Preparing for Increased M&A Activity in the US Hemp Industry
By Emily Gordon, Hoban Law Group
With a stroke of President Trump’s pen on December 20, 2018, the Agricultural Improvement Act (“2018 Farm Bill”) became law in the United States, clarifying and affirming the lawfulness of hemp and permanently precluding hemp from treatment as a controlled substance. The USDA still has a long way to go toward finalizing the regulations that will implement the 2018 Farm Bill, and there are still many areas of uncertainty, but one thing is all but certain: the industry will continue to grow, consolidate, and move further into the mainstream.
Looking at the North American marijuana industry, which has had more time to move toward consolidation, as well as deals that are already taking place in the hemp industry, provides a glimpse into hemp’s future. As more clarity gradually emerges for US hemp businesses, it is never too early to be thinking ahead to potentially being part of the kinds of deals happening right now – consolidation via multi-million- and billion-dollar transactions – and doing what businesses can now to prepare.
The largest deals in both the marijuana and hemp industries are still happening in Canada, in no small part due to greater access to capital, including the mammoth deal made earlier this month between Canopy Growth and Acreage Holdings, although the full approximately $3.4B US value of the deal only comes into play if and when the US Federal government legalizes marijuana production and sale.
Recent Canadian-led hemp deals of note include the acquisition of Manitoba Harvest, the largest manufacturer of hemp foods in the world, by Canadian marijuana producer Tilray, and Canopy Growth’s increasing involvement in hemp, including through its acquisition of Colorado-based ebbu, Inc., a leader in hemp research. The passage and implementation of the 2018 Farm Bill should help facilitate the continued acceleration of greater access to capital by businesses in the hemp industry and a corresponding increase in mergers and acquisitions.
Here are three things for US hemp businesses to consider, from a legal standpoint, who want to prepare now to be part of the accelerated industry consolidation of the future:
- Businesses can consider ways to ensure the continued strength of their brand. One way to do this is to consider registration of the company’s trademarks, long a major component of brand protection in mainstream industries, but less commonly available in the marijuana and hemp industries, due to the requirement to show the mark is lawfully used in commerce. USPTO has flip-flopped over time with respect to hemp-related marks. With the passage of the 2018 Farm Bill, it is anticipated to be easier to obtain federal trademark protection of hemp-related marks, such as a company’s logo, brand name, and other marks, and allow the company – and potential future business partners – to enjoy the benefits of trademark protection.
- Businesses might not yet be overly concerned with activities like preparing monthly financial statements, much less preparing audited While undertaking these and other recordkeeping tasks sooner rather than later might cost money and time now, that could pale in comparison to the time and headache that can be avoided when a potential acquirer is asking for three years of audited financial statements.
- Businesses can begin to think now about potential legal and compliance issues that may arise during the due diligence phase of a merger or acquisition – that is, when another company’s lawyers are scrutinizing every move the company has ever made. Have all of the company’s employees signed robust non-disclosure agreements? Are copies of all of the company’s signed contracts organized and safely stored? Does the company have a robust compliance regimen to maintain compliance with the various regulatory requirements, including a plan for managing and responding to regulatory changes?
Being proactive now will not only contribute to the ongoing success of the business but will also show potential acquirers and partners that the business is high quality and positioned for success, and will save valuable time later when all of the focus is on getting a deal across the finish line.
Emily Gordon is a senior associate attorney at Hoban Law Group in Denver, Colorado. Emily has worked on several legal issues in the cannabis space, specializing thus far in hemp, regulatory compliance (hemp and marijuana), corporate and securities. Visit www.hoban.law.
This article has been prepared for informational and general guidance purposes only; it does not constitute legal or professional advice. You should not act upon the information contained herein without obtaining specific professional advice. No representation or warranty (express or implied) is made to the accuracy or completeness of the information contained in this publication. Hoban Law Group, its members, employees, and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based thereupon.
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