Cannabis Investment and the NBA

In case you missed it, professional players on teams in the National Basketball Association are getting a free and clear opportunity to take advantage of the cannabis industry through cannabis investments. As a former D-1 college athlete, I’m glad to see the NBA not only remove cannabis from its list of banned substances but also allow its players to get some of the upside from this (still) burgeoning industry. At the beginning of this month, the long form collective bargaining agreement (the “Agreement”) between the National Basketball Players Association (“Players Association”) and the NBA went into effect, and it will last for seven years. Here’s a copy of that agreement. Among the 600 plus pages of the Agreement is the entree for players to finally be able to invest in the cannabis industry, which is a major boon for cannabis investments.

Cannabis investment and NBA players

Section 20 of the Agreement lays out the do’s and don’ts of cannabis investments for the players:

. . . a player may hold a direct or indirect ownership interest (whether controlling or non-controlling) in an entity that produces or sells CBD Products, provided that (A) such entity does not also produce or sell one or more products containing any Prohibited Substance or any other Schedule I or II substance under the Controlled Substances Act, and (B) such interest is held, and such entity operates, in compliance with all applicable laws and regulations.

The Agreement goes on to state that:

. . . a player may hold a direct or indirect ownership interest in a Marijuana Company, provided that: (A) Such interest is passive (i.e., includes no management, governance, voting, or executive role or other operational rights or roles); and (B) The player’s ownership interest is equal to less than a fifty percent (50%) beneficial interest in any class of securities (or other class of ownership interests) in such Marijuana Company (including via a partnership interest in a fund that owns an interest in such Marijuana Company); and (C) Such interest is held, and such entity operates, in compliance with all applicable laws and regulations . . . no player may hold any ownership interest (whether direct or indirect, including via a partnership interest in a fund) in an entity that produces or sells any products containing any Prohibited Substance or any other Schedule I or II substance under the Controlled Substances Act.

The fine print is mostly in the definitions

The Agreement defines key terms a follows:

CBD” means “hemp-derived compounds that have a concentration of tetrahydrocannabinol (‘THC’) at or below 0.3% and contain no other form or amount of cannabis.”
CBD Products” means “supplements and other products containing CBD as an ingredient (e.g., oils, creams, drinks, pills, powders, and roll-ons), but does not mean products that meet the definition of ‘Marijuana Products’ . . .  or products containing any substance on the list of Prohibited Substances . . . or on Schedule I or II of the Controlled Substances Act.” Note that the list of “Prohibited Substances” is at Exhibit I-2 of the Agreement.
Marijuana Products” means “supplements and other products (e.g., flower, oils, creams, drinks, pills, powders, and roll-ons) containing (A) a non-CBD form of cannabis as an ingredient, and/or (B) a concentration of THC above 0.3%. . . any products containing both CBD and a non-CBD form of cannabis, and any products containing kratom, shall be Marijuana Products.”
Marijuana Company” means “an entity that (A) produces or sells one or more Marijuana Products, including an entity that produces or sells both CBD Products and one or more Marijuana Products, and/or (B) produces or sells CBD Products and has an affiliate that produces or sells one or more Marijuana Products under the same or a substantially similar brand as such entity or CBD Products.”

Translation for NBA players and cannabis investments

Players are free to directly or indirectly own or invest in companies that sell only CBD Products (and not, for example, cannabis, kratom, or psilocybin). Interestingly, via the list of example products in the Agreement — and since the NBA included drinks, pills, and powders — NBA players seemingly will be able to own and invest in CBD companies that violate the Food, Drug, and Cosmetic Act (given the FDA’s current position on CBD in food and beverage and regarding health claims). To be 100% safe from federal enforcement, NBA players would be wise to own and/or invest in CBD companies that make CBD topical products only (without making any health claims), but we all know that that likely won’t happen.

When it comes to state-licensed cannabis companies (i.e., companies that sell just “Marijuana Products” and/or “Marijuana Products” as well as “CBD Products”), players are more restricted in what they can and cannot do. Specifically, if a player directly or indirectly owns and/or invests in a state-licensed cannabis company, that interest cannot entitle the player to any “management, governance, voting, or executive role or other operational rights or roles”, and the player has to have a minority stake (i.e., less than 50%) in the venture or entity, whether it’s via direct ownership or through, for example, a fund. Of important note is the fact that if a CBD company also sells “Marijuana Products” (or, weirdly, kratom) or has an “affiliate” that sells Marijuana Products under the same or substantially similar brand as its CBD Products, that CBD company becomes a “Marijuana Company”, and the player’s ownership and investment options are limited.

Cannabis endorsement and promotions

Finally, the Agreement allows for the following:

. . . a player may participate in the promotion or endorsement of any brand, product, or service of an entity that produces or sells CBD Products, provided that such entity (A) is not a Marijuana Company, (B) does not also produce or sell one or more products containing any Prohibited Substance or any other Schedule I or II substance under the Controlled Substances Act, and (C) such participation and such entity’s operation comply with all applicable laws and regulations.

Without having to ask the Players Association and the NBA, players can promote and endorse any brand, product, service, or company that makes or sells CBD Products, but that’s it. They cannot do the same for any Marijuana Company (which is a massive bummer), and they’re still prohibited from any such promotion or endorsement even for a CBD company if that CBD company (or its affiliate) also sells Marijuana Products (or any product or substance that constitutes or contains a “Prohibited Substance” or a Schedule I or II controlled substance).

If a player wants to promote or endorse CBD Products sold by a Marijuana Company, they need a green light from both the NBA and the Players Association. This will be no small task. That player request to promote/endorse must be in writing; include a complete list of the products that the Marijuana Company produces or sells; include a complete list of all ingredients of such products; a description of the player’s proposed promotion or endorsement activity for the Marijuana Company’s CBD Products; and a detailed summary of the non-financial terms of any proposed promotion or endorsement agreement between the player and the Marijuana Company.

Unless a player’s request has been approved in writing by both the NBA and the Players Association, the player can’t promote any CBD Products sold by a Marijuana Company. And neither the NBA nor the Players Association will approve these if the subject CBD Products are “associated by the Marijuana Company with any Marijuana Product (e.g., the CBD Product is marketed or sold under a brand that also includes or refers to Marijuana Products) or if any proposed promotion creates a reasonable risk of public confusion with any Marijuana Product”. And, of course, these approvals can come with specific terms and conditions, too, from the NBA and/or the Players Association.

Bad cannabis investments

If players violate the Agreement when it comes to cannabis investments and/or promotions and endorsements, “without limiting other NBA rights or remedies, the player shall be required to promptly dispose of his ownership interest in the prohibited investment and/or immediately terminate his participation in the prohibited promotion or endorsement, as applicable.” The correction remedy here is swift and unforgiving, and penalties to the player could also apply (not to mention any collateral contract breach issues with the corresponding CBD and/or Marijuana companies).

What happens now?

We may see increased investment and ownership in the realm of CBD and cannabis when it comes to NBA players. It’s still not without risk of violating the Agreement, but it’s a pretty solid start to more participation in the cannabis industry by professional athletes. I’m hoping to see more IP licensing deals, direct investment, and joint ventures involving athletes, but that will obviously be after significant regulatory compliance exploration with both the Agreement and federal and state CBD and cannabis laws and rules.

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