To fully comprehend the risks of investing in cannabis, fund managers must also understand the host of issues faced by the businesses in which they intend to invest. For instance, cannabis businesses face unique intellectual property (IP), tax and marketing/advertising restrictions that make it more difficult for them to realize profits. Managers must also be aware of any residency requirements that restrict their abilities to make investments in certain jurisdictions. Because investing in underlying cannabis companies creates a risk of loss with limited – or no – recourse for recovery, it is imperative for fund managers to understand the legal and compliance issues faced by those companies. This third article in a four-part series evaluates how federal illegality affects underlying businesses, as well as residency requirements for investing. The first article
discussed the legislative, judicial and executive cannabis framework, as well as state legalization and industry growth. The second article
analyzed cannabis deal structures, ways managers should diligence investments, disclosures managers should include in offering documents and anti-money laundering concerns. The fourth article
will assess the international prospects for investing, including in Canada; public perception and valuation issues; and service providers in the space. See our two-part series on how hedge funds can protect their brands and IP: “Trademarks and Copyrights
” (Feb. 23, 2017); and “Trade Secrets and Patents
” (Mar. 9, 2017).