Want to Expand Across State Lines? Better Understand Details of State Dispensary Background Checks

October 9, 2017
tanyahoke
Compliance and Regulations
0 Comments

Everyone rightly expects that applicants for cannabis dispensary licenses will need to pass a state background check of some sort. But did you know that in many states, minority investors in licensed cannabis businesses (LCB) might also need to pass regulatory background checks?

Our research found that minority shareholders or owners in LCBs in California, Colorado (Statute 12.43.3-307(2)), Pennsylvania, Oregon, and Las Vegas, Nevada can all be subject to background checks by state regulators. But the rules governing which minority investors have to pass these checks vary significantly by state.

For example, in California, you’ll need to be a 20 percent shareholder in a public LCB before you are subject to regulatory background checks. But in Pennsylvania, that number is only 5 percent for a public company and any stake at all in a private company.

Oregon: Regulations vary depending on business structure. Generally, anyone holding 10 percent or more of a company’s shares is required to complete a Marijuana Business Individual History form (this rule also applies to spouses). In addition, the Oregon Liquor Control Commission License Investigator has a great deal of discretion in identifying other individuals with an interest in the business who may be required to complete the form.
Colorado: Requires disclosure of all shareholders in an LCB, but has different categories for those owning more than 5 percent (associated key person) and those owning less than 5 percent (qualified limited passive investor). It’s unclear whether the Marijuana Enforcement Division treats these categories differently for background check purposes.

Consequences

These different triggering levels for background checks lead to some interesting issues for LCBs expanding across state lines.

For example: Imagine a California company getting ready to expand its brand to Oregon. The company has an investor who holds a 15 percent stake in the California company, and wants to participate at the same level in the Oregon company. The investor’s 15 percent stake didn’t trigger a check in California, so the company has never looked into his background. But if his stake in Oregon exceeds 10 percent, he may have to pass the Oregon Liquor Control Commission’s checks. What will they find?

Another example: Public companies don’t usually have control over who buys their shares. But in Pennsylvania, an ownership stake of as little as 5 percent in a public LCB can trigger a background check. So what is a public company supposed to do if an investor acquires a 5 percent stake and then fails Pennsylvania’s background checks? Will they lose their license?

The takeaway

Some of these issues are hypothetical for now – public LCBs are rare in the U.S., so Pennsylvania’s regulation is unlikely to be applied any time soon. But LCBs that are hoping to expand across state lines should absolutely be aware of the triggering levels for background checks in different states. Just because an investor is a minority owner doesn’t mean they can avoid regulatory scrutiny.

Our advice? Always practice KYI – Know Your Investor – before accepting an investment. If you don’t, your license could be at risk.

Tanya Hoke and Caroline Lambert

Tanya Hoke has a decade of experience managing investigative due diligence for clients in a range of industries, including pharmaceuticals, manufacturing, financial services, and consulting.

She has led hundreds of due diligence investigations into management teams, helping clients to identify business, legal, and reputational risks prior to proceeding with high-value investments. Prior to founding Belem Group and Galen Diligence, she was a senior consultant in corporate investigations at Control Risks Group. Hoke is a certified fraud examiner and a licensed private investigator in the Commonwealth of Massachusetts. She received a Bachelor of Arts degree from Swarthmore College and a Master of International Business degree from the Fletcher School at Tufts University.

Caroline Lambert is a second-year law student at Boston University School of Law pursuing a J.D. with a concentration in international law. Bachelor’s degree, magna cum laude, in interdisciplinary studies and political science. Extensive knowledge and research experience within the fields of regional organizations and conflict management. Conference presentations include International Studies Association National Conference (2016) and International Studies Association Northeast Regional Conference (2015)

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