On May 29, 2019, Governor Jared Polis signed six bills introducing new regulations on marijuana, including capital raising, social consumption and delivery.
Colorado Expands Ownership of Cannabis Companies
Since the legal cannabis industry started in Colorado, state regulations have restricted the types of companies and persons who could own licensed cannabis businesses.
Originally, only Colorado residents who were natural persons could own licensed cannabis businesses. This made raising money for cannabis businesses difficult as it practically prevented them from selling a portion of the equity in the business for cash.
In 2016, Colorado loosened ownership restrictions to allow for out of state passive investors who owned less than 5% of a cannabis business and to provide that out of state investors could hold convertible securities, so long as such convertible securities did not convert into actual ownership without MED approval. In addition, out of state individuals could apply to MED to be Direct Beneficial Interest Owners, but companies were limited to up to 15 out of state individuals. Direct Beneficial Interest Owners were subject to background checks and investigation by MED. Licensed cannabis businesses still could not go public or raise capital from traditional venture funds.
Despite this change, fundraising activity with non-Colorado investors was difficult. It was difficult to structure in a way that met Colorado legal restrictions and allowed the parties to benefit from the transaction in a way that made sense for both parties. Transactions have cost more than they otherwise should have and took longer to negotiate.
In the interim, states such as California, Nevada and Oregon legalized recreational cannabis and did not impose similar ownership restrictions. As a result, companies in those states were able to successfully go public in Canada or in the United States on the OTCQX or the OTCQB. This generated significant investment capital for these companies and liquidity opportunities for their stockholders.
With the recent passage of HB-1090 by the Colorado Legislatures and the approval of Governor Polis this week, Colorado will now allow licensed cannabis businesses to be owned by public companies and private capital funds.
This is a big deal for the Colorado cannabis industry and will lead to significant capital markets and transactional activity. Non-Colorado investors will have their first opportunity to invest directly into equity of Colorado cannabis companies. Transactions should be easier to negotiate. Colorado cannabis companies will go public providing investment income and an opportunity for stockholders to achieve liquidity.
The new legislation creates two new ownership licenses: Controlling Beneficial Owner and Passive Beneficial Owner. A Controlling Beneficial Owner is a person that owns 10% or more of a licensed cannabis business or otherwise has some control over the business. This is a similar definition to the “Affiliate” definition under the Securities Act of 1933, as amended. Persons applying for such licenses will need to apply to MED for a finding of suitability (passing a background check). A Passive Beneficial Owner owns less than 10% of a licensed cannabis business and does not have any control over the license cannabis business.
Importantly, either of these ownership licenses may be held by Publicly Traded Corporations or Qualified Private Funds. Publicly Traded Corporations are companies that are registered with the SEC for periodic reporting and have securities traded on the NYSE, Nasdaq, OTCQX or OTCQB. In addition, Publicly Traded Corporations include foreign private issuers in countries that have authorized the sale of cannabis, including companies that have securities trading on the Canadian Stock Exchange, the Toronto Stock Exchange or the TSX Venture Exchange. Unlike other licensed cannabis businesses, Publicly Traded Corporations are not required to report to MED every change in ownership percentages.
Publicly Traded Companies and Qualified Private Funds that are Controlling Beneficial Owners or Passive Beneficial Owners are required to disclose to MED their management and their own 10% or greater beneficial owners. Qualified Private Funds include venture capital funds, hedge funds and private equity funds so long as the fund is advised or managed by a registered Investment Advisor.
Colorado still requires each person who has day-to-day operational control of the licensed cannabis business to be a Colorado resident. Out-of-state Controlling Beneficial Owners are required to have a registered agent for service of process in Colorado.
The new law goes into effect in November 2019. MED has not yet issued rules implementing the change in law nor is it accepting ownership applications resulting from the new law.
Once the law is effective we expect to see increased capital markets transactions as Colorado companies go public in the United States or Canada. In addition, we expect to see public companies outside of Colorado acquire Colorado companies using their cash or publicly traded securities as currency for such acquisitions. We also expect to see more venture financings as Colorado companies seek new sources of investment income.
Summaries of Other New Marijuana Legislations: HB-1230, HB-1234, HB -1311; SB-218, SB-224
HB-1230 allows licensed businesses to sell or permit the consumption of marijuana on their premises. Commencing January 1, 2020, the state licensing authorities may issue three classes of state licenses. First, a non-sale license for “marijuana hospitality establishments” permits the social consumption of marijuana on the establishment’s premises. Furthermore, a retail food establishment may apply for the license, but only in an isolated portion of the premises. A marijuana hospitality establishment cannot allow the consumption of alcohol on the premises. Second, a license for a “retail marijuana transporter” operates identically, but is available to mobile establishments.
The third license for “retail marijuana hospitality and sales establishments,” including cultivation facilities and retail marijuana stores and manufacturers, permits the consumption of the retail marijuana or retail marijuana products it has sold on its premises. A restaurant may operate a retail marijuana hospitality and sales establishment in an isolated portion of the premises provided it does not hold a license to serve alcoholic beverages, a special even liquor permit, or manufacture, import or sell fermented malt beverages. It also may not add marijuana to foods produced or provided at the retail food establishment.
This bill is severely limited because local licensing authorities may adopt more stringent approval requirements than contained in the bill or prohibit its operation within its jurisdiction altogether. These licenses are valid only up to one year and are renewable annually thereafter.
While it is prohibited to operate a marijuana hospitality establishment without state and local licensing authority approval, a business operating before December 31, 2019, at which the consumption of marijuana is permitted pursuant to a local ordinance or resolution, may continue to operate provided it has submitted an application for a state license.
HB-1234 authorizes medical marijuana centers, retail marijuana stores, and transporters to deliver marijuana directly to customers in their private residences.
A licensed medical marijuana center can obtain a “medical marijuana delivery permit” commencing on January 2, 2020. The permit allows a center to deliver medical marijuana and medical marijuana-infused products. A single permit may apply to multiple medical marijuana centers provided that they are identically owned and located in the same local jurisdiction. Deliveries must be made to the patient, parent, guardian, or primary caregiver who placed the order. Any person delivering medical marijuana must possess a valid occupational license and be a current employee of the licensed medical marijuana center or possess a medical marijuana transporter license with a valid medical marijuana delivery permit.
A retail marijuana delivery permit authorizes a retail marijuana store to deliver retail marijuana and marijuana products. This permit will be available from January 2, 2021. As above, the permit may apply to more than one retail marijuana store provided the stores are identically owned and located in the same local jurisdiction. Each delivery must append a $1 surcharge which is remitted to the municipality where the licensed retail marijuana store is located. Any individual delivering retail marijuana or retail marijuana products must possess a valid occupational license and be a current employee of the licensed retail marijuana store or retail marijuana transporter licensee with a valid retail marijuana delivery permit.
House Bill 19-1234 also creates some important constraints on deliveries. Most importantly, delivery is not permitted in any municipality, county, or city unless a majority of the registered electors at a regular or special election or a majority of the members of the governing board vote in favor of the bill’s regulations. Furthermore, local ordinances may prohibit the delivery of marijuana and marijuana products from a medical marijuana center or retail store that is outside its jurisdictional boundaries. Those jurisdictions that vote to allow the delivery of marijuana may determine whether permit applications comply with local restrictions. Each permit is valid for only one year, but may be renewed annually. Deliveries are constrained to one per day, limited to private residences, and cannot be made to college campuses.
HB-1311 refined the mission of the Institute of Cannabis Research at Colorado State University – Pueblo. The institute was originally established in June 2016. The bill refines its mission is to “conduct research related to cannabis, including clinical research, biotechnologies, clinical studies, the efficacies of medical marijuana, and economic development associated with cannabis in Colorado, and to publicly disseminate the results of the research.” It will be led by a Governing Board, comprised of Colorado State University’s Chancellor, the Executive Director of the Department of Public Health and Environment, the Executive Director of the Colorado Commission on Higher Education, scientists, and members of cannabis-related industries, among others.
SB-218 introduces several changes to current regulation on medical marijuana. Firstly, the bill states that a physician must consult with the patient or, in the case of a minor, the patient’s parents about the potential risks and benefits of the use of medical marijuana before the patient applies for a registry identification card. Secondly, the types of medical professionals permitted to make a medical marijuana recommendation for a disabling medical condition was expanded to include dentists and advanced practice practitioners. Only a physician is permitted to make a medical marijuana recommendation for a non-disabling medical condition, however. Thirdly, the state health agency is prohibited from releasing information belonging to a registered patient or primary caregiver for a patient with a debilitating medical condition or disabling medical condition unless it is consistent with Article XVIII Section 14 of the State Constitution. Fourthly, the state health agency is authorized to extend the validity of a patient or primary caregiver registry identification card beyond one year.
Finally, the bill reforms the health care panel under current law that monitors and reports the health effects of marijuana. Specifically, the bill requires the panel to include individuals with expertise in different fields, including neuroscience and toxicology. It also demands that the panel disclose all financial interests related to the health care and marijuana industries. The bill permits the department to collect Colorado-specific data that involves health outcomes associated with cannabis from all-payer claims data, hospital discharge data, and available peer-reviewed research studies.
SB-224 combines the former medical and retail marijuana codes into one code, the Colorado Marijuana Code, and continues that code until 2028 with a sunset provision prior to 2028. As the result, the unlawful acts section is now consistent and applicable to both medical and retail marijuana codes.
The bill creates several licensing procedures and restrictions. It creates new categories of ownership similar to HB-1090 – Controlling Beneficial Owner, Passive Beneficial Owner, and Indirect Financial Interest Owner. It requires new disclosures such as organizational charts and financial interest information under the licensing procedures. Furthermore, local ordinances are now allowed to determine their own licensing application timelines.
The licensing restrictions for persons with felony charges or convictions are relaxed with the adoption of the bill. State authorities can now only deny licensing to persons who was convicted of a felony within three years of the licensing application or are currently serving a sentence for a felony or a deferred judgment or sentence. The bill also requires state authorities to track information on license disqualifications based on criminal history. The Bill makes formerly confidential information available to the public. For example, final agency actions, testing records, and applicant and licensee demographic information.
With the passing of the 2018 Farm Bill, this bill allows both medical and retail stores to sell industrial hemp consumables and requires that those products be tested prior to manufacturing. And to supplement HB-1234, the Bill outlines in detail the policies for marijuana delivery permits.
Turning to medical patients, a patient who has submitted an application to be on the registry but has not received a patient card only need to present a copy of the application. Medical marijuana stores may not sell more than two ounces of medical marijuana flower, forty grams of medical marijuana concentrate, or medical marijuana products containing a combined total of 20,000 mg to a patient in a single business day. This rule is not applicable if a registered patient has a physician recommendation.
Lastly, all fine revenue from the retail and medical marijuana program will be directed to the general fund, instead of the marijuana cash fund.
