Week in Review: Microsoft’s big cannabis splash, crowdfunding fail & potential legal precedent

Just Released! Get realistic market forecasts, state-by-state insights and benchmarks with the new 2024 MJBiz Factbook member program, now with quarterly updates. Make informed decisions.

By Omar Sacirbey and John Schroyer

Microsoft makes a landmark foray into the marijuana business, an Arizona bank pulls the plug on a cannabis company’s crowdfunding effort, and a Denver MJ company scores a legal win.

Here’s a closer look at some notable developments in the marijuana industry over the past week.

Microsoft isn’t very micro in cannabis

Microsoft’s blockbuster disclosure about partnering with Kind Financial to go after government cannabis inventory tracking contracts shouldn’t alarm software companies already in that particular niche.

In fact, they may find wannabe partners knocking on their own doors.

That’s the opinion of two industry consultants. They reckon companies such as Denver-based MJ Freeway and Fort Lauderdale, Florida-based BioTrackTHC don’t have to fret over Microsoft dominating the space right away.

Why? Microsoft is using its Azure online cloud platform to host Kind Financial’s software – versus developing its own technology.

“If Microsoft said, ‘We developed a custom solution to target (government contracts),’ then that would be a more dominating force that would preclude competition,” said Mike Bologna, CEO of Denver-based Green Lion Partners, a marijuana consultancy. “But because it’s more of an existing tech platform … that leaves the door open for companies like MJ Freeway.”

MJ Freeway isn’t sweating it. “No, we don’t think this partnership will make it more difficult for us to win government contracts,” the company said in a statement, citing the “quality” of its product and other attributes.

Industry consultant John Conlin said Microsoft’s entry could even spur similar partnerships involving companies such as BioTrackTHC and Metrc (designed by a Florida tech firm), both of which have landed state contracts.

If he was in their shoes, Conlin said, “I’d look to partner with a big dog ASAP.” He figures that companies such as MJ Freeway, BioTrackTHC and Metrc are well positioned for partnerships.

Indeed. The New York Times reported Thursday another tech giant, Oracle, has been working quietly with New York state on tracking medical cannabis patients. That could change now that Microsoft has advertised its marijuana connection.

“This is just the beginning,” Bologna said of the Microsoft and Kind Financial partnership.

Arizona bank snuffs out crowdfunding effort

Marijuana businesses hoping to raise money through crowdfunding sites may have to reconsider.

Last month, StartEngine Crowdfunding in Santa Monica, California, closed the account of NextRX, a Las Vegas software company that doesn’t touch the plant. Why? Western Alliance Bank in Arizona, which holds investments made through StartEngine, was leery of NextRX’s cannabis connection.

NextRX is developing an online system to allow medical cannabis dispensaries to store patient records electronically.

Does that mean that other banks will follow suit – and that crowdfunding is just another dead-end proposition for marijuana companies? Or is this a one-off, meaning crowdfunding remains a viable option for cannabis businesses?

If one crowdfunding site and its banking partner feel it’s too risky to service a cannabis client, it’s possible other crowdfunding sites and their partner banks feel the same, Jeanne Sullivan, founder of Sullivan Adventures, a New York-based investment advisory firm, said.

That’s unnecessary and unfortunate, Sullivan added, because a 2014 U.S. Treasury Department letter essentially allows banks to service cannabis businesses so long as both comply with certain guidelines.

But most banks and other financial institutions have been reluctant to serve marijuana businesses, fearing the feds may punish them for having clients involved with a federally illegal substance.

While some 300 banks have cannabis clients, most marijuana businesses have struggled to find capital to expand – much less open bank accounts.

Last month, the Securities and Exchange Commission implemented rules permitting companies to raise up to $1 million from small, unaccredited investors through crowdfunding. Experts saw that option as a way for cannabis companies to bypass existing banking barriers.

Now that marijuana businesses know they might be rejected by crowdfunding sites or the banks that hold their money, it makes sense for marijuana businesses to explore avenues they already are exploring.

“Keep knocking on doors such as community banks and credit unions that get it,” Sullivan advised.

Pig ‘N Whistle precedent?

Could a Denver district court judge’s ruling make it harder for local municipalities to prohibit marijuana businesses?

In a June 9 decision, Denver District Court Judge Catherine Lemon decided the city of Denver unfairly denied the Pig ‘N Whistle medical cannabis dispensary a recreational business license.

Although the Pig ‘N Whistle met all the necessary requirements, Denver city officials wouldn’t issue a license because local residents objected to the granting of a rec license.

It’s perhaps the first such decision of its kind – one that could have major legal ramifications for Colorado’s cannabis industry.

“I think it’s a big deal,” said Brian Vicente of the Vicente Sederberg law firm, one of the attorneys representing the Pig ‘N Whistle. “I think it is certainly a persuasive precedent. Whether it is binding is tough to say. But I think it would be pretty difficult for a new judge to ignore this.”

Vicente reckons the decision could affect about a half dozen other rec license applicants awaiting  the city’s final approval. Denver city attorneys couldn’t be reached for comment.

While store owner Russ Vaisman was thrilled with the decision, the case took a toll on him financially and emotionally, Vicente said, noting his client spent hundreds of thousands of dollars renovating the dispensary property but couldn’t recoup his money while the case was unfolding.

“The lost income from not being able to open for almost a year has been crippling,” Vicente said.

And within an hour of issuing Vaisman a license, the city sent a tax collector to his door.

Vaisman hopes to open the Pig ‘N Whistle Friday, said Vicente, who doesn’t expect the city to appeal.

“My takeaway is that sometimes the good guys do win,” Vicente added.

Omar Sacirbey can be reached at omars@mjbizdaily.com

John Schroyer can be reached at johns@mjbizdaily.com