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We Still Need Clarity: Non-Profit to For-Profit Conversion in California

The Bureau of Cannabis Control (“BCC”) implemented Regulations under California’s Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”). New Regulations were released and titled the Proposed Non-Emergency Regulations (“Regulations”). The Regulations, among other things, provide the licensing requirements for cannabis businesses. As part of those requirements, all “owners” of the licensed business must be disclosed to the BCC. “Owners” include certain shareholders, but can also include the CEO, directors, or anyone participating in the direction, control, or management of the licensed business. If there are ownership changes, such as a new CEO, a new application and fee are required—which can be a sizeable task.

When California first allowed cannabis businesses to legally operate, they had to operate as nonprofits. However, the Regulations allow operation on a for-profit basis (with potential limitations on medical cannabis). Many cannabis businesses started as non-profit mutual benefit corporations, still operate as nonprofit corporations, and wish to convert to for-profit corporations. The Regulations are unclear as to whether a nonprofit corporation converting to a for-profit corporation would trigger a change of ownership and require a new license application and fee.

The following will describe Regulation interpretation that may permit conversion without triggering a change of ownership (and in turn not require a new application); however, I emailed the BCC asking if a conversion based on the following interpretation would trigger a change of ownership, and in a risk-averse response, the BCC stated that a new application would be necessary. I subsequently submitted a public comment for consideration before Regulation finalization, suggesting that the Regulations include that conversion without changing the owners would not trigger a change of ownership and would not require a new application or fee. Therefore, the following interpretation should not be implemented without knowing there is a possibility a new application and fee may be required.

Section 5023(c), states, in part “if one or more of the owners of a license change, a new license application and fee shall be submitted to the Bureau within 10 business days of the effective date of the ownership change.” The Section goes on to state that “a change in ownership occurs when a new person meets the definition of owner”. “Person” is not defined by the Regulations; however, it is defined in MAUCRSA as including “any individual, firm, partnership, joint venture, association, corporation, limited liability company, estate, trust, business trust, receiver, syndicate, or any other group or combination acting as a unit, and the plural as well as the singular.” Note that “person” does not distinguish between nonprofit corporations and for-profit corporations. Further, nonprofit corporations are referred to as corporations under California’s corporation law.

Considering the definition of “person”, a nonprofit corporation licensee could be a “corporation”, given the selection of categories within the definition of Person. Therefore, upon conversion, there would be no ownership change between the licensee as a nonprofit corporation and the licensee as a for-profit corporation at the entity level because they are both corporations–no “new person” is an owner.

If for purposes of this article, one individual is the CEO, Director and has control over the nonprofit licensee, that individual would be considered an owner under the Regulations. Following conversion, that individual could be appointed CEO and Director, be issued shares, and have control over the new for-profit corporation. Therefore, no “new person” would meet the definition of owner because the same individual would be the owner before and after conversion.

A conversion should not trigger the need for a new application and fee. It is a business modification that many businesses have to make given the prior requirement to operate as a nonprofit. Hopefully the BCC strongly considers the public comment.

Cole Morgan

Cole Morgan

Mr. Morgan practices real estate and corporate transactional law, including negotiating and drafting agreements, conducting due diligence, and advising on legal and compliance issues. He represents a wide range of companies, from start-up businesses in need of formation and negotiation of initial transactions, to mature companies that require complex reorganizations.

Mr. Morgan has assisted numerous clients in the cannabis industry of all license types, including vertically integrated companies, with their commercial real estate and corporate needs. His experience includes property acquisition, leasing, joint venture agreements, corporate reorganization, structuring investments, and many other transactional matters.

He has assisted in negotiating some of the largest cannabis-related leases and property acquisitions in California, including all leases filling a multi-building industrial project of over 200,000 square feet in Desert Hot Springs, lease of an industrial building of over 100,000 square feet in Long Beach, and purchase and sale of an 85,000 square foot distribution and manufacturing facility in West Sacramento.

Recently, Mr. Morgan successfully closed the sale of a cannabis retail license and related leasehold interest located in Santa Ana, California, on behalf of the selling parties. The purchaser, Planet 13 Holdings, Inc., is a leading vertically integrated publicly traded cannabis company.

Mr. Morgan has been selected to the 2020 Southern California Super Lawyers Rising Stars list. In addition to his professional achievements, Mr. Morgan is involved with StandUp for Kids, a nationally recognized non-profit charity that finds homes for homeless youth across the country and educates them on entrepreneurship and business formation. Mr. Morgan serves as a mentor and regularly lends his legal perspective at StandUp for Kids events throughout the year.

Mr. Morgan is the co-founder of the Newport Coast CBD Invitational, a golf tournament at Pelican Hill benefitting the Infinite Hero Foundation, an organization committed to helping our veterans using innovative technologies.

Prior to joining Stuart Kane, Mr. Morgan practiced corporate and commercial real estate law with Madden, Jones, Cole & Johnson.

He can be contacted through his email: [email protected]

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