This article is part 2 of a two-part series on the challenges facing psilocybin business operators in Oregon following Measure 109. Read part 2 here.
Opening a psilocybin business in Oregon may not be easy or profitable given the untested and complex legal requirements.
As entrepreneurs prepare to launch psilocybin businesses in 2023, when supervised use of the substance becomes legal under state law and regulated by the Oregon Health Authority (OHA), they have also been looking to lawyers for guidance.
Under the new law, anyone over 21 with a GED, a high school equivalency credential, can become a facilitator, guiding people through their mushroom trips, so long as they train and pass a state test.
The 70-page penultimate draft of the rules for the production and consumption of psilocybin, the active ingredient in magic mushrooms, was released by the OHA on November 1. The final draft is due out Friday, December 30, 2022.
In September 2022, Kaci Hohmann and Dave Kopilak, attorneys with the Emerge Law Group, gave a clear rundown of what type of business requirements to expect. In a talk entitled “Operating in Oregon Under the Psilocybin Services Act” presented at the Horizons Northwest conference in Portland, they pointed out that selling psilocybin is a risky business with many unknowns.
“Sometimes folks in the psychedelics industry roll their eyes and say, ‘Well, we’re not cannabis.’ I totally get it. But some of the legal issues we encountered for cannabis are identical, and the psychedelic industry will encounter those exact federal issues,” Kopilak told the conference.
Will the Feds Prosecute Psilocybin as a Schedule One Substance?
Kopilak said much depends on the U.S. Department of Justice choosing not to prosecute psilocybin providers under the Controlled Substances Act. Like cannabis, psilocybin remains an illegal Schedule 1 substance under federal law. During the legalization of cannabis in Oregon under state law, the Cole Memorandum, an internal policy statement by federal law enforcement, helped ensure nobody in the cannabis business got arrested if they were in compliance with Oregon Measure 91. The measure legalized recreational marijuana for people ages 21 and older.
Oregon also had direction from the Williams Memo, named after state attorney general Billy Williams, which said the state would also not prosecute cannabis distributors, so long as they obeyed state laws.
“What are they probably going to do? Nothing. They’re going to sit there and wait and watch and observe,” said Kopilak of federal prosecutors observing the implementation of Measure 109 which legalized psilocybin use in Oregon. He speculated that if the psilocybin rollout goes smoothly, the Oregon Department of Justice or the U.S. Department of Justice will leave psilocybin providers alone. But if it doesn’t, they will intervene. “So, everybody has an interest in a very positive, safe rollout.”
One of the risks for those investing in psilocybin businesses, on top of losing all their money, is that they could be prosecuted under federal law and potentially go to prison. Kopilak recalls that cannabis investors quickly stopped worrying about that because they felt protected by the Cole Memo. But psilocybin doesn’t have such protections or published notices indicating that federal prosecutors are stepping back.
“They can theoretically repeal (Measure 109) tomorrow, but they probably won’t,” says Kopilak. “Everybody’s sort of nodded their heads [and said] ‘Here, we have nothing, no guide.’”
Cash, Trademarks, and Bankruptcy
Another challenge for psilocybin businesses is that the industry is going to have to deal in cash. Credit unions agreed to bank for cannabis companies (with high fees) because of the protection from the Cole Memo. As psilocybin doesn’t have this directive, mainstream banks will stay away.
“I think you’ll have a safe in your office, and there’ll be cash there,” said Kopilak.
Hohmann says psilocybin businesses will not be able to federally trademark their products because the product is federally illegal. “But there are services, which present nuanced issues. There are often creative solutions to protect intellectual property, even without federal trademarks,” Hohmann said. As an example, she notes that copyrights have no lawful commerce requirement like trademarks, so copyrights can be used to protect certain intellectual property content.
Bankruptcy courts are a creature of federal law and a result, cannabis companies are not protected by the federal bankruptcy code. “We have to assume that’s going to be true for psilocybin. Unfortunately, that just means that financially distressed businesses will have to rely on state law bankruptcy alternatives if they’re experiencing liquidation,” Hohmann said.
Taxes, 280E, and Multiple Entities
Psilocybin entrepreneurs also face tax issues as they set up their businesses. Kopilak notes that according to the IRS tax code 280E, if a trade or business is trafficking in a controlled substance, it cannot take any business deductions. Normally, a business owner can adjust their gross income downwards based on their cost of goods sold. He recommends any psilocybin business hire a certified public accountant who understands the 280E tax code.
According to Kopilak, cannabis growers can deduct all their expenses for creating the product. However, cannabis retailers can’t deduct sales and marketing, leaving them very little to deduct.
“So, marijuana retailers got pretty much hammered, more than the producers did,” Kopilak said of that legalization story.
Because the psilocybin business in Oregon will be mainly made up of retail services, instead of product producers, most expenses are not related to buying the product. “I thought, ‘this is going to be really bad.’ But there are some creative solutions here, with multiple entities and bifurcating products and services,” says Kopilak. “I’m predicting that most psilocybin operations will have multiple entities.”
Those setting and navigating business requirements in Oregon will need to consider if a psilocybin facilitator is more like a retailer that buys, sells and transports a scheduled substance – which is the definition of trafficking under federal law. And what about the person who actually hands the mushrooms to the client to start their journey? How will they be classified?
“The client is going to purchase some psilocybin product and consume it. It happens at the beginning. How long does that take, 15 minutes, 20 minutes, with some ceremony? And now the rest of the administration system is over here,” Kopilak said, explaining how businesses will have to split up their scope of work.
Emerge Law advises cannabis retail stores to become C-corporations, not LLCs or S-corporations, which are pass-through tax entities “where they would end up paying more taxes than they should,” says Kopilak. A C-corp is a legal structure for a corporation in which the owners, or shareholders, are taxed separately from the entity.
Kopilak says he has seen cannabis retailers amass enormous tax liabilities that they could not pay, then just go out of business. “But with a C-corporation, the IRS isn’t coming after the owners. That’s why a C-corp can inflate the tax liability to the entity, not to the owner.”
He says that having a coffee shop as part of a cannabis dispensary reduced tax liability for cannabis entrepreneurs because the coffee shop was not trafficking. Kopilak expects psilocybin services centers to do similar things, breaking up their business into parts.
Residency Requirements and Criminal Records
Hohmann, a land use expert, explained to those at the Horizons conference seeking a psilocybin manufacturing and service license, that more than 50% of the ownership interest in a licensed entity has to be held by one or more residents of Oregon. Facilitators also have to be residents of Oregon for the past two or more years. That requirement sunsets, January 1, 2025.
“Certain applicants are going to have to submit to a criminal background check,” warned Hohmann, “Although personally identifiable information is exempt from public records requests.”
Perhaps in an effort to limit empire-building, the preliminary rules governing psilocybin businesses state that no individual or legal entity can have a financial interest in more than one manufacturing license and five service center licenses.
When raising money from investors there is personal liability involved, so psilocybin entrepreneurs need to disclose the risks. This includes the risk of intervention by federal law enforcement.
Providing non-medical psilocybin services in Oregon under Measure 109 will be complex for those currently providing medical and therapeutic services. The OHA and the current draft rules prohibit facilitators from engaging in conduct that requires an additional professional license, and from exercising the privileges of any professional license that they hold in another field while they’re providing psilocybin services.
This means that people who hold DEA registrations for federally approved controlled substances, such as medical providers, could be jeopardized if they own or operate a psilocybin business in Oregon.
The upshot is, no one can practice medicine or psychotherapy on someone to whom they are providing psilocybin services. OHA will provide a script of yes-no questions for use in the preparation session for people who are about to experience psilocybin under this complex legal framework.
Medical providers in Oregon will need to weigh the implications for them if they choose to become a psilocybin provider and lawmakers will need to consider if, and how, to protect them.