EXECUTIVE SUMMARY

The widening market for legal marijuana has created significant business opportunities for entrepreneurs. Estimates put the existing legal cannabis market at around $2.5-$2.7 billion at the end of 2014, while growth projections for the medium-term are bullish. Not only has legalization of medical marijuana reached a tipping point at the state-level, the beginnings of a legal recreational market are also emerging.

Given the significant developments that have taken place over the last few years with growing momentum for broader acceptance and in an effort to better serve our growing number of cannabis-based business clients, we undertook our first in-depth review of the legal marijuana industry, encompassing growers, testing labs, infusion, packagers, and retail outlets as well as participants providing ancillary services and products.

This paper outlines the size of the legal cannabis industry and highlights key legislative, regulatory, and major judicial developments, before diving into the hurdles entrepreneurs in this industry face on the financial and tax compliance fronts. We also provide an overview of the current funding picture.

Though the industry presents significant growth opportunities, they are tempered by ongoing legal, regulatory, and financial risks including:

➢ Cannabis-based businesses’ poor access to the banking system ➢ Distinctive tax burdens ➢ Ongoing uncertainty surrounding the interplay between states’ sovereign efforts to foster legalized marketplaces without preemption by the federal government’s continued enforcement efforts.

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Cannabis Market Overview: The Lay of the Land

Introduction

Given all the changes afoot from the legislative, regulatory, and public opinion standpoints, now is the ideal time to take a deep dive into examining the burgeoning legal industry. We’ll highlight market size and key characteristics, recent trends and future outlook from both the regulatory environment and funding perspectives before focusing in on the very real constraints, specifically, banking and tax compliance challenges businesses operating in this industry face.

We believe the long-term outlook for the industry is positive, with healthy underlying demand and growing momentum in terms of more favorable public attitudes and Source: Gallup poll of Oct. 12-15, 2014 ​a​cceptance and an accelerating push towards greater legalization.

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Just how large is the legal cannabis market?

Key market observers estimate the value of the legal industry at around $2.5 billion in revenue at the end of 2014.

Key Characteristics

What does the industry look like in terms of market participants? The legal industry is comprised of growers, wholesalers, dispensary operations, retail outlets, infused products manufacturers, and testing facilities. In its ​Marijuana Business Factbook 2014,​ data from which we incorporated in the two charts below, CannaBusiness estimated the number of participants in each segment as of March 2014 as follows:

Dispensaries: 2,000-2,500 Recreational stores: 50-75 Cultivation sites: 1,500-2,000 Infused Products Firms: 550-750 Testing labs: 15-20

Regulatory environment

At the federal level, marijuana continues to be classified as a Schedule I drug, “t​he most dangerous class of drugs with a high potential for abuse and potentially severe psychological and/or physical dependence” u​ nder the 1970 C​ ontrolled Substances Act (CSA).​ As such, it remains illegal at the federal level with violators subject to fines, asset forfeitures, prosecution, and lengthy imprisonment. A 2013 bill introduced in the House of Representatives, S​ tates’ Medical Marijuana Patient Protection Act ​(H.R. 689), which would have rescheduled marijuana and made the Controlled Substances Act inapplicable to those acting in compliance with state medical marijuana laws, has gone nowhere.

3 This March, three senators introduced a new bill entitled, ‘​‘C​ ompassionate Access, 5 Research Expansion, and Respect States Act of 2015.​" Their bill also seeks to reclassify marijuana as a Schedule 2 drug, provide safe harbor to financial institutions that wish to offer banking services to marijuana-related businesses, and among other things, offer some degree of protection from federal prosecution to those "acting in compliance with State law.’’ ​W​ hile we will monitor events closely, to date th​ ere is nothing to indicate that this Congress would consider a reclassification at this time.

In that context, the C​ ole Memorandum,​ authored by Deputy Attorney General, James M. Cole, and issued on August 29, 2013, by acknowledging diverging federal and state approaches to enforcement and legalization as well as the potential that “robust controls and procedures” effectively enforced at the state level might afford some protection from federal prosecution marked a major turning point. The Cole Memo outlines eight priorities for the Department of Justice’s (DoJ) enforcement of laws prohibiting marijuana use:

➢ Prevent distribution of marijuana to minors ➢ Prevent marijuana revenue from funding criminal enterprises, gangs or cartels ➢ Prevent marijuana from moving out of states where it is legal ➢ Prevent use of state-legal marijuana sales as a cover for illegal activity ➢ Prevent violence and use of firearms in growing or distributing marijuana ➢ Prevent drugged driving or exacerbation of other adverse public health consequences associated with marijuana use ➢ Prevent growing marijuana on public lands ➢ Prevent marijuana possession or use on federal property

The Cole Memorandum’s publication has been widely interpreted to mean that state-sanctioned marijuana business operators and individuals cultivating marijuana for their own personal use, in the vast majority of cases for medical purposes, now face greatly reduced risk of prosecution by the federal government. While that may be true, any victory laps for legalization advocates are somewhat premature. Significant risk is still present given that the memo also firmly asserts the federal government’s right, at its sole prosecutorial discretion, to investigate and prosecute violators of the CSA.

A Justice Department Memorandum dated October 28, 2014, in response to requests for guidance, makes clear that prioritization of enforcement efforts on

4 Native American lands will also fall under the rubric outlined in the Cole Memorandum as well as clarifying that:

“in the event that sovereign Indian Nations seek to legalize the cultivation or use of marijuana in Indian Country. Consistent with the Attorney General's 2010 Indian Country Initiative, in ··· evaluating marijuana enforcement activities in Indian Country, each United States Attorney should consult with the affected tribes on a government-to-government basis.”

The Door is opening, but how wide?

“There are so many doors to open. I am impatient to begin." —​ D​ aniel Keyes

Medical and recreational marijuana legislation and regulatory developments

Following on the heels of the Cole Memo, Congress passed the Omnibus spending bill for fiscal year 2015. It contained this provision:

“N​ one of the funds made available in this Act to the Department of Justice may be used, with respect to the States of Alabama, Alaska, Arizona, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Hawaii, Illinois, Iowa, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, Oregon, Rhode Island, South Carolina, Tennessee, Utah, Vermont, Washington, and Wisconsin, to prevent such States from implementing their own State laws that authorize the use, distribution, possession, or cultivation of medical marijuana.”

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The meaning of “implementing” in this case is not clear, and will be up to the courts to interpret. However, some legalization advocates, supporters, and others believe Congress’ intent to be an end to federal enforcement actions against state-permitted marijuana activities so long as these are well-regulated and violations effectively enforced. As we’ll note later, the jury is still out on this interpretation.

Marijuana Regulation at the State Level

Source: Governing.com

Medical marijuana is now legal in 23 states, shown in green above; while recreational marijuana is legal in Alaska, Colorado, Oregon, Washington, and for now, the District of Columbia which is so far resisting Congressional efforts to negate its recently passed law.

Marijuana regulation and enforcement at the local level

Municipal laws regarding marijuana present a conflicting tableau. Legalization at the state level has not necessarily provided a green light for would be entrepreneurs. Many states and localities, particularly in Colorado and California have imposed stiff restrictions, and, in some cases, outright bans on marijuana dispensaries and retail outlets.

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Judicial developments

On the judicial front, while the Supreme Court has yet to adjudicate a case involving marijuana prosecutions by federal authorities for activities individuals or businesses were explicitly permitted to do at a state level, recent and pending cases are not comforting:

➢ Gonzales v. Raich,​ 545 U.S. 1, 27-29 (2005) ​-- The United States Supreme Court recognized that federal agents could enforce federal laws against a California woman who legally possessed marijuana solely within the state of California.

➢ STATES OF NEBRASKA AND OKLAHOMA v. Colorado ​-​- The Attorneys General for Nebraska and Oklahoma invoke the U.S. Constitution’s Supremacy Clause to argue that federal law should preempt Colorado’s legalization of marijuana distribution on the grounds that “a state may not establish its own policy that is directly counter to federal policy against trafficking in controlled substances or establish a state-sanctioned system for possession, production, licensing, and distribution of drugs.” The lawsuit also attacks the strength of Colorado’s regulatory framework for legal distribution of marijuana and accuses it of lax enforcement.

➢ U.S. v. Larry Lester Harvey, Rhonda Lee Firestack-Harvey, Michelle Lynn Gregg, Rolland Mark Gregg, and Jason Lee Zucker (aka Kettle Falls Five) -​- T​rial wrapped up in U​ .S. District Court in Washington in e​arly March. The defendants, three of whom are members of one family, were growing marijuana on their property which they assert was for 1) their own use and 2) for medical purposes. Though Washington state has legalized both medical and recreational marijuana, federal authorities charged the five with firearms possession and possession with intent to distribute among other charges. Three of the defendants (one accepted a plea deal prior to trial while the government dropped charges against another due to illness) were acquitted of all but the charge of growing marijuana. Sentencing is set for June. The case is viewed by some as prosecutorial overreach given that the Cole Memo and Omnibus spending bills suggested more federal restraint in targeting state-legal marijuana activities.

Financial challenges

“Let's go." "We can't." "Why not?" "We're waiting for Godot.” —​ S​ amuel Beckett

7 Banking

Officially, there are m​ ore than 100 banks and credit unions ​serving the industry. In reality, with the federal government still labeling marijuana as a “dangerous substance” and with money-laundering falling in the category of one of the eight priorities for law enforcement, banks on the whole have been extremely reluctant to extend relationships to cannabis-related businesses, leaving these businesses for the most part, unbanked.

The Treasury Department offered a ray of hope that cannabis businesses might be allowed to officially participate in the U.S. banking system when its Financial Crimes Enforcement Network (FinCEN) released u​ pdated guidance ​to banks last year, appropriately on February 14. Per the guidance, “​In general, the decision to open, close, or refuse any particular account or relationship should be made by each financial institution…”

In practice, in order for banks to welcome marijuana-related businesses as clients, they must scale some very high hurdles. Specifically they face an additional layer of reporting requirements the first of which is the customer “due diligence” process. Banks are also required to file “Marijuana Limited” Suspicious Activity Reports (SAR) not only upon opening accounts with marijuana-related businesses, but also at regular intervals for as long as the accounts remain open. And the onus is on the banks to detail deposits, withdrawals, and transfers plus any changes that might warrant increased scrutiny.

There’s also the issue of required deposit insurance, whether through the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA), and the fact that banks are forbidden from using the electronic payment system to facilitate illegal trade. No surprise then that banks and the American Bankers Association (ABA), the industry’s main lobbying group, have been slow to welcome these businesses and as detailed in this M​ arijuana and Banking FAQ,​ extremely wary of the legal repercussions of servicing them despite Treasury’s FinCEN guidance.

As a result, many of the industry’s entrepreneurs are forced to operate cash businesses. Beyond the obvious security and theft risks this poses for individual operators, from the perspective of cash management, this is hugely problematic.

➔ How do you adequately measure, document, and manage cash burn? ➔ How do you handle reconciliations? ➔ How do you manage tax compliance including mandatory withholding and documentation of receipts?

8 The strain of basic cash management leaves little time for proactive financial management, while also distracts from time spent focused on building sound businesses.

Not only does lack of access to the banking system mean being cut off from building a credit history and investing working capital, it makes documentation of financial transactions and record-keeping harder, while presenting grave safety risk to business owners. And, if as often happens, founders turn to their personal bank accounts as a place to store business cash, the result is at best, an accounting nightmare, and at worse, a high liability risk.

To underscore the risk, on the long list of potential red flags banks seeking to do business with cannabis-related businesses should be on the lookout for, the Treasury includes “​Excessive commingling of funds with the personal account of the business’s owner(s) or manager(s)...”

More insidiously, the lack of access to the banking system also closes off one potential avenue of funding. Bank lending to small businesses ranges from providing letters of credit to equipment-based lending, to loans and revolving credit lines. Without access to bank capital, operators are forced to rely on reinvesting profits, bootstrapping, and raising funds from friends and family.

To date, most marijuana businesses are coping by concealing the nature of their businesses in order to open accounts or banking with the few institutions likely to take them on in some, usually limited, capacity. Uncertainty is high though summary closures of accounts and many entrepreneurs going from financial institution to institution in search of banking access. The result is large amounts of cash on hand, extra overhead in the form of vaults, security, and armoured car rentals. On top of that, the time involved in managing an all cash business is significant, and the risk of errors concomitantly high.

So what’s the upshot?

In the absence of meaningful progress on this front, local operators, not surprisingly largely concentrated in Colorado and Washington, the two states at the forefront of the legalization tide, have tried to address the lack of banking access, with efforts to set up financial institutions to specifically serve marijuana-related businesses. For the most part these have failed, languished, or been quietly abandoned. One of the latest efforts was Colorado’s state-chartered Fourth Corner Credit Union, which has so far failed to receive a decision on its request for a banking license from the Federal Reserve.

9 One initiative that EGFS is participating in is underway in Washington state. Working closely with that state’s attorney general and banking regulators, the outline of a state approved banking solution is taking shape. Final approval is still pending, but if it succeeds, it would be the first of its kind in the U.S.

Meanwhile, some financial institutions, largely local credit unions, such as Numerica, O​ Bee, and S​ alal Credit Union, which began a pilot program last spring, do offer banking services to the industry, while the majority of business owners continue to covertly access the banking system either through personal accounts or holding company structures or operate as cash businesses.

Taxation

“The hardest thing in the world to understand is the income tax.” — Albert Einstein

Taxation is another major area of concern. While cannabis-focused businesses must obviously still comply with their tax obligations, I​nternal Revenue Code (IRC) 280E,​ passed by Congress in 1982, expressly forbids them from taking a number of common deductions available to businesses. Under 280E:

“No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of Schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.”

The provision was an attempt to insure that operators engaging in trade in illegal products and/or activities would not receive any tax benefits from doing so. Thanks to 280E, foregone deductions include those for equipment depreciation, business expenses (e.g., supplies, telecommunications), rent expenses, certain startup costs, and several others including some types of payroll expenses.

One way marijuana-related businesses have sought tax relief is by deduct their costs of good sold (COGS) in computing their tax liability, which they are allowed to claim deductions for. This is only of benefit for businesses using the accrual method of accounting, which includes capitalizing certain costs such as those for purchases of marijuana for resale and distribution, ​“plus transportation or other

10 necessary charges incurred in acquiring possession of the marijuana, direct costs for seeds or plants, “direct labor costs (e.g., planting; cultivating; harvesting; sorting).”

Businesses may also deduct their “ordinary and necessary” business expenses for the portion of their businesses which are unrelated to marijuana. Business operators have achieved tax relief by for example co-locating ancillary lines of business such as the sale of retail items or wellness facilities. In doing this, they looked to the U.S. Tax Court’s 2​ 007 ​ruling in C​ alifornians Helping to Alleviate Medical Problems,​ 128 T.C. 173. In that case, the Court ​upheld the deductibility of these expenses.​ ​But a 2012 in the case of O​ live v. Commissioner of Internal Revenue ​made clear that businesses have a high bar to meet in terms of proving that the businesses are separate. It also noted deficiencies in “substantiation” of receipts and the need for reliable records to support legitimate deductions.

In other bad news from a tax burden perspective, recent guidance from the IRS in its T​axpayers Trafficking in a Schedule I or Schedule II Controlled Substance -- Capitalization of Inventoriable Costs ​Chief Counsel memorandum of 1/23/15, response to an inquiry from a Denver accountant may call even the limited tax relief businesses can benefit from into question by clarifying that a different section of the U.S. tax code, I​RS 263A,​ passed in 1986, which some marijuana-related businesses had been using to capitalize some of their general and administrative expenses, deducting them in the same way as COGS, thus enabling them to reduce their tax liability. This memo makes clear that the IRS by stating that may not apply 263A in order to deduct expenses that 280E explicitly denies them.

Lastly, in its memo the IRS indicated that while under 280E only businesses following the accrual account method can benefit from deducting COGS, it may in its discretion allow deductions even for businesses using the cash basis method:

“In our view, Examination and Appeals have the authority under §446(b) to require a taxpayer to change from a method of accounting that does not clearly reflect income to a method that does clearly reflect income regardless of whether that change results in a positive or negative §481(a) adjustment.”

“Thus, a marijuana reseller using an inventory method would have capitalized the invoice price of the marijuana purchased, less trade or other discounts, plus transportation or other necessary charges incurred in acquiring possession of the marijuana. Similarly, a marijuana producer using an inventory method would have capitalized direct material costs (marijuana seeds or plants), direct labor costs (e.g., planting; cultivating; harvesting; sorting), Category 1 indirect costs

11 (§1.471-11(c)(2)(i)), and possibly Category 3 indirect costs (§1.471-11(c)(2)(iii)).”

Two things should be noted: It is unclear what applicability the memo will have to other cases, given that the guidance stated it should not be viewed as setting precedent.

Confused yet? As it relates to tax compliance, cannabis-related businesses have special challenges with respect to tax withholding for employees, recordkeeping, and financial documentation as well as tax compliance given the onerous burdens involved in operating as cash businesses.

They also face penalties for non-compliance with the IRS’ requirement that employers remit taxes electronically via the E​ lectronic Federal Tax Payment System (EFTPS). ​A​dditionally, those choosing to report on a cash versus an accrual basis lose the limited existing opportunities for tax deductions. Until legalization occurs at the federal level, these businesses will continue to face a substantial financial penalty.

Lastly, certain legal entity structures pose greater risk to owners. LLCs and S. Corps, which function as pass-through entities for tax purposes, expose owners to personal liability and asset seizures if their businesses’ aren’t able to make their tax payments.

Clearly this is not an area where operators should muddle through on their own. They require knowledgeable, experienced, professional help with tax, cash management, and accounting.

Funding Picture

Tides do what tides do–they turn. —​ D​ erek Landy

The picture is brighter from the funding side. According to the M​ arijuana Business Factbook 2014,​ most marijuana-related businesses are, not surprisingly, self-funded. In cases where founders don’t completely bootstrap, they may receive some funding from friends and family. Typically institutional capital has been absent, but that’s beginning to change.

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Data from CB Insights puts 2014 funding for marijuana startups at $104 million. That was up nearly 10 times over its figure for 2013 funding. Most institutional funders are private equity or boutique investment firms. Though still embryonic in terms of amounts, VC funding is beginning to enter the sector.

Cannabis startups hit funding/deals highs:​ $104M/59 deals in 2014

Source: CB Insights

The majority of last year’s funding went to A​ phria,​ a Canadian provider and grower of medical marijuana.

Other Funded Companies include:

Potbotics ​-- enterprise technology platform to s​treamline p​rescription, cultivation and cannabis selection Tilray ​-- medical cannabis grower and packager in British Columbia Marley Natural ​--Jamaican cannabis grower and accessory provider in partnership between Bob Marley family and Privateer Holdings Leafly ​-- clearinghouse and information portal for researching cannabis strains, ratings, and local dispensaries; owned by Privateer Holdings

Conclusion/What’s Ahead

13 While these are exciting times for the legal cannabis industry, a number of questions remain:

➢ What will it take for the federal government to remove its classification of cannabis as a Schedule 1 drug?

➢ When will California get its act together and create a workable regulatory framework at the state level?

➢ Will the Supreme Court issue a ruling on states’ ability to set their own agendas and requirements concerning marijuana use?

These are all, for the moment, to be determined but there is no doubt that the legal industry is a long-term upward trajectory.

EGFS operates in Silicon Valley, San Francisco, Los Angeles, Austin, Chicago, Boulder, Seattle, Las Vegas and New York City. Clients include Indiegogo, Klout, TechShop, Open and 450+ early-stage, small, and mid-sized, including a number of cannabis-related businesses nationwide. We offer a complete suite of solutions and support, from high-level financial strategy to day-to-day accounting, taxes and valuation.

Major Sources

CannaBusiness: Marijuana Business Factbook 2014.

CannaLawBlog.com

R. Cole, M​ emorandum for all United States Attorneys,​ August 29,2013.

14 CB Insights: C​ annabis Startups Have Been Raking in Funding Long Before Privateer. Hits High in Q4 2014.​

Department of the Treasury, Financial Crimes Enforcement Network, G​ uidance,​ February 14, 2014.

Marijuana Business Daily

Marijuana Policy Project

26 U.S.C. 280E,​ Expenditures In Connection With The Illegal Sale Of Drugs.

Section 263A.—C​ apitalization and Inclusion in Inventory Costs of Certain Expenses.​

15 Appendix 1

State-by-State Overview

Alaska ​-- M​ easure 2,​ passed in 2014 legalized recreational marijuana for adult use in. In​ dividuals are limited to one ounce of marijuana and to grow up to six marijuana plants. Alaska will levy an excise tax on wholesalers. The state’s Alcoholic Beverage Control Board will regulate the market.

Arizona -​- P​rop .203 ​legalized medical marijuana with the goal of “​protecting from arrest...s​eriously ill patients who have a medical need to use marijuana” v​ia state-sanctioned dispensaries regulated by the state’s Department of Health Services (DHS). Covered conditions include hepatitis C, Alzheimers, cancer, and AIDS.

California ​-- P​roposition 215 ​authorized medical marijuana use by “seriously ill.” The legislation did not create a regulatory framework; instead delegating implementation to municipalities.

Colorado -​- A​ mendment 64 ​legalized adult use of recreational marijuana. Individuals are allowed to consume or possess limited amounts of marijuana. The legislation authorized licensing of cultivation, product manufacturing, and testing facilities as well as retail stores. It permits local governments to regulate, including banning facilities, and provides for an excise tax on wholesalers. Medical marijuana has been legal since 2000.

D.C. ​-- I​nitiative 71 ​allows adults to ​“P​ossess, grow, harvest or process, within the interior of a house or rental unit that constitutes such person’s principal residence, no more than six cannabis plants, with three or fewer being mature.” The initiative is currently under fire from Congress, which is seeking to prevent its implementation.

Delaware -- M​ edical Marijuana Act provides that the state will issue licenses for “Compassionate Care” marijuana distribution centers. Covered conditions include cancer, multiple sclerosis, HIV and AIDS, Hepatitis C, Lou Gehrig's disease, Alzheimer's disease, and PTSD among others. Patients will require prescriptions from a doctor and may possess no more than six ounces of “usable marijuana.”

Hawaii -​- B​ ill 862 ​allows the ​“u​ se, possession and cultivation of marijuana by patients who possess a signed statement from their physician affirming that he or she suffers from a debilitating condition.” T​he law has since been updated to

16 specify “​adequate supply" as seven marijuana plants, whether immature or mature, and four ounces of usable marijuana.”

Illinois ​-- H​ B 1,​ C​ ompassionate Use of Medical Cannabis Act, became law in August 2013. It is structured as a “pilot program” a​uthorizing dispensaries and a maximum of 60 c​ultivation centers. Neither patients nor caregivers can cultivate. Eligible patients may purchase up to 2.5 ounces of cannabis every 14 days. The prescribing physician and patient must have an established relationship.

Maine -​- M​ aine Medical Use of Marijuana Program ​(MMMP) provides for eight dispensaries. Patients and caregivers can maintain six mature marijuana plants, and possess a maximum of 2.5-ounces of cannabis. T​he bill adds a provision prohibiting municipalities from adopting ordinances “duplicative of or more restrictive” than Maine’s medical marijuana law.

Maryland ​-- H​ B 881 ​en​ ables patients, prescribed by state-approved physicians, and with special identification cards, to obtain marijuana for medical use from licensed dispensaries, supplied by licensed growers.

Massachusetts ​-​- B​ allot Question 3 ​legalized medical marijuana use by qualifying patients, physicians and healthcare professionals, patient caregivers, and treatment center agents. The state will register a maximum of 35 non-profit treatment centers. Patients are limited to "no more marijuana than is necessary for personal, medical use.”

Michigan ​-- L​aw 1 Michigan Medical Marihuana Act ​enacted in December 2008, approved medical marijuana use for “d​ebilitating medical conditions.” Patients are allowed to possess up to two and a half ounces of usable marijuana and twelve plants (if they lack a primary caregiver to cultivate the marijuana).

Minnesota ​-- S​ F 2470 ​p​ermits state manufacturers to produce medical cannabis for patients with specified medical conditions.

Montana ​-- M​ ontana Medical Marijuana Act ​passed in 2004, but did not contain a regulatory structure; effectively repealed in 2011 by S​ B423, M​ ontana Marijuana Act.​ Q​ u​ alifying patients and caregivers may each possess six marijuana plants and one ounce of usable marijuana. P​roviders must register with the state.

Nevada ​-- C​ hapter 453 ​authorizes p​ossession and cultivation of marijuana with "written documentation" from patients’ physician for certain approved conditions. It sets a limit of one ounce of usable marijuana, three mature plants, and four immature plants.

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New Hampshire ​-- H​ B 573 ​a​llows patients with designated medical conditions to register to possess up to two ounces of marijuana. The law authorizes four non-profit alternative treatment centers (ATCs) to grow and sell marijuana to patients.

New Jersey ​-​- ​C​ ompassionate Use Medical Marijuana Act.​ Patients with “debilitating medical conditions” must register and be prescribed via a state registered physician to receive treatment via a state-authorized alternative treatment center (ATC). No home grow or caregiver cultivation is allowed.

New York ​-- B​ ill S7923 ​allows patients certified by their healthcare providers to register with the New York State Department of Health. It provides for five “registered organizations” to be granted licenses to grow and dispense marijuana through 4 dispensaries each.

Oregon ​-- M​ easure 91,​ effective as of July 2015, legalized recreational marijuana and designates the O​ regon Liquor Control Commission as the state regulatory (O​ LCC) authority. Producers, processors, wholesalers, and retailers must apply for and receive licenses. Individual growers are limited to 8 ounces of marijuana and 4 plants.

Rhode Island ​-- M​ edical Marijuana Act ​protects “patients with debilitating medical conditions, and their physicians and primary caregivers, from arrest and prosecution.” The Act allows for cooperative cultivation of marijuana. Caregivers are required to submit applications to the state for designation.

Vermont -​- Bill 76, since updated, p​ermits four medical marijuana dispensaries; all of which are required to grow their own inventory. Caregivers and patients must be registered with the state. Two ounces, with a limit of seven immature plants, are allowed for home cultivation.

Washington ​-- I​nitiative 502 ​l​icenses and regulate recreational marijuana production, distribution, and possession in a manner similar to that used to regulate alcohol. It also creates three categories of licenses for producers, processors, and retailers. ​6​ 9.51A RCW ​ legalized medical marijuana for a limited number of medical conditions. Qualifying patients must be recommended by providers with whom they have an existing relationship.

18 Appendix 2

Overview of funders

Angels ArcView Group ​-- San Francisco-based seed and early-stage angel association; runs CanopyBoulder accelerator

FastFunds Financial Corp ​-- FL based financial-services holding company; provades angel funding via Cannabis Angel

Boutiques Broadband Capital ​-- New York-based investment bank and broker-dealer

Delavaco Group ​-- Based in Florida; private equity and merchant banking firm investing in early-stage companies; $6.2M in Aphria

Four Twenty Investments ​--Toronto-based investment fund; $10M loan to TX-based Nhale

Founders Fund ​(invested through Privateer Holdings) -- San Francisco-based venture capital firm

Pharmacan Capital ​-- Toronto merchant bank investing in medical marijuana companies

Privateer Holdings ​-- Seattle holding company (owns Leafly and Tilray; partnering with Marley Natural)

Therapix Biosciences ​-- Tel Aviv based; invests in biopharmaceuticals; $1.5M invested in LaraPharm

York Plains Investment Group ​-- Canadian PE firm; $6.2M co-invested in Aphria (with Broadband and Delavaco)

VCs First Ascent Associates-​- San Francisco-based; invested in CannaSys, a provider of “concierge” type services including systems and tools to the cannabis industry

19 Fresh VC ​-- New York and San Francisco-based early-stage investors; provided $1.5 million in seed funding for medical marijuana delivery startup E​ aze

Tao Capital ​P​ artners ​-- P​ritzker family-owned S​ an Francisco-based firm focused on investing in technology, alternative energy, healthcare, and real estate; announced ​i​nvestment in MJ Freeway, SaaS platform offering data solutions to cannabis-based businesses

20 About Early Growth Financial Services (EGFS)

We get small businesses. We understand your challenges—and we can help.

With our full suite of outsourced financial services, from outsourced CFOs to day-to-day blocking and tackling accounting, to strategic finance, tax compliance, and 409a valuations, our team of finance professionals is committed to partnering with you to reduce the financial burdens and administrative headaches that come with running a business.

Headquartered in the Bay Area, EGFS operates in nine markets: Silicon Valley, San Francisco, Los Angeles, Las Vegas, Seattle, Austin, Boulder, Chicago, and New York City serving 450+ small to mid-sized business clients nationwide.

EGFS was ranked #13 in Silicon Valley Business Journals’ Fastest Growing Private Company Award for 2014 and earned a spot on Inc. Magazine’s list of the 5000 fastest-growing private companies in the U.S.

For more information about this report or EGFS, please call or email us at: 415-234-EGFS (3437) or c​[email protected]

David Ehrenberg Deborah Adeyanju, CFA Founder & CEO Content Strategist & Social Media Manager

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