Lots of Different Rules Governing Maine’s Marijuana Programs Are Going to Become Official Soon – But When?

We are waiting on final and effective versions of several different sets of rules governing Maine’s marijuana programs. I’ll start with the Rules for the Certification of Marijuana Testing Facilities, since the public hearing for these rules was just yesterday. The hearing was sparsely attended and public comments were not particularly noteworthy. Readers probably know that the Emergency Rules for the Certification of Marijuana Testing Facilities already took effect in September. This is allowed during rulemaking under Maine’s administrative procedures act in certain situations, and so rulemaking continues anyway. Final written comments are due October 10. At that point, we can expect about a month until final testing rules are released since the Office of Marijuana Policy (OMP) will need to work with the Office of the Attorney General to sort through and incorporate any comments.

We are, of course, also still waiting with baited breath for the final adult use rules to be released. These will incorporate, at a minimum, the changes required by the legislature last June. The legislature required some fairly broad changes to the residency requirements in these draft rules, and we are waiting to see how OMP reacts and what the final rules look like accordingly. These adult use rules, the OMP has stated, will be released within the next 60 days.

Don’t forget that the rules governing Maine’s medical marijuana program are outdated. The current rules were enacted before the legislature significantly revised the program in 2018. So expect OMP to also tackle a rewrite of these rules sometime, perhaps this winter.

VLA Committee Recommends Changes to Adult Use Rules

The adult use rules necessary to launch Maine’s new market are still winding their way through the legislature, but they’ve been voted out of committee with a number of changes, and should be sent along (in one form or another) to the Governor in the next couple days. The majority report from the Veterans and Legal Affairs Committee contains the changes to the rules and some related changes to statute. This was handed out during amendment review in the committee yesterday.

While you can peruse the majority report for all the details, a couple of things stand out:

1. The committee is amending statute to state that adult use edibles are not “considered to be adulterated” under Maine’s food code. This places adult use edibles in the same ranks as medical marijuana edibles and, though in different statute, foods containing CBD. 
2. You’ll see that in Section 8 of the majority report, the legislature does not actually “redline” the rules created by the Office of Marijuana Policy. Rather, the OMP will receive these specific directives from the legislature, and it will be up to the OMP to put the rules in a final form consistent with these directives. This leaves a few things up in the air about the rules until we see the OMP’s final version. 
3. The legislature is directing the OMP to eliminate the terms “other interested parties,” “party of control” and “true party of interest” from the adult use rules. The rules will “substitute for those deleted terms the statutory terminology in Title 28-B, subchapter 2 regarding the characterization of ownership interests.” This directive should serve to bring the rules in line with the statute in terms of residency requirements for officers and directors, as well as for owners of marijuana establishments. We have in the past written on the residency requirements generally (here, here, and here). 

Stay tuned as we expect this to move quickly through the legislature and on to the Governor.

If You Believe the Proposed Rules, Regulators Want to Know EVERYTHING About YouOr: A Few Words on Disclosure Requirements

For those who are still scouring the proposed adult use rules, take a look at  the sheer volume of information required to be disclosed to the Department of Administrative and Financial Services (DAFS) by anyone seeking a license, and the Department’s claim to unlimited power to keep digging and digging and digging until “satisfied.”

Section 2.4 seems to be designed to require the disclosure of every contract and relationship and, the Department may argue, could even require you to disclose not only your contractors, but your contractors’ contractors. Remember the broad definition of “party of control” (discussed here), and add to that similarly broad definitions of “true party of interest” and “other interested parties.” An applicant must not only disclose all three categories of “parties” (which could be read to encompass everyone remotely involved with or interested in the business), but must provide “all requested information concerning financial and management associations and interests of other persons, parties of control, other interested parties or true parties of interest in the marijuana establishment” (Rule 2.4.2(B)(2)). 

These regulations take us at least two layers deep, but if the Department wants to keep digging even further, it can. Rule 2.5.1 allows the Department to “require additional information to verify that business structures, loans, franchise 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.”

If these exacting disclosure requirements, combined with broad powers of investigation, remain in the final rules, this will cause headaches on both sides of the process. Applicants will need to be comfortable providing all sorts of sensitive information to regulators, but will also need to be sure their investors, contractors, etc., are comfortable also providing this information to regulators. This is probably something that businesses will want to address, if possible, at the time they enter into their business arrangements to make sure these issues don’t arise in the thick of the application process.

I expect that regulators, too, will find these regulations a bit too much when put into practice. They will need to sift through vast troves of contractual arrangements and other partnerships, many of which will require a particular expertise to decipher. Applicants who want to air on the side of compliance will be almost required to dump their entire filing cabinet on the Office of Marijuana Policy (OMP) just by virtue of the vague nature of the regulations. We’ll see if this language stays in the final rules, and we’ll see if it is relaxed over time through the practice of the Department.

The Public Hearing on Proposed Adult Use Cannabis Rules Is Over, But the Public Comment Period Continues

The public hearing on the proposed adult use cannabis rules took place this morning at the Holiday Inn in Portland. The room was packed with a pretty diverse group of industry folks – banks, towns, and marijuana establishments large and small were all well-represented today. Comments were limited to three minutes per person, and the hearing took barely more than two hours total. Some of the reoccurring issues throughout the morning included: 

• Concerns that testing labs will be a serious bottleneck and drag on the adult use industry
• A number of smaller operators are worried that the rules are too comprehensive and "onerous" and will drive the industry underground
• Concerns that the rules will limit out-of-state investment and make it difficult to work with experts and consultants from other states
• Questions about confidentiality provisions in the rules and the degree that applicant info will be publicly available

The panel of regulators from Department of Administrative and Financial Services (DAFS) and the Office of Marijuana Policy (OMP) seemed to be diligently taking notes this morning, and we’ll have to wait and see how amenable they are to changing the rules as a result of this process. It’s a safe bet that written comments (due June 2) will be more impactful than today’s three-minute spiels, but how impactful, we don’t know. The OMP says that they plan to provisionally adopt final rules and send those rules to the legislature for approval in June. If approved by the legislature, then the rules would likely be scheduled to take effect 90 days later.

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.)