David N. Feldman is a partner at Top 100 law firm Duane Morris LLP, an expert on reverse mergers and Regulation A+ offerings, and the author of multiple books. Recently he has also become heavily involved in advising cannabis industry participants, including investors, advocacy groups, and public and private companies. We got a chance to catch up with him and learn more about reverse mergers, recent deals and the expanding role and participation of law firms in the cannabis space.
Take On Clients Committing a Federal Crime, Really??
To most lawyers, taking on a client that is knowingly and willingly committing a federal crime seems like an instant no, but to David it started out as a maybe. Being an expert on reverse mergers, the cannabis industry initially caught David’s attention in 2012 when he noticed more and more cannabis companies seeking to complete (and successfully completing) reverse mergers. He then began to investigate the medicinal benefits of cannabis, which quickly became “clear and apparent” to him. He was further encouraged by the then Obama Administration’s reversal on the issue with the issuance of the Cole memo de-emphasizing enforcement against state legal actors in 2013 and FinCEN issuing guidelines for banks and investment banks to enter the space the following year. After inheriting a client in the industry, he saw the great opportunity to expand his clientele in the space.
Getting The Firm Behind It
Next, came the realization that this business is just like every other business, but with a twist; that twist being that these companies are committing a federal crime every day they do business. How as a lawyer can you represent a company that is committing a federal crime? Most law firms just instantly decided, you can’t, including David’s old firm. Because of this he had to turn down more than one million dollars in business from cannabis related companies, even ones that didn’t even touch the plant! He then moved to his current firm, and brought his inherited cannabis industry client with him. It was just the right timing. The firm had already been conducting a yearlong review when he arrived and upon completion they came to a seemingly surprising conclusion...they approved! Now, clearly there had to be some restrictions, but cannabis companies now had access to the services of a top 100 law firm. An interesting aspect of why the firm approved has to do with the that fact that lawyers are regulated on the state level (like cannabis) and their local bar associations started to issue statements regarding lawyers and the cannabis industry. The bar associations reasoned that if their state legislature decided to legalize and regulate cannabis, companies in the industry deserved to have their lawyers help in navigating these laws. Despite this, the current industry involvement of the top 100 law firms is nearly nothing. Only a handful of firms serve cannabis clients and even fewer promote it publicly. Duane Morris is one of these few.
A Success Story - Duane Morris LLP
Since David brought that first industry client and Duane Morris approved, this firm’s cannabis industry practice has surged. David tells us that Duane Morris’ presence in over a dozen states, all with legal marijuana, and coverage of corporate, securities, taxation, real estate and zoning, intellectual property, employment law, licensing and health care uniquely position the firm to work with larger players with multijurisdictional interests both touching and not touching the plant, as well as local companies seeking licenses to grow, process or sell cannabis.
Opportunities, Risks and Threats
In David's opinion, the biggest opportunities in the space are in the ancillary businesses (companies that don't touch the plant), especially financial services and alternate delivery methods (including extracts, edibles and vapes). In regards to the businesses that actually touch the plant, he likes the dispensaries best because they require a lower capital commitment and carry less risk. David expressed concern regarding the growers due to the immense capital commitment and concerns about supply outpacing demand (or at least out pacing the amount that dispensaries can sell). A discussion of threats in the cannabis space wouldn't be complete without mentioning Jeff Sessions, and David was sure to do so. Additionally, he expressed concerns relating to Trump's confusing statement regarding the Rohrabacher Amendment. An additional risk (but also opportunity) that David pointed out is the high proportion of young people in the industry. Experience is important in business, and although he noted that he’s seeing more ‘gray hair’ recently, he wants to see more.
Reverse Mergers and Cannabis, Why?
Reverse mergers in the cannabis space started out as a necessity because these companies were too scared to have to file with the SEC because they are violating federal law. Reverse mergers gave them a way to go public without having to file with the SEC. However, fast forward to today and there is really no longer a need for legitimate cannabis companies to enter the public markets through a reverse merger. Plenty of companies have filed with the SEC (they only require additional risk disclosures), and one has even successfully listed (Innovative Industrial Properties), making reverse mergers in the cannabis space obsolete in David's opinion. He also thinks the market has moved on from the failed listing of MassRoots on the NASDAQ and from the failed Regulation A offering of Med-X.
OTC Markets - Risks and Opportunities
David notes that the OTC Markets carry more risk than listed stocks and urges investors to be cautious, but not ignore the OTC Markets. He notes a lack of analyst coverage, low liquidity, and higher volatility as some things to watch for. However, David noted that the OTC Markets can be an efficient way to ease into public status with lower compliance costs and governance requirements with a hope to uplist at some point.
Most Notable Cannabis Offering
Although there have been many notable deals in the space, David doesn't think the cannabis industry's publicly traded 'poster child' has come yet. Some of the larger companies in the space are involved in other businesses and other well-known issuers faced some challenges in completing their IPO.
He’s looking forward to the increased participation of investment banks. Although recently there have been some entrants into the space, notably Cowen, Ladenburg Thalmann and Canaccord Genuity, he’s hopeful to see more investment banks coming to similar realizations as have some law firms, allowing them to access the floodgates of opportunity.
We hope you enjoyed learning more about David, his work in the cannabis space and his perspectives on the industry. We sure did! Stay tuned for more from David on the Daily Marijuana Observer and be sure to subscribe to our cannabis industry legal newsletter to stay up to date with cannabis and the law.