The text of this article was originally published in the Argent Communications Group’s Cannabis Law and Regulation Reporter. It is reprinted here with permission.
The Complex Policies of Oregon Recreational Cannabis Financial Interests Rules
The OLCC’s Responsibility to Oversee Financial Interests in its Licensees
One of the primary responsibilities of the Oregon Liquor Control Commission’s recreational cannabis division is ensuring that the program and its licensees avoid running afoul of federal enforcement priorities, as laid out in the now rescinded Cole Memorandum. Limiting ownership of and financial interest in recreational cannabis companies is crucial in complying with several of those priorities. Thus, oversight of financial interest in and ownership of licensed businesses is necessary for a healthy industry.
As the industry has matured and evolved, ownership structures and financial interests have become more complicated, thus complicating the pre-approval and disclosure rules, and leading to rule and policy changes. Licensees, their attorneys, and even OLCC representatives, often find themselves confused about which category an entity or individual falls into and whether or not personal information and fingerprints need to be included in the application.
The OLCC is releasing new guidance this summer to clarify the rules and policies. Meanwhile, the agency continues to adjust and hone the rules based on industry changes and stakeholder input. This article is a non-exhaustive explanation of the current rules implemented by OLCC according to the new guidance.
Basic Reporting Requirements
Depending on its connection to a licensed business, an individual or entity may need to submit one of several forms, and an individual may need to submit fingerprints for a background check. Further, while some changes to the licensed business’s structure and its financial interest holders require only disclosure to the OLCC, most require preapproval. The maximum penalty for failing to properly disclose or gain preapproval for financial interests and changes in ownership is license cancellation. The OLCC has become increasingly focused on enforcement of these types of violations.
Individual History Form
The Individual History Form discloses to the OLCC an individual’s identifying information, including their birthdate, social security number, address, spouse or domestic partner’s identity, and some information about their criminal history.
Each business entity type has a corresponding entity questionnaire. These questionnaires are used to disclose an entity’s owners and the people who control the entity.
Individuals who are required to submit to a full background check provide fingerprints through Fieldprint office. Their fingerprints are then used by the state police to run a background check, with the results being provided to the OLCC within about a week of fingerprinting.
Financial Interest Holders
The OLCC takes a broad definition of “financial interest” in determining who has a financial interest and is subject to disclosure and approval requirements. According to OAR 845-025-1015(26), “’financial interest’ means having an interest in the business such that the performance of the business causes, or is capable of causing, an individual, or a legal entity with which the individual is affiliated, to benefit or suffer financially.”
Financial Interest Holders Outside the Licensed Structure
Individuals and entities outside the licensed structure are generally those that they do not have a direct or indirect right to any ownership of the business, either on their own or through an entity or spouse or domestic partner. The following individuals and entities are financial interest holders:
- Those that are entitled to receive any portion of revenue, profits, or losses from the business. This includes landlords who receive a portion of a business’s profits as rental payment and employees who are paid compensation based on the performance of the business. Contracts must be carefully drafted to avoid creating unintended financial interests; even some intellectual property licensors can be financial interest holders based on the structure of their compensation.
- Individuals and entities that loan or give $100,000 or more to a business, or 50% or more of the business’s start-up costs if less than $100,000, if such loan or gift is unsecured and not convertible into ownership interest in the company.
- Individuals and entities that loan money to a licensed business at a commercially unreasonable rate. The OLCC does not have a firm definition of “commercially unreasonable rate” at this time. The OLCC should be consulted if a licensed business, investor, or an attorney representing one of the parties is unsure about whether a particular interest rate is commercially reasonable.
Financial Interest Holders Within the Licensed Structure
Financial interest holders within the licensed structure broadly includes anyone with a direct or indirect right to any ownership in the licensed business, whose interest is not sufficient to make them an applicant, as described below.
Financial interest holders within the licensed structure include:
- Spouses, domestic partners, and financial interest holders of applicants.
- Individuals and entities with an ownership interest of less than 10% in the licensed structure.
- Individuals and entities with loans that are secured by an interest in the business or its assets.
- Individuals and entities with convertible loans of any amount to the business.
Documentation Required for Financial Interest Holders
Entity financial interest holders must submit entity questionnaires and an analysis will be done on their owners and operators to determine the status and documentation requirements for each.
Individual financial interest holders must submit individual history forms. Some individual financial interest holders, such as convertible note holders, must submit fingerprints as well.
The following individuals and entities are applicants:
- Individuals and entities that do or can exercise control over the business, over an applicant entity within the licensed structure, or over an applicant entity outside the licensed structure, other than under the direction of an owner.
- Individuals and entities that do or can incur debt on behalf of the business, other than under the direction of an owner.
- Individuals and entities that do or can enter into contracts on behalf of the business, other than under the direction of an owner.
- Individuals and entities identified as lessees on a lease for the license premises.
- Individuals and entities that hold or control 10% or more of a licensed business, or of an applicant entity within the licensed structure. “Holds or controls” includes any right to receive revenues or profits of the business, such as in the case of a lease that provides for a landlord receiving 15% of the company’s profit as rent payments.
- Individuals and entities that hold or control 10% or more of an applicant entity outside the licensed structure.
Documentation Requirements for Applicants
Entity applicants must submit entity questionnaires. The owners and operators may be financial interest holders or applicants and need to submit the corresponding documentation.
Individual applicants must submit individual history forms and fingerprints.
More About Entities
When an entity has a financial interest or is an applicant, the owners and those who have direct control over the entity are generally subject to the same pre-approval and disclosure requirements as they would be if they owned or controlled the licensed business directly. Thus, if a corporation is an applicant entity, such as because it owns 20% of the licensed entity, the corporation’s principal officers, directors, and shareholders holding 10% or more of the corporation are also applicants, subject to the same disclosure requirements (entity questionnaire or individual history form) and, for individuals, the same fingerprinting and background check requirements as if their ownership or control were in the licensed entity. The disclosure and 10% or more ownership or control test is repeated until there are no more entities that hold financial interests or are applicants. Note that this may result in an individual with only a small ownership interest in the licensee being subject to fingerprinting. For example, if a corporation with ten shareholders, each owning 10% of the corporation’s stock, purchases 15% of a licensed business, the shareholders of the corporation will be subject to fingerprinting requirements, even though they each have only a 1.5% interest in the licensed entity.
Preapproval of Changes
Changes to a licensed business’s structure and financial interests generally must be approved by the OLCC prior to being implemented. This includes reallocation of ownership interest among current owners.
Publicly Traded Companies
Publicly traded companies that own or invest in licensed businesses have a hard time complying with some of the disclosure and preapproval rules. A company cannot gain OLCC preapproval for ownership changes when their shares are trading on the open market, and they may not be able to determine the identity of all of their shareholders. While the rules themselves do not exempt publicly traded companies from disclosure and approval rules, the OLCC has been flexible in finding solutions that allow publicly traded companies to participate in the industry without weakening the OLCC’s ability to properly oversee ownership interest and control of licensed entities.
OLCC Representative Discretion
OLCC representatives have discretion in determining which parties related to a licensed business or applicant business need to submit to various levels of vetting. While business owners and attorneys can generally rely on these guidelines, they should be prepared to provide additional information as requested and for any individuals related to the business to have to provide fingerprints. The risk of surprise background checks or additional information requests increase as the business structure becomes more complex and OLCC representatives are likely to ask for more information if a business structure appears designed to shield particular individuals or entities from being disclosed to or vetted by the OLCC.
Proper disclosure and approval of financials interests in a licensed business is among the most important compliance tasks for a licensed business. The OLCC takes its responsibility to monitor financial interests seriously and the penalties for financial interest related rules violations are severe. These rules and the policies surrounding them will continue to evolve for the foreseeable future. Industry players and their legal representatives need to monitor the rules and policies diligently to ensure compliance.