In one of the last actions taken by the Michigan Legislature in 2018, the state passed Senate Bill No. 1262 and 1263 to amend the Medical Marihuana Facilities Licensing Act (MMFLA). The
amendments were signed by outgoing Governor Rick Snyder on December 28, 2018 and went into effect on January 1, 2019.
Definition of “Applicant” has been Amended
There are several notable changes to the MMFLA in Senate Bill 1262. First, the bill revises the definition of an “applicant”. Under the previous iteration of the MMFLA, the term “applicant”
included officers, directors, and managerial employees, as well as “any person holding any direct or indirect ownership interest in an applicant.” This phrasing, which was meant to be a catchall provision to discourage creative business structuring in an effort to avoid disclosure, created significant burdens for both applicants and the state. As an “applicant”, each person was required to submit a supplemental application, which required a thorough background check, including a review of financial history, criminal history, tax filings, property documents, and a myriad of other required materials. As a supplemental application can be hundreds or thousands of pages in documentation, the burden on applicants and on the Department of Licensing and Regulatory Affairs (LARA) to process all of these materials was overwhelming.
The newly amended Section 102(c) defines applicant more narrowly, outlining specifically which individuals needed to provide supplemental materials. The term “applicant” now includes managerial employees, persons holding indirect ownership interest of 10% or more in the applicant, and outlines specific individuals whom need to disclose based on various types of applicant entities, such as directors, officers, members, owners, and spouses.
“True Parties of Interest” are Gone
It’s only a sentence long, but the ramifications are huge – “Section 404 of the medical marihuana facilities licensing act…is repealed.” Under the prior version of the MMFLA, Section 404 stated that “true parties of interest” must be included in the disclosures and provide the required materials for review. This section was meant to be an umbrella provision, requiring disclosure of additional individuals such as spouses of applicants and stockholders. While the legislature’s intent was valid, the provision received backlash from applicants and the burgeoning industry, as the analysis for determining whom was a true party of interest could be applied inconsistently and often created confusion throughout the application process.
Senate Bill 1262 completely eliminates this gray area and strives to define each specific individual they expect to disclose supplemental materials for review. This change alleviates headaches for applicants and reviewers alike as we move towards a more consistent and clear application system.
Public Corporations Can Enter the Market
As indicated above, the prior version of the MMFLA required disclosure of “any person holding any direct or indirect ownership interest”, and did not create a threshold of ownership for those undergoing this intensive review process. Section 401 required disclosure of the name and address of allowners and their spouses, regardless of the degree of ownership. This requirement created a stifling effect on applicants, most notably for publicly traded corporations, whom wouldn’t be able to identify individual stockholders or obtain all the information from them needed to make a full and complete application. The structure of the application requirements effectively eliminated every publicly traded corporation from the Michigan industry, significantly limiting the overall market. The newly amended Section 401 now states that the names and addresses of stockholders who hold a direct or indirect interest of greater than 5%shall be disclosed. This change is in line with the SEC disclosure requirements and allows publicly traded corporations the ability to compile a manageable and thorough application for licensure.
Clarification on Third-Party Inventory Control and Tracking Systems
Until now, it has been a requirement for all applicants to adopt and utilize a third-party inventory control and tracking system to interface with METRC, the statewide monitoring system. These third-party software systems are costly and aren’t necessary for some license types, such as growers or processors, if the applicants are capable to access and enter information directly within METRC. For that reason, the state has added Section 207(2), which states that if METRC allows the licensee to interface directly with the state through the METRC system, they are no longer required to adopt a separate third-party system.
Guidance on Transfers of Ownership
One of the biggest topics of conversation for clients have been how to facilitate a transfer in ownership for a licensed entity. The newly amended Section 406 still holds each license as exclusive to the licensee and requires the board’s approval prior to a licensee being sold, transferred or purchased. However, the state has added a caveat that transfers of ownership only require 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. This development is crucial for the success of publicly traded corporations within the Michigan market, as its shares can publicly traded without needing Board approval before each trade (unless the trade represents 10% or more in the applicant’s equity ownership).
Consequences for Non-Licensed Entities Conducting Business
An oversight in the prior iteration of the MMFLA was the lack of consequences for those who violate the law. Senate Bill 1262 rectifies this omission by codifying new crime and penalty provisions for individuals or entities that do not adhere to the MMFLA. Beginning June 1, 2019, anyone that “hold[s] itself out as operating a marihuana facility” without a valid license, or who continues to operate the facility while the license is suspended, revoked, lapsed, void, or fraudulently obtained or transferred without the Board’s approval could be charged criminally.
A first violation is a misdemeanor punishable by a fine between $10,000 and $25,000 and/or imprisonment up to 93 days. Subsequent violations may result in the same fines, but the length of imprisonment increases up to a year (or four years if the violation results in death or serious injury). Senate Bill 1263 updated the code of criminal procedure to reflect the new penalties.
Industrial Hemp is Excluded from Definition of Marihuana
A small technical change worth noting is that Section 102(m) amended the definition of “marihuana plant” to exclude industrial hemp. Because the bill took effect on January 1, 2019 and is not retroactive, the changes to the definition of applicant only apply to applications filed after January 1, 2019 – not to applications that have already been decided by the Board or are awaiting their hearing. While LARA has not indicated how it will process amendments to current pending applications filed before January 1, 2019 for transfers or adding investors under the 10% threshold, we can certainly expect to see advisory bulletins or formal guidance from the Department on that point. Overall, these changes to the MMFLA were much needed and provide clarity and continued opportunity for applicants and aspiring cannabis entrepreneurs to enter the Michigan market.