International Cannabis: Guidance for Companies Entering the U.S. Market, Part 1

11 May International Cannabis: Guidance for Companies Entering the U.S. Market, Part 1

As I mentioned in a prior post (see here), we have been fielding regular inquiries from international cannabis companies that want to engage with the U.S. market by selling raw hemp or cannabis, distillates (including cannabinoids), and products, including products that have been proven in their home markets. This post is addressed to companies considering how to enter the U.S. market. It is the first of several posts that will cover taxation, employment, licensing, and other concerns relevant to international companies seeking to do business in the U.S. cannabis industry.

High Level Strategic Information. As a business transactions lawyer, I am accustomed to business owners asking for insight and advice that goes far beyond legal considerations. Generally, international cannabis companies want advice on whether and how to partner with domestic companies, which domestic markets are particularly attractive, which state laws and regulations give international companies the maximum flexibility (regarding financing, licensure, and product sales), and which state laws and regulations are particularly problematic (or prohibitive like Washington) for international companies.

Other considerations include which financial institutions, insurance companies, transportation and logistics companies, accounting firms, payment processors, marketing companies, and web development companies are friendly to the cannabis industry and have a good track record of customer service.

Ways to Enter the U.S. Market. Most established international companies are either looking to partner with a U.S. company in some type of contractual or entity joint venture, or they want to establish their own independent presence, with or without a formal brick-and-mortar presence.

Forming a U.S. Entity. The initial question is whether the international company needs to or must set up a U.S.-based entity. Some states will require a U.S.-based entity. Some states will even require a licensed cannabis (marijuana or hemp) business to be formed in their own state, while others will permit another state’s entity to merely qualify to do business in their state.

Finding the Right U.S. State. Cannabis companies need to consider several issues when deciding upon the U.S. base of operations. Initially, you want to form your entity in a state that has favorable taxation, general business laws, and clear cannabis business policies. Some of this will depend on your intended business market. Another prominent question is whether you have a good reason to form a Delaware company (generally if you anticipate bringing on institutional investors (like venture capital) at some point) (see here and here). For many months our firm has prepared and updated on a monthly basis a 50-state risk matrix regarding hemp laws, regulations, and enforcement surrounding hemp-derived products. This is a particularly helpful tool for our international clients who want a comprehensive roadmap to each state.

Ownership of the U.S. Entity. If a new entity needs to be formed, then the second question is whether that new entity should be a wholly-owned subsidiary of the foreign parent or whether the underlying owners of the foreign parent want to personally invest in the U.S. company. Generally, we end up advising on forming a U.S.-based entity (LLC or C corp) that will be a wholly owned subsidiary of the parent company in order to minimize the U.S. tax issues for the underlying individual owners of the parent company. Because of IRC Section 280E considerations (see here) with marijuana (not hemp) ventures, we frequently hear CPAs recommend a C corporation “blocker entity” as the primary U.S. investment vehicle.

Find a Good Accounting Firm. All of our international cannabis clients already work with a good CPA firm in their home country. If our client already does business in multiple international markets, then their CPA firm is generally international, as well, and can provide solid guidance regarding foreign and sometimes U.S. tax considerations. If the foreign CPA firm does not have U.S. tax law expertise, then we often provide recommendations based on the foreign company’s intended base of operations in the U.S. A good domestic CPA firm is important to help deal with income, employment, and sales and excise taxes that vary from state to state and even city by city. Do not wait to find a good accounting firm in the U.S.

In the next post in this series I will discuss international and domestic taxation, which is often the driving factor in many of the business decisions that need to be made.