As election day draws near, proposed laws which would permit recreational or medical use of marijuana are on the ballot in nine states. Riding the wave of the legalization movement–in addition to the nine states with legalization measures currently on their ballots, four states have already legalized recreational marijuana and 25 states currently permit medical use–business interests are lining up to service the potentially burgeoning cannabis industry, and one company in particular is poised to take a marijuana-related business model public and mainstream.

Innovative Industrial Properties

On October 17, 2016, Innovative Industrial Properties, Inc., a Maryland corporation with headquarters in San Diego, California, filed a registration statement with the United States Securities and Exchange Commission under which the company is offering up to 8.75 million shares at an initial public offering price of $20 per share. At the IPO price, the offering would value the company at over $200 million.

According to its SEC filing, Innovative Industrial Properties intends to qualify and be taxed as a real estate investment trust, or REIT. REITs are real estate companies that own or finance income-producing real estate assets. The company’s business focuses on the acquisition, ownership and management of specialized industrial properties leased to experienced, state-licensed operators of regulated medical use cannabis facilities.

The Company has already lined up its first tenant, PharmaCann, LLC, which is a licensed medical marijuana company with operations in Illinois and New York. PharmaCann will sell its New York facility to Innovative Industrial Properties, then lease the property back from the company.

Alongside its SEC filing, Innovative Industrial Properties has also filed to list its shares on the New York Stock Exchange. If its offering is successful and the NYSE approves its listing, the company will be the first publicly-traded REIT focused on the marijuana industry, as well as the first marijuana-focused company listed on the Exchange.

Challenges

NYSE approval is not guaranteed. In an October 19, 2016 article regarding the offering, Forbes indicated that the Exchange has declined to comment on the approval process, but that it provided Forbes with a document describing the process. Such document provides that “the Exchange may deny listing or apply additional or more stringent criteria based on any event, condition, or circumstance that makes the listing of the company inadvisable or unwarranted in the opinion of the Exchange.” In other words, NYSE has broad discretion to deny the listing if it is not comfortable with the company.

Another aspiring marijuana-related company can attest to the uncertain path Innovative Industrial Properties faces in its effort to be listed on a major exchange. In May of this year, MassRoots, Inc., a publicly-traded social networking platform for marijuana users, had its application to be listed on Nasdaq rejected by that exchange. According to MassRoots, Nasdaq rejected its application on the grounds that listing the company could have been seen as aiding the distribution of an illegal substance. MassRoots currently trades over the counter.

It remains to be seen whether NYSE adopts the same approach as Nasdaq in its evaluation of whether to list Innovative Industrial Properties’ shares. For the moment, federal law remains in conflict with the legalization measures adopted by several states. As is noted in Innovative Industrial Properties’ SEC filing, cannabis is a Schedule-I controlled substance under the Controlled Substances Act of 1970. Individuals and entities may violate federal law if they intentionally aid and abet another in violating federal controlled substance laws, or conspire with another to violate them. The prospect of potential de jure violation of federal law may be reason enough for NYSE to deny the company’s listing request.

On the other hand, the federal government in recent years has relaxed its enforcement position with respect to individuals and entities that operate in compliance with state law. On August 29, 2013, the U.S. Department of Justice provided guidance in the so-called “Cole Memorandum” to all federal prosecutors regarding the enforcement of federal laws regarding marijuana, which states that enforcement should be focused on eight specific concerns, which we have discussed here: Where Are We and How the Heck Did We Get Here? Listing the shares of a REIT whose operations involve the leasing of real estate to state-licensed operators of regulated medical use cannabis facilities would not, on the surface, appear to directly trigger any of such concerns.

The state of the law regarding the marijuana industry continues to evolve at a rapid pace. As the push for legalization of marijuana for recreational and medical use gains momentum in several states, it will be important to monitor the parallel evolution of the legal and corporate structures that are put in place to limit, or permit, the practical commercial effectuation of the liberalization of marijuana use laws.