Item
8.01 Other Events.
In
connection with the Trust’s acquisition of the Properties, the Trust is updating and adding the following risk factors to
supplement those risks previously disclosed in the Trust’s periodic reports filed with the Securities and Exchange Commission,
including its Annual Report on Form 10-K for the year ended December 31, 2018.
Risks
Related to Regulation
Our
business activities, and the business activities of our cannabis tenant, while believed to be compliant with applicable U.S. state
and local laws, are currently illegal under U.S. federal law.
While
certain states in the U.S. have legalized “medical cannabis,” “adult-use cannabis” or both, medical and
adult-use cannabis remains illegal under federal law. The U.S. Controlled Substances Act (the “CSA”) classifies “marijuana”
as a Schedule I drug. Under U.S. federal law, a drug or other substance is placed on Schedule I if:
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“[t]he
drug or other substance has a high potential for abuse”;
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“[t]he
drug or other substance has no accepted medical use in the United States”; and
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“[t]here
is a lack of safety for the use of the drug or other substance under medical supervision.”
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As
such, cannabis-related business activities, including, without limitation, the cultivation, manufacture, importation, possession,
use or distribution of cannabis, remains illegal under U.S. federal law. Although we believe our cannabis-related activities are
compliant with the laws and regulations of the State of Colorado, strict compliance with state and local rules and regulations
with respect to cannabis neither absolves us of liability under U.S. federal law, nor provides a defense to any proceeding that
may be brought against us under U.S. federal law. Furthermore, we cannot give any assurance that our cannabis tenant,
JAB
Industries Ltd.,
and any future cannabis tenants, are currently operating, and will continue to operate, in strict compliance
with state and local rules and regulations in which they operate. Any proceeding that may be brought against us could have a material
adverse effect on our business, financial condition and results of operations.
Violations
of any U.S. federal laws and regulations could result in significant fines, penalties, administrative sanctions, convictions or
settlements, arising from either civil or criminal proceedings brought by either the U.S. federal government or private citizens,
including, but not limited to, property seizures, disgorgement of profits, cessation of business activities or divestiture. Such
fines, penalties, administrative sanctions, convictions or settlements could have a material adverse effect on us, including,
but not limited to:
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our
reputation and our ability to conduct business and/or maintain our current business relationships;
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the
listing of our securities on the NYSE American (the “NYSE”); and
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the
market price of our common shares.
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We
cannot assure you that our common shares will remain listed on the NYSE.
Our
common shares are currently listed on the NYSE. To our knowledge, the NYSE has not approved for listing any U.S.-based companies
engaged in cannabis-related activities
,
other than Innovative Industrial Properties, Inc. (NYSE:IIPR), a cannabis-focused
real estate investment trust listed in late 2016 just prior to the nomination of former Attorney General Sessions. Although we
currently meet the maintenance listing standards of the NYSE, we cannot assure you that we will continue to meet those standards,
or that the NYSE will not seek to delist our common stock as a result of our entry into a lease agreement with a licensed U.S.
cannabis cultivator. If we are delisted from the NYSE, then our common shares will trade, if at all, only on the over-the-counter
market, such as the OTCQB or OTCQX trading platforms, and then only if one or more registered broker-dealer market makers comply
with quotation requirements. Any potential delisting of our common shares from the NYSE could, among other things, depress our
share price, substantially limit liquidity of our common shares and materially adversely affect our ability to raise capital on
terms acceptable to us, or at all.
The
U.S. federal government’s approach towards cannabis laws may be subject to change or may not proceed as previously outlined.
In
an effort to provide guidance to U.S. federal law enforcement, under former President Barak Obama, the U.S. Department of Justice
(the “DOJ”), released a memorandum on August 29, 2013 entitled “Guidance Regarding Marijuana Enforcement”
from former Deputy Attorney General James Cole (the “Cole Memorandum”). The Cole Memorandum sought to limit the use
of the U.S. federal government’s prosecutorial resources by providing United States attorneys (“U.S. Attorneys”)
with certain priorities (the “Cole Priorities”) on which to focus their attention in states that have established
cannabis programs with regulatory enforcement systems. U.S. Attorneys were required to adhere to the Cole Priorities until the
rescission of the Cole Memorandum in January 2018.
While
the rescission of the Cole Memorandum did not create a change in U.S. federal law, as the Cole Memorandum was policy guidance
and not law, the revocation removed the DOJ’s guidance to U.S. Attorneys that state-regulated cannabis industries substantively
in compliance with the Cole Memorandum’s guidelines should not be a prosecutorial priority. Accordingly, the rescission
added to the uncertainty of U.S. federal enforcement of the CSA in states where cannabis use is regulated. Pursuant to his rescission
of the Cole Memorandum, former Attorney General Jeffrey B. Sessions also issued a one-page memorandum known as the “Sessions
Memorandum.” According to the Sessions Memorandum, the Cole Memorandum was “unnecessary” due to existing general
enforcement guidance adopted in the 1980s, as set forth in the U.S. Attorney’s Manual (the “USAM”). The USAM
enforcement priorities, like those of the Cole Memorandum, are also based on the U.S. federal government’s limited resources,
and include “law enforcement priorities set by the Attorney General,” the “seriousness” of the alleged
crimes, the “deterrent effect of criminal prosecution,” and “the cumulative impact of particular crimes on the
community.” To date, U.S. Attorney General William Barr has not issued statements or guidance in his official capacity since
becoming Attorney General with respect to the medical or adult-use of cannabis, although in his confirmation hearings he indicated
that he believed that rescinding the Cole Memorandum was a mistake.
The
United States House of Representatives passed an amendment to the Commerce, Justice, Science, and Related Agencies Appropriations
Bill (currently known as the “Joyce Amendment” and formerly known as the “Rohrabacher-Blumenauer Amendment”),
which funds the DOJ. Under the Joyce Amendment, the DOJ is prohibited from using federal funds to prevent states “from implementing
their own State laws that authorize the use, distribution, possession, or cultivation of medical marijuana.” In particular,
the Joyce Amendment only prohibits the use of federal funds to prosecute individuals and businesses operating cannabis companies
in compliance with state laws regulating the medical use of cannabis and does not apply to adult-use cannabis operations. The
Joyce Amendment must be renewed each federal fiscal year and was subsequently renewed by the U.S. Congress (“Congress”)
through September 30, 2019. There can be no assurance that Congress will further renew the Joyce Amendment for the 2020 fiscal
year.
The
U.S. federal government’s approach towards cannabis and cannabis-related activities remains uncertain. If the Joyce Amendment
is not renewed in the future, and/or until the U.S. federal government amends the laws and its enforcement policies with respect
to cannabis, there is a risk that the DOJ and other U.S. federal agencies may utilize U.S. federal funds to enforce the CSA in
states with a medical and adult-use cannabis program, which could have a material adverse effect on our current and future cannabis
tenants.
Furthermore,
while we have acquired and may acquire additional cannabis facilities with the intent to lease those facilities for the cultivation
and processing of medical-use cannabis facilities, our lease agreements do not prohibit our cannabis tenant from cultivating and
processing cannabis for adult use, provided that such tenant complies with all applicable state and local rules and regulations.
Certain of our tenants may opt to cultivate adult-use cannabis in our medical-use cannabis facilities, which may in turn subject
our cannabis tenant, us and our properties to federal enforcement actions.
Laws,
regulations and the policies with respect to the enforcement of such laws and regulations affecting the cannabis industry in the
United States are constantly changing, and we cannot predict the impact that future regulations may have on us.
Medical
and adult-use cannabis laws and regulations in the United States are complex, broad in scope, and subject to evolving interpretations.
As a result, compliance with such laws and regulations could require us to incur substantial costs or alter certain aspects of
our business. Violations of these laws, or allegations of such violations, could disrupt certain aspects of our business plan
and may have a material adverse effect on certain aspects of our planned operations. Further, regulations may be enacted in the
future that will be directly applicable to certain aspects of our cannabis-related activities. We cannot predict the nature of
any future laws, regulations, interpretations or applications, especially in the United States, nor can we determine what effect
additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on our business.
Currently,
there are 33 states plus the District of Columbia and certain U.S. territories that have laws and/or regulations that recognize,
in one form or another, consumer use of cannabis in connection with medical treatment. Of those, 11 states plus the District of
Columbia and certain U.S. territories have laws and/or regulations that permit the adult-use of cannabis. As cannabis is classified
as a Schedule I substance under the CSA, U.S. federal laws and regulations prohibit a range of activities regarding cannabis.
Unless and until Congress amends the CSA with respect to cannabis (the timing and scope of which is not assured and hard to predict),
there is a risk that governmental authorities in the United States may enforce current U.S. federal law, and we may, through our
business activities, be deemed to be operating in direct violation of U.S. federal law. Accordingly, active enforcement of the
current U.S. federal regulatory position on cannabis could have a material adverse effect on us. The risk of strict enforcement
of the CSA in light of Congressional activity, judicial holdings, and stated policy remains uncertain, and any regulations prohibiting
the use of cannabis, or prohibiting cannabis-related activities, could have an adverse effect on our business, financial condition
and results of operations.
In
addition, relevant state or local rules and regulations may be amended or repealed, or new rules and regulations may be enacted
in the future to eliminate prohibiting the cultivation, processing and dispensing of cannabis. If our current cannabis tenant,
or any future cannabis tenants, are forced to cease operations, we would be required to replace such tenant with one that is not
engaged in the cannabis industry, who may pay significantly lower rents. Any changes in state or local laws that reduce or eliminate
the ability to cultivate and produce cannabis would likely result in a high vacancy rate for the kinds of properties that we seek
to acquire, which would depress our lease rates and property values. In addition, we would realize an economic loss on any and
all improvements made to properties that were to be used in connection with cannabis cultivation and processing.
We
may be subject to anti-money laundering laws and regulations in the United States.
Financial
transactions involving proceeds generated by cannabis-related activities can form the basis for prosecution under the U.S. money
laundering, financial recordkeeping and proceeds of crime, including the U.S. Currency and Foreign Transactions Reporting Act
of 1970 (the “Bank Secrecy Act”), as amended by Title III of the Uniting and Strengthening America by Providing Appropriate
Tools Required to Intercept and Obstruct Terrorism Act of 2001.
The
Financial Crimes Enforcement Network (“FinCEN”), a bureau within the U.S. Department of the Treasury primarily charged
with administering and enforcing the Bank Secrecy Act, previously issued a memorandum providing instructions to banks seeking
to provide services to cannabis-related businesses (the “FinCEN Memorandum”). The FinCEN Memorandum states that in
some circumstances, it is permissible for banks to provide services to cannabis-related businesses without risking prosecution
for violation of U.S. federal money laundering laws, and explicitly refers to the Cole Priorities. As discussed above, the Cole
Memorandum was rescinded in January 2018 and the decision to prosecute was left to the discretion of each U.S. Attorney in each
district. As a result, it is unclear at this time whether the current administration will follow the guidelines of the FinCEN
Memorandum and whether Attorney General Barr will reinstate the Cole Priorities, adopt a different enforcement policy or take
no action at all. Treasury Secretary Steven Mnuchin did state, following rescission of the Cole Memorandum, that the FinCEN Memorandum
remains in place. If any of our investments, or any proceeds thereof, any dividends or distributions therefrom, or any profits
or revenues accruing from such investments in the United States were found to be in violation of anti-money laundering laws or
otherwise, such transactions may be viewed as proceeds of crime, including under one or more of the statutes discussed above.
Any property, real or personal, and its proceeds, involved in or traceable to such a crime is subject to seizure by and forfeiture
to governmental authorities. Any such seizure, forfeiture or other action by law enforcement regarding our assets could restrict
or otherwise jeopardize our ability to declare or pay dividends or effect other distributions, and could have a material adverse
effect on our business, financial condition and results of operations.
Litigation,
complaints, enforcement actions and governmental inquiries could have a material adverse effect on our business, financial condition
and results of operations.
Our
participation in the cannabis industry may lead to litigation, formal or informal complaints, enforcement actions and governmental
inquiries. Litigation, complaints, enforcement actions and governmental inquiries could consume considerable amounts of our financial
and other resources, which could have a material adverse effect on our sales, revenue, profitability, and growth prospects.
Litigation,
complaints, enforcement actions and governmental inquiries could result from cannabis-related activities in violation of federal
law, including, but not limited to, the Racketeer Influenced Corrupt Organizations Act (“RICO”). RICO is a U.S. federal
statute providing criminal penalties in addition to a civil cause of action for acts performed as part of an ongoing criminal
organization. Under RICO, it is unlawful for any person who has received income derived from a pattern of racketeering activity,
to use or invest any of that income in the acquisition of any interest, or the establishment or operation of, any enterprise that
is engaged in interstate commerce. RICO also authorizes private parties whose properties or businesses are harmed by such patterns
of racketeering activity to initiate a civil action against the individuals involved. Recently, a number of RICO lawsuits have
been brought by neighbors of state-licensed cannabis farms, who allege they are bothered by noise and odor associated with cannabis
production, which has also led to decreased property values. By alleging that the smell of cannabis interferes with the enjoyment
of their property and drives down their property value, plaintiffs in these cases have effectively elevated common law nuisance
claims into federal RICO lawsuits. These lawsuits have named not only the cannabis operator, but also supply chain partners and
vendors that do not directly handle or otherwise “touch” cannabis. To our knowledge, none of these cases has been
entirely dismissed at the pleadings stage, and we cannot be certain how the courts will rule on cannabis-related RICO lawsuits
in the future. If a property owner were to assert such a claim against us, we may be required to devote significant resources
and costs to defending ourselves against such a claim, and if a property owner were to be successful on such a claim, our cannabis
tenant may be unable to continue to operate its business in its current form at the property, which could materially adversely
impact such tenant’s business and the value of our property, our business and, financial condition and results of operations.
Further,
from time to time in the normal course of our business operations, we, or any of our subsidiaries, may become subject to litigation,
complaints, enforcement actions and governmental inquiries that may result in liability material to our financial statements as
a whole or may negatively affect our operating results if changes to our business operations are required. The cost to defend
such litigation, complaints, actions or inquiries may be significant and may require a diversion of our resources. There also
may be adverse publicity associated with such litigation, complaints, actions or inquiries that could negatively affect customer
perception of our business, regardless of whether the allegations are valid or whether we are ultimately found liable. Insurance
may not be available at all or in sufficient amounts to cover any liabilities with respect to these or other matters. A judgment
or other liability in excess of our insurance coverage for any claims could have a material adverse effect on our business, financial
condition and results of operations.
We
and our cannabis tenant may have difficulty accessing the service of banks, which may make it difficult for us and for them to
operate.
Financial
transactions involving proceeds generated by cannabis-related activities can form the basis for prosecution under the U.S. federal
anti-money laundering statutes, unlicensed money transmitter statutes and the Bank Secrecy Act. As noted above, guidance issued
by FinCEN clarifies how financial institutions can provide services to cannabis-related businesses consistent with their obligations
under the Bank Secrecy Act. Furthermore, since the rescission by U.S. Attorney General Jefferson B. Sessions on January 4, 2018
of the Cole Memorandum, U.S. federal prosecutors have had greater discretion when determining whether to charge institutions or
individuals with any of the financial crimes described above based upon cannabis-related activity. As a result, given these risks
and their own related disclosure requirements, despite the guidance provided in the FinCEN Memorandum, most banks remain hesitant
to offer banking services to cannabis-related businesses. Consequently, those businesses involved in the cannabis industry continue
to encounter difficulty establishing or maintaining banking relationships.
While
we do not presently have challenges with our banking relationships, should we have an inability to maintain our current bank accounts,
or the inability of our cannabis tenants to maintain their current banking relationships, it would be difficult for us to operate
our business, may increase our operating costs, could pose additional operational, logistical and security challenges and could
result in our inability to implement our business plan.