Michigan Cannabis License 10 Percent Rule: What to Know

Are you familiar with the Michigan cannabis license 10 percent rule? What about the main cannabis license applicant? A supplemental cannabis license applicant? This article covers these important terms in great detail, as well as the cannabis license pre-qualification process. They all play a large part in securing your license, your business structure, and your long-term chances of success in the booming marijuana industry.

Do you need help with the license process? What about corporate legal services or real estate? Request a consultation now.

The cannabis license pre-qualification process is always the start in Michigan.

Pre-qualification is the State of Michigan’s background check process for entities and individuals hoping to own and operate marijuana establishments.

The cannabis license pre-qualification process involves a significant audit and review of the applicant entities financial and operational history, as well as a review of all significant stakeholders and their spouses.

While the Marijuana Regulatory Agency (MRA) has been making great efforts to streamline this process, individuals and entities undergoing the pre-qualification process will be required to collect, process, and submit a significant amount of information during the process.

The Main Cannabis License Applicant

By default, pre-qualification requires the MRA to perform a background check on the entity or individual that will own the cannabis license.

While this should almost always be an entity, an individual can hold and own the license directly. (We don’t recommend this).

We call this entity the primary or main cannabis license applicant.

When you’ve completed the licensing process and MRA is issuing your license, the main applicant is the entity named on the license itself.

Once we’ve identified the main cannabis license applicant, its ownership structure will determine the stakeholders associated with the main applicant.

They must also prepare pre-qualification materials.

All such stakeholders are called supplemental cannabis license applicants. Becoming a supplemental cannabis license applicant comes down to three factors:

1. Ownership.
2. Management.
3. Control.

The MRA must perform background checks on any entities or individuals with the authority to control or direct the affairs of the main applicant.

Identifying Management in the Initial Application

For the initial application, identifying management and control is a straightforward process.

Depending on your corporate form – partners in partnerships, managers in LLCs, corporate officers and directors in corporations – main applicants identify the individuals or entities positioned by its governing documents to make decisions for the company.

It is important to note that an employee working or anticipated to work for the Main Applicant with the title of “manager”  doesn’t necessarily trigger supplemental cannabis license applicant status.

Supplemental applicants are based on the position’s defined responsibilities to the main applicant.

Remember, control is always a potential factor for MRA review, even beyond the cannabis license pre-qualification process.

If the main applicant is a tenant in its facility, for example, having a lease agreement with your landlord gives the landlord the ability to direct the affairs of the main applicant.

This type of control could require the landlord entity to become a supplemental applicant as well.

Therefore, marijuana establishments should keep in mind that some contractual relationships may create control triggers for the pre-qualification process.

If the landlord in our example is willing to be a supplemental applicant, then this likely won’t be a problem.

But if that landlord can’t or won’t participate, the main applicant’s pre-qualification will be in jeopardy.

As you operate your facility, carefully review any agreement that would provide another entity with the affairs of the main applicant.

This can be important to keep your cannabis facility operational, as cannabusinesses lose their license on a regular basis for this reason, along with many other reasons.

Do you need help with the license process? What about corporate legal services or real estate? Request a consultation now.

The Supplemental Applicant

Next, whenever a supplemental applicant is identified based on a management or corporate officer position, please remember that that individual’s spouse also becomes a supplemental applicant.

Throughout the pre-qualification process, if a supplemental applicant from any category is identified, that person’s spouse must also prepare application materials.

(Remember, any supplemental applicant with a disqualifying factor, such as having a felony in the last 10 years, will disqualify the main applicant. Please keep this in mind when identifying and selecting your corporate officers. If someone wants to act as your CEO, that person’s husband could disqualify the whole application, even if that person has nothing to do with the main applicant).

This finally takes us to the last and most obvious trigger for identifying supplemental applicants: ownership.

For most main applicants, identifying owners will be simple.

However, the State of Michigan has recognized that for some entities, such as publicly held corporations or entities with large, complex capitalization tables, it would be highly impractical, if not impossible to identify all of the owners of the main applicant, let alone prepare pre-qualification applications for everyone.

Because of this, both the medical and adult-use licensing systems have implemented the cannabis license 10 percent rule.

Supplemental applicants include any entity or individual with greater than 10 percent of the ownership interest, either directly or indirectly, in the main applicant.

Just like with corporate officers, if an owner is identified as a supplemental applicant, that owner’s spouse becomes a supplemental applicant as well.

Direct ownership is easy.

Based on the main applicant’s cap table, if someone owns more than 10 percent of the ownership interest, they become a supplemental applicant.

Indirect ownership interest becomes a bit more complicated.

Consider the business structure below:

The Three Stakeholders

Assume the main applicant is owned by three stakeholders:

• Holding Company 1.
• Holding Company 2.
• Individual 1.

Together, these three stakeholders own 100 percent of the ownership interest in the main applicant.

Note that Individual 1, by owning only 10 percent of this entity, is not a supplemental applicant.

Holding Companies 1 and 2, however, own more than 10 percent.

Both companies must submit supplemental applicant applications.

As supplemental applicants, we now look to the ownership interest of each Holding Company to determine indirect ownership interest in the main applicant.

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Holding Company 1

Holding Company 1, LLC is owned in its entirety by Individual 2.

Individual 2 owns 100 percent of Holding Company 1’s 40 percent, and is thus considered by the MRA to be an indirect owner holding 40 percent of the ownership interest in the main applicant.

As 40 percent is greater than the 10 percent rule, Individual 2 and its spouse will be considered a supplemental applicant. (40% x 100%=40%).

Holding Company 2

Next, we’ll consider the same situation for Holding Company 2.

Holding Company 2 is owned by two individuals.

Individual 3 owns 80 percent and Individual 4 owns 20 percent.

Using the same process, Individual 3 holds 80 percent of Holding Company 2’s ownership interest in the main applicant.

MRA would determine that Individual 3 indirectly owns 40% of the main applicant (80% x 50%=40%).

Individual 4 holds 20 percent of Holding Company 2 and indirectly owns 10 percent of the main applicant (20% x 50%=10%).

As Individual 4 doesn’t indirectly own greater than 10 percent of the main applicant, Individual 4 and its spouse aren’t considered supplemental applicants.

Remember, even though Individuals 1 and 4 aren’t considered supplemental applicants based on ownership, they can still be considered supplemental cannabis license applicants if either holds a:

• Corporate officer.
• Manager.
• Director.
• Other control position within the main applicant.

The Background Check

There can be several reasons a cannabis stakeholder may want to avoid the pre-qualification process.

First, for disqualification purposes, only background check information found in the main applicant and supplemental applicants can be cited as grounds for denying an applicant.

If an owner holding less than 10 percent of the ownership isn’t otherwise considered a supplemental applicant, that person’s criminal history (such as having a felony in the last 10 years) will not disqualify the main applicant as a whole.

Such an individual isn’t subject to the background check process.

Further, while the pre-qualification process is getting easier, some entities and individuals are required to prepare a large amount of information during the process.

Some potential stakeholders may determine that the time and cost of preparing a supplemental applicant application is prohibitive.

Such stakeholders can still hold some ownership in the main applicant so long as they ensure that such ownership is below the 10 percent threshold.

Finally, and most directly, it will be significantly easier for larger entities and publicly help companies to comply with Michigan’s background check process when only the shareholders and owners holding more than 10 percent of the main applicant are required to participate.

Without the 10 percent rule, it would be impossible for any cannabis company to not only apply initially for a license, but also consider the option of taking their company public in the future.

Even if your company is just starting out, should you find success in this industry, the 10 percent rule gives you the opportunity to seek the benefits of taking your company public in the future.

The Cannabis License 10 Percent Rule and Owner Responsibility

In closing, while the cannabis license 10 percent rule makes the pre-qualification process significantly easier, it doesn’t shield owners from responsibility.

While the 10 percent rule determines which owners become supplemental applicants, there are disclosures that all owners will need to make.

For entities, this will include the name, address, federal employer identification number (FEIN), and percentage of interest held by the owner.

For individuals, we replace the FEIN with a social security number.

Individuals also identify this information for their spouses.

For larger companies or publicly held corporations, providing this information can be just as challenging.

MRA typically will work with the main applicant to determine exceptions to these disclosures when the circumstances warrant.

However, hopeful applicants should be prepared to provide this information for all owners, regardless of the 10 percent rule.

Do you need help with the license process? What about corporate legal services or real estate? Request a consultation now.