Business Basics California Law Medical Marijuana Recreational Marijuana

Buyer Beware: Buying and Selling Los Angeles Marijuana Dispensaries Under Proposition M

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Watch out! It’s straightforward to slide up underneath Proposition M.

I’ve written prior to now concerning the precarious enterprise of shopping for and promoting present dispensaries in Los Angeles, however that was underneath the now repealed Proposition D. In March of 2017, Angelenos voted in favor of Proposition M, which is a licensing and regulatory piece of laws carried out and overseen by the Metropolis’s Division of Hashish Regulation (“DCR”) and the Hashish Regulation Fee. Under Prop. M, the Metropolis is licensing hashish companies in three phases, the primary of which was solely for “Existing Medical Marijuana Dispensaries” (EMMDs). EMMDs are principally grandfathered Prop. D/Pre-ICO operators that met sure compliance standards set forth by the Metropolis beneath Prop. M. As of the writing of this publish, there are solely 163 EMMDs in all the Metropolis. This low variety of dispensaries in probably the most important hashish market on the planet makes the secondary marketplace for these storefronts extremely scorching. A lot in order that our Los Angeles hashish legal professionals are receiving time period sheets for the acquisition of EMMDs on an virtually bi-weekly foundation. And based mostly on that have, it’s time to replace readers on what to search for when considering the acquisition of an EMMD, which is not any small activity beneath the Metropolis’s new legal guidelines.

Operating due diligence on dispensaries in Los Angeles is massively essential. The reason is (along with regular M & A due diligence) is that the Metropolis nonetheless has many, many unlawful operators (although the Metropolis Lawyer is doing his greatest to close down these operations as quick as potential). Subsequently, it’s not a stretch that an “LA dispensary” would attempt to take a purchaser for a experience on a sale when, in actuality, that dispensary is 100% unlawful, making the purchaser a sitting duck.

In flip, listed here are the key bases to cowl when shopping for an EMMD within the Metropolis of LA underneath Prop. M:

  1. Is the dispensary even on the Metropolis’s EMMD record? The DCR has achieved a incredible job of regularly updating its EMMD listing on its web site. Checking that listing is the very first step for any dependable due diligence. If the dispensary shouldn’t be listed, ask the sellers why that’s the case. At this level, with the window for EMMD licensing closed, failure to seem goes to be an enormous and deadly pink flag that’s deadly until the promoting dispensary can present viable proof that they’re in legitimate pursuit of EMMD standing from the DCR or interesting a DCR denial of EMMD standing,
  1. Licenses usually are not transferable. Many individuals don’t understand that business hashish licenses usually are not transferable beneath California State regulation. The identical goes for business hashish licenses within the Metropolis of L.A.—they can’t be purchased and bought as particular person belongings; solely the entity that holds them can change house owners (which means, you’re taking a look at buying the corporate that holds the license). Subsequently, any EMMD that’s making an attempt to promote you one in every of its licenses (or one among its future licenses) is just not recognizing that it might solely promote its membership pursuits or inventory, and not the licenses themselves, underneath state and L.A. legal guidelines and laws.
  1. What entity sort is the EMMD? Assuming your goal EMMD is on the Metropolis’s EMMD record and the EMMD understands that it may solely interact in an entity buy and sale, the subsequent query is whether or not the EMMD is organized as a non-profit or a for revenue firm. If the EMMD was in compliance with Prop. D, it’s almost certainly some type of a non-profit company (most frequently a non-profit mutual profit company (“NPMBC”), stemming from 2008 State Lawyer Basic tips relating to compliance with the Compassionate Use Act of 1996 underneath which the sale of medical hashish for revenue shouldn’t be permitted). This clearly creates a problem the place a non-profit has no fairness that may be legally purchased and bought, and particular person NPMBC administrators taking purchaser buy cash undoubtedly violates the California firms code in a mess of the way. In flip, a part of the EMMD buy will entail some type of “conversion” to a for revenue entity to make sure that future membership pursuits or inventory may be bought off. Fortunately, NPMBCs and non-profits usually in California can “convert” to for revenue firms and, from there, into no matter different for revenue entity the controlling pursuits so determine. To “convert” although, until the NPMBC’s bylaws specify in any other case, a vote of the complete “membership” (i.e., probably all the medical hashish affected person members) of the non-profit could also be required to be able to convert. And don’t forget that loads of dispensaries in L.A. might have made vital errors when placing collectively their bylaws so that a “conversion” vote might not even be attainable with out exposing the purchaser to vital successor legal responsibility from the NPMBC’s “members”. Additionally, don’t overlook that the previous company and tax sins of the NPMBC might hang-out the brand new entity, so safe the suitable representations, warranties, and indemnities accordingly.
  2. EMMD conversion is permitted outright in LA with a catch. Upon getting the overall conversion plan sorted in your time period sheet, you must cope with conversion underneath native regulation. In L.A., “. . . a change from non-profit status to for-profit status by an EMMD is exempt from [having to seek DCR approval] if no other ownership change is made in accordance with Proposition D’s ownership rulesand notice is provided to DCR within five business days. This exemption is not available after a License is issued.” Which means whereas EMMDs keep a short lived license from the DCR to function, EMMDs can convert from non-profits to for-profits with out having to safe DCR approval as long as: 1) The unique administrators stay the “owners” and 2) The DCR will get 5 enterprise days’ discover of the company change over. In flip, even when the entity might be transformed, purchasers can’t instantly take over the EMMD until the EMMD and the brand new house owners are prepared to finish all the steps at level 6 under.
  1. EMMD standing stopped in Part 1. A variety of our shoppers have been pitched by a number of EMMDs on the alleged proven fact that EMMDs will get particular remedy for the receipt of further retail licenses in L.A.. This isn’t right. All retailers in L.A. can obtain and run as much as three retail licenses complete (together with Sort 9 supply solely retail). In part 1 licensing, which was for EMMDs solely and which has come and gone eternally, if an EMMD solely utilized for a single retail license in that “Priority Processing” part, they need to wait till part three for extra retail license software (which is most of the people licensing part). Relating to part three, the Metropolis has by no means stated when it can open and it’s anybody’s guess as to when that window will begin, nevertheless it’s unlikely to occur in 2018 given the slower tempo of licensing in LA. In any occasion, if EMMDs need extra retail licenses (for which they didn’t apply when part 1 was open), they’ll should get in line like everybody else in part three.
  2. Part three could also be a lifeless finish. Per level 5 above, if a part of your buy settlement is that the EMMD standing will provide help to safe further retail licenses in part three, you actually have to be cautious with that efficiency obligation. In part three, the Metropolis is already obligated underneath Prop. M to challenge retail licenses to social fairness candidates on a 2-to-1 foundation relative to different basic public (non-social fairness) candidates. Since over 160 EMMDs exist already in L.A., because of this earlier than even a single retail license points to a common public (non-social fairness) applicant, the Metropolis should first difficulty over 300 retail licenses to social fairness candidates. Couple that with the truth that Los Angeles has undue focus caps for retail licenses and the writing is on the wall that retail licensure will not be potential for non-social fairness common public candidates in part three, and that features for non-social fairness EMMDs looking for further retail licenses.
  1. This ain’t your daddy’s M & A. Mergers and acquisitions in regulated industries are a unique animal as a result of the transaction has to suit with regulatory vetting and approval earlier than something actually turns into efficient between the events. Hashish M & A is not any totally different and, actually, might be worse because it’s an rising business and as a result of business hashish exercise stays federally unlawful. As soon as a California hashish enterprise has its annual license, if it needs to promote its membership pursuits or inventory to usher in a disclosable “owner” (i.e., amongst different issues, anybody or any entity that owns 20% or extra in fairness), it should first want to hunt approval from the state company that issued it its licenses. That’s not unusual in states with strong hashish laws. What individuals might not know, although, is that the DCR additionally needs to find out about modifications in possession and has full authority to reject the change request based mostly on its scrutiny of the incoming house owners. Particularly, in LA:

“A License is not transferable unless the change to the Licensee’s organizational structure or ownership is submitted to and approved by DCR. The Licensee shall complete a change of ownership application, pay all applicable fees and obtain the written approval of the change of ownership by DCR, pursuant to the Rules and Regulations . . .”

There are additionally particular elevated necessities for modifications of possession for a social fairness enterprise set forth within the Metropolis’s Hashish Procedures at part 104.20.

In any M & A time period sheet and/or definitive buy settlement for an EMMD in L.A., the events need to take note of the requirement of first going via the DCR to have the transaction permitted and additionally they want to deal with what occurs within the occasion the brand new house owners are, or the change of possession request is, rejected by the DCR. The timeline for state and native authorities approval on this stuff can also be each essential and unpredictable, however ought to nonetheless be agreed to by the events on the outset of the transaction to make sure success.

  1. Relocation is not any picnic. Along with their grandfathering, the EMMDs are usually not topic to undue focus limits, and as long as they meet sure necessities they don’t need to adjust to the Prop. M zoning and buffer necessities till 2022. Nevertheless, if the EMMD relocates (which the DCR presently permits) or if it strikes any of its different licenses from its unique premises, it’ll lose the zoning and buffer exemptions. A very good quantity of the M & A we’re seeing features a element that an EMMD with different licenses will both re-locate itself or some or all of its different licenses as a part of the transaction. And numerous that M & A totally fails to deal with the truth that upon such relocation the zoning and buffer grandfathering is misplaced. Make sure to tackle this grandfathering and/or the loss thereof if it’s a part of your dispensary M & A objectives in LA.

It’s not a stretch to say that promoting and shopping for EMMDs in LA just isn’t for the faint of coronary heart. There are numerous essential particulars that have to be thought-about in any due diligence interval and that should even be mirrored in any viable buy and sale settlement. So, do your homework and proceed with excessive warning.