The Bureau of Cannabis Control recently announced the release of final proposed cannabis regulations which were submitted December 3, 2018 to the California Office of Administrative Law (OAL) and are currently under review by OAL. The proposed changes will not be in effect until they are approved by OAL but we expect them to go into effect, as drafted, upon such approval. The proposed changes could pose significant challenges for cannabis companies holding licenses subject to such regulations in many ways (Bureau-licensed retailers, distributors, microbusinesses and testing laboratories). This blog specifically focuses on the challenges expected with respect to the Designation of Owner section (§5003) and specifically subsection (c) thereof. (The text of such regulations can be found here: https://www.bcc.ca.gov/law_regs/proptext_title_16.pdf.)
The designation of Owners is broadened in Section 5003 and of particular concern is subsection (c). Subsection (c) currently provides (under the Emergency Regulations) that if an entity has an aggregate ownership interest of 20% or more in the commercial cannabis business, the CEO and/or members of the board of directors of the entity shall be considered owners. For cannabis businesses with a holding company owning the licensee, this sheltered the individual shareholders in the holding company from being disclosed as owners unless they controlled the entity as CEO or board members. Section 5003 of the proposed final regulations provides instead that when an entity is an owner in a commercial cannabis business, all entities and individuals with a financial interest (See §5004) in the entity shall be disclosed to the Bureau and may be considered owners of the commercial cannabis business.
The proposed regulations also state that this includes all entities in a multi-layer business structure, as well as the CEO, board members, partners, trustees and all persons controlling a trust and managing members or non-member managers of the entity. For each entity disclosed as having a financial interest, the identities of persons having a financial interest must be disclosed until only individuals remain.
In summary, the entities and individual participants therein all must be disclosed regardless of how the cannabis business is structured. All individual shareholders of all entity participants in a cannabis business must be disclosed as well as any other financial interest holders. The word “may” in the sentence reading that such persons may be treated as owners appears to allow discretion by the Bureau on how they will treat such persons. The requirements are quite onerous in the original application (see Section 5002) with respect to information required to be provided for designated owners and regarding updates to the ownership of a cannabis business (See Section 5023) which, under the final proposed regulations, are required to be made within 14 calendar days.
The result of this change in language, once effective, would require cannabis businesses to submit significant amounts of information at the application stage and to keep up with any changes throughout the life cycle of the cannabis company through all layers of entities and individuals. All funds that are shareholders (e.g. a limited partnership or limited liability company shareholder) would need to disclose all the fund participants to the cannabis company and provide personal information for all of such participants and update the cannabis company in real time when or if the fund changes participants so that the cannabis company can comply with the time sensitive disclosure requirements. This is just one example of why the changes will be onerous. Often funds even have their own entity participants so the funds would need to further disclose until only individuals remain. This could turn off investors because of the administrative burden of having to keep up with the broad provision of information and additionally the disclosure of personal information of its investors and participants.
Owners are technically all subject to potential background checks. This means that, regardless of percent ownership, even an investor holding a single share could be considered a designated Owner under the final proposed regulations changes and be subject to the detailed disclosure requirements set forth in the regulations. We at Rogoway Law Group are here to help navigate these tricky regulatory challenges and are standing by to assist as the regulatory landscape continues to change. You can schedule an initial consultation by contacting us online or calling 1-844-414-7155.