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LA Cannabis Social Equity Partnerships

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The Los Angeles Social Equity Verification period came to an end at 4pm on Monday, July 25th. Recall that verification is required to enter into the Social Equity Retail Lottery this Winter. The verification period will be followed by a 90-day review period. Then, the Department of Cannabis Regulation (DCR) will notify qualified applicants of their eligibility to enter this cannabis licensing lottery.

For those that don’t qualify or fail to obtain verification, consider forging a partnership with a verified applicant who wins a lottery ticket. We won’t know who those folks are until after the lottery this winter. However, it makes sense to begin considering your options. Even if a verified applicant doesn’t win the Social Equity Retail Lottery, other licensing options are available. For example, cultivation and delivery licensing will only be open to verified social equity applicants until 2025.

Moreover, for those of you who are social equity applicants awaiting verification, knowledge will be your greatest tool in establishing successful, balanced, partnerships with investors or incubators. This blog has written extensively about the risks that present themselves with these kinds of partnerships, and more generally about cannabis partnerships. As a general rule, partnerships last longer and produce greater benefits when all parties stand on equal footing.

Some social equity licensees won’t mind allowing a management company, investor, or incubator to take over the day-to-day operations of the company. Many will want to maintain decision-making authority over their business and brand. Either way, the regulations require that the social equity owner maintains voting and economic rights conducive to their ownership share (51% or more). And, either way, social equity partners should have adequate business acumen. More on this below.

How to forge a relationship with a compatible Social Equity licensee

Ultimately, this decision is about compatibility. Trying to force a social equity owner to accept a minimized role in their own corporation is bound to end in a lawsuit. Similarly, expecting an owner without cannabis business experience to make key decisions could result in financial loss for the company.

If you’re an individual investor (or group of individual investors) that knows very little about what it takes to operate a business in the cannabis space, it makes sense to find a social equity partner who possesses that knowledge to manage operations for the company. We’ve written on this blog before about entity selection. In this scenario, an LLC would be your best choice for most entities owned by a social equity applicant. This arrangement allows the social equity partner to manage the company. Meanwhile the partner-investor takes on the administrative roles related to finance and budgeting. In this way, the investor keeps an eye on the spending of their capital contribution, while the owner-operator focuses on building a successful business.

If you’re a management company, institutional investor, or incubator, you might seek out a social equity partner comfortable with just voting and economic rights and the accompanying right to elect a number of board seats. It also makes sense to form a C-Corporation in this scenario. A C-Corp allows for more flexible fundraising while maintaining the licensee’s control of the company. That way, the company’s structure satisfies regulatory requirements, affords the social equity partner adequate authority over their company, and enables the management company or incubator to conduct a profitable business.

There are of course important tax considerations that need to be made when choosing between a corporation and LLC, and social equity applicants and their partners should consider these with a qualified tax advisor. In general, having a solid operating plan will attract further investment to sustain the company through its start-up stage.

Social Equity licensees: Here’s what you should know before seeking investment

Social equity partners historically get the short end of the stick when it comes to these deals. To avoid that outcome, it makes sense to learn basics business. You should also find an attorney to represent you at the negotiating table. Once upon a time, my mother and I sought cannabis licensing and these are all things I wish we’d known at the start.

     1.  If you intend to operate your cannabis business, start drafting a business plan now

If you know the industry well, you probably have a lot of great ideas. But great ideas are best on paper. Begin the process now of evaluating whether they’ll work in practice. We have explained before that a cannabis business plan is a great tool for that. Good business plans contain:

  • an executive summary: self explanatory, just sums up the other sections and includes some information about yourself and anyone else who will operate the business with you.
  • an overview of the products and/or services: what will you contribute to the market? and how?
  • a marketing analysis with a corresponding marketing strategy: who is your consumer base? how will you reach them?
  • financial planning, and key budget elements: how much money will you need to operate? and how will you spend it wisely?

You can share your business plan with trusted friends and advisors for feedback.

Even if you don’t intend to operate, you should decide what kind of business you want to run, beyond just the license type. Do you want to be a retailer that serves high-end consumers and tourists, or a mom-and-pop shop that serves communities and patients? Knowing will help you identify the right kind of incubator or management company.

       2. You should consider who you’d want to employ to help you run your business

Having a team and a plan in place before you seek out start-up funding ensures that you’re taken seriously by investors. Even if you don’t plan to operate your business, you should still build a team of advisors who might even serve as board members for your C-Corp, or otherwise provide you with counsel in making key decisions.

If you’re a lone-wolf with a huge investment company or management company as a partner, you’re bound to feel outnumbered. It’s vital to have people who are knowledgeable about business in your corner. That person could be a family member, your pastor, or your barber who owns his own shop. The advice and support of someone you trust and the representation of a good attorney will keep you on relatively equal footing with even a large corporation.

     3.  Read and stay updated on the regulations

This represents one of the most important practices of a good owner-operator. You want to be the first to know when a new law or rule will effect your business. We write extensively about regulations on the Canna Law Blog. But if you can, read them for yourself, attend regulatory meetings, and discuss them with your team of trusted advisors. It might benefit you to join a trade organization. These groups often update their members when new laws affect the trade, and advocate on members’ behalf. This is key, as social equity licensing has been a regulatory rocky road from the start. I wrote a guide to advocating for better regulations earlier this summer, which I encourage you all to read.

Source: https://harrisbricken.com/cannalawblog/la-cannabis-social-equity-partnerships/

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New Mexico cannabis operator fined, loses license for alleged BioTrack fraud

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New Mexico regulators fined a cannabis operator nearly $300,000 and revoked its license after the company allegedly created fake reports in the state’s traceability software.

The New Mexico Cannabis Control Division (CCD) accused marijuana manufacturer and retailer Golden Roots of 11 violations, according to Albuquerque Business First.

Golden Roots operates the The Cannabis Revolution Dispensary.

The majority of the violations are related to the Albuquerque company’s improper use of BioTrack, which has been New Mexico’s track-and-trace vendor since 2015.

The CCD alleges Golden Roots reported marijuana production only two months after it had received its vertically integrated license, according to Albuquerque Business First.

Because cannabis takes longer than two months to be cultivated, the CCD was suspicious of the report.

After inspecting the company’s premises, the CCD alleged Golden Roots reported cultivation, transportation and sales in BioTrack but wasn’t able to provide officers who inspected the site evidence that the operator was cultivating cannabis.

In April, the CCD revoked Golden Roots’ license and issued a $10,000 fine, according to the news outlet.

The company requested a hearing, which the regulator scheduled for Sept. 1.

At the hearing, the CCD testified that the company’s dried-cannabis weights in BioTrack were suspicious because they didn’t seem to accurately reflect how much weight marijuana loses as it dries.

Company employees also poorly accounted for why they were making adjustments in the system of up to 24 pounds of cannabis, making comments such as “bad” or “mistake” in the software, Albuquerque Business First reported.

Golden Roots was fined $298,972.05 – the amount regulators allege the company made selling products that weren’t properly accounted for in BioTrack.

The CCD has been cracking down on cannabis operators accused of selling products procured from out-of-state or not grown legally:

Golden Roots was the first alleged rulebreaker in New Mexico to be asked to pay a large fine.

Source: https://mjbizdaily.com/new-mexico-cannabis-operator-fined-loses-license-for-alleged-biotrack-fraud/

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Marijuana companies suing US attorney general in federal prohibition challenge

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Four marijuana companies, including a multistate operator, have filed a lawsuit against U.S. Attorney General Merrick Garland in which they allege the federal MJ prohibition under the Controlled Substances Act is no longer constitutional.

According to the complaint, filed Thursday in U.S. District Court in Massachusetts, retailer Canna Provisions, Treevit delivery service CEO Gyasi Sellers, cultivator Wiseacre Farm and MSO Verano Holdings Corp. are all harmed by “the federal government’s unconstitutional ban on cultivating, manufacturing, distributing, or possessing intrastate marijuana.”

Verano is headquartered in Chicago but has operations in Massachusetts; the other three operators are based in Massachusetts.

The lawsuit seeks a ruling that the “Controlled Substances Act is unconstitutional as applied to the intrastate cultivation, manufacture, possession, and distribution of marijuana pursuant to state law.”

The companies want the case to go before the U.S. Supreme Court.

They hired prominent law firm Boies Schiller Flexner to represent them.

The New York-based firm’s principal is David Boies, whose former clients include Microsoft, former presidential candidate Al Gore and Elizabeth Holmes’ disgraced startup Theranos.

Similar challenges to the federal Controlled Substances Act (CSA) have failed.

One such challenge led to a landmark Supreme Court decision in 2005.

In Gonzalez vs. Raich, the highest court in the United States ruled in a 6-3 decision that the commerce clause of the U.S. Constitution gave Congress the power to outlaw marijuana federally, even though state laws allow the cultivation and sale of cannabis.

In the 18 years since that ruling, 23 states and the District of Columbia have legalized adult-use marijuana and the federal government has allowed a multibillion-dollar cannabis industry to thrive.

Since both Congress and the U.S. Department of Justice, currently headed by Garland, have declined to intervene in state-licensed marijuana markets, the key facts that led to the Supreme Court’s 2005 ruling “no longer apply,” Boies said in a statement Thursday.

“The Supreme Court has since made clear that the federal government lacks the authority to regulate purely intrastate commerce,” Boies said.

“Moreover, the facts on which those precedents are based are no longer true.”

Verano President Darren Weiss said in a statement the company is “prepared to bring this case all the way to the Supreme Court in order to align federal law with how Congress has acted for years.”

While the Biden administration’s push to reschedule marijuana would help solve marijuana operators’ federal tax woes, neither rescheduling nor modest Congressional reforms such as the SAFER Banking Act “solve the fundamental issue,” Weiss added.

“The application of the CSA to lawful state-run cannabis business is an unconstitutional overreach on state sovereignty that has led to decades of harm, failed businesses, lost jobs, and unsafe working conditions.”

Source: https://mjbizdaily.com/marijuana-companies-suing-us-attorney-general-to-overturn-federal-prohibition/

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Alabama to make another attempt Dec. 1 to award medical cannabis licenses

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Alabama regulators are targeting Dec. 1 to award the first batch of medical cannabis business licenses after the agency’s first two attempts were scrapped because of scoring errors and litigation.

The first licenses will be awarded to individual cultivators, delivery providers, processors, dispensaries and state testing labs, according to the Alabama Medical Cannabis Commission (AMCC).

Then, on Dec. 12, the AMCC will award licenses for vertically integrated operations, a designation set primarily for multistate operators.

Licenses are expected to be handed out 28 days after they have been awarded, so MMJ production could begin in early January, according to the Alabama Daily News.

That means MMJ products could be available for patients around early March, an AMCC spokesperson told the media outlet.

Regulators initially awarded 21 business licenses in June, only to void them after applicants alleged inconsistencies with how the applications were scored.

Then, in August, the state awarded 24 different licenses – 19 went to June recipients – only to reverse themselves again and scratch those licenses after spurned applicants filed lawsuits.

A state judge dismissed a lawsuit filed by Chicago-based MSO Verano Holdings Corp., but another lawsuit is pending.

Source: https://mjbizdaily.com/alabama-plans-to-award-medical-cannabis-licenses-dec-1/

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