UPDATE: 4/11/14, 10:15 a.m. EDT. The SEC has halted trading in GrowLife shares due to concerns about “potentially manipulative transactions” involving its stock. GrowLife has responded to the decision with a statement.
GrowLife, a public company whose products are used in the cultivation of marijuana, has hired Crowell & Moring to advise it on regulatory compliance and M&A matters amid a surge in public support for legalizing what has long been an illicit substance.
Sterling Scott—a former Washington, D.C.–based Jenner & Block partner who is now GrowLife’s CEO—believes that by signing on to advise the company, Crowell is on the leading edge of what will soon become a trend as law firms move to tap into a budding industry that one recent estimate claims could grow into a $10 billion-a-year juggernaut by 2018.
“I think you’ll start to see more large firms get involved in this arena,” says Scott, while noting that his Carson, Calif.–based company is still finalizing the terms of Crowell’s engagement. He adds that GrowLife, which received $40 million in funding earmarked for acquisitions and growth capital last month, is likely to rely on the kind of alternative legal fee deals that have become increasingly popular among start-ups and other mainstream businesses.
GrowLife’s decision to tap an Am Law 100 firm for outside counsel on key issues is yet another sign that momentum for widespread legalization—which began with some states easing restrictions on the use of marijuana for medicinal purposes and accelerated when Colorado and Washington voters approved its recreational use in those states last year—continues to build.
From Scott’s perspective, a “seminal moment” in the history of the legal cannabis industry came in October 2009 when the U.S. Department of Justice issued the so-called Ogden memorandum. Authored by former deputy U.S. attorney general David Ogden—who was a partner of Scott’s at Jenner—the three-page missive states that the federal government will not prosecute individuals using marijuana for medical purposes in states where it is legal.
“The Ogden memo was a critical development that set the parameters of when the Justice Department would intervene,” Scott says. “It’s essentially the basis of our current [regulatory] landscape, where the federal government has taken a ‘hands off’ approach to medical marijuana use as long as it complies with state law.”
Ogden left the Justice Department in February 2010 to become a partner at Wilmer Cutler Pickering Hale and Dorr in Washington, D.C., where he chairs the firm’s government and regulatory litigation practice. He was unavailable for comment Wednesday on that landmark memo, which Scott says is well known to everyone—even small-time hemp farmers in Humboldt County, Calif.—in the industry it helped jump-start.
Former Bryan Cave partner James Cole, who succeeded Ogden as U.S. Attorney General Eric Holder Jr.’s second-in-command, made marijuana history himself in August by penning a four-page memo stating that the federal government would not sue to stop Colorado and Washington from legalizing recreational cannabis use.
The day after Cole testified before Congress on Sept. 10 about the memo and the Justice Department’s marijuana enforcement efforts, Scott issued an open letter to investors in which he highlighted Main Justice’s “paradigm shift” and called it “the watershed event that GrowLife, among other public companies, has been awaiting.”
Still, some may be inclined to regard promises of high returns made by companies operating in the still-developing cannabis sector warily. As sibling publication Corporate Counsel reported this summer, the Financial Industry Regulatory Authority has warned investors about possible marijuana-related stock scams.
As it happens, one of those applauding FINRA’s call for caution has attracted some skepticism of its own.
On the heels of FINRA’s warning, Hollywood, Calif.–based Medbox, a publicly traded company that describes itself as providing “software and systems that improve compliance, increase transparency, accountability and enhance security of medicines of all types,” including medicinal marijuana, issued a press release supporting FINRA. “We are in a period that is like the Gold Rush,” said Medbox CEO Dr. Bruce Bedrick in the release. “We want these fly-by-night operations out of our industry, and support any regulatory authority in calling attention to the problem.”
But as Yahoo Finance reported in October, Medbox is now facing tough questions about its founder and primary shareholder Pejman “Vincent” Mehdizadeh. The Southern Investigative Reporting Foundation noted earlier this year that Mehdizadeh has a history of legal problems, including impersonating an attorney despite having never attended law school. (SIRF also raised questions about Medbox’s chief legal adviser.)
GrowLife’s Scott acknowledges that the nascent nature of the legal cannabis industry might give some investors pause. At the same time, he remains bullish on his company’s future and insists that investors can take comfort in the stable of legal advisers GrowLife has on staff and retainer to help it navigate the current regulatory environment.
Lake Forest, Calif.–based Horwitz, Cron & Armstrong serves as GrowLife’s outside general counsel, and besides Scott, the company has two other attorneys on its board of directors in Robert Hunt and Eric Shevin. Scott says that Crowell corporate partner Larry Eisenstat—a former law school classmate of his who joined the firm in a five-lawyer lateral move from Dickstein Shapiro this summer—will lend M&A and regulatory expertise to GrowLife as it mulls expansion opportunities.
GrowLife was formed in April 2012 following the merger of predecessor companies Phototron and SG Technologies. Scott was a majority stakeholder in privately held SG, which specialized in the production of LED lighting systems used to grow marijuana indoors, and took over the combined company once the merger was complete.
Scott is careful to note that GrowLife does not sell marijuana. Federal law still considers the plant a “Schedule I controlled substance,” making its transport between states a criminal offense. Because GrowLife has operations in several states—it owns hydroponics stores in California, Colorado, Massachusetts, Maine and New Hampshire—the company must confine itself to selling equipment used in cultivation. ( Click here for a breakdown on the laws in 50 U.S. states and the District of Columbia as they pertain to the medicinal and recreational use of marijuana.)
GrowLife makes between 3,000 and 4,000 products for the marijuana industry, Scott says, and the company’s market capitalization as of Tuesday was roughly $60 million. GrowLife’s lighting business is among its most profitable units, which makes sense given that the flourishing legal marijuana industry in the U.S. would wither without indoor LED lighting.
Scott says the economics of growing marijuana indoors are simple. Cultivating plants inside, as opposed to outdoors, allows growers to control variables and maximize 60-day crop cycles. Marijuana grown indoors can produce up to six crop cycles in one year, while outdoor yields are much more unreliable.
“There’s a great deal of science to it, particularly [agricultural] science,” says Scott, adding that GrowLife is looking into hiring plant geneticists. “This is not your father’s cannabis industry.”
Scott says one of the benefits of being a public company—predecessor Phototron went public through a reverse merger in March 2011—is the “heightened access to capital.” As a result, GrowLife allows investors to have more liquidity in the capital they wish to invest. And with increased investment, economic incentives, mainstream media attention and social acceptance come attorneys and lobbyists, some of whom want to partake themselves.
Last year Denver-based Vicente Sederberg, whose website calls it “the marijuana law firm,” opened an office in Boston to serve clients interested in obtaining one of Massachusetts’ new medicinal marijuana licenses. Massachusetts is one of the next states many industry observers believe could fully legalize cannabis use, and companies like GrowLife are competing for investors’ capital as the market for marijuana dispensaries expands.
Cannabis Science, GreenGro Technologies, Hemp Inc., MedBox and MediSwipe are just some of the other companies in the emerging legal cannabis industry. Many, like GrowLife, are bulking up their legal teams.
Cannabis Science hired former Skadden, Arps, Slate, Meagher & Flom associate Chad Johnson as its general counsel in November 2012. In April, GreenGro added California lawyer Owen Naccarato to its board, while Seattle-based venture capital firm Privateer Holdings, which raises money from private investors and owns online marijuana review website Leafly, counts former prosecutor Tonia Winchester as a director.
A recent SEC filing by Medbox—which announced a year ago this month that it had hired an unidentified “renowned Seattle-based law firm” to assist Washington officials in the state’s implementation of new medical marijuana usage laws—shows it has hired Baltimore-based Ober, Kaler, Grimes & Shriver as outside securities counsel. Another SEC filing earlier this year by MediSwipe reveals that Irvine-based Greenberg Traurig corporate partner Daniel Donahue has advised the company. (Donahue did not respond to a request for comment.)
As far as Scott is concerned, if the trend toward legalization keeps up its current pace, there will plenty of money for everyone in the field.
“If you take into account the black market, which is starting to disappear, it might be worth $120 billion,” Scott says. “This is not a small industry.”