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More Controversy in Michigan: Proposed Minimum Capital Requirements For Cannabis License Applicants Raise Eyebrows

The meetings of the Medical Marihuana Facilities Licensing Board have often stirred up controversy. You may recall the debate about closing dispensaries in September.

The October 17, 2017, meeting was no exception.  Along with the drama of a member of the public serving legal process on board member Bailey, the Michigan Department of Licensing and Regulatory Affairs (LARA) also announced its recommendations for minimum capitalization for applicants for facility licenses.

Suffice to say the numbers raised eyebrows among the board and in the audience.

Here’s our assessment.

The Medical Marijuana Facilities Licensing Act (MMFLA) explicitly authorizes the board to consider the financial capital of an applicant in determining whether to issue a license. Section 402(3)(c) authorizes the board to review the “. . . total amount of the applicant’s capitalization to operate and maintain the proposed marihuana facility.”

Because of this statutory condition, it is appropriate for LARA to establish explicit capitalization minimums as a part of the approval process.

Director Andrew Brisbo of the LARA licensing bureau outlined LARA’s capital recommendations as follows:

Grower:

Class A – $150,000

Class B – $300,000

Class C – $500,000

Processor – $300,000

Provisioning Center – $300,000

Secured Transporter – $200,000

Safety Compliance (Lab) – $200,000

Total capitalization is sometimes computed as total assets less total liabilities. In other words, what financial resources are available to meet financial obligations of the business?

As we think about marijuana facilities as businesses, it makes perfect sense to try to determine how much capital will be required to meet expenses and turn a modest profit (that is, succeed). But marijuana businesses are a little different, which makes the determination of minimum capital more speculative.

First, most marijuana businesses will not have any access to bank financing. Remember, marijuana businesses are illegal under federal law, and most banks don’t want to have anything to do with this activity. So, the business will need to find financial resources from their own pockets, non-traditional lending sources or from investors.

Investors and lenders in high risk and non-traditional markets tend to expect a much higher return. So marijuana business will cost more to finance – it’s a fact of life.

Second, we have very little experience in Michigan operating marijuana businesses, so we have very little real world data to help us assess capital requirements. LARA based their recommendations on the numbers they did know (like LARA fees, insurance costs, local government fees, etc.), and then made a guess based on the experiences of other states about the overall costs of a business. In some cases, their guesses seemed very high. In others, based on what we know about the equipment needs for some of these facilities, they may be too low.

Grow operations will take land, in most cases buildings (or greenhouses), equipment, significant utility (electric, gas, water) support, employees (full or temp), and lots of time. During startup, these businesses will need to cover all their costs for many months from their capital. If there are any issues with the harvest, they may need to wait longer for their first sales. The requirements for Class A seem reasonable. Maybe those for B and C are too high. Processors will face many of the same financial challenges, and it’s hard to object to the minimum set by LARA.

Safety compliance will probably need equipment and facilities that will cost more than the minimum established by LARA. But a provisioning center will in many cases require far less than the $300,000 that LARA is recommending. A secure transporter will also probably need less.

Finally, there is the issue of “liquidity.”  We know that this word was used several times in the discussion of the capital requirements. We are hoping that the word was not used in any precise or technical sense, because it seems unreasonable to us that any of these business would need “liquid” assets in the amounts suggested in addition to all other capital expenditures to start the business.

What they will need is available financial resources to meet their operating expenses as they establish their various types of facilities. We will provide further information once the board and LARA promulgate the emergency rules

Bob HendricksBob Hendricks

Bob Hendricks

Robert Hendricks is a business attorney in Grand Rapids, Michigan, licensed since 1984. In 2013 he and his partners began developing a marijuana business practice called CannalexLaw. Hendricks is a member and officer of the State Bar of Michigan’s Marijuana Law Section, and a member of the National Cannabis Industry Association and the National Cannabis Bar Association. He speaks on marijuana and business at various forums in Michigan. He blogs on marijuana business issues at www.cannalexlaw.com

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