Oregon approved Ballot Measure 109 (M109) and put into place the Oregon Psilocybin Services Act (the “Act”) to allow for consumption of psilocybin at certain licensed service centers through licensed facilitators and administrators in the State of Oregon. It was voted into law in November 2020 and is codified in the Oregon Revised Statutes under ORS 475A. Following a two-year development period from January 1-December 31, 2022, it is expected that psilocybin service centers will now commence opening up for licensed parties to provide services to qualifying clients. The four license types (manufacturing, laboratory, service center and facilitator licenses) (the “Oregon Psilocybin Licenses” or “Licenses”) will take some time to be fully structured and issued, but ORS 475A allows the Oregon Health Authority (“OHA”) to license and regulate psilocybin products and services and commence this process.
Residency Requirements as Potential Barrier to Entry for Psilocybin Licenses
There are many interesting and nuanced aspects of the Act, as well as parts of the Act that remain in need of clarification and supplementation. Among one of the issues which could create a significant barrier to entry, is the current residency requirement to obtain most Oregon Psilocybin Licenses that provides that a resident of 2 or more years owns more than 50% of the ownership interest in the business. For certain psilocybin license types there are residency requirements as follows, (collectively, the below, the “Residency Requirements”) as applicable to the License type as set forth in the Act (See 475A.290 re manufacturing; 475A.305 re service centers; and 475A.325 re facilitators) (note that it is not yet entirely clear what other qualifications may be required to receive laboratory accreditation and licensure):
- Legal Entities: For service centers and manufacturers, if the direct owner of the business operating or to be operated under the license is an entity, the entity must (until January 1, 2025), provide proof that more than 50% of the shares, member interests, partnership interests or other ownership interests of the legal entity are held, directly or indirectly, by one or more individuals who have been residents of Oregon for 2 or more years;
- Non-Entity Partnerships: For service centers and manufacturers, if the direct owner of the business operating or to be operated under the license is a partnership that is not a legal entity, the partnership must provide proof that more than 50% of the partnership interests of the partnership are held, directly or indirectly, by one or more individuals who have been residents of Oregon for 2 or more years; and
- Individual: for service centers, manufacturers and facilitators, if the direct owner of the business operating or to be operated under the license is an individual (which it always is for facilitators), the individual must provide proof that the individual has been a resident of Oregon for 2 or more years.
Given the other requirements for qualification and unique and evolutionary subject matter of these services, these residency requirements may create a difficult barrier to entry for applicants for licensure and specifically for persons or entities that may have experience and knowledge in the space (which, at this stage, may be relatively limited). This residency restriction, therefore, may require creative contracting to include Oregon residents of 2 or more years in the business endeavors in order to qualify to receive a psilocybin license under the parameters above.
Contracting Tips for Compliance with the Residency Requirements
Given that the Residency Requirements endure only until January 1, 2025, there are a variety of ways that non-resident applicants can approach the Residency Requirements without it becoming unduly burdensome. One example is that, for service centers and manufacturers that involve entities, the service center or manufacturer can:
(i) form an entity as a limited liability company that is manager-managed in lieu of forming a limited liability company that is member-managed, or
(ii) form a corporation that has a board of directors of non-residents (for governance purposes) but shareholders meeting the 50%+ shareholder requirement.
A limited liability company may be preferable to a corporation under the current and certain circumstances (tax matters notwithstanding and subject to tax advisor review such as for Sec. 280E), in order to facilitate flexibility on transfers of member interests between members and flexibility in the management, voting and control of the entity through the drafting of an operating agreement, given the Residency Requirements at issue.
Going the Manager-Managed LLC Route
A manager-managed LLC, for example, allows specifically named managers to largely control the significant business decisions of the company (other than decisions requiring member voting under applicable law), in lieu of a member-managed limited liability company (which requires that the members (usually majority members) control decision-making as delineated in an operating agreement and as otherwise required under applicable law, even though there does not appear to be a requirement that the residents be voting members per se in order to fulfill the Residency Requirement). This could allow for non-residents to be the managers and one or more 2 year+ residents to make up 51% or more of the membership interests of the entity in the case of a manager-managed LLC or, in the case of a member-managed LLC, potentially could allow for the voting members to be the non-resident members even if a majority of the membership interests are owned by the non-voting resident members, subject to applicable laws of the jurisdiction and additional requirements from the OHA as the process evolves.
Operating agreements governing LLCs can take many shapes and sizes, subject to applicable laws in the jurisdiction of formation. The operating agreement could provide for a call right or a redemption right whereby the resident members are required, after January 1, 2025, to relinquish their equity interests in the business at their original purchase price or the then-existing fair market value back to the company or provide for transfer to the other non-resident equity-holders at such time.
In Conclusion: Choose and Form the Correct Type of Entity to Comply with the Residency Requirements
It remains to be seen how these Residency Requirements evolve and whether additional restrictions will be placed on how the residents can be treated in their ownership capacity with respect to the licensed psilocybin business(es) in the next couple of years, but, as the Act is drafted currently, the above suggestions appear to be feasible contracting approaches to address those applicants who desire to come from out of state or who are newer to Oregon (under the 2-year qualification threshold) and who desire to maintain voting or governance control of the organization and the primary longer-term benefit of the organization, all while maintaining the Residency Requirement until 2025.
There are many other considerations for determining the type of entity to form for business operations. It’s possible a corporation could be structured in a similar way with a call right of the company to call or a redemption right to redeem the shares of the residents following the January 1, 2025 sunset of the Residency Requirement and to structure such corporation such that the board of directors is controlled by non-residents rather than the 2-year+ resident(s). Tax considerations and applicable jurisdictional law considerations with respect to the state of formation of the entity will also come into play.
There is no one-size-fits-all solution; the correct operating entity to form depends on your unique circumstances and goals. At Rogoway Law, we are seasoned veterans of emerging regulated industries, including working creatively with our clients to adjust and adapt to regulatory challenges and provide business solutions. t is an exciting time in the State of Oregon with the potential for research and improvement of mental health through this emerging industry, and we look forward to helping you with your Oregon psilocybin service center, manufacturer, and/or testing laboratory queries and concerns.
This post is co-authored by Managing Attorney Joe Rogoway, who is licensed to practice in the State of Oregon.