New York Cannabis: Lawyers can consume, advise companies and own them (if they dare)

In the continuing trend to normalize the cannabis industry for practical reasons, the New York State Bar Association (NYSBA) Professional Ethics Committee issued Views1225 (opinion). In short, NYSBA now explicitly allows lawyers to represent clients in the recreational marijuana industry in New York.

NYSBA actually issued three separate decisions, each of which was incorporated into the New York Lawyers’ Professional Conduct Rules:

First, lawyers can now provide legal services ethically to assist clients in complying with New York’s recreational marijuana laws (marijuana regulation and taxation act). NYSBA adopted its previous opinion on the recreational marijuana industry in New York’s medical marijuana legislation in the context of rule 1.2(d) which prohibits assisting clients in breaking the law.

NYSBA provided four reasons for its opinion:

  1. In view of the continued decision by the federal government not to prosecute medical marijuana legalized by the state, it provides lawyers with a “cover” to practice marijuana law: “Because 17 states, plus Washington DC and Guam, the recreational use of marijuana has now been legalized .. Some form… It’s fair to say that the federal tolerance in enforcing federal narcotics laws over the past decade also applies to state laws that legalize recreational marijuana and state laws that legalize medical marijuana.”
  2. MRTA’s powerful licensing and regulatory system is a federal law enforcement policy designed to be the object of federal tolerance.
  3. Customers need legal advice when applying and using MRTA. Without these advice, the recreational cannabis industry in New York may collapse.
  4. This situation is unique because the interaction between federal and state laws is not Rule 1.2(d) which prohibits lawyers from assisting clients when they know they are engaged in illegal activities.

NYSBA’s second decision is that lawyers can participate in the use of marijuana, own marijuana businesses, and grow marijuana plants as permitted by the MRTA. Similarly, NYSBA relies on federal tolerance policies to explain the permitted use, possession of cannabis businesses, or home cultivation.

Third, NYSBA explicitly allows lawyers to accept the client’s equity in the cannabis business as compensation for providing legal services. The opinion listed rules generally applicable to equity, as well as warnings about violating MRTA and engaging in interstate trade.

This is the last part of the comments we found very interesting on the Canna Law Blog. For a long time, we have been talking about the risks associated with choosing the wrong lawyer for the cannabis business (here and here). We have also heard some anecdotes from clients about the need for equity attorneys in New York for “marijuana” lawyers as part of their representation.

According to NYSBA’s opinion, this approach now appears to be acceptable. But we strongly warn anyone to agree to give up equity without asking a few questions, the most important of which is MRTA itself?

In the context of prohibiting vertical integration, the MRTA’s adult cannabis clause explicitly prohibits the following: (i) having direct or indirect ownership rights in multiple licenses of each license type; (ii) in multiple license types Have direct or indirect ownership interests (with limited exceptions); (iii) If the individual or entity has ownership interests in growers, processors, and/or distributor licensees, any ownership in retail pharmacies rights and interests.

At least, at this time (that is, before the actual rules and regulations are issued) requiring fairness as part of the legal representation reflects a lack of understanding or concern about the fundamentals of the MRTA itself. The obvious risk is that the law firm or lawyer’s ownership interest in the applicant will disqualify the applicant from obtaining an adult license.

Then, you might wonder if you can ask a law firm to provide a list of its cannabis investments if you are the only client being asked to provide equity. You should, but not for the answer, but to see how seriously your prospective lawyer treats client confidentiality.

We think it is obvious that given that MRTA explicitly prohibits vertical integration and has direct or indirect interest in multiple licenses, at this point, it is a very tricky proposal for lawyers to have an ownership interest in the potential cannabis business of a New York client. For this reason, even the requirement for equity at this stage of the rulemaking process (because the rulemaking process has not even begun) is itself a red flag.

In short, we warn any potential applicants to think carefully before agreeing to transfer equity to their lawyers. Not from a commercial point of view, but because of the potential consequences of a license application. If your lawyer does not have a good answer to the questions raised here, then you may need to consider how well your lawyer really understands the MRTA.

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