk about serving the illegal cannabis industry; the entire topic remains wide open.
I’ve decided that my own future professional opportunities lie in representing those with struggles in the illegal cannabis industry, just as I represent illegal clients in the farming, food processing, fisheries and construction industries. 4 All of these industries have high rates of noncompliance with accounting laws. That doesn’t mean that they don’t deserve a good accountant, but it does mean that their future accounting problems are likely to be higher than average. I’ve developed the business structure, tools, temperament and skills to be effective in this environment. I see big demand ahead in this area.
Reforms in the cannabis industry will continue to march forward at an awkward gait. Accountants will not be immune from the angst.
Footnotes
1 I took a similar stance in pointing out and documenting inconsistent positions within the profession in response to CPA statements and actions following enactment of the Affordable Care Act. These discussions are uncomfortable but still useful to ourselves and the industry.
2 Nothing in this post is meant to be disparaging to Mr. Hunzicker, a respected leader in this profession.
3 CPAs are governed by a core principle in the AICPA Code of Professional Conduct requiring us to avoid acts discreditable to the profession. Some interpret that to mean that no public discussion should be made of illegal, off-color or nonconforming opinions. However, that is not an accurate interpretation of the professional standard.
4 I’m not a user, proponent or impassioned by the cannabis industry itself. However, I have a strong track record of representing independent businesses in their struggle with government.
Today the U.S. The House of Representatives passed a cannabis reform bill for the first time. The new law would permit cannabis businesses to access banking and financial services.
The bill passed in a vote of 321-103. A total of 230 Democrats voted in favor of the bill while 91 Republicans also voted for the legislation. 102 Republicans opposed the bill despite overwhelming support by U.S. voters.
Next the bill advances to the Senate where it ia also expected to pass and then to the President for passage into law. This is really a major step forward for the industry.
This coming week the U.S. House of Representatives will introduce H.R. 1595, the SAFE Banking Act of 2019 that is intended to legalize cannabis banking. The bill has already cleared the Financial Services Committee and is expected to be voted on through a process known as ‘suspension of the rules’ that requires two-thirds of the chamber (290 members) to support the bill for passage.
It is uncertain what outcome we should expect but the bill already has 206 bipartisan co-sponsors.
The role of the small business Chief Financial Officer (CFO) is typically described in four distinct functions. I describe my own CFO role as filling five functions in the emerging marijuana industry.
Recordkeeping
The CFO has primary responsibility to assemble, safeguard, manage and store the financial records of the company. This basic but necessary service is best handled by a person focused and experienced on business records. This may sound straightforward, but I find that almost every business faces challenges keeping and managing necessary records.
Internal controls
CFOs add value by designing, monitoring internal controls. This happens to be the area where management tends to have the least experience and so this important function might be otherwise overlooked, leading to financial losses that could have been avoided. Management often underestimates the risk of fraud and misappropriation; the CFO must keep that risk control front and center.
Communication and reporting
The CFO communicates internally to management and to external stakeholders.
A business needs accurate timely data to make good management decisions. The always-changing type of data, the format, timing and the method of delivery are all important components to consider as part of this function. Management may also need to know how the company is doing compared to the competition or benchmarks established by investors. Managers typically want to know the business is doing now compared to earlier periods.
CFOs also oversee duties related to owners, investors and shareholders and are the primary control of risks related to management fraud and disclosing financial information.
Sometimes the CFO must develop forecasts of future performance and utilize industry benchmarking data.
Compliance
Every company has compliance issues to address with government, and the CFO oversees many of them. Filing and paying taxes is obviously one major burden, but not the only compliance requirement. Marijuana businesses face strict non-financial recordkeeping burdons.
Advocate for management and the industry
The modern CFO is often active as an advocate, negotiator and representative of the company in dealing with new potential customers, government regulators, and investors. I often find myself active through industry associations that leverage the power of small independent businesses.
I am pleased to discuss how an experienced part-time CFO can help your business. Please use the chat box below to send a message or the scheduling link on the right to set a time to talk.
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I talked with two local small business owners this weekend who recently started marketing CBD products in their shops. One is a local health food drink maker and the other primarily markets beauty products. Both were completely unaware of the risks they take in selling CBD products. They are considered MRB (marijuana related business) under the law. They didn’t know that they are subject to some of the same harsh law enforcement actions as a street corner drug dealer.
The implications of being raided by law enforcement are scary (think about Eric Garner, the unlicensed cigarette seller killed by police in a takedown raid) and the many whose lives were ruined by overly aggressive marijuana prosecutions with slim and questionable evidence. Not even to mention the cases where false evidence was introduced to cover up an officer’s action who initiated an improper action and arrest. Today’s MRB entrepreneurs like to think “this couldn’t happen to me”. I presume that’s what Eric Garner thought before his fatal encounter with law enforcement.
Then yesterday there was a case reported where police in Maryland arrested and jailed a middle aged business guy for more than a month. He had no criminal background and police later admitted what they thought was an illegal substance was simply a bad lab test result.
So call me paranoid, but I’m concerned that the risk of selling an unapproved product could be worse than the seller imagines.
One otherwise flawless small business had thousands of dollars in merchandise confiscated and their shop left in shambles after a raid during business hours (not to mention the embarrassment and damage to community reputation). Law enforcement is not responsible for financial damages caused by their actions without lengthy, difficult and expensive legal actions. Another young small business owner faces prosecution action by the local health department for introducing a CDB flavored product into his lineup. Either one could possibly lose their insurance, their banking, their business lease, etc.
I say again and again:
In summary, selling CBD products is not a decision to be taken lightly. DOn;t assume that becasue hemp products are decriminalized where you live that you are ‘in the clear’. I am pleased to discuss the issue with anyone who has concerns.
