Don’t wait for cannabis regulations to take effect
By Michele Brooke
In California, thousands of non-profit and unincorporated medical marijuana businesses have been formed under existing law. The Medical Marijuana Regulation and Safety Act will likely allow current businesses to choose between non-profit or for-profit, or even a combination of both, beginning in 2018 at the commencement of the licensing process. The new law has 17 different types of cannabis business licenses, including cultivation, manufacturing, transportation, testing and distribution licenses.
With the hope of obtaining a state license and attracting investors, some business owners are considering options for changing their current corporate structure.
Common questions include: Do we want to remain a non-profit? What will give us the competitive edge? And, what is the method by which we change our business structure? All good questions for business owners to ask.
Whether you want to remain a non-profit or change to a different structure depends on your business goals. There are two options for changing the structure: conversion or merger. Conversion is the process by which we change one type of entity into another. Mergers are when one business or parts of a business are infused with another. When businesses merge, in essence, they lose their former identity.
Advantages and disadvantages each method should be discussed with both your cannabis business lawyer — not just a regular attorney — and a certified public accountant who is knowledgeable about the application of marijuana laws. Mistakes could lead to costly litigation, so this is not a time to trust a “cannabis consultant” who doesn’t have the proper degree.
Conversions and mergers are likely to be time consuming, so any structural changes should be done as soon as possible. If you wait until the last minute, you might not be ready when the state starts accepting applications.
Plus, there are a limited number of marijuana business lawyers in California, so an attorney’s caseload might cause the process to take longer. It’s definitely important to think ahead.
The time required to complete a conversion or merger is based on the difficulty of the process, including factors such as provisions in primary corporate documentation and considerations that must be given to the rights of others. Some conversions may even require court orders. Thus, it is advisable to start sooner rather than later, especially if you are seeking investment income. Regardless, the transition should be completed before entering the California license application process.
Why should a business convert from one entity to another? One reason could be that the business is subject to priority in the application process with the state of California. In other words, it has been incorporated and operating legally prior to Jan. 1, 2016. In limited instances, some businesses may have priority to apply before others.
The line to apply for a state license is likely to be long, and state employees are sparse compared to the need, so timing could be critical.
As it is with converting, mergers can be a complex — perhaps even more complex than conversions in some instances. So the same advise applies: Start now! No procrastinating. Be ready to move to the front of the line when the starting gun fires.
Whether a business is merging or converting, it should be considered sooner than later.
Michele Brooke is an attorney in California who practices civil litigation and civil cannabis law (www.brookelawgroup). She is a member of Americans for Safe Access, NORML and the American Herbal Products Association.