After decades of legal exile, cannabis is seeing better days.
Green lights for entrepreneurs are on and investment in legal organizations in full swing. Yet, a shadow of uncertainty looms over this rapidly-growing, infant industry.
Some risks are general in nature, such as ever-elusive returns and profits. Others are specific to marijuana operations and call for extra due diligence.
For instance, the federal government still holds investors and business owners as legal hostages. Consequently, banking and insurance players tend to shy away from green entrepreneurs.
You cannot eliminate such risks, as they stem from the legal status of goods and profit sources. But, with legal risks management, you can reduce them to a manageable and tolerable level.
Namely, this practice aims to evaluate the risks ahead of time and brace you for impact. Here is what areas your risk mitigation efforts should focus on.
Table of Contents
1. The Weight of Federal Shackles
Despite a wave of legalization, cannabis remains federally illegal (Schedule 1 drug).
In other words, you cannot own, manufacture, distribute, and disperse it under federal law. This kind of legal treatment is at odds with many state-level legislations.
Nevertheless, it dissuades banks from financing cannabis-related businesses. They’re forced to take a cautious, risk-based approach. They may engage in suspicious activity reporting (SAR), as well as currency transaction reports.
Among other things, this means financial transactions can constitute a basis for prosecution. Shy of this scenario, banks could simply refuse to offer their services or charge you more for them.
Where does that leave you? Well, you may be forced to transact business in cash and explore alternative financing options such as crowdfunding and angel investors.
The main takeaway is clear: come up with a plan on how to fund and conduct your endeavor.
2. Value Chain Pitfalls
Position in a value chain of the industry profoundly impacts your risk profile.
This vast matrix encompasses organizations, individual actors, resources, and information. They all play a role in transforming raw inputs into finished products.
Being directly involved with production and distribution invokes more legal attention. On the other hand, being just a small part of the seed-to-sale process lowers the risks. Tertiary players that provide ancillary services or underpinning technology are exposed to the fewest legal obstacles.
Similar rules govern the distinctions between medical and recreational marijuana sellers. The purpose of the product and its customers always paint how legal and financial institutions perceive you.
So, you have to follow the “know your client (KYC)” rule and cope with the prospects of rigorous inspection. It’s a tall order all right.
3. A Matter of Compliance
In the burgeoning cannabis sector, compliance poses a multi-faceted legal issue.
One crucial aspect is on-site regulation compliance. It pertains to having certifiable licenses, processes, and agreements on the premises. Most notably, you have to preserve product quality and ensure tractability over the entire value chain.
This obligation echoes traceability and safety programs that food and pharmaceutical industry champion. It requires data collection, IT, and analytic capabilities.
The list of compliance requirements goes on, involving various manufacturing standards and product withdrawal mechanisms. So, you want to do your homework.
Set up efficient operational processes supported by various technologies. Promote transparency and steer clear of harsh non-compliance penalties.
4. Intellectual Property (IP)
IP is one of the most precious assets a cannabis business possesses.
It’s also a factor that green investors weigh when allocating their money.
The first thing to do is to determine the targeted protections. They can refer to patents, copyrights, trademarks, and secrets. Applying for some of these IP assets, such as patents, is a lengthy and complex process.
Still, the fact remains you have to secure your business value and branding. They are both prone to machinations of various copycats and keen-on-playing-hardball competitors. Displeased former employees are a potential risk source to keep an eye on too.
The benefits of this IP-centric approach are obvious.
Apart from financial woes, you avoid unfavorable case settlements and licensing agreements. Check out the insurance section (no. 6) for more detail on measures you can implement.
5. Cyber Liability
Cyber perimeter is rife with potential threats.
To keep them at bay, develop a sound IT strategy and invest in proper security tools. No, IT isn’t just some overhead you should seek to trim. Many cannabis businesses have already learned this the hard way.
So, seek customized solutions and insurance coverage that meet your specific risk management needs. They shield you against phishing, data breaches, ransomware, and hacker attacks.
Nobody can afford to take these lightly: they may bear business-sinking consequences.
Finally, notice IP is an integral part of your cyber liability. Keep your confidential and proprietary business information (like recipes) away from prying eyes. You should allow you to maintain your competitive advantage.
6. Insurance Policies
The right insurance policy is an essential weapon in the legal arena.
It sorts out legal expenditures, as well as costs associated with business disruption.
Enforcement and defense policies are two basic forms of protecting IP rights. They both minimize the risk of going bankrupt in the wake of legal hassle, as they offer reimbursement.
For example, they can help you cover the costs of litigation in cases of having to enforce a patent. The other instance in which it comes in handy is when you unwittingly infringe on a patent.
Therefore, do some shopping around, see your options, and make an educated choice. These steps let you find a nice, broad coverage without breaking the bank.
Not only that but they empower you to grow and thrive despite all the hurdles on the road.
Legal Risks Management Done Right
The green gold rush is in sweeping across the country.
This great new for many entrepreneurs, but don’t succumb to the hype. Risk is inherent to operating in this sector and all stakeholders would do well to remember that.
Hence, if you really mean business, play it smart and run a fully legitimate operation. Start by gauging your own risk tolerance— the acceptable level of risks you can actually deal with.
Then, establish a robust risk assessment framework and related processes. Adopt the best legal risks management practices and policies.
Find your place in the value chain and get adequate insurance. Make do without easy access to the formal financial system. Pay close attention to changes to federal drug policies.
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