Business
Mistakes in Oregon Cannabis Business Sales
We have been helping people buy and sell Oregon cannabis businesses since the early days of the adult use market. Most of these sales are relatively simply asset purchase agreements—including many for naked licenses—but some have been stock sales. Others have taken place amid administrative enforcement action by the Oregon Liquor and Cannabis Commission (OLCC). This post and my next post will cover mistakes commonly made in these sales.
Lazy diligence
Buyers of Oregon cannabis businesses don’t need to do an extraordinary amount of diligence—especially outside of stock sales—but it’s wise to do some, starting with a public records request on the seller. I can’t tell you how many times we have seen people try to sell things that aren’t actually saleable– either because they do not own them, or because the business is mired in an OLCC enforcement proceeding, or because the item at issue (i.e., a pending application) isn’t transferrable as a matter of administrative law.
Sellers should also consider doing some diligence on Oregon cannabis business buyers. On several occasions, we have seen people assume they can purchase a business and transfer its license to a location that doesn’t work. We have also seen sellers agree to carry financing on sales with buyers who could not pass even basic underwriting muster. One buyer literally defaulted under the first monthly payment on promissory note, 30 days after close. That was sort of incredible; but it was also avoidable had the seller done some basic vetting.
Finally, diligence and monitoring may often extend after a purchase agreement is signed, and through the closing period. Aside from general business or financial inquiry rights the parties may negotiate, it’s important for a buyer to require a seller to timely notify it of any potentially adverse OLCC action during the pre-closing period. Sellers, in turn, should require that a buyer submit to OLCC a “Licensed Representative Authorization” form, authorizing the seller or its lawyer to receive information about the buyer’s license application. These are just a few examples to ensure things remain on track.
Sleeping on inventory
I’m amazed at how many forms I come across that give cursory treatment—or no treatment at all—to inventory matters. Inventory is very important! Sellers want to ensure they can liquidate their METRC prior to handing off the business, whether to the buyer or via a separate sell-down process. A buyer, alternatively, may want to ensure that a seller operates its business in the ordinary course with respect to inventory practices prior to close. The parties may also agree to assign a base inventory value in the purchase agreement, from which closing adjustments can be made.
Inventory may be purchased per a stand-alone inventory purchase agreement at closing, or wrapped in with other assets in a bill of sale exhibit. Pricing is typically tied to seller’s wholesale cost, but other metrics may be used. In any case, it’s important for buyers and sellers to coordinate on the physical count (by seller) and any audit (by buyer) at changeover. Failure to outline basic inventory terms can result in negotiation long after close, or even litigation. No one wants that.
Using a services agreement
A few months back I wrote a post called “Oregon Cannabis: Beware the Services Agreement.” I began that one by stating that services agreements are a problem in the Oregon cannabis industry. Feel free to click through for all the gory details, but the big takeaway is that these agreements add arbitrary and significant risk for sellers (up to and including license cancellation). Most of these agreements are badly drafted and loosely followed to boot. Stay away! Or, if exigent circumstances require a services agreement, make sure you really dial in the form and that both parties adhere to its terms closely in the pre-closing period.
Unclear deadlines
A well drafted cannabis purchase agreement will be marbled with deadlines for buyer and seller. Some of these deadlines will apply to both parties, as in the case of a “drop dead date” after which the transaction may be terminated. Other deadlines will relate to specific, required actions by one party or the other. The buyer, for example, should be required to submit OLCC and local land use compatibility statement (LUCS) applications within a short period after signing the purchase agreement. The seller should be required to submit OLCC “Change in Ownership” forms shortly after that.
We’ve had parties come to us for purchase agreement enforcement long after execution, where the buyer literally never submitted basic OLCC paperwork. We’ve seen others agree to large earnest money payments with no funding or return deadlines, causing disagreements. All of these dates and deadlines should be present in the purchase agreement, calendared, observed and enforced by the parties. You want a smooth roadmap and process here.
Source: https://harrisbricken.com/cannalawblog/mistakes-in-oregon-cannabis-business-sales/
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:
- Regulators alleged in August that Albuquerque dispensary Sawmill Sweet Leaf sold out-of-state products and didn’t have a license for extraction.
- Paradise Exotics Distro lost its license in July after regulators alleged the company sold products made in California.
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/
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.”
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/
New Mexico cannabis operator fined, loses license for alleged BioTrack fraud
Marijuana companies suing US attorney general in federal prohibition challenge
Alabama to make another attempt Dec. 1 to award medical cannabis licenses
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