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Michigan Changes Medical Marihuana Licensing Process to Facilitate Investment, Provide Path for Publicly Traded Companies

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Michigan Changes Medical Marihuana Licensing Process to Facilitate Investment, Provide Path for Publicly Traded Companies

As one of the final acts of its 99th Legislative Session, the Michigan Legislature passed amendments to the Medical Marihuana Facilities Licensing Act (MMFLA), as well as changes to the Marihuana Tracking Act. These amendments were signed by outgoing Governor Rick Snyder on December 28, 2018, with the MMFLA amendments effective January 1. The Tracking Act amendments took effect immediately.

MMFLA amendments

Generally speaking, the MMFLA amendments (Senate Bills 1262 and 1263) make the license application process more practical for business entities, facilitate publicly traded corporate licensees, and create a new crime for operating unlicensed facilities. The bills become effective January 1, 2019.

The most significant changes under SB 1262 are to the application process. Under the previous version of the MMFLA, any person holding any direct or indirect ownership interest in an applicant was subject to a background check, the results of which could then disqualify the applicant under Section 402. Similarly, Section 401 required disclosure of the name and address of all owners, regardless of degree of ownership. These requirements effectively made it impossible for publicly traded corporations to participate in the Michigan market. They also hampered investment, and overburdened State regulators, who were required to vet a passive owner holding a .5% interest in a licensee to the same degree as a sole owner. Apart from these sections, Section 404 defined “true parties of interest,” who may or may not affect licensure, and did so in a manner that was internally inconsistent and nearly impossible to implement.

SB 1262 eliminates the “true party of interest” section, and both clarifies and narrows the definition of applicant and disclosure requirements. The new definition of applicant no longer contains the broad provision that an applicant includes “a person who holds any direct or indirect ownership interest in the applicant.” Instead, the definition now captures only those individuals who have a more substantial ownership interest. This includes managerial employees of the applicant and persons holding an indirect ownership interest in the applicant of at least 10%. For partnerships, limited liability companies, and corporations, the term applicant does not include limited partners, members, and shareholders holding a direct or indirect ownership interest of less than 10% and who do not “exercise control over or participate in the management of” the business. Applicants also include the spouses of each of the aforementioned individuals.

SB 1262 also amends Section 401 to require public corporations to disclose only shareholders with an interest greater than 5%. This change tracks with Securities and Exchange Commission disclosure requirements, so the information to be disclosed under the MMFLA should already be known by a publicly traded corporation.

In addition to amending the application process, SB 1262 changes transfers of ownership requirements under Section 406 to make the MMFLA more pragmatic for publicly traded corporations. Section 406 now requires approval from the Medical Marihuana Licensing Board before transferring an ownership interest in a licensee if the result of the transfer would mean that the transferee meets the definition of applicant. Thus, a business can now go public and have its shares publicly traded without needing Board approval before each trade (unless the trade represents 10% or more equity ownership).

The aforementioned changes to the definition of applicant apply to applications filed after January 1, 2019, not to applications already decided or in the pipeline. It is unclear how the State will treat amendments to existing, pending applications, if an applicant in process sought to add new investors under the 10% threshold. The State could certainly consider those to be new applications—the other option would seem to be to wait for that existing applicant to get licensed, and then have the applicant transfer an interest in a license to the new investors at that point.

The applicant changes are also relevant for recreational marijuana businesses. As the Michigan Regulation and Taxation of Marihuana Act (MRTMA) is rolled out over the next few years, recreational licensees for processors, retailers, and most growers will initially be available only to MMFLA licensees. Consequently, the application process under MRTMA will need to be harmonized with the MMFLA to accommodate MMFLA-licensed businesses. With much of the application and licensing process to be decided by rules from the Department of Licensing and Regulatory Affairs, the MMFLA will likely serve as a guidepost for the Department’s rules—which will have to somehow account for the fact that MRTMA, like the initial MMFLA, dictates that the State review all owners of a license applicant.

The other significant change wrought by SB 1262 is to add a new crime and penalty provisions, beginning June 1, 2019, for anyone that “hold[s] itself out as operating a marihuana facility” without a valid license. A first violation is a misdemeanor punishable by a fine between $10,000 and $25,000 and/or imprisonment up to 93 days. In addition to the same fines above, subsequent violations may result in imprisonment for up to a year (or four years if the violation results in death or serious injury). SB 1263 updates the code of criminal procedure to reflect the new penalties. These changes have been interpreted by some as allowing unlicensed “temporary operators” to stay in business until May 31. This, however, is not the case—as we have previously written, this provision of SB 1262 does not change the fact that existing law renders sale of marihuana illegal, unless it is truly between a caregiver and one of his or her maximum of five connected patients.

Finally, SB 1262 makes a number of technical changes; with the only truly substantive changes being (1) exclusion of industrial hemp from the definition of marihuana, and (2) allowing licensees to access METRC without use of a third party inventory control system.

Marihuana Tracking Act amendments

In another change beneficial for the industry, House Bill 6422 amended the Marihuana Tracking Act to provide direct access to a licensee’s data for financial institutions designated by the licensee. Although this amendment received significantly less attention than SB 1262, it too is vitally important, as it will help facilitate the provision of banking services to licensees.

As always, check back with Dykema’s Cannabis Law Blog for further updates.