More Changes to Maine’s Marijuana Program Are on the Table on February 10

Earlier this week, the Veterans and Legal Affairs Committee in Maine’s legislature considered a series of bills related to Maine’s marijuana program. I discussed one of those in this blog post.

Now, there are three more bills up for a public hearing on February 10:

• An Act to Impose Further Restrictions on Where Marijuana May Be Smoked
• An Act to Improve Compliance with Department of Administrative and Financial Services, Office of Marijuana Policy Registration and Licensure Requirements
• An Act to Amend the Marijuana Legalization Act and Make Other Implementing Changes 

The latter two are both children of the Office of Marijuana Policy. Those who were present at the hearing earlier this week will recall that OMP asked the committee to hold off on any significant changes to Maine’s adult use program. Perhaps consistent with this position, nothing proposed in either OMP bill is really big or structural. But…

Of note, the committee will be considering a new category of licensee: a "marijuana establishment support entity," which seems to be a way for OMP to regulate "sample collectors" who will be working with testing facilities and, perhaps, others who touch the product but don’t fit neatly into a current category of licensee.

OMP is also proposing an exemption to Maine’s Freedom of Access Act for certain discrete categories of information, including trade secrets related to marijuana cultivation, etc., and standard operating procedures for marijuana establishments.

Big picture: we can expect the State to continue tweaking our marijuana programs for years to come. I won’t be surprised by some key changes this session, with more and bigger changes to come down the road.

Adult Use Residency Rules Are Bad Business

If you saw our previous post on the residency requirements in the proposed adult use rules, you know that they severely restrict the ability of non-Maine residents to own equity, operate, or exert “more than minimal influence” over a Maine cannabis business. Putting aside the legality of the rules (and the legality of the residency requirement in the statute, which may also be questionable), these residency rules are bad business and will harm Maine’s burgeoning cannabis industry.

Maine cannabis companies do not qualify for bank loans or other traditional sources of financing. The typical way cannabis companies raise capital is through equity investment and, for many companies, at least some of their equity investors live out of state. It is also customary in the industry to have management or consulting agreements in place with companies from other states who have expertise in an area of processing, cultivation, or product development that your company does not have, with royalties paid to consultants in return for their time and expertise. In addition, many cannabis companies are beholden to private lenders for equipment loans or leases. The expansive residency rules go far beyond the statute’s mandate to have 51% of owners be Maine residents, and would arguably prohibit or severely restrict Maine cannabis companies from having or entering into any of the foregoing arrangements. And existing caregiver and dispensary operations may be required to rethink their ownership structures and contractual relationships before entering into the adult use market, as DHHS has historically allowed consulting and management agreements with out-of-state vendors.

The legislature created residency requirements focusing on ownership, rather than control, because this allows outside investment to come into Maine in certain forms so long as it does not upset the 51% residency requirement. This balance is necessary to the growth of Maine’s cannabis industry. Other states have taken restrictive approaches to outside investment when they launched their adult use cannabis markets, only to loosen these restrictions down the road. Oregon initially required 51% of a cannabis business to be owned by two-year residents but repealed the requirements in 2016. According to the Cannabis Association Executive Director, Amy Margolis, the residency requirement was a failure because it stifled investment and hurt Oregon business owners. Margolis said: “[f]or every five people who came into my office, three or four of them were looking for capital, and they couldn’t find it here in Oregon. It became clear that unless people could reach outside the state for investment money, we weren’t going to have a very successful market.” Colorado similarly loosened its residency requirements to allow for out-of-state investment. We shouldn’t disregard the hard lessons learned by other states.

Prohibiting out-of-state investments for cannabis companies will only result in reduced investment into the Maine economy and will result in Maine having an industry that’s less competitive than states with more lenient or no residency requirements. A less healthy industry means fewer jobs for Maine people, fewer choices for Maine consumers, and an industry susceptible to falling behind other states. This is why the legislature struck a balance and did not effectively prohibit outside investments in Maine cannabis businesses. The Office of Marijuana Policy Department of Administrative and Financial Services should not substitute its judgment for that of the legislature and slow the growth of Maine’s adult use marijuana industry before it even starts.

What’s up with the Residency Requirements in the Proposed Adult Use Rules?

If you’ve looked at the proposed adult use rules, you’ve probably noticed some pretty expansive language limiting the ability of non-Mainers to play really any role in a Maine marijuana business. The Marijuana Legalization Act already requires that every officer, director, manager, and general partner of a marijuana business must be a Maine resident, and requires that “a majority of shares” or “other equity ownership interests” must be held by Maine residents (See 28-B MRS § 202(2)). Now the proposed rules go way beyond these restrictions in statute. 

The statute allows 49% of a business to be owned by non-Maine residents, for example. The rules, though, prohibit any out-of-state person or entity from exerting “more than minimal influence, through direct or indirect financial interest, over decisions regarding the operation of a marijuana establishment.” Whoa. To spin this out a bit: If I’m from Delaware and I own 20 percent of a Maine marijuana business, I’m 100 percent in compliance with the law. But wouldn’t a 20 percent owner necessarily exert “more than minimal influence” over decisions of the business? These rules seem to prohibit what the law allows, which makes the legality of the rules questionable. (More on this in forthcoming blog posts.)

Finally, I’ll just note that the proposed rules give the Office of Marijuana Policy Department of Administrative and Financial Services broad authority to dig, deeply, into the corporate structure and dealings of any applicant or licensed business. Check out rule 2.5.1, which allows the Department to “require additional information to verify that business structures, loans, franchise agreements, royalty agreements and other legal arrangements or anything else regarding true parties of interest, parties of control or other interested parties are not being used to circumvent ownership requirements.” Depending on the Department’s motivation, it can keep digging and digging and withhold a license until its satisfied that residency requirements, etc., are met.

(I am trying not to bury too many legal citations in this blog, to make it digestible, but to spell out the residency requirements explained above, check out section 2.3.1(B)(2) on page 15 of the proposed rules, which states that “no person or entity shall create a party of control to a marijuana establishment license consisting of less than a majority of residents.” Now, check out the definition of "party of control" on page 9 of the rules. This definition is frighteningly broad, as quoted above.)