The highly-anticipated emergency rules for Adult-Use Marihuana Establishments were published on July 3, just in time to give everyone some light holiday reading. Before I even had them downloaded, posts were springing up on social media sites touting the relaxed capitalization requirements as a victory for “the little guy,” and spouting fears that this low financial threshold will mean a flood of licenses diluting the market and devaluing businesses. However, it is fair to say that these first impressions are not accurate. Indeed, has anything really changed?
The financial rules for recreational cannabis do distinguish themselves from those adopted for medical cannabis in several ways. First, any person may own a whole 10 percent of a licensed recreational cannabis business without prequalification, compared to the paltry 9.9 percent ownership allowed for unvetted medical cannabis businesses. It’s an insignificance for some, but a huge relief to us lawyers tired of drafting 9.9 percent purchase agreements. The recreational rules also provide more clarification and leeway on financing. Neither a person who merely provides financing, nor a franchisor, nor a licensor of intellectual property is required to be an applicant for prequalification purposes as long as they stay below the ownership threshold. As for the actual financial background investigation of the applicant, the rules do not specify other than taxes for the current year, so it is presumed they will likely mirror the Medical Marijuana Facilities Licensing Act (MMFLA) due diligence rules. And while the application fee is the same, the licensure fee (what the MMFLA calls an Annual Assessment) is determined by license type and renewed based upon sales volumes.
The most significant difference is the absence of any capitalization requirement, which makes sense from a statutory perspective and baffles from a regulatory perspective. It is appropriate not to require a person to show any capitalization, as the Michigan Regulation and Taxation of Marihuana Act does not have such a requirement. However, neither does the MMFLA, and yet some arguably oppressive capitalization requirements managed to appear not only in the MMFLA emergency rules, but in the permanent rules as well. For example, an MMFLA Class C grower applicant must show $500,000 dollars in unencumbered capital assets, 25 percent of which is liquid, and that capital can never be used again. So, a Class C grower who wants to grow 7,500 plants in the same exact building—must come up with $2.5 million in assets. By comparison, an adult-use Excess Marijuana grower applying to cultivate 10,000 plants must show exactly no capitalization at all.
The MMFLA capitalization requirements are not only statutorily unsupported but unconstitutionally restrictive. There is little question that the capitalization requirements, by providing such a high financial threshold, and regardless of their stated purpose, have significantly restricted the availability of licenses at the state level in direct contravention of Article 3 of the Act. Perhaps this absence of a capitalization requirement in the recreational emergency rules is a reflection of the statute’s “Social Equity Plan” whose stated purpose is to encourage participation in the cannabis industry in communities disproportionately impacted by cannabis prohibition. Perhaps the Marijuana Regulatory Agency realized that the requirements were creating a lot of awkward financial agreements between applicants and their family members. Either way, the state will have a very tough time justifying a requirement for proof of capitalization for medical cannabis applicants now.
“The MMFLA capitalization requirements are not only statutorily unsupported but unconstitutionally restrictive.”
The absence of a capitalization requirement also makes sense from a practical standpoint. Because one cannot even qualify for a recreational grow, processing, retail or secured transport license unless you already hold an MMFLA license, and because it is highly likely that communities who permit recreational facilities will prioritize their MMFLA licensees, it would make little sense to require proof of capitalization from a bunch of open and operating businesses who have already had to meet those financial thresholds.
As for those new to the application process, and those applying after December 2021 when the MMFLA restriction sunsets, does the absence of a capitalization requirement really change anything? These are still businesses that require capital to start. There are still application fees, license fees, rental, payroll, taxes, professional fees, marketing and all of the other customary administrative costs required to start and operate a business. While no capitalization requirement may sound good, it does not mean a new cannabis business will not be just as expensive to open and maintain. In other words, you may not have to prove it to the state, but you will still have to prove it to everyone else.