Authorities Seize THC Products from Several Nebraska Dispensaries

We have written several previous articles focusing on the legality of the sale in Nebraska of products containing Delta-8 tetrahydrocannabinol (“Delta-8 THC”).   In the past, we have noted that there have been no enforcement actions by any governmental agency regarding these products.  However, on August 14, 2023, it was reported that several dispensaries in Sarpy County and Lancaster County had certain products and documents seized by law enforcement agencies.  A press release from the Lincoln Police Department stated that, based on independent testing of products purchased earlier this year, certain dispensaries were selling “statutorily prohibited substances.”  In addition, a Sarpy County Sheriff’s Office press release stated that certain products it tested earlier in the year contained products with THC levels in excess of 15%.  As of now, we understand no criminal charges have been filed.  

As a refresher, under the Nebraska Hemp Farming Act (the “Nebraska Hemp Act”), hemp is legal in Nebraska and removed from the Nebraska Controlled Substances Act (the “CSA”).  Hemp is defined as “the plant Cannabis sativa L. and any part of such plant, including the viable seeds of such plant and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol (“Delta-9 THC”) concentration of not more than 0.3 % on a dry weight basis” (emphasis added).

A legal argument can be made that if hemp derivative products (such as those containing Delta-8 THC) do not contain Delta-9 THC in excess of 0.3% they are classified as hemp, and not illegal substances under the CSA.  Based on the information we have now, it’s unclear whether the products seized contained Delta-9 THC or Delta-8 THC.  If the latter, under the Nebraska Hemp Act, the THC quantity should have no bearing on the legality of the products.  

We will continue to follow this story and provide updates as they become available.  In the meantime, hemp product retailers should take all measures to ensure their products are legal under the Nebraska Hemp Act.  If you have any questions about Delta-8 THC or other cannabis issues, attorneys at Erickson | Sederstrom can assist you. Attorneys Shay Garvin or Andrew Collins can be reached at (402) 397-2200.

Nebraska Delta-8 Update

As retailers continue to enter the Delta-8 THC market in Nebraska, much uncertainty remains regarding how long the unrestricted sale of Delta-8 THC products will continue in this state. Since we published our last article on Delta-8 THC in October 2021, several additional states have taken steps to ban or regulate Delta-8 THC products. This includes South Dakota, which recently passed a bill making it illegal for persons under 21 to buy Delta-8 THC products.

As we have previously discussed, Delta-8 THC provides a similar, but milder euphoric effect compared to the more common Delta-9 THC (which is abundant in commercially produced medical and recreational cannabis).  However, Delta-8 THC does not occur naturally in high concentrations in cannabis plants and must be extracted from CBD oil using a chemical synthetization process. Delta-8 THC became legal in Nebraska through a loophole in the Nebraska Hemp Farming Act, which made hemp products legal in Nebraska as long as they had a Delta-9 THC concentration of not more than 0.3 % on a dry weight basis.  

Since we published our last article on Delta-8 THC, we are not aware of any potential legislation that would impact Delta-8 THC sales in Nebraska nor has the Nebraska Attorney General issued any statement or opinion regarding its legality (as he was requested to do by Governor Ricketts).  However, there has been other activity that does not bode well for Nebraska Delta-8 THC retailers.  For example:

• CBD Oracle, a website that reviews hemp-derived products including CBD as well as Delta-8 THC products, sent 51 different Delta-8 THC products to FESA Labs, a licensed testing company in Santa Ana, California, to see if potency levels and other metrics printed on the products’ labels were accurate. The results of these tests determined that (i) 76% of tested products contained Delta-9 THC at greater than the 0.3% limit set by the 2018 Farm Bill, making them federally illegal (and illegal in Nebraska) and (ii) 77% of products tested had less Delta-8 THC than advertised, on average containing 15% less than the advertised amount.  The inaccurate labeling and the inconsistent (and illegal) THC levels contained in Delta-8 products have been a reason many opponents have used to push for restrictions on their sale.

•  The Food and Drug Administration has issued safety warnings regarding Delta-8 THC products based on the unregulated nature of the production process. Some manufacturers may use potentially unsafe household chemicals to make Delta-8 THC through the chemical synthesis process needed to extract it. Final Delta-8 THC product may therefore have potentially harmful by-products and contaminants due to the chemicals used in the process, and there is uncertainty with respect to other potential contaminants that may be present or produced depending on the composition of the starting raw material. In addition, manufacturing of Delta-8 THC products may occur in uncontrolled or unsanitary settings, which may lead to the presence of unsafe contaminants or other potentially harmful substances.

• The Attorney General for the State of Kansas issued an opinion in December 2021 which stated that Delta-8 THC is illegal under Kansas law.  While such opinion does not constitute binding law in Kansas, it has led to raids on certain Kansas Delta-8 retailers and County Attorneys pursuing charges against such retailers.

For now, Nebraska retailers appear safe, but that could change at any time.  Retailers are urged to move cautiously and limit any large-scale investments in a Delta-8 THC business until the future landscape becomes clearer.  If you have any questions about Delta-8 THC or other cannabis issues, attorneys at Erickson | Sederstrom can assist you. Attorneys Shay Garvin or Andrew Collins can be reached (402) 397-2200.

Medicinal Cannabis in Nebraska May be Coming Soon

A registered ballot question committee, Nebraskans for Medical Marijuana, has been working to gather signatures to place two initiatives on the Nebraska ballot in November later this year.   If these initiatives are added to the ballot, and confirmed by a majority of voters, they would serve to legalize the possession and use of cannabis for medicinal purposes in Nebraska.

The legalization of cannabis for medicinal purposes would be a significant departure from Nebraska’s historic stance against it.  While the Nebraska Hemp Farming Act was passed in 2019, the intent of this legislation was to legalize industrial hemp in Nebraska, and not the use of cannabis for any of its psychoactive properties (for medicinal use or otherwise).  In addition, several medicinal cannabis bills have been proposed and failed in the unicameral in the past few years.  Also, in 2020, a medicinal cannabis measure that would have been on the 2020 ballot was invalidated by the Nebraska Supreme Court after a determination that the initiative violated Nebraska’s single subject rule.  

However, the tide may be changing.  Many former cannabis opponents have recently appeared to alter their stance on medicinal cannabis.  For example, in January 2022, former State Senator Mike Groene, who had previously been outspoken against the subject, sponsored LB1275, which would legalize cannabis use for a limited number of medical conditions and authorize a defined number of dispensaries to operate in the state. In addition, Governor Ricketts (who appeared in an ad as recently as December 2021 advocating against medicinal cannabis) recently stated that he was “open to learning more about [LB1275]”.   Advocates for medicinal cannabis in Nebraska believe that these shifting viewpoints are evidence that cannabis opponents believe they can no longer keep the public sentiment on the issue at bay, and such opponents would rather control medicinal cannabis through legislation instead of a voter approved constitutional amendment.

In anticipation of medicinal cannabis becoming a reality in Nebraska, potential cultivators, processors, retailers, and other participants have already begun making plans for this possible new market.Since cannabis that is used to treat medical conditions is currently illegal under federal law (making transportation across state lines illegal), such cannabis is typically grown and processed in the state where it will be sold.In Nebraska, legal medical cannabis would likely result in the construction and/or leasing of large-scale cultivation and processing facilities where medicinal cannabis goods would be grown and produced, as well as new markets for the transportation, storage, and retail sale of such goods.We are currently advising clients on a multitude of issues related to these new markets, including banking, leasing, and transportation. If you have any questions about cannabis issues, the attorneys at Erickson | Sederstrom can assist you. Attorneys Shay Garvin or Andrew Collins can be reached (402) 397-2200.

Nebraska Delta-8 THC and CBD Retailers Beware

On the heels of the boom in cannabidiol (“CBD”) sales, many Nebraska CBD retailers have recently been marketing and selling products containing Delta-8 tetrahydrocannabinol (“Delta-8 THC”), which is an isomer of Delta-9 tetrahydrocannabinol (“Delta-9 THC”). Delta-9 THC is the common compound in marijuana that provides euphoric effects to it users.  Marijuana plants and other products containing Delta-9 THC in concentrations high enough to provide users with any such effects are generally illegal under federal and Nebraska law.  Delta-8 THC provides a euphoric effect similar to Delta-9 THC, but milder, and due to a loophole in the federal and Nebraska law, as further discussed below, products containing Delta-8 THC are arguably legal in Nebraska and many other states.   

The Delta-8 THC market was born when producers began looking for ways to turn extra CBD extracted from hemp into something else profitable. Using a chemical synthetization process, they were able to produce Delta-8 THC from CBD, and incorporate Delta-8 THC into products that could be marketed as a legal recreational drug in many states.

Under the Nebraska Hemp Farming Act (the “Nebraska Hemp Act”), “Hemp” is legal in Nebraska and removed from the Nebraska Controlled Substances Act.  Hemp is defined as “the plant Cannabis sativa L. and any part of such plant, including the viable seeds of such plant and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol concentration of not more than 0.3 % on a dry weight basis” (emphasis added) . Thus, as long hemp derivative products (such as CBD and Delta-8 THC) do not contain Delta-9 THC in excess of 0.3%, a plain reading of the statute indicates that Delta-8 THC and products containing Delta-8 THC would be classified as Hemp, and are legal in Nebraska.  Many other states have similar industrial hemp statutes that purport to make Delta-8 THC products legal in the same manner. 

Under the federal 2018 Farm Bill (the “Farm Bill”), “Hemp” was removed from the federal Controlled Substances Act.  In addition, under the Farm Bill, the definition of Hemp is the same as it is under the Nebraska Hemp Act, meaning that Delta-8 THC products that do not contain Delta-9 THC in excess of 0.3% are legal under federal law. 

However, despite the purported legality of Delta-8 THC under Nebraska and federal law, Nebraska retailers face a myriad of risks.  In 2020, the Drug Enforcement Agency (“DEA”) issued an Interim Final Rule that stated, in part, that “all synthetically derived tetrahydrocannabinols [regardless of THC content] remain schedule I controlled substances.”  There is some debate over whether Delta-8 THC is “synthetically derived,” but there appears to be a conflict between this DEA Rule and the Farm Bill.  In any event, Delta-8 THC retailers face risk of DEA enforcement for the possession, distribution, or transportation of products containing Delta-8 THC.   In addition, the Food and Drug Administration (“FDA”) retains authority to regulate products that contain cannabis or cannabis derivatives under the federal Food, Drug and Cosmetic Act.  Currently, Delta-8 THC products do not appear to be prohibited by FDA regulations. However, the FDA recently issued a consumer update warning of the dangers of Delta-8 THC products, including contamination concerns from potentially unsafe manufacturing methods.  Thus, Delta-8 retailers also risk that the FDA may take steps to ban or more tightly regulate these products.

At the state level, the tide appears to be shifting, as more states are closing the legal loophole that purports to make Delta-8 THC legal under laws similar to the Nebraska Hemp Act. For example, Colorado (which allows recreational marijuana use) has banned Delta-8 THC since May 2021, and Texas recently did the same in October 2021.  As of the date of this article, sixteen other states have restricted or banned Delta-8 THC. In Nebraska, Governor Rickett’s office has generally taken a negative position towards cannabis and its derivative products, and Governor Ricketts recently asked the state Attorney General to review the legality of Delta-8 THC.  Recall that prior to the enactment of the Nebraska Hemp Act, certain Nebraska sellers of CBD products were raided and charged with criminal drug trafficking offenses. The Nebraska Supreme Court eventually found in favor of the sellers, but only after years of the defendants expending extensive legal fees. Nebraska Delta-8 THC retailers could face a similar situation.

There is also the risk that Delta-8 THC retailers may inadvertently possess and/or sell products containing Delta-9 THC in amounts greater than 0.3%, in which event they would be subject to potential felonies under the Nebraska Controlled Substances Act.  Thus, such retailers are advised to take as many steps as possible to confirm that its Delta-8 THC products fall within the definition of Hemp under Nebraska law, and don’t contain Delta-9 THC in amounts greater than 0.3%.

Persons considering entering the Delta-8 THC market should carefully consider these risks, and be prepared to handle the effects of a Delta-8 THC ban or restriction under Nebraska or federal law. If you have any questions about Delta-8 THC or other cannabis issues, attorneys at Erickson | Sederstrom can assist you. Attorneys Shay Garvin or Andrew Collins can be reached (402) 397-2200.

Erickson|Sederstrom Elects Matt Quandt and Shay Garvin as Partners; Connor Orr Joins the Firm

ERICKSON | SEDERSTROM is pleased to announce that MATTHEW D. QUANDT and SHAY GARVIN have been elected Partners and CONNOR W. ORR has joined the firm as an Associate.

Matt has been with the firm for two years, before which he litigated at a reputable Kansas City firm. His practice focuses on civil litigation, including catastrophic injury and wrongful death, trucking and transportation, construction defect, product liability, and professional liability. He is also a member of TIDA (the Trucking Industry Defense Association). He received his J.D. from the Washburn University School of Law (cum laude) and his B.S. from Baker University (cum laude). He is admitted to practice law in the state and federal courts of Nebraska, Kansas, and Missouri.

Shay has been with the firm since 2019. Prior to joining Erickson | Sederstrom, he practiced for several years with a nationally recognized firm in Lincoln. Shay focuses his practice on transactional areas, including mergers and acquisitions, business formation, securities offerings, debt and equity financing, and general counsel. Shay also has extensive experience in the transportation industry and is active in the Nebraska logistics community. He received his J.D. and M.B.A. in 2015 from the University of Nebraska and his B.A./B.S. from the University of Arizona. He is admitted to practice law in Nebraska.

Connor has joined the firm representing both individual and commercial clients for litigation and general counsel matters. Connor graduated from Creighton University Magna Cum Laude in 2014 with a Bachelor’s degree in Economics, then went on to obtain his Juris Doctorate from the Creighton University School of Law in 2017. He is a member of both the Nebraska and Iowa State bars, and has extensive litigation experience representing clients in both state and federal courts for matters including commercial contract disputes, insurance defense, personal injury, construction defects, product liability, wrongful death, trucking and transportation, and disputes concerning both commercial and residential real estate. He also has experience providing estate and business planning services, providing advice to help guide families and small, local business owners through both prosperous and difficult times.

Solar Land Leases

Most Nebraskans and Iowans have become accustomed to seeing wind farms popping up across the prairies of the Midwest. However, fewer of us may realize that solar farms, which are large-scale, ground-mounted arrays of photovoltaic (PV) panels, are emerging as a potential renewable energy alternative to wind power.  Consequently, landowners in certain areas are being approached by developers of solar farms to discuss a potential lease of their land for the housing of a solar farm.

 The use of solar energy is on the rise in the United States and in Nebraska.  In fact, according to the Solar Energy Industries Association, solar energy production in Nebraska is expected to increase over 500% during the next five years.  The increase is due to two main factors.  One factor is the tax incentives offered by state and federal governments that help offset the cost of solar development (which incentives may be increased further under a Biden administration).  The other factor is that the cost of PV cells has decreased significantly over the last few years (and will likely continue to decrease).  

 The rapid growth of solar energy production has caused owners of large tracts of land (including farmers) to consider whether alternative uses of their land may bring them a higher rate of return.  However, solar farm developers are generally very selective when choosing potential land for a solar farm.  The primary criteria such developers use when choosing land are (i) frequency of sunlight (including the absence of sunlight blocking obstructions), (ii) proximity to important infrastructure like roads and grid connection points and (iii) quality of terrain (flat and free from large rocks is most desirable).   When a developer does find land that meets these criteria, it may aggressively pursue a long-term “solar lease” with the owner of the land for the development of a solar farm.  In these instances, a landowner should seek the advice of legal counsel before entering into a solar lease, as it will affect the use of and earnings from the land for generations.  Items to consider prior to agreeing to a solar lease include the following:

1.      Lease Term – Due to the significant investment made by the developer, solar leases are generally going to be for at least 20 years, during which time the land will be unavailable for other purposes.  Thus, a landowner should ensure he or she is willing to devote the land for this use for the entire length of the lease.  Solar leases may also include options by the developer to extend the term of the lease and/or obtain rights to use additional land owned by the landowner.  These terms should be negotiated carefully, and the implications should be fully understood by the landowner.    

 2.      Compensation – Landowners should be particularly careful about the way their compensation is structured.  A flat rental rate will provide a landowner with a steady and certain income stream on the land.  However, a developer may try to structure all or a portion of the rent based on the developer’s income and/or revenue.  This is generally ill-advised to the extent it can be avoided, as it reduces the certainty of income to the landowner.

 3.      Landowner Remedies – A landowner should ensure he or she will have a sufficient remedy in the event of a breach of the solar lease by the developer.  Developers may be newer companies without significant assets.  To the extent possible, a landowner should seek parent/owner guarantees and/or security deposits for his or her protection in the event the developer fails to fulfill its obligations under the solar lease.

 4.      Rights of Others – Mortgages, deeds of trust, farm leases and other rights in the landowner’s property that may be granted to others could preclude granting a solar lease on the land.  A landowner should ensure that no such other rights in the land have been granted that could conflict with the solar lease.  Failure to do so could cause a landowner to be in breach of other agreements and/or the solar lease, resulting in significant costs to the landowner.

 5.      Land Impact – The installation of a solar farm may cause long-term damage to the soil and/or irrigation systems of farmland.  It may take considerable time and expense after the termination of a solar lease and removal of equipment for the land to be returned to a condition suitable for crop production.  The allocation of the costs of returning the land to such condition should be addressed in the solar lease.

6.      Taxes – Solar leases may impact the classification of land as agricultural for tax purposes. This can increase a landowner’s taxes going forward, and may result in recapture of prior tax reductions.  A landowner should understand the tax impact of any solar arrangement and the lease should allocate which party is responsible for taxes during the lease term, including any tax increases. 

 7.      Risk and Insurance – The lease should include customary indemnification and allocation of risk provisions.  The parties should also ensure that adequate insurance is carried by both to cover such obligations.

 8.      Maintenance – The developer is typically going to be the party that is responsible for maintaining the solar equipment, but the lease should also clearly specify which party is charged with maintaining access to such equipment and/or the area surrounding the solar equipment.

 9.      Community Perceptions – A landowner should consider how a solar lease may impact his or her relationship with the community.  Community members may object to the installation of a solar farm in their community for a variety of reasons.  These include (i) opposition to the appearance of solar panels on the landscape, (ii) concern over the impact  the construction and maintenance of a solar farm may have on neighboring properties (including property values) and (iii) distrust of outside developers.

Entering into a solar lease is a major decision, and landowners should not take entering into one lightly.  If you have any questions regarding a potential solar lease on your land, please contact a member of our Real Estate group.

The material in this publication was created as of the date set forth above and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.

Structuring the Sale of a Business

Selling Assets Versus Equity

One of the more critical initial items to consider when selling a business is determining whether the sale involves selling the equity or assets of the business.  The choice of structure will have an impact on several items, including, (i) the tax consequences to each of the buyer and seller, (ii) the party responsible for the company’s liabilities, and (iii) third-party consents required to consummate the transaction.  In many cases, the buyer and seller will benefit differently depending on the structure, so it is important for the seller of a business to fully understand the impact of each structure.  This article will briefly describe the mechanics of an asset sale and equity sale, and then discuss some important items that are implicated depending on the chosen structure.  

Equity Sales

 A sale of equity involves the buyer, which may be an individual, group of individuals, or a company, purchasing the stock (in the case of a corporation) or interests (in the case of an LLC or partnership) of the business directly from the owner(s) of the equity.  After the sale of the equity is consummated, the  buyer takes the entire business as a whole, including all of the business’s assets and liabilities.

Diagram 1 shows the structure of a proposed equity sale.  Note that ABC, LLC is the target company and owned by the seller prior to the sale.   The buyer is proposing to transfer cash to the seller in order to purchase the equity of ABC, LLC.  Diagram 2 shows the results of the transaction after the closing, with the buyer owning the equity of ABC, LLC and the seller now holding the cash from the buyer.  Note that the buyer takes ABC, LLC with all of the assets and liabilities of the company and, except as may be agreed between the buyer and seller, the company is still responsible for satisfying all of the liabilities it had when it was owned by the seller.

Asset Sales

In contrast to an equity sale, a sale of the assets of a business involves the buyer (almost always an entity) purchasing only certain assets and assuming only certain liabilities of the target company.  After the sale is consummated, the target company retains any unpurchased assets and liabilities that were not assumed by the buyer.

Diagram 3 shows the structure of a proposed asset sale.  Note that ABC, LLC is the target company and the buyer is proposing to transfer cash to the target company in order to purchase certain assets and assume certain liabilities of ABC, LLC.  Diagram 4 shows the results of the transaction after the closing, with the buyer owning the purchased assets and liabilities and the target company now holding the cash from the buyer, as well as certain retained assets and liabilities.  This is an important distinction from an equity sale since the cash generated from the asset sale may now need to be used to pay off certain retained liabilities.

Impact of Structure

Tax Consequences

In an asset sale of a business with significant depreciable assets, the buyer will often receive a tax benefit while the seller may experience a tax disadvantage.  This is because the purchase price in such an asset sale is often greater than the basis of the depreciable assets.  This allows the buyer to receive a stepped-up basis in such assets and further depreciate the assets to reduce the buyer’s income.  Meanwhile, the seller will have to pay taxes at the ordinary income rate for the difference between the assets’ basis and the purchase price.

In an asset sale without significant depreciable assets, the tax benefit to the buyer (and disadvantage to the seller) will generally be much lower.

In an equity sale, the seller typically receives a tax advantage because in most equity sales, the equity that is sold receives tax treatment as a capital gain (which is taxed at a lower tax rate than ordinary income). State rates for capital gains vary by state. In Nebraska, capital gains may be avoided altogether through the use of certain tax planning strategies.

There are also certain tax elections that may apply to some transactions that can provide benefits to both the buyer and seller.  For example, a 338(h)(10) election made in connection with the sale of stock allows a seller to receive capital gains tax rates on the sale and the buyer to receive a stepped-up basis in the assets. 

Treatment of Liabilities

As touched on above, in a sale of equity, all of the liabilities of the target company stay with the target company after the sale.  This means that the seller of equity generally does not have to worry about responsibility for further liabilities of the company after the sale (although the seller will likely have agreed to backstop the buyer for certain undisclosed liabilities that may arise for some period after the closing). 

Contrast this with an asset sale, where the buyer of the assets generally takes few liabilities.  This means that the seller of the assets will remain responsible for future liabilities of the target company, and owners of the target company may thereafter remain liable for several years after dissolution. This is why asset sales are generally preferred by buyers and equity sales are generally preferred by sellers.

Assignment of Intangible Assets

In a sale of equity,  contracts (such as leases, customer agreements, etc.) transfer with the target company by operation of law.  This means that, unless any contracts have restrictions on a change of control of the target company, there is no need to obtain the consent of contract counterparties in order to consummate the transaction. 

However, in a sale of assets, such transfer does not occur automatically, and most contracts will have a restriction on assignment without the consent of the counterparty.  This can take considerable effort depending on the number of consents that are needed, and may jeopardize the confidentiality of the transaction.  Thus, all other items being equal, a sale of equity is generally preferential if the target company has a large number of material contracts.

The bottom line is that the choice of transaction structure can have a significant impact on the pre-closing duties and post-closing obligations of the parties and have a direct effect on the amount of cash that the seller ultimately receives from the transaction. Thus, any business owner should seek competent legal advice to understand the risks and benefits of various transaction structures very early on in a potential sale process.