Green in a gray area: Lessons for Virginia cannabis ‘gifting’ businesses

The cannabis space is young in Virginia, but valuable lessons from the past could provide an edge to those paying close attention.

In addition to establishing a medical marijuana regime some years ago, the Virginia General Assembly legalized adult possession of recreational marijuana without creating a legal retail market. Several retail establishments then emerged throughout the commonwealth purporting to “gift” marijuana to their customers alongside a non-marijuana purchase.

This practice, Virginia Attorney General Jason Miyares says, still amounts to unlawful distribution of marijuana. Recent police searches of “gifting” establishments shows the attorney general’s interest in enforcing this interpretation. The present cannabis legal environment is reminiscent of another recent legal gray area in Virginia: gaming and gambling.

Cannabis in the commonwealth

Adult personal possession of certain amounts of marijuana for recreational use is legal in Virginia under the Virginia Cannabis Control Act, or VCCA. (See Va. Code Ann. § 4.1-1100).)

The law allows adults to share marijuana with each other, provided there is no compensation for the sharing (Id. § 4.1-1101.1). However, it remains illegal to sell marijuana for recreational use (Id. § 18.2-248.1). This legal framework has opened a void between “sharing” — permissible under the law, and “selling” — impermissible under the law.

Out of the VCCA void have emerged several cannabis-themed retail stores, many of which are found throughout the southwestern region of the Commonwealth (See Susan Cameron, “Cannabis-related Stores Are Popping up Across Virginia amid Confusion over the State’s Marijuana Laws,” Cardinal News (Sept. 6, 2023)).

The business model of such stores involves the sale of a non-marijuana product, like gardening equipment or stickers. Upon making the purchase, customers receive a “gift” of marijuana — with the amount and quality of the “gift” determined by the amount of money spent on the purchase (See id.).

Miyares issued an opinion on similar business practices in April (See 2023 WL 3073195 (Va. A.G.)). He found that giving away marijuana contemporaneously with another reciprocal transaction between the same parties is unlawful (Id.).

For months following the issuance of that opinion, businesses operating on this “gift” system continued to do so in the absence of meaningful enforcement (See Cameron, supra). However, enforcement trends are never set in stone. State and local law enforcement — in coordination with the Virginia Attorney General’s Office — recently executed 24 search warrants upon many such “gifting” establishments (See Matt Busse et al., “Police Execute Search Warrants in 9 Southwest Va. Counties in Drug, Money Laundering Investigation,” Cardinal News (Sept. 28, 2023)). “Too many stores are selling THC products, often marketed for children, in clear violation of the law,” Miyares said, following the execution of the search warrants on September 28 (Id.).

A careful analysis of the opinion, surrounding legal context and recent law enforcement action could allow businesses to operate more confidently in compliance with the law. Naturally, it may be advantageous to promptly determine a relatively low-enforcement-risk operation structure.

Operating in a gray area: Lessons from gaming

The cannabis space is far from Virginia’s first legal gray area for businesses. Perhaps the most recent example comes from the early 2010s when multiple Virginia Attorney General opinions were issued on the topic of what activities constitute illegal gambling (See, e.g., 2011 WL 4429182 (Va. A.G.); 2010 WL 4137620 (Va. A.G.); 2010 WL 3184154 (Va. A.G.)).

Virginia defines “illegal gambling” as “[t]he making, placing, or receipt of any bet or wager in the Commonwealth of money or other consideration or thing of value, made in exchange for a chance to win a prize, stake, or other consideration or thing of value, dependent upon the result of any game, contest, or any other event the outcome of which is uncertain or a matter of chance.” (Va. Code Ann. § 18.2-325.1).

The statute therefore provided three elements of “illegal gambling” — consideration, chance and prize. The repeat issue addressed in the Virginia Attorney General opinions was whether a given set of gaming business activities contained all three.

The opinions illustrated the office’s thinking on these specific scenarios, but no single opinion provided a one-size-fits-all path forward for the commonwealth’s diverse contingent of gaming businesses. Instead, the opinions created a patchwork of standards for permissible operations in the gaming space. Systematic assessment of the multiple opinions was necessary to determine practical, tailored compliance guardrails. Gaming thereby occupied a gray area analogous to the present cannabis space.

Gray areas, especially those further complicated by state attorney general opinions, are a unique and challenging business environment — one in which savvy organizations will craft a strategy to operate within the confines of the law.

Virginia’s cannabis environment, looking forward

As of the time of publishing, Miyares has issued only one opinion addressing business practices under the VCCA (2023 WL 3073195 (Va. A.G.)). That opinion, discussed above, illustrates the attorney general’s thinking regarding only one of several possible business models under the law. This does little to clarify the distinction between “sharing” and “selling.”

The opinion also does not address the legality of any other potential business models. For instance, Miyares has not commented on whether it would be permissible to create a truly private membership club or a “gifting” system in which the cannabis shared does not reflect the dollar value of items purchased (See id.).

A detailed review of the opinion and surrounding law is necessary to determine the legal risk associated with a particular formulation of those possible business models. State attorney general opinions remain crucial predictors of enforcement in a gray area. Failure to conduct one’s business accordingly can come with consequences (See id. (finding that the “gift” system is “illegal distribution of marijuana”); Busse et al., supra (describing search warrants upon “gifting” businesses pursuant to “an extensive, ongoing criminal investigation into allegations of money laundering and illegal narcotic distribution network by retail establishments.”).)

Jean Gonnell, a partner in Troutman Pepper’s Charlotte office, has more than a decade of dedicated experience in cannabis law and provides clear-cut and actionable guidance in a fluid regulatory landscape.

Augustin Rodriguez, a partner in the firm’s Richmond office, is a seasoned business partner who leverages his in-house background to guide tobacco, cannabis, gambling, and other highly regulated clients.

Stephen Piepgrass, a partner in the Richmond office, leads the firm’s Regulatory Investigations, Strategy + Enforcement (RISE) Practice Group.

Zie Alere is an associate in the firm’s RISE Practice Group in the Richmond office.

Troutman Pepper’s cannabis practice provides advice on issues related to applicable federal and state law. Marijuana remains an illegal controlled substance under federal law.