Michael Weiner is a partner at Dorsey & Whitney, where he leads the Denver corporate group and is co-head of the firm’s cannabis practice.
The Minneapolis-based law firm’s cannabis group works out of Denver, Seattle, Canada and Northern California on corporate transactions and, according to Weiner, has “long-standing expertise” in Canadian cross-border securities work.
Law Week spoke to Weiner, who has been practicing in emerging companies for 25 years, about the major trends he has seen develop in cannabis law and transactions over the past year and his predictions for the year ahead and beyond.
The following conversation has been edited for clarity, length and style.
Law Week: What have been the big trends or changes that you’ve seen in your practice over the past year?
Michael Weiner: We’ve seen a significant drop-off in capital market activity as a firm since the bubble burst in the fall.
That’s been the biggest trend that’s also had some ancillary effects on M&A activity, since a lot of public companies … were acquiring companies using stock as their currency. With stock prices being lower, those become less attractive and more difficult to get done. They’re still happening, but it is at a much slower pace.
LW: Among marijuana, hemp and CBD, are there any products that have posed more challenges, or where there has been more activity, in the past year?
MW: We thought going into the year that hemp and CBD from hemp was going to be a big product category in 2019. We really thought it would take off in a variety of ways. And for a variety of reasons, that hasn’t quite happened yet. There are still products being sold — you can find them all over the place. But it’s been a slower introduction with them than we thought.
As a result, even though I think we’ll see growth in that in 2020, I’m actually thinking we’re not going to see it really take off until 2021. And I think that’s because of regulatory concerns. Those regulatory concerns then cause potential litigation concerns, and then also issues with getting banking services. We all thought that [hemp] companies would be able to bank, and even though legally they can, it hasn’t happened yet.
LW: You talked a little about the bubble that burst. Can you explain a bit about the background of that and what that means for financing and investment for the next year?
MW: What often happens with industries early on is that people get more excited than the financial results from that industry [merit]. So what happens is stock prices on the public markets become much higher than they should be relative to the underlying financial performance. What tends to happen — or what you hope would happen — is that over time, stocks would gradually decline to the right level, and/or financial performance would increase to meet that level. And that would happen gradually.
What tends to happen in reality is, for any number of reasons, one day everybody wakes up and says, “Oh, my God, I’ve got stock in a company that’s worth more than it should be.” And in very short order, stocks decline precipitously, even though there’s been really no change in the underlying financial performance.
So, the nice part about cannabis, relative to other industries, is that the underlying performance is still often very good. It just wasn’t high enough to support the stock valuation. There’s still underlying performance and sales. One would think that, over time, those will continue to grow and then get stock prices moving higher.
When stock prices take a precipitous decline, what tends to happen is [companies are] more reluctant to use their stock as a currency to buy other companies. And even if they want to use their stock as a currency, they generally will value the target company at a much lower price because they themselves have seen their valuation drop. And then the sellers don’t want to sell because they’re being offered a price that is often a fraction of what they used to be valued at. And it takes time for that to cycle through — generally anywhere from six to 18 months for everybody to sort of be comfortable with the new reality.
LW: It sounds like you’re involved with cannabis clients and transactions in other states and even in Canada. Are there any particular challenges to working in all these different regulatory environments or across state or national lines?
MW: There’s lots of challenges to the various regulatory regimes where things you can do in one state you can’t do in another state. It’s difficult to move money. It’s difficult for financial services. It’s difficult to protect IP because of the federal illegality. So there’s a whole host of issues related to the regulatory regimes and federal illegality.
LW: As far as the growth of cannabis practice groups in Denver law firms, is this an area where we need more attorneys in the state? Or have we hit a saturation point?
MW: I think we have a fine number. I don’t think there are folks running around saying, “I can’t find anybody to do my legal work.” I don’t think that is an issue. I think what will happen as legalization continues — I think you’ll see it in particular in the hemp space, which is a legal industry — you’ll see more and more lawyers participating.
LW: Is there a need for attorneys or practice groups that have a specific focus or specialization within the cannabis industry? Or is there more need for full-service practices?
MW: I think the only area that is somewhat problematic in Colorado is litigation. Because the federal courts did not adopt the Colorado ethics rules regarding representing cannabis companies, I know we have issues — and I know other people in the industry have issues — about presenting themselves in federal court or state court on behalf of a cannabis company because they don’t want to lose their federal court privileges. That’s an area that if I could wave a magic wand, I’d love to see that change for a variety of reasons, and so that there would be a little bit more certainty in the enforcement of contracts, in particular.
LW: What are your big expectations or predictions for the year ahead? What are going to be the big issues affecting your clients and your practice?
MW: I think that hemp and hemp CBD will come more to the forefront during the year, [followed by] a complete introduction of those products in 2021. Then I think you’ll see a one- or two-year cycle focused on hemp and CBD from hemp before we’ll eventually see THC come back to the forefront.