Category: Cannabis Law Alert

New Regulations Affect Lending to Maryland Cannabis Licensees

Posted on by Hanna Hefner

  • Only banks, credit unions, and similar entities are permitted to obtain a security interest in a Maryland cannabis license.
  • All security interests in Maryland cannabis licenses must be approved by the Maryland Cannabis Administration.
  • Several questions remain unanswered in the Emergency Regulations, including whether an eligible secured creditor can take a security interest in a license as a collateral agent for itself and other lenders (some of which may not be eligible secured creditors).

 

Like most companies, Maryland-licensed cannabis businesses generally rely on access to capital to purchase equipment and other capital assets, fund acquisitions and other forms of expansion, and provide working capital to cover short-term expenses.  Industry experts agree that venture capital is extremely difficult to obtain in the cannabis space and that most equity raises are limited to friends and family rounds.  In addition, because the production, distribution, and sale of cannabis and products containing cannabis remain in violation of federal cannabis laws, cannabis businesses are unable to obtain loans from any financial institution that is regulated by a federal agency (which includes the vast majority of banks operating in Maryland).

As a result, Maryland-licensed cannabis business have had only two choices for obtaining debt capital – either one of the few state-regulated financial institutions willing to lend to cannabis companies, or a non-bank lender that is not regulated.  In either case, as is typical of secured transactions, the lender would expect to obtain a security interest in all of the assets of the borrower, including any cannabis license.  Once a lender or other secured party obtains a security interest in assets of a borrower and takes certain steps such as filing a notice called a financing statement (referred to as a UCC-1 in the Uniform Commercial Code), the secured party expects to be able to foreclose on the assets of the borrower if the borrower does not repay the loan by its terms – this foreclosure typically is an out-of-court sale of the pledged assets to the highest bidder, with the proceeds of the sale used to repay (in order) the costs of sale, the debt owed to the secured party, and any additional sale proceeds paid the borrower.

But one unresolved question was whether the security interest in a Maryland-issued cannabis license was enforceable.  In other words, it has never been clear whether a secured party ever obtains any rights in a cannabis license – arguably one of the most valuable assets of a cannabis company.  If not, then a foreclosure sale following default of a loan to a cannabis company would be much less likely to generate proceeds in an amount to repay the defaulted loan in full.

Adult Use in Maryland and Recent Emergency Regulations

Following approval by Maryland voters of adult-use cannabis legalization as part of a November 2022 ballot referendum, the Maryland legislature passed the Cannabis Reform Act which was signed into law by Governor Moore in May of 2023.  On June 23, 2023, the Joint Committee on Administrative, Executive, and Legislative Review approved Emergency Regulations, found at COMAR 14.17.01 – 14.17.22, which took effect on July 1, 2023.

These new regulations cover many topics related to the expansion of cannabis into adult use, including:  conversion of existing medical licenses into adult use licenses; the process for issuance of new licenses (including new license categories); testing laboratory registration and operations; operational issues for growers, processors, and dispensaries; record keeping, inspections, and enforcement issues; ownership and control; and related issues.  Enforcement will be supervised by the Maryland Cannabis Administration (the “Administration”), as a successor to the Maryland Cannabis Commission.

 

This alert focuses on the subset of the new Emergency Regulations that relate to the ability of a lender to obtain a security interest in a cannabis license.

 

Security Interest in a Maryland Cannabis License

Which Lenders Can Obtain

The Emergency Regulations provide that a licensed grower, processor, or dispensary may pledge to an eligible secured creditor an interest in the proceeds from an Administration-approved sale of cannabis license as a security interest for a loan.  But there are numerous requirements and restrictions baked into this simple statement.

The secured party must be a “secured creditor” – under the Emergency Regulations this means a lending institution as defined under the Maryland Financial Institutions Code, whether chartered by Maryland or any other state.  Such institutions include commercial banks, non-depositary trust companies, savings banks, credit unions, and savings and loan associations.  Note that this definition would exclude any of the non-bank lenders that typically are funds using private capital to make loans (sometimes in addition to private equity investments).

Approval to Act as Secured Creditor

To act as a secured creditor the lending institution must submit to the Administration for approval (i) a compliance and reporting plan; (ii) a proposed plan for the appointment of a receiver that meets the requirements set forth in the emergency Regulations; (iii) confirmation that the lending institution is in good standing and eligible to conduct business in Maryland and is in compliance with any regulatory requirements applicable to the lending institution; and (iv) any other information requested by the Administration.  The secured creditor also will need to submit an annual report to the Administration certifying continued compliance and eligibility.  The Administration will maintain on its web site a list of approved secured creditors.

Approval of Security Interest

To obtain approval for a security interest in connection with a specific transaction, the approved secured creditor must submit to the Administration for approval a copy of the security agreement intended to be used.  An approved security agreement may not contain provisions that authorize the secured creditor to unilaterally:  (i) require the loan to become due, except if the licensee materially breaches or defaults on its material obligations as set forth in the security agreement; (ii) convert the debt under the loan to equity; (iii) deprive the licensed grower, processor, or dispensary of the right to operate the license; or (iv) restrict the ability of the licensed grower, processor, or dispensary from making payment on the secured loan through a third party unless the payment restriction would cause the secured creditor to violate a law by which it is governed.  The Administration also may restrict a security interest for “other good cause” as determined by the Administration.

The scope of the security interest, once approved, is limited to the proceeds of a sale of the license that occurs in accordance with a disposition plan as required by the Emergency Regulations.  The security interest excludes any right to operate the license.

Plan of Disposition

The Emergency Regulations include detailed provisions addressing the plan for the disposition of a cannabis license, including:  (i) selection of an eligible receiver; (ii) application for receivership; (iii) security protocols for the receiver in non-public areas of licensed premises; (iv) the receiver’s responsibilities; and (v) sale of the cannabis license.

Although foreclosure sales of personal property collateral under the Uniform Commercial Code can proceed rather quickly, often in as few as 10 days following a required notice of sale, the timeline for the disposition of a license under the Emergency Regulations will be considerably more time consuming.  The starting point will be that either (i) the lender has obtained a receivership order from a court, (ii) the borrower is insolvent, or (iii) the borrower has materially breached its obligations under the Administration-approved security agreement.  Following one of these triggering events, the Administration must approve the appointment of the receiver following submission of an application with detailed information about the proposed receiver as well as a plan of disposition.  Any proposed sale requires advance notice of at least 60 days, and potential bidders must be approved by the Administration.  Any completed disposition and transfer of a license will not be final until approved by the Administration.

Summary

While the Emergency Regulations have clarified some important issues with respect to secured lending to Maryland-licensed cannabis companies, the new restrictions may have the unintended result, at least in the short term, of limiting the ability of Maryland licenses to obtain much-needed debt capital.  Potential lenders that cannot qualify as eligible “secured creditors” under the Emergency Regulations may not want to lend the Maryland licensees now that it is clear that such non-bank lenders will not be able to obtain a security interest in cannabis licenses.  And lenders that could be eligible to obtain a security interest in a cannabis license, such as state-chartered banks, will have to jump through many time-consuming hoops to obtain Administration approval.

 

Unanswered Questions

  • Do the regulations limit the ability of a lender that is not a “secured creditor” (as defined in the Emergency Regulations) from making a loan to a Maryland-licensed cannabis company and taking a security interest in assets other than the license(s)?
  • Can an eligible secured creditor take a security interest in a license as a collateral agent for itself and other lenders (some of which may not be eligible secured creditors)?
  • What is an example of “other good cause” that would permit the Administration to restrict the security interest in favor of an eligible secured creditor?
  • The scope of the approved security interest is limited to the proceeds of an Administration-approved sale of a licensed grower, processor, or dispensary – but does this provision refer only to a sale by a receiver established at the request of the secured party, or will the scope of the security interest include any sale of a license, even without use of the receiver or consent of the secured party?

Please contact us if you have any questions regarding your cannabis business or how the Act may affect the operation of your business.

To read the full text of the Emergency Regulations, click HERE.

CONTACT

R. Timothy Bryan

MORE INFORMATION

The contents of this Alert are for informational purposes only and do not constitute legal advice. If you have any questions about this Alert, please contact the Shulman Rogers attorney with whom you regularly work or a member of the Shulman Rogers Cannabis Industry Group.

HHS Makes History: Recommending that Cannabis be Reclassified

Posted on by Hanna Hefner

On August 29, 2023, the U.S. Department of Health and Human Services (HHS) issued a letter formally recommending the U.S. Drug Enforcement Administration (DEA) re-classify cannabis from a Schedule I Controlled Substance to a Schedule III Controlled Substance under the federal Controlled Substances Act.

Schedules

Since the founding of the DEA in 1970, cannabis has been listed as a Schedule I substance. Under federal law, Schedule I drugs are defined as having “no currently accepted medical use and a high potential for abuse.” Along with cannabis, other Schedule I drugs include heroin and LSD.

Under federal law, Schedule III drugs are defined as having “moderate to low potential for physical and psychological dependence.” Schedule III drugs include ketamine, anabolic steroids, and testosterone.

HHS Recommends Reclassification[1]

Pursuant to the Controlled Substances Act, the HHS Secretary and Attorney General began their review of how marijuana is scheduled under federal law last year. HHS completed the administrative process in less than 11 months, reviewing eight factors: (1) its actual or relative potential for abuse; (2) scientific evidence of its pharmacological effect; (3) current scientific knowledge regarding the drug and other substances; (4) current pattern of abuse; (5) the scope, duration, and impact of abuse; (6) whether there is (and if so what) risk to public health; (7) its psychic or physiological dependence capability; and (8) whether the substance is an immediate precursor to an already controlled substance.[2] After comprehensive evaluations, HHS provided its recommendation for marijuana in a letter to the DEA on August 29, 2023.

Next Steps

The DEA has the final authority to reschedule a drug under the Controlled Substances Act. Therefore, the DEA will now initiate its review based on the information provided by HHS. If the DEA determines the drug should be reclassified, then it will begin the formal rulemaking procedures, as required by the Administrative Procedures Act (APA). Once the formal rulemaking process is complete, an administrative law judge (ALJ) will decide whether to adopt the regulation. If the ALJ adopts the regulation, it will be published in the Federal Register.

Impact

If cannabis is rescheduled to Schedule III instead of Schedule I, the drug will still be federally illegal. States will continue to have the power to legalize cannabis but do not have to. This also means that interstate commerce in cannabis would not, technically, be legal.[3]

But it does mean that Section 280e of the IRS tax code will no longer be a barrier to cannabis businesses. 280e prohibits state-licensed cannabis businesses from claiming standard business deductions (which are available to every other business in America) and applies to Schedule I and II substances. If cannabis were reclassified to Schedule III, cannabis businesses would have an opportunity to increase their cash flow by claiming the deductions. More cash flow could lead to greater ability for businesses to take in debt for improvements and expansions.

It also means that institutional lenders may be more willing to be a source of capital for cannabis businesses. The reclassification may signal to risk-averse investors that the federal government views cannabis as less of a problem than it once was, and these investors may see the opportunity to get involved as less risky. This may further lead to stimulation of the lending market, which would, hopefully, reduce high-interest rates imposed on current loans in the cannabis space. Further, if the SAFE Banking Act is passed, financial institutions would be exempt from liability and penalties for seeking out opportunities with marijuana businesses that are compliant with state law.

Questions

For now, we must sit and wait to see what the DEA decides, but this is nonetheless a historic step in a direction that would have a strong impact on cannabis businesses. If you have additional questions, please reach out to your Shulman Rogers Attorney.

[1] Reclassification (or rescheduling) is distinct from descheduling. While rescheduling would transfer cannabis to another schedule (i.e., Schedule I to Schedule III), descheduling completely removes cannabis from the list of controlled substances entirely. SMART, Understanding The Difference Between Rescheduling and Descheduling Cannabis, September 6, 2023, https://studentmmj.com/rescheduling-and-descheduling-cannabis/#:~:text=Rescheduling%20moves%20cannabis%20to%20a,it%20more%20like%20common%20items.

[2] Bradley Arant Boult Cummings LLP, To Reschedule or To Deschedule: That is the (Marijuana) Question, September 20, 2023, https://www.lexology.com/library/detail.aspx?g=fc68e77a-d321-4a4a-abdf-0e13553f0a8f&utm_source=Lexology+Daily+Newsfeed&utm_medium=HTML+email+-+Body+-+General+section&utm_campaign=Lexology+subscriber+d.

[3] While interstate commerce may remain illegal, the possibility of rescheduling may impact the ability to advertise across states.

The Legal Leaf Cannabis Alert – The First Round for Maryland’s Cannabis Business License Application Period Starts November 13, 2023.

Posted on by Laura Gastwirth

On September 8, 2023, the Maryland Cannabis Administration (MCA) announced that the first application cycle for cannabis business licenses will open on November 13, 2023 and run for 30 days, through December 12, 2023.  This first round for cannabis business licenses is exclusively for social equity applicants and represents the period of time in which a verified social equity applicant can submit their completed application to the MCA.

A Social Equity Applicant is an applicant who has at least 65 % ownership and control held by one or more individuals who have:

(1) Lived in a “disproportionately impacted area” for at least five of the past 10 years; or

(2) Attended a public school in a “disproportionately impacted area” for at least 5 years; or

(3) For at least 2 years, attended a 4-year institution of higher education in the State where at least 40% of the individuals who attend are eligible for a Pell Grant.

To be a verified Social Equity Applicant, an applicant must provide specific documentation depending on which criteria they fall under (see MCA – Acceptable Verification Documentation) and complete the following form: Cannabis Business License Interest Form.

The cannabis business license application has not yet been released.

In advance of the forthcoming application release, MCA recently opened the Social Equity Verification Portal, a prerequisite to the application process, on September 8, 2023.  This portal instructs prospective licensees on the social equity applicant eligibility requirements and allows them to confirm their social equity status before the application period opens on November 13, 2023.  The Social Equity Verification portal will remain open for a period of 60 days, closing on Tuesday, November 7, 2023.

Upon release of the application, a verified Social Equity Applicant who meets the cannabis business license application’s minimum requirements—to be graded on a pass/fail basis— will be placed in a randomized lottery.  The lottery will be based on license type (i.e., grower, processor, dispensary) and the county or region for which the application was submitted.  Under the Cannabis Reform Act, lottery selection will begin on or before January 1, 2024.

MCA released the total number of available licenses based on geographical area.

The total number of cannabis business licenses available during the first round are outlined below  and will be distributed throughout the State based on the license type and the geographical area.

Standard Dispensary License Distribution:

There are 75 standard dispensary licenses available.  The distribution of available licenses per county can be viewed HERE.

Standard Grower, Processor and Micro License Distribution:

For distribution of the remaining license types, MCA disclosed that the State will be divided into the following four regions:

  1. Western Region: Allegany, Carroll, Frederick, Garrett, Montgomery and Washington counties
  2. Southern Region: Anne Arundel, Calvert, Charles, Prince George’s and St. Mary’s counties
  3. Central Region: Baltimore, Baltimore City, Cecil, Harford, and Howard counties.
  4. Eastern Region: Caroline, Dorchester, Kent, Queen Anne’s, Somerset, Talbot, Wicomico and Worcester counties

Equal numbers of the remaining license types will be distributed throughout these geographic regions as indicated below:

Number in

Each Region

 Total in

Round 1
Standard Growers 4 16
Processors 8 32
Micro Growers 6 24
Processors 6 24
Dispensaries 2 8

 

See also MCA’s Distribution of Growers, Processors and Micro Licenses.

If you have any additional questions, please contact one of the attorneys in the Shulman Rogers Cannabis Industry Group.  For more details about the application process, please refer to MCA’s website HERE.

MORE INFORMATION

The contents of this Alert are for informational purposes only and do not constitute legal advice. If you have any questions about this Alert, please contact the Shulman Rogers attorney with whom you regularly work or a member of the Shulman Rogers Cannabis Industry Group.

To receive Cannabis Industry Alerts and other timely news and information from Shulman Rogers, please click HERE to subscribe.

The Legal Leaf Cannabis Alert – It’s a Marathon, Not a Race: The First Step to the SEA Round is Here

Posted on by Hanna Hefner

As of July 1, 2023, adult-use cannabis consumption is legal in the State of Maryland. The Maryland Cannabis Administration (MCA) provided information for interested cannabis business owners regarding the process to apply for a cannabis license. Of particular importance is that the first round of applications is exclusively for Social Equity Applicants (SEA). On September 1, 2023, the Office of Social Equity (OSE), an independent executive agency, released the specific criteria that applicants can use to determine if they are an eligible Social Equity Applicant to apply in the first round.

Social Equity Applicant Criteria

A Social Equity Applicant is eligible if they are applying for a cannabis license or cannabis registration that has at least 65 percent ownership and control[i]held by one or more individuals who have:

  1. Lived in a “disproportionately impacted area” for at least five of the past 10 years (i.e., lived in these zip codes: Review the zip codes here); or
  2. Attended a public school in a “disproportionately impacted area” for at least 5 years (i.e., attended one of these schools: Review the list of currently open public schools here); or
  3. For at least 2 years, attended a 4-year institution of higher education in the State where at least 40% of the individuals who attend are eligible for a Pell Grant.[ii]

Note: As long as the applicant meets one of these criteria, they do not need to live in Maryland to be eligible to apply for a license. However, the applicant must still use MCA’s Social Equity Verification Portal. In addition, the applicant will need to provide supportive data that indicates the geographic area in question is consistent with Maryland’s definition of “disproportionately impacted area.”

 

What now?

Only verified Social Equity Applicants may apply for a license in the first round. Applicants must verify themselves as a Social Equity Applicant before the cannabis business license applications are released. To verify eligibility, an applicant must:

  1. Make sure they meet one of the Social Equity Applicant criteria above. The applicant will need to prove their Social Equity Status by providing specific documentation depending on which criteria they fall under (see MCA – Acceptable Verification Documentation); and
  2. Complete the following form: Cannabis Business License Interest Form.

Note: While the above tasks are mandatory, completing the tasks only verifies that the applicant can apply for the first round of licensing. However, that process is not the completion of the application itself.

 

What’s next?

Once the Cannabis Business License Interest Form is successfully completed, the applicant will receive a personalized link to The Social Equity Verification Portal (Portal). Free of charge, this Portal will confirm that the applicant is eligible to apply for a license during the first round.

The Portal will open (tomorrow) Friday, September 8, for a period of 60 days, closing on Tuesday, November 7. If an applicant successfully completes the Cannabis Business Interest Form before September 8, then they will receive a link upon opening the Portal. If an applicant successfully completes the verification after September 8, then they will receive a personalized link via email within 1-2 business days.

If an applicant is verified through the Portal as a Social Equity Applicant based on the MCA Acceptable Verification Documents, they will be granted a social equity applicant verification number and corresponding report that they must submit along with their actual application.

It is still unclear when the cannabis business license applications will be released. According to the regulations, MCA must make an application announcement at least 60 days before the application period (i.e., the period in which a prospective licensee submits their application). The application period will be open for 30 days.[iii] While the release of the application is pending, the Cannabis Reform Act requires MCA to begin issuing first-round licenses on or before January 1, 2024.

Note: Just because an applicant is verified and can apply, this does not mean they are guaranteed admission to the application lottery. If there are more applications from verified Social Equity Applicants than there are available licenses, a random lottery will determine the license winners.

 

Questions

If you have any questions, please reach out to one of the Cannabis Group Attorneys at Shulman Rogers, go to the MCA website, and/or email the MCA at mca.infoandregistration@maryland.gov.

 

[i] As defined by statute:

Owner means a person with an ownership interest in a cannabis licensee.

Ownership interest means a direct or indirect equity interest in a cannabis licensee, including in its shares or stock.

Control means:

(i) the decision-making authority over the management, operations, or policies that guide a business; or

(ii) authority over the operation of the technical aspects of a business.

Control includes:

(i) holding a right to veto significant events;

(ii) the right or authority to make or veto decisions regarding operations and strategic planning, capital allocations, acquisitions, and divestments;

(iii) the right or authority to appoint or remove directors, corporate-level officers, or their equivalent;

(iv) the right or authority to make major marketing, production, and financial decisions; and

(v) the right or authority to execute exclusive contracts or significant contracts in the aggregate of $10,000 or greater on behalf of the licensee.

See Md. Alcoholic Beverages Code Ann. § 36-101.

[ii][ii] A “disproportionately impacted area” is defined as a geographic area that has had above 150% of the State’s 10-year average for cannabis possession charges.

[iii] See COMAR 14.17.05.03.

 

More Information

The contents of this Alert are for informational purposes only and do not constitute legal advice. If you have any questions about this Alert, please contact the Shulman Rogers attorney with whom you regularly work or a member of the Shulman Rogers Employment and Labor Law Group.

To receive Employment Law Alerts and other timely news and information from Shulman Rogers, please click HERE to subscribe.

Legal Leaf Cannabis Alert – Maryland Cannabis Update

Posted on by Hanna Hefner

Office of Social Equity Releases Cannabis Social Equity Eligibility Criteria

On September 1, 2023, Maryland’s Office of Social Equity released cannabis social equity eligibility criteria and a detailed explanation of the social equity verification process. Please see the information below and reach out to a member of the Shulman Rogers Cannabis Practice Group with any questions or assistance.

 

Linthicum Heights, MD – The Office of Social Equity today released the eligibility criteria to be considered a social equity applicant for the upcoming Fall 2023 Cannabis License Application Period.

“As the only state in the country to exclusively reserve the first round of new cannabis licenses to social equity applicants, Maryland continues to lead the nation in promoting access and equity in the adult-use cannabis market,” said Gov. Wes Moore. “Leaving no one behind means ensuring that communities that have borne the brunt of misguided policies have an equal shot at benefitting from this lucrative industry.”

The Office of Social Equity, established by the Cannabis Reform Act of 2023, is an independent executive agency that issues official guidance on the eligibility requirements to qualify as a social equity applicant, based on the statutory framework. The Maryland Cannabis Administration, a new agency regulating medical and adult-use cannabis in the State, will administer the social equity verification process and the license application process.

“With the introduction of our new social equity eligibility criteria for the upcoming cannabis licensing application round, Maryland embarks on a transformative trajectory. This forward-looking measure underscores our dedication to rectifying past injustices and ensuring a level playing field,” said Office of Social Equity Executive Director Audrey Johnson. “I affirm that by facilitating equal opportunities, we reshape the cannabis industry’s narrative, enabling marginalized voices to craft a future that’s rich in diversity and vitality. Over the next months, our office will offer support and technical assistance to social equity applicants, making sure they possess the tools necessary to compete fairly for license awards.”

Using data provided by the Maryland Judiciary, the Maryland State Department of Education, and the Maryland Higher Education Commission, the Office of Social Equity conducted statistical analyses to arrive at the eligibility criteria. A social equity applicant is an entity that is at least 65% owned and controlled by one or more individuals who meet at least one of the following criteria:

Methodology

  • For Criteria 1, the Office of Social Equity conducted a 10-year average of cannabis possession charges utilizing data provided by the Maryland Judiciary. The Cannabis Reform Act of 2023 defines a “disproportionately impacted area” as a geographic area identified by that had above 150% of Maryland’s 10-year average for cannabis possession charges. The 10-year period analyzed was from 2013-2022, which represents the most recent available data.
  • For Criteria 2, the Office of Social Equity obtained a list of currently active public schools from the Maryland State Department of Education that are located in ZIP codes determined as disproportionately impacted areas.
  • For Criteria 3, the Office of Social Equity conducted a 10-year average using Pell grant recipient data obtained from the Maryland Higher Education Commission that met the statutory requirements. The 10-year period analyzed data from Fall 2012-Fall 2021. This represents the most recent available data.

For more information about the Social Equity Eligibility Criteria, visit www.ose.maryland.gov.

For information regarding the Social Equity Verification Process and the Fall 2023 Cannabis License Applicant round, visit www.cannabis.maryland.gov.

About the Office of Social Equity

The Office of Social Equity, an independent agency established by the Cannabis Reform Act of 2023, is charged with providing resources and support for historically disadvantaged individuals and businesses seeking to enter the adult-use cannabis market. The vital responsibilities of the office include implementing technical assistance programs for qualifying social equity applicants and licensees, reviewing regulations and laws through an economic equity and social justice lens, and supporting key programs including the Community Repair and Reinvestment Fund and the Cannabis Business Assistance Fund. The mission of the Office of Social Equity is to provide resources and support for historically disadvantaged individuals and businesses seeking to enter the Maryland adult-use cannabis industry.

 

Social Equity Applicant Verification

The Cannabis Reform Act establishes an initial business licensing round for eligible social equity applicants. A social equity applicant is an applicant with at least 65% ownership and control held by one or more individuals who meet the statutory definition of social equity applicant (details below). Only verified social equity applicants may apply for a standard or micro grower, processor, or dispensary license in the first round. To access the Maryland Cannabis Administration’s (MCA) Social Equity Verification Portal and verify eligibility as a social equity applicant, an individual must first demonstrate their interest in, and understanding of, the upcoming licensing process by completing the following form: Cannabis Business Licensing Interest Form.

By verifying an individual’s status as a social equity applicant in advance of the licensing round, the MCA aims to further streamline the application process for prospective licensees.

The Cannabis Reform Act defines social equity applicant as meeting ONE or more of the following criteria:

  1. Have lived in a disproportionately impacted area for at least 5 of the 10 years immediately preceding the submission of the application1;
  2. Attended a public school in a disproportionately impacted area for at least 5 years; or
  3. For at least 2 years, attended a 4-year institution of higher education in Maryland where at least 40 percent of the individuals who attend the institution of higher education are eligible for a Pell Grant.

A map of disproportionately impacted areas in Maryland, and a list of qualifying institutions may be found on the Office of Social Equity’s website, ose.maryland.gov.

Address documentation supporting a minimum of five years will be validated using a combination of two data points per address. Failure to provide the requested documentation may result in the delay of your certification or inability to successfully submit a license application.

Eligibility Criteria

The table below shows documentation that will be accepted by the MCA to verify that an individual meets the above criteria:

Eligibility Criteria Table

2 A list of currently operating public schools located in disproportionately impacted areas in Maryland may be found here on the Office of Social Equity’s website.

3 If unable to produce or identify public school records, individuals are still encouraged to use the State’s 3rd party vendor, as they may be able to verify an individual’s attendance at the particular school without school documentation. You will be asked to submit: School name, location, dates of attendance, major/degree (if applicable), if graduated, date of graduation (if applicable), and name while attending.

 

Individuals Who Have Not Lived In or Attended a Public School in Maryland In an Identified
Disproportionately Impacted Area

If you are seeking social equity status based on living in or attending a public school in a disproportionately impacted area outside of the State of Maryland, you still must use MCA’s Social Equity Verification Portal. Additionally, you must provide data that indicates the geographic area in question meets the State’s definition of a disproportionately impacted area.

After completing your social equity applicant verification portal, you may receive additional communications from the MCA with the specific data requirements to verify the location as a disproportionately impacted area.

Gaining Access to the Verification Portal

The MCA is working with a third party (Creative Services Inc.) to verify eligibility as a social equity applicant.

Individuals interested in verifying their status as a social equity applicant must complete the Cannabis Business Licensing Interest Form to receive a personalized link to the portal.

The Social Equity Verification Portal will open on Friday, September 8, for a period of 60 days, closing on Tuesday, November 7. Upon successful completion of the form, you will receive a personalized link via email within 1-2 business days. For any interest form completed in advance of September 8th, you will receive a link upon the opening of the portal.

Verified Social Equity Applicants

Once verified, an individual will be granted a social equity applicant verification number and corresponding report that they must submit along with their application.

Verification of one’s social equity applicant status does not:

  1. Guarantee an individual’s admission to the application lottery; or
  2. Replace the need for statutory application materials.

The verification of social equity status is a service being provided at no cost to the prospective applicant. A completed report from the State’s vendor is a required component of the forthcoming application. This portal will close prior to the beginning of the application being open. Please direct any questions to mca.applications@maryland.gov.

Legal Leaf Cannabis Alert – Limitation on Transfer of Ow­­nership of Control of the License

Posted on by Hanna Hefner

The emergency rules for adult-use cannabis went into effect on July 1, 2023. These rules are slightly different from the previous rules. If you operate a cannabis business or invest in a cannabis business, the new rules may require you to get approval from the Maryland Cannabis Administration (MCA) before taking certain actions.

Previously, an “ownership interest” in a cannabis business was defined as only including a “direct” ownership in the cannabis business. However, the new rules define an “ownership interest” to include both “direct and indirect” ownership in the cannabis business. “Indirect ownership” would include an ownership interest in a legal entity that itself is an investor in a cannabis business.

As a result, the new definition impacts not only operators of a cannabis business, but also investors in a cannabis business, whether their investment is directly in the cannabis business or in a legal entity that holds an interest in a cannabis business.

A cautious reading of this new definition would suggest that if a cannabis business has investors who are organized as legal entities (i.e., LLC or corporation), the investors in that legal entity cannot transfer their ownership until MCA approves the transfer.

Because the prior rules only applied to “direct” ownership, a legal entity that owned an interest in a cannabis business would not be required to seek approval from MMCC (the predecessor to MCA) before making changes to its own capitalization table.

If you have questions about the new rules and transfers of equity ownership, please speak with your Shulman Rogers’ Cannabis Industry Attorney.

To see how this applies, please see below.

1. Are you operating a cannabis business?

If yes, you are unable to transfer ownership prior to July 1, 2028.

If no, proceed to question 2.

2. Are you a direct investor in a cannabis business or an investor in a legal entity that holds an interest in a cannabis business?

If yes, proceed to question 3.

3. Does the cannabis business have publicly traded stock?

If yes, proceed to question 3A.

If no, proceed to question 4.

3A. Is your investment in the publicly traded stock greater than 5%?

If yes, you need (a) approval from the MCA, and (b) to provide a criminal history record and financial information to the MCA before transferring your investment in the cannabis business.

If no, you do not need to seek review and approval by the MCA before transferring your investment in the cannabis business. 

4. Does your current investment in the cannabis business, whether directly or through a legal entity, represent more than 5% of the equity of the cannabis business?

If yes, you need (a) approval from the MCA, and (b) to provide a criminal history record and financial information to the MCA before transferring your investment in the cannabis business.

If no, you still need approval from the MCA before transferring your investment in the cannabis business, but you do not need to provide a criminal history or financial information. 

ADDITIONAL RESOURCES

  • In order to seek approval from the MCA, you must submit THIS FORM.
  • Additional MCA guidance regarding transfers of ownership can be found HERE.
  • MCA Guidance for existing medical cannabis licensees can be found HERE.

MORE INFORMATION

The contents of this Alert are for informational purposes only and do not constitute legal advice. If you still have questions about this Alert or any other cannabis-related legal issue, please contact your Shulman Rogers’ Cannabis Industry Attorney for more information.

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Good News, Bad News: Maryland Cannabis Businesses are Essential! But Do Not Qualify for SBA Loan Program

Posted on by dcadmin

As you may have seen, the Governor issued an order on Monday ordering all non-essential businesses and other establishments to close.  The Maryland Office of Legal Counsel issued Interpretive Guidance issued guidance, as well, making it clear that the Order is not a shelter-in-place order, but noted that all Marylanders are urged to remain home and even businesses that are permitted to remain open are urged to promote work-from-home arrangements to the greatest extent possible.

 

Governor Hogan’s Order noted that the list of essential businesses is the same list that the federal government released as “federal critical infrastructure sectors.” There has been some confusion regarding the types of businesses that meet the criteria of federal critical infrastructure. The Interpretive Guidance from the Maryland Office of Legal Counsel provides more detailed guidance on this topic and included a non-exhaustive list of businesses that are considered within the “federal critical infrastructure” sectors. 

 

The good news for cannabis related businesses is that medical cannabis growers, processors and dispensaries are explicitly listed as essential businesses under The Healthcare and Public Health sector.  Accordingly, licensed cannabis growers, processors and dispensaries may remain open. Of course, under the Order, employers are still urged to promote work from home arrangements. 

 

The bad news is, because cannabis remains a Schedule 1 drug and remains illegal under federal law, the new federal SBA loan program for small businesses is not available to cannabis related businesses at this time.   That said, Maryland released some new state funding programs today that may be available to cannabis business.   Here is a list of the newly adopted Maryland programs for small businesses….

 

Emergency Relief Loan Fund – This $75 million loan fund offers no interest or principal payments due for the first 12 months, then converts to a 36-month term loan of principal and interest payments, with an interest rate at 2% per annum. 

 

Emergency Relief Grant Fund – This $50 million grant program offers grant amounts up to $10,000, not to exceed 3 months of demonstrated cash operating expenses for the first quarter of 2020. 

 

Covid 19 Layoff Aversion Fund – The Maryland Department of Labor established this fund with $7 million of State and federal Rapid Response resources.

Cannabis Law Alert: U.S. Congress Takes One MORE Step Towards Legalizing Marijuana, But Don’t Hold Your Breath

Posted on by dcadmin

U.S. Congress Takes One MORE Step Towards Legalizing Marijuana, But Don’t Hold Your Breath

By Scott D. Museles and Hunter M. Haines

On November 20, 2019, the House Judiciary Committee took another step towards legalizing marijuana.  After a favorable 24-10 vote, the House Judiciary Committee approved the Marijuana Opportunity Reinvestment and Expungement Act of 2019 (the “MORE Act of 2019”), which would decriminalize marijuana at the federal level. The MORE Act of 2019 now heads to the House for review. Although it is unlikely that the Act will pass both the full House and Senate, the favorable vote at the Committee level on this Act reflects continued momentum for social equity components of cannabis laws with a focus on the economically disadvantaged and those disproportionately impacted by the war on drugs, or both.

The MORE Act of 2019 would:

  • Remove “Marijuana” from the Controlled Substance Act and retroactively apply the repeal to all prior and pending judicial proceedings;
  • Require federal courts to expunge prior convictions, allows prior offenders to request expungement, and require courts, on motion, to conduct resentencing hearings for those still under supervision;
  • Broaden protections for marijuana users and previous offenders by prohibiting the denial of any federal public benefit, including housing;
  • Expand immigrant protections for aliens, protecting aliens from being denied any benefit or protection under the immigration laws based on any event…relating to cannabis;
  • Create an Opportunity Trust Fund, a fund established to help people impacted by the war on drugs; and
  • Create the Community Reinvestment Grant, the Equitable Licensing Grant, and Cannabis Opportunity Grant through the Opportunity Trust Fund.

Although the MORE Act of 2019 adds a five (5) percent sales tax to purchases of marijuana, the Act brings much needed banking and tax relief to marijuana business owners.  By removing “Marijuana” from the list of federally controlled substances, the MORE Act of 2019 would also:

  • Allow marijuana businesses to bank at banks insured by the Federal Deposit Insurance Corporation;
  • Allow credit cards to be used for marijuana related purchases; and
  • Remove marijuana from section 280E of the Tax Code, allowing marijuana businesses to take advantage of the numerous tax benefits offered to other businesses.

Please contact us if you have any questions regarding your cannabis business or how the Act may affect the operation of your business.

Link to Bill Text: https://www.congress.gov/116/bills/hr3884/BILLS-116hr3884ih.pdf

DISCLAIMER: The contents of this Alert are for informational purposes only and do not constitute legal advice. If you have any questions about this Alert, please contact the Shulman Rogers attorney with whom you regularly work or a member of the Shulman Rogers Cannabis Industry Group.

Cannabis Law Alert: USDA’s Hemp Regulation: What Producers Need to Know

Posted on by dcadmin

On October 31, 2019, the US Department of Agriculture (“USDA”) issued interim rules  (the “Interim Rules”) to implement the 2018 Farm Bill[1] regulating hemp production in the United States.  Under the Interim Rules, States and Indian Tribes that intend to oversee hemp production within their borders must submit their regulatory plans to USDA for pre-approval.  If a State or Indian Tribe elects not to regulate hemp production, then a hemp producer in that jurisdiction can apply directly to USDA for a hemp production license and USDA will be responsible for licensing and regulating the producer.[2] Hemp producers currently operating may continue to cultivate hemp under the 2014 Farm Bill research pilot program; however, on October 31, 2020, the 2014 Farm Bill hemp provisions will expire and state programs must comply with the new regulations.

Applications

If you operate in a State or Indian Tribe that regulates hemp production, then you will apply to your State or Indian Tribe for a license.  Otherwise you will apply to USDA for a hemp production license.  If you operate in more than one State or Indian Tribe territory, you will be required to obtain more than one license.

How do you know if your State or Indian Tribe regulates hemp or is requesting USDA approval to do so?  You can start by checking with your State’s department of agriculture, governor’s office or attorney general – these agencies are responsible for developing and submitting hemp regulation plans to USDA for approval.  Once a State or Indian Tribe hemp regulation plan is approved it will be posted on the USDA website.[3]  

USDA does not want to review applications from hemp producers if the States or Indian Tribes in which they operate will self-regulate hemp.  As a result, USDA will not accept license applications from hemp producers until December 2, 2019 in order to allow States and Indian Tribes to first submit their plans to USDA for approval.

When applying for a hemp production license, you should expect to provide the following information (whether you apply to your State, Indian Tribe or the USDA): 

 

  • Legal description of the land on which you plan to grow hemp (including geospatial location);
  • Acreage dedicated to the production of hemp;
  • For individuals: Full name, residential address, telephone and email;
  • For business entities: Legal business name and location, full name and title of key participants, EIN; and
  • Criminal history report: Criminal history report for all key participants dated within 60 days prior to submission date. Key participants covered by the license may not have a felony conviction in the past 10 years. 

 

Testing Requirements

                You will be required to submit crop samples for testing within fifteen (15) days of your anticipated harvest and are prohibited from harvesting your crop before the sampling is complete.  In order to qualify as hemp (and not marijuana), a cannabis plant must have less than 0.3% THC.  The sampling methodology must demonstrate with 95% confidence that no more than 1% of the hemp plants in the lot would exceed the 0.3% threshold (the “THC Threshold”).  This testing will occur whether the State or the USDA regulates your hemp production.  During the testing, you or your authorized representative must be present and the sampling agency must have complete and unrestricted access to your facilities and inventory. The Interim Rules also include detailed provisions for the licensing of laboratory testing facilities. 

Disposal Requirements, Audits and Non-Compliance

In the event your crop tests above the THC Threshold, you will be required to dispose of the crop in accordance with regulations promulgated under the Controlled Substances Act and regulations of the Drug Enforcement Administration.  In addition, USDA must be notified of instances where crops test above the THC Threshold. 

Hemp producers will also be subject to random audits and a failure to comply with the applicable rules will subject a hemp producer to enforcement action.  A hemp producer that negligently[4] violates the rules can also be saddled with a corrective action plan administered by their State, Indian Tribe or USDA and will need to provide periodic reports on its progress in correcting violations. 

The Interim Rules indicate that any of the following actions will constitute negligent violations of the rules:

  • Failure to provide legal description of land where hemp is farmed;
  • Failure to obtain necessary licenses; or
  • Producing cannabis with THC above the THC Threshold – note, however, that a producer will not be subject to criminal consequences if the producer makes reasonable efforts to ensure the THC level is no more than 0.5%.

 

Next Steps

Hemp producers that have invested heavily in their operations should get a head start on understanding the Interim Rules.  As with any interim rules, there will be questions that remain unanswered and issues that have not been appropriately addressed by USDA.  The comment period for submitting clarifications and comments to USDA is currently open and runs through December 31, 2019 and we anticipate a large volume of comments from our clients.

 

[1] Formally referred to as the Agricultural Improvement Act of 2018.

[2] States and Indian Tribes may also prohibit hemp production in which case hemp producers will not be allowed to apply for a license from USDA.

[3] States and Indian Tribes can submit plans to USDA for approval after October 31, 2019 and USDA must approve or reject a plan within 60 days.

[4] The Interim Rules define “negligence” as the failure to exercise the standard of care that a reasonably prudent person would have exercised in a similar situation.

MORE INFORMATION

The contents of this Alert are for informational purposes only and do not constitute legal advice. If you have any questions about this Alert, please contact the Shulman Rogers attorney with whom you regularly work or a member of the Shulman Rogers Cannabis Group.