[co-authors: Meriem Sefta, PhD*, Antony Vitanov, Jade Levin]
The value of the global medicinal cannabis market is projected to reach US$62.7 billion by 2024, with over US$22 billion of that market generated by Europe and an estimated excess of £2 billion likely to be generated in the UK. Despite the potential scale of this nascent market, the UK seems to be relatively slow to issue permissions for medical cannabis companies to operate, with only two licences issued as of January 2021 for the cultivation of medicinal cannabis in the UK.
Investing in medical cannabis involving the UK takes three main forms:
- structuring and operating an investment fund (potentially domiciled in the UK) planning to invest in medicinal cannabis assets (whether inside or outside of the UK);
- deploying capital to acquire or invest in medicinal cannabis companies (whether inside or outside of the UK); and
- listing a business on the UK markets which operates in the medical cannabis area.
1. Medical Cannabis Fund Formation, Management and Marketing
1.1 The first issue fund managers will need to consider when establishing a fund with the intention of investing in medicinal cannabis is where they wish to domicile the fund. For fund managers seeking to launch a medicinal cannabis fund, the normal domicile decision (typically based on tax and market expectations) can be much more complicated. This is because in many jurisdictions, the laws relating to medicinal cannabis are not clear and it may be difficult to identify a jurisdiction in which the fund can be domiciled with the clear support of local regulators.
1.2 For example, in certain jurisdictions, such as the Cayman Islands and Bermuda, provided that the underlying activities in which the fund invests are legal in the jurisdiction in which they are carried out, the fund should not face obstacles with the local regulators. Other jurisdictions, such as the Channel Islands, may require that the underlying activities in which the fund invests are legal not only in the jurisdiction in which they are carried out, but also locally. In a jurisdiction where this is the case, fund managers will need to consider not only relevant local laws, but also laws relating to secondary offences such as proceeds of crime laws. Local legality may not always be a straightforward analysis. For example, in the United States, where most medical cannabis investment is currently taking place, there is currently a discrepancy between laws at the state and federal level that may make it difficult to domicile a fund, even in jurisdictions where it is sufficient that the underlying activities in which the fund invests are legal in the jurisdiction in which they are carried out. Prospective fund managers should therefore be mindful of the local regulatory environment in the jurisdiction in which they intend to domicile the fund and may wish to consider approaching local regulators on a “no names” basis to test the waters before making a decision. They should also seek careful advice from counsel.
1.3 Once a fund manager has determined where to domicile their fund, they will need to consider structuring the management entity. Broadly, the issue in relation to advising on investments in medicinal cannabis companies that UK investment managers should understand revolves around the Proceeds of Crime Act 2020 (“PoCA”) and whether the fees (both management fees and performance fees) they receive from the fund are (indirectly) proceeds of a criminal activity with the consequent risk that PoCA offences are committed.
1.4 No formal guidance on this topic has been issued by the authorities, and therefore it appears that a fund manager in the UK does not yet have complete clarity as to whether or not they may be caught by the legislation. While PoCA provides for a mechanism for UK fund managers to self-report and for the National Crime Agency (“NCA”) to consent to such activity, the NCA has so far exercised its discretion to neither grant nor deny consent to deal when a suspicious activity report (“SAR”) is filed and therefore it is left to the UK investment manager to determine (usually on the basis of careful legal advice) whether they would be committing an offence. For further details on the SAR process and potential delays this may cause for investments, see section 2 below.
1.5 The UK’s anti-money laundering laws are contained in Part 7 of PoCA. They criminalise dealing with, or entering into arrangements in respect of, the proceeds of “criminal conduct”. Importantly, the definition of “criminal conduct” in PoCA captures conduct which is lawful overseas, but would be a crime were it to occur in the UK. If this definition catches revenue generated by an overseas licensed cannabis producing portfolio investment, then the anti-money laundering responsibilities established by PoCA and subsidiary legislation could be engaged, meaning that the adviser will commit an offence if it receives fees related to these activities. Investors in the fund may also find themselves committing an offence when they receive distributions from the fund.
1.6 The legality of any investment scheme or product is fact specific. However, it is possible that a UK investment manager will not fall foul of the UK’s anti-money laundering rules in a situation where:
1.6.1 an investment (whether by share acquisition or otherwise) is contemplated in, and returns are thereafter intended to be received from, an overseas cannabis production and/or distribution business;
1.6.2 this business is licensed and operating lawfully in the country in which it is carried out;
1.6.3 the nature of the overseas cannabis production business is in the public domain; and
1.6.4 neither the fund nor any agent or subsidiary through which an investment is undertaken is suspicious that it is being misled or deceived about the investments, the transactions comprising the underlying business or the participants in it.
1.7 It is important to note that, at the time of writing, there is considerable debate about the application of PoCA to investments in medicinal cannabis outside of the UK and the analysis in each case will be extremely fact-specific and there may currently be some divergence of opinion. Until such time as guidance is received from the authorities, the laws are clarified or there is a consensus opinion in the market, fund managers would be wise to seek specific legal advice.
1.8 Once a manager and fund have been formed and are suitably domiciled, the next step will be to raise capital for the fund. When marketing the fund in different jurisdictions, UK investment managers should note that each jurisdiction will have its own rules in relation to marketing a fund, and possibly further rules relating to marketing a fund investing in the medicinal cannabis sector.
1.9 Similarly to the issues faced by a UK investment manager, it is important for investors to understand how the returns from their investments in a fund investing in the UK medical cannabis sector will be treated in their jurisdiction, and in particular whether they will be considered to be proceeds of a “criminal activity”. It therefore falls to each investor to determine this in accordance with the relevant legislation in their own jurisdiction.
1.10 Finally, as with all medical, scientific or research-based investment strategies which are rapidly evolving, managers of funds investing in medicinal cannabis must take care when presenting the investment strategy and producing marketing documents (such as the prospectus) as the investment strategy sections will likely provide forward-looking statements regarding an industry which remains largely unresearched in comparison to other, more mature, industries. Disclosures and disclaimers will need to be carefully reviewed to ensure that any such statements are properly qualified, otherwise investors…