The most common issue facing prospective applicants in competitive cannabis licensing environments is inadequate preparation. Putting together a winning application is an enormous undertaking that takes months to complete. Below are some common hurdles that must be overcome – and virtually none of them can be overcome overnight. The failure to address even one can be fatal to a cannabis license application.
1. Build the Right Internal Team
It’s easy to find people who want to be involved in an industry as exciting as cannabis. But before adding somebody to your team, you should ask yourself some fundamental questions: How will this person’s background, experience or other qualities help us obtain a license? What do they know about agriculture, business, medicine and cannabis compliance?
When submitting an application, your team should resemble a team that the regulators want to see, which can be different than a team that your marketing professional wants to see. For example, in a medical market, you may want somebody on your team to have a medical or pharmaceutical background (assuming your state’s regulations do not require this already).
Building the right team can take time, and you may find that your team is not as committed as you originally thought. Often, prospective team members will be employed at other companies when you apply, and being included on a cannabis application can cause heartburn to their current employer. The employer may not be thrilled with the fact that their employee wants to get involved in an industry that is still operating in conflict with federal law. The employer may also think (rightfully so) that the employee is not dedicated to his or her job and is looking to leave the company. Those dynamics must be taken into consideration, and can result in your star addition deciding at the last minute that the off chance of a cannabis license is not worth risking his or her current employment. It’s important to allow yourself time to replace team members who may ultimately decide that they do not want to participate in your venture.
2. Vet and Select the Right External Team of Advisers
Applying for a competitive license is expensive. Often there are non-refundable fees paid to state licensing agencies that applicants forfeit if they do not obtain a license. While these non-refundable fees can be in the five-figure range (for example, Ohio Level I cultivator applicants paid a non-refundable $20,000 fee to the Department of Commerce for each application submitted), they pale in comparison to the amount of money that applicants will spend on lawyers, accountants, consultants, architects and other outside advisers. Amounts paid to these outside advisers can eclipse the state licensing fees ten-fold.
Since you will be spending so much money on advisers, it makes sense to take your time to vet their experience and knowledge. Anybody can start a website and call themselves an “expert” in cannabis, but you may find that these “experts” are unable to answer simple industry-specific questions.
When hiring a lawyer, make sure that the lawyer is working for a firm with experience in complex corporate transactions, regulatory compliance, real estate and intellectual property. A litigation background, including defense against government investigations, prosecutions and other enforcement actions, is a bonus given the current state of federal and state law. And, of course, an intimate understanding of your state’s cannabis laws is an absolute must – you do not want to pay your lawyer to learn one of the most complicated areas of practice. Build your legal team with multiple experts in each of these disparate fields, and be suspect of any single lawyer proclaiming to be an expert in all them.
Most importantly, start interviewing law firms as soon as possible. Lawyers advising clients in competitive environments can be conflicted out of representing applicants in similar geographic regions. You do not want to lose out on a good lawyer because you waited too long.
Accountants are just as important as lawyers to a well-run cannabis business, and it can be difficult to find an accountant comfortable advising you about cannabis-specific issues, such as Internal Revenue Code Section 280E. Your accountant should be able to work with your legal advisers to structure your company in the most tax-efficient manner.
Consultants are increasingly important as new legal states come up with ways to make the licensing application process more complex. Their experience in preparing applications can be the deciding factor in whether a license is awarded. Take your time and talk to as many as you can before hiring one. Find out how many applicants they helped win licenses in truly competitive markets. Can they help you operate if a license is awarded? Are they are working for any other applicants who might be competing against you? If so, how will they keep your information confidential? Your consultant will likely be your most expensive outside adviser – so do the proper due diligence beforehand.
There are numerous other outside advisers whom you will want to bring on board. A good architect can work with your consultant to help you design a state-of-the-art facility. A lobbyist can work with you to learn important information about the application process that may not be easily accessible, and may be able to work with your legal team to influence state or local regulations – even the development of the cannabis application itself, if you are early enough in the process.
3. Negotiate Business Agreements With Your Initial Team
Once you have selected your internal team, it is essential that partners in a business negotiate the terms of their investments in written documents prepared by competent legal counsel. Failure to do so can lead to the business entity being disregarded if a lawsuit is filed against you, and will almost certainly lead to disputes among partners when it comes time to allocate profits and losses.
These business documents govern everything from who manages the company, how it will be treated for tax purposes, which owners have their interests diluted when new funds are raised and how owners can sell their interests. They help separate cannabis-related assets from non-cannabis-related assets.
Many state regulators require the disclosure of corporate documents when companies submit applications for cannabis licenses. You do not want to be scrambling at the last minute to address complicated corporate governance issues that should have been addressed earlier.
4. Finance Your Venture Properly
One of the most important components of a competitive license application is financial viability. In new markets, this might mean having enough cash committed to your venture to weather lean patient ramp-up periods. In established markets, this might mean having the ability to survive in an economic climate of ever-dropping cannabis prices. There are few things that state regulators want less than a bunch of going-out-of-business cannabis license holders – it would reflect poorly on their ability to select the best applicants and will cast doubt on their ability to award licenses in future rounds.
To avoid this doomsday scenario, many states require applicants to have a significant amount of liquid assets at the time of application. Ohio, for instance, required Level I cultivator applicants to have $500,000 in liquid assets at the time of an application. Ohio dispensary applicants must have liquid assets equal to their first-year expenses (which may, in some cases, exceed the liquid asset requirement for cultivators). Raising this level of capital can take time. Many investors are reluctant to commit assets to a venture before a license is even awarded – a lack of available capital puts your ability to pay not only your outside advisers, but also a state license application fee in peril.
When raising the required capital, you must consider the impact of federal and state securities laws and make every attempt to comply with those laws and regulations. Be careful when making representations to your investors, and make sure they understand that investing in a cannabis company is inherently risky, far riskier than investing in non-cannabis businesses. Disclose these risks in writing and paper the terms of new investments from start to finish. Should a dispute arise between you and your investors, you will be glad you did.
5. Double-Check Your Credentials
The easiest way to be disqualified during a license application process is to have a partner fail a required criminal background check. Many states identify ahead of time those criminal convictions that will bar participation in the state’s cannabis industry. It is imperative that you vet every person with an ownership interest in your venture, as well as those who will have significant influence or control, to ensure any past convictions will not disqualify your company during the application process.
Getting the required background checks may not be as easy as it sounds. Typically, applicants must run both a state and federal criminal background check. These checks can take days or even weeks to complete.
Make sure that you have enough time to run background checks privately before running the checks that will be submitted to state regulators – you do not want to learn of a partner’s undisclosed felony conviction after your application has been submitted.
Finally, consider asking your partners about prior issues with any professional licenses held. Prior suspensions or other enforcement actions may adversely impact your cannabis license application, even if the partner has no criminal conviction history.
If you find that a partner will cause your application to be disqualified, you may discover that there are other ways for the partner to be involved depending on state regulations. Can the partner own the real estate where your business would operate, loan money to your company in return for repayment over time with interest, or act as a third-party consultant if a license is awarded? These are all complicated questions that are heavily dependent on your state’s regulatory framework, and should only be addressed by your legal counsel.
6. Lock Up Compliant Real Estate
In many states, applicants must comply not only with state regulations but also with regulations imposed by local municipalities and counties. City-by-city zoning frameworks can be difficult to navigate and time-consuming to comply with, but local compliance is often a nonnegotiable requirement during the competitive licensing process.
If you need to obtain a local zoning variance or conditional use permit, that process can require multiple meetings with council committees, planning commissions, zoning boards and other local government officials. You may find that obtaining a required variance or special permit is a six-to-eight-week process, without any guarantee of success.
On top of the variance or conditional use requirements, you may be dealing with a locality that has enacted a moratorium or ban on cannabis businesses. Even if you can convince local officials to repeal any such moratorium, the process to do so can take another six weeks, if you are lucky.
Keep in mind, that many of the local officials you will be dealing with are elected, and the public will have a voice throughout the process. You will need to dedicate time to educate your prospective neighbors and other community leaders who may have reservations about a cannabis company operating in their neighborhood. Unanticipated public backlash can derail your plans and put your application in jeopardy.
As if that weren’t enough, properly negotiating purchase, lease and option agreements can take weeks, with multiple drafts being circulated between lawyers for each side. These agreements have to identify a number of contingencies (such as license approval), and oftentimes the seller/lessor will require ongoing payments while you wait to hear from state regulators regarding license awards.
The takeaway: Rome wasn’t built in a day, and your cannabis company won’t be, either.
The application processes for cannabis licenses are becoming more and more competitive as additional states adopt cannabis reforms. The difference between applicants who win licenses and those who don’t often comes down to pre-application preparation.
Applying for a cannabis license in competitive environments is an arduous undertaking, and anything you can do to eliminate unanticipated problems will serve you well in the long run.
*This article is for educational purposes only and nothing in this article constitutes legal advice or creates an attorney-client relationship. You should discuss your particular plans with a lawyer who is licensed in your state and familiar with the applicable laws.*
Tom Haren is a cannabis attorney practicing with Frantz Ward LLP, where he is a member of the firm’s Marijuana Law & Policy practice. He advises clients on cannabis compliance matters, and blogs about Ohio’s medical marijuana law at www.ohiomarijuanalaw.com.
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