investment in michigan marijuana industry

What Will an Investment in a Michigan Medical Marihuana Operation Entail?

The Michigan Medical Marihuana Facilities Licensing Act (“MMFLA”) will become effective December 20, 2016.  There will then be a wait of almost a year until the State begins accepting license applications on December 15, 2017.  Despite the wait, we’ve already begun meeting with clients, friends, and acquaintances about the investment opportunities in this new marketplace.

The 5 MMFLA Licenses of Commerical Medical Marijuana

The MMFLA creates five commercial medical marijuana licenses: growers, processors, provisioning centers, secure transporters, and labs.  The MMFLA contemplates outside investors in each license category, since a license applicant is required to disclose information about those who hold ownership interests in the potential licensee.  The medical marijuana industry in Michigan will be available for outside investors.  The question we consider here is whether investors are ready for the industry.

Federal Law and Legalization

As always when addressing state-legalized marijuana, we begin with a reminder that marijuana remains illegal under federal law.  It’s a Schedule I controlled substance, and virtually all marijuana-related activity is prohibited by the federal government.  While the tide of marijuana legalization certainly seems to be turning against prohibition, it’s still illegal under federal law — which increases the difficulty and risk for those who engage in the business, whether as operators or investors.  

If problems obtaining a bank account, the absence of traditional business lending, increased income taxes, and criminal liability under federal law, among other challenges, aren’t enough to discourage such an investment, then the reader may choose to look more closely at investing in a licensed Michigan marijuana business.

Industry Investment

There are almost a quarter million Michigan medical marijuana patients (approximately 203,000) and caregivers (approximately 35,000) who will be eligible to purchase marijuana under the MMFLA.  Based on the established prices of medical marijuana today, we have seen estimates of the annual retail value of the market between $500,000,000 and one billion dollars.  Many individuals and companies considering entering this market as operators are younger, less experienced in business, and less financially stable than may be typical in other industries.  Therefore, the need for outside investment by knowledgeable entrepreneurs seems very likely.

Disclosure Requirements for Applicants

The MMFLA will require substantial disclosures to the Michigan Department of Licensing and Regulatory Affairs from the applicant and from anyone who holds an ownership or high-level managerial interest in an applicant.  Sections 102(c) and 404(2) of the MMFLA provide that if the applicant is a corporation or limited liability company, the required disclosures and disqualifications apply to shareholders, corporate officers, LLC members, LLC managers, and the spouses (if any) of those persons.

The information an equity investor (and spouse) must disclose will be extensive, and will include any other equity interest in any marijuana grower, processor, provisioning center, lab or transporter business (nationwide); encounters with the criminal justice system; other commercial license history; and other financial or business information required by the Board.

The application for the license will be denied if the Board determines the investor (or spouse) has a criminal record of a felony conviction within the past 10 years, a controlled substance misdemeanor conviction within the last 5, or the investor fails to meet other criteria established by rules established by the Board.  

In deciding if a license should issue, the Board may also consider other facets of the investor’s record, including integrity, character, reputation, personal and business honesty, financial ability and experience; the sources and amount of money utilized for the investment; prior criminal record (including charges and expunged records); bankruptcy in the past 7 years; complaints for taxes delinquent for 1 year or more; and current business litigation.

These extensive disclosure requirements, and the possibility of disqualification of an applicant for the “sins” of an investor (and spouse), highlight the importance to each side of careful due diligence before the investment decision is made.  Even if there are no skeletons in either closet, there’s no guarantee that the application will be granted.  We are ready to advise investors and operators now based on what we know about the required disclosures.