Forewarned is Forearmed Part II

Part II

In part I of this article, we laid out the history and current status of the Medical Marihuana Facilities Licensing Act (“Licensing Act”) passed by the Michigan House of Representatives on October 7, 2015.  If the Licensing Act becomes the law, then a government board would be responsible for issuing medical marijuana related licenses.  That board would apply criteria to license applicants including background checks.  If the applicant had certain issues in their past, they might not qualify for a license.  In this part II, we continue to look closely at the criteria that would be applied if this legislation becomes the law in Michigan. 

The applicant (which includes all equity holders over 1% if the applicant is not a natural person) will be required to disclose:

  • arrests, indictments, convictions, or pleas under any controlled substance or felony criminal laws (any jurisdiction);
  • licensing applications and dispositions (any jurisdiction);
  • tax delinquencies and disputes (federal, state or local);
  • certain financial relationships with certain governmental officials; and
  • any other information the department requires.

If the applicant has (in Michigan or any other US state) felony convictions or incarcerations within the past 5 years, or controlled substance felony convictions within the past 10 years, or controlled substance, theft, dishonesty or fraud misdemeanor (or equivalent) convictions within the past 5 years, the applicant will not be eligible for a license.  The applicant will also be ineligible for a license if it cannot demonstrate the ability to acquire and maintain required insurance for its facility.

The Board may also consider the applicant’s integrity, moral character, reputation, financial ability and experience (including prior bankruptcy), sources and amount of capital, overall criminal history (not limited to 5 or 10 years), tax and regulatory non-compliance, and pending business litigation (as defendant).

An application for a license would require the payment of a non-refundable fee, in an amount that is not established in the bill.  Fee structures in other states suggest that the application fee could be substantial.  If approved for a license, a regulatory assessment would also be made, again in an amount not established in the bill.  There are also several additional provisions that will apply to the ongoing conduct of a licensee: consent to inspections, searches, seizures and the like; limits on who may be employed by a licensee; business cessation; and the sale or consumption of alcohol at a licensed facility. 

Persons considering a future application for a license to grow, process, transport or test medical marijuana, or to operate a medical marijuana provisioning center, should be certain that the disqualifying criteria described above would not apply, and should take steps to guard against the occurrence of a disqualifying event in the future.  If the potential applicant determines that they may not be able to meet the criteria, they may be forced to abandon any plan for lawful marijuana activity requiring a license. 

Potential applicants who conclude that their present circumstances would not prevent licensing should be careful to conduct their activities to remain compliant.  For example, if an applicant will create a legal entity to pursue the license, the applicant should not include in the ownership structure any person who cannot themselves pass the eligibility criteria.  In other words, if a best friend and potential partner has a controlled substances conviction that would disqualify him, don’t make him a part of your business entity.  Or again, if an applicant is considering a possible investment opportunity in a Colorado edibles manufacturer, recognize that the details of any such deal will probably be closely examined in any application process.

When alcohol prohibition in the United States was ended in the 1930s, most states which chose to legalize the alcohol industry established strict and rigorous laws and regulations to control the manufacture, transportation, distribution and sale of alcoholic products.  Complex and detailed licensing criteria are applied to all who desire to enter that industry.  There are more than a few Michigan citizens who would like to hold a liquor license, but who don’t meet the standards.  In all likelihood, Michigan’s marijuana licensing apparatus will end up looking and feeling a lot like our liquor control system.  So, for those who want to be part of a future licensed marijuana business in Michigan, there are likely to be significant regulatory hurdles to a license.  Forewarned is forearmed.