The Minnesota Legislature recently approved an amendment to its Adult-Use Cannabis Law, which accelerates the issuance of licenses to social equity applicants through a vetted lottery system, among other things.

Gov. Tim Walz is expected to sign the bill.

Below is an overview of the amendment.

Social Equity Licenses and Vetted Lottery

The Office of Cannabis Management (OCM) will now be permitted to hold a vetted lottery to issue preapproved licenses to social equity applicants ahead of the general pool of candidates. The lottery application period must begin no later than July 24, 2024, and end by August 12, 2024. Put simply, a “vetted” lottery requires that the OCM confirm an application’s minimum requirements are present and no obvious barriers exist in the application prior to an applicant entering the lottery.

The pre-approved license will permit early cultivation for certain licenses, subject to certain requirements. However, holders of pre-approved licenses will not be permitted to sell until they are converted into a regular license, as described below.

Following the amendment, social equity applicants are defined to include an applicant who:

• Was convicted of an offense involving the possession or sale of cannabis or marijuana prior to May 1, 2023.
• Had a parent, guardian, child, spouse or dependent who was convicted of an offense involving the possession or sale of cannabis or marijuana prior to May 1, 2023.
• Was a dependent of an individual who was convicted of an offense involving the possession or sale of cannabis or marijuana prior to May 1, 2023.
• Is a military veteran, including a service-disabled veteran, or current or former member of the National Guard.
• Is a military veteran or current or former member of the National Guard who lost honorable status due to an offense involving the possession or sale of cannabis or marijuana.
• Has been a resident for the last five years of one or more subareas, such as census tracts or neighborhoods:
  • That experienced a disproportionately large amount of cannabis enforcement as determined by the study conducted by the office pursuant to section 342.04, paragraph (b), or another report based on federal or state data on arrests or convictions.
  • Where the poverty rate was 20 percent or more.
  • Where the median family income did not exceed 80 percent of the statewide median family income or, if in a metropolitan area, did not exceed the greater of 80 percent of the statewide median family income or 80 percent of the median family income for that metropolitan area.
  • Where at least 20 percent of the households receive assistance through the Supplemental Nutrition Assistance Program.
  • Where the population has a high level of vulnerability according to the Centers for Disease Control and Prevention and Agency for Toxic Substances and Disease Registry (CDC/ATSDR) Social Vulnerability Index.
• Has participated in the business operation of a farm for at least three years and currently provides the majority of the day-to-day physical labor and management of a farm that had gross farm sales of at least $5,000, but not more than $100,000, in the previous year.

With respect to a business entity, the above qualifications must apply to the ultimate holders of at least 65 percent of the controlling ownership of the entity.

The lottery will be “vetted” in the sense that each applicant will submit an application and the OCM will be permitted to reject that application if, among specific other reasons, the application is incomplete, is false, the applicant is prohibited from holding a license or the application does not meet the minimum requirements.Once the lottery pool is established, the OCM will hold the lottery if the number of qualified applicants exceeds the number of available licenses. Only the following number of preapproved licenses may be granted to social equity applicants:

After the OCM adopts initial rules under the Adult-Use Cannabis Law, the OCM can convert the temporary license into a preliminary license if the owner submits a request, including evidence of a location and a site inspection within 18 months of the OCM adopting its initial rules. Further, this same vetted lottery concept will apply to other non-social equity applicants.

The amendment permits licenses held by social equity applicants to be transferred to any entity after a three-year holding period. During the three-year holding period, social equity applicants may transfer the license to others who would qualify as a social equity applicant. Each transfer must be approved by the OCM and its Division of Social Equity.

Application Requirements

In certain respects, the amendment alleviates some of the burdens to apply for a license, including that an applicant is no longer required to secure a physical premises for the business at the time of application. This was perhaps the most burdensome requirement contained within the application given the cost associated with securing a space without the ability to operate.

However, the amendment adds other requirements, including:

• Disclosure for every “true party of interest” in the business and background checks (see below on “true party of interest”).
• Disclosure for standard operating procedures for: (i) quality assurance, (ii) inventory control, storage, and diversion prevention and (iii) accounting and tax compliance.
• A description of training and education for employees.

Maximum Licenses to be Issued

Until July 1, 2026, when the OCM will have the right to determine the number of licenses that would be consistent with the stated goals of the Adult-Use Cannabis Law, the number of licenses that may be issued by the OCM cannot exceed:

True Party of Interest

Introduced in this amendment, a “true party of interest” is defined as someone who holds a traditional role in the business like stockholder, member, partner, director, officer or sole proprietor. It also includes any person who “has the right to receive some or all of the revenue, gross profit, or net profit from a cannabis business during any full or partial calendar or fiscal year” or someone who “has the right to exercise control over a cannabis business.” There are listed exceptions for a “true party of interest” that cover landlords with fixed rent, certain employees and bonus or commission recipients and financial institutions, among others.

The impact of this change lies in the number of applications which may be submitted and the number of licenses which may be held by a true party of interest. A true party of interest may only submit one application for any single type of license or multiple licenses if the licenses may be held together. Further, no true party of interest may hold more than one license unless explicitly permitted by the Adult-Use Cannabis Law. These limits do not apply to someone who holds ten percent or less of a controlling ownership of a business entity.

Further, financiers (i.e., lenders) may not hold an equity interest in a business holding a license unless it is disclosed as a true party of interest.

With this development, we anticipate people with capital will wait to tie their hands to an operator until the operator has a license.

Transition from Minnesota Department of Health

Previously, the Minnesota Department of Health would oversee the medical cannabis program and hemp-derived edibles until early 2025. Now, the OCM will takeover both programs, its staff and existing infrastructure on July 1, 2024.

The amendment further clarified the ability of the OCM to enforce laws governing the sale of hemp or cannabis flower. There is an expectation that the OCM will begin consistent enforcement to cover perceived laxness over the unlicensed sale of cannabis flower.

Hunt for an Executive Director

Minnesota has been without an OCM executive director since last year, when the previous appointee resigned after an admittedly botched process. With the amendment, the salary can be set by the Compensation Council and may be more attractive for potential hires.

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