The legalization of cannabis in Massachusetts in 2016 created a brand-new industry in New England, an industry still illegal at the federal level and stigmatized by many. Despite the obvious hurdles, entrepreneurs lined up to try their hand in this unique space.

David S. Hirsch, a partner at Hinckley Allen, has been working with cannabis companies since legalization, helping them navigate business formation, regulatory challenges, and fundraising issues. Here David shares how the cannabis industry has evolved over the last six years and what he sees in its future.

What hurdles does the cannabis industry still face despite its legalization in so many states?

Right now is one of the most challenging times if you’re a cannabis operator, because if you are operating in multiple states, you’ve got a myriad of different state rules and regulations that you’ve got to manage through, all while operating illegally on a federal level. Even though cannabis is legal in many states, it cannot cross state lines because it is still federally banned. The next frontier for the industry is achieving federal legalization, which would bring myriad benefits to the industry. As it stands today, traditional bank and larger institutional financing sources have been sitting on the sidelines. Similarly, cannabis companies often have trouble securing sophisticated banking and cash management services relied upon by other industries, as banks wary of crossing federal regulators have refused to serve the industry.

An end to federal prohibition would also likely mean relief from a harsh aspect of the federal tax code known as 280e, which disallows normal business deductions for those deemed to be “trafficking” illegal substances under federal law.  The result of 280e has been effective tax rates in the cannabis industry, significantly higher than in almost all other sectors.  Thus there are a lot of positives that would occur if the federal ban is lifted.

How do you work with your cannabis clients to deal with those barriers and the other issues they face?

I take a very practical approach when advising clients and I listen to them to find out what they really want to achieve in each business decision. Many of them are trying to balance personal and business needs, such as when they make a decision to buy or sell a company. I help them look around the corners and think through different scenarios to see what kind of deal or approach is best for them. Often when it comes to business and personal life, there are not clean dividing lines. Everything is relevant when you are making big decisions like this, so we give clients our best guidance and arm them with the right information so they can make the right choice for their situation.

As far as raising capital in the industry, historically it has been predominantly private investment or non-US public companies. While we do see some bank lending happening more frequently now, no public company on the NASDAQ or NYSE can own a plant-touching cannabis company. That would presumably change if and when the federal government changes their rules. To bridge this finance gap, several states have put together special funds for disenfranchised people or people disproportionately impacted by the war on drugs, to help them gather startup capital, and we’ve assisted clients pursue those specially allocated funds.

Tell us about an interesting deal you worked on in the cannabis industry.

When Massachusetts first legalized cannabis, there were a lot of multi-state operators, some public in Canada (where cannabis is legal at the federal level), which had raised a lot of money. These companies all sought cannabis licenses in multiple states, to show growth and to achieve synergies such as lower overhead costs, having a bigger footprint, and establishing a recognizable brand. This led to a wave of consolidation as many early cannabis licenses were acquired by these larger operators.

For one company I represented, we negotiated the sale of their provisional license to a Canadian public company prior to the business even executing a lease or letter of intent for their approved location. Essentially all my client had was a provisional medical marijuana license, and we structured and facilitated the sale of that asset to a Canadian public company in a deal worth eight figures.

How is the cannabis industry adapting as the market gets more mature and saturated?

I have several clients, particularly in Massachusetts, interested in testing the market for turnkey retail dispensary operations. While there will no doubt be buyers for this kind of business, multiples have come down as the industry has matured and the Massachusetts retail market has become more saturated.  We expect buyers will be more rational going forward and will use more traditional valuation metrics to determine valuations. Nevertheless, I do expect there will continue to be more merger and acquisition activity in the industry over the next several years, despite the challenges posed by federal prohibition.