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Soy RICO? The Perils of Cannabis Investing in Light of Racketeering Laws

  • Risk

At the risk of being labeled a “square” this article is intended to outline some of the potential perils and pitfalls of investing in the Cannabis industry in light of the Federal RICO laws.

Some Helpful Laws to Know

The Tenth Amendment to the United States Constitution says that any powers not delegated to the Federal Government by the Constitution are vested in the state governments and ultimately the people.

Article I , Section 8, Clause 3 of the Constitution is frequently referred to by anyone who went to law school as the “Commerce Clause” which basically regulates any commerce involving more than one state or a foreign country. Basically, if you conduct any business that somehow involves someone in another state – the Federal Government is now involved.

Racketeer Influenced and Corrupt Organizations Act as codified under 18 U.S.C. 1961 et seq. or RICO is a Federal law that says that a person who has committed at least two acts from a list of 35 crimes (27 of which are Federal crimes and 7 are state crimes) within a 10 year period and such acts are related to an enterprise (any individual, partnership, corporation, association or other legal entity, and any union or group of individuals associated in fact although not through a legal entity) is guilty of racketeering.

The Controlled Substances Act lists a giant pile of substances under which the manufacture, importation, possession and use of certain drugs is regulated.  These drugs are set forth in various schedules ranging from the highest potential for abuse to the lowest. Under Schedule I as found in Section 102, no prescriptions may be written for these substances and there is no currency accepted medical use in treatment in the United States and there is a lack of accepted safety for using the drug or other substance under medical supervision. Schedule I, Section (c)  – Hallucinogenic Substances includes subsection (17) TetraHydroCannabinols (which is Cannabis a/k/a Marijuana, Pot, Reefer, Ganja, Grass, and Doobie).

High Crimes

Under RICO, the felonious manufacture, importation, receiving, concealment, buying, selling or otherwise dealing in a controlled substance or listed chemical (as defined in Section 102 of the Controlled Substances Act), which is punishable under any law of the United States is considered a racketeering act. Do it twice and you’re a racketeer (its as simple as that). For those of you playing along at home, the sale of any amount of Cannabis is a felony under Federal Law as is the cultivation of any amount of marijuana. Basically, if you sell Cannabis twice or you grow it and sell it or any other combination thereof you are considered to be a Racketeer (and not in a good way).

But its legal in Colorado / Nevada / California / DC et al!

Although it may be legal under state law and this may cause people to open businesses and believe that the legality conferred by a state may somehow insulate them from liability at the Federal level, to the extent that the enterprise leaks out beyond the borders of a state – the state laws no longer govern.

In the event that a Cannabis company could make a compelling argument that what they were doing was in no way related to interstate commerce and therefore their conduct should be regulated exclusively by the laws of the state in which they do business – they might have an argument for the inapplicability of RICO. That said, in the modern economy it would be practically impossible to devise a solution that had no component of interstate commerce.

An interstate of mind

Ever since 1942, when the US Supreme Court essentially declared that essentially everything commercial (or quasi-commerce) undertaken in modern America falls under the definition of interstate commerce and thus is the purview of the Federal government, it has become essentially impossible for businesses to rely upon the exclusive jurisdiction of state law as the determining force of regulation.

Some examples of what now may constitute interstate commerce are: (a) accepting credit cards, (b) accepting cheques, (c) bringing in supplies from another state, (d) employees in another state, (e) customers in another state, (f) using the internet, (g) providing or receiving financing across state lines. To the extent that some enterprising Cannabis company figures out how to engage in none of the above acts, anything else that might be interstate commerce, and has investment comprised solely from residents exclusively from their state – I tip my hat to them.

Possible problems for investors and companies seeking investment

Section 10(b) of the Exchange Act and SEC Rule 10b-5.

Section 10(b) of the Exchange act forbids the use of any manipulative or deceptive device in contravention of the SEC rules and regulations for the protection of investors. Rule 10b-5, adopted by the SEC pursuant to section 10(b), prohibits fraudulent devices and schemes, material misstatements and omissions of any material facts, and acts and practices that operate as a fraud or deceit on any person in connection with the purchase or sale of a security. Each offering participant, including the issuer, its officers and directors, the underwriters, accountants and other experts, is potentially liable under this provision.

One might easily argue that the omission of the material fact that every transaction undertaken by the company was a violation of the Controlled Substances Act and that taken together the company is almost certainly engaging in a violation of RICO. “Oh by the way, everything we do is a Federal crime.” is a difficult thing to adequately disclose to investors as a risk factor.

O Canada

Investors may believe that hopping the border to our Northern Neighbor might somehow immunize the risk of RICO claims in light of the fact that the activities are taking place IN CANADA. That would be all well and good if the investor is Canadian although for purposes of this article we are assuming an investor who is American investing in Canadian Cannabis. Unfortunately, for the budding international cannabis investor, US Federal laws apply to acts by Americans which, while they may be legal in the country they are conducted in, are illegal in the United States of America. This should also give pause to anyone considering investing in a foreign sex tourism company.

Final Thoughts

Inevitably, promoters of Cannabis investments will claim that the risks outlined herein are overstated and that the likely risk of prosecution “in the real world” is low because there are so many companies doing it and it does not “actually hurt anyone”. Notwithstanding the merits of these arguments, the contention here is that the juice (the potential returns from a Cannabis investment) is simply not worth the squeeze (the risk of Federal prosecution) at this time.

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