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Yesterday’s election was historic in many ways.  The imminent change in federal administration may have repercussions for state-run legal marijuana regimes.  Until now, states with legal marijuana regimes have been functioning under the protection of what’s called the “Cole Memo” – a document issued by the US Department of Justice, which directs federal prosecutors to use discretion in prosecuting marijuana-related crimes per eight enforcement priorities.  While many believe that Hillary Clinton would have most likely maintained the status quo regarding the Cole Memo, President-Elect Donald Trump’s position is less clear.  Look for future blog posts for more comprehensive analyses on this issue.

Yesterday’s election was a watershed moment for marijuana legalization among the states.  Please see our summary of the results of marijuana initiatives.

Adult-Use Marijuana

Four states have legalized marijuana for adult-use, joining Alaska, Colorado, Oregon and Washington.

  • Arizona (Failed) – The state electorate defeated Proposition 205 with a 52.1 percent “no” vote.  It would have allowed adults to carry up to one ounce, grow up to six plants (12 total per household), and consume marijuana in private spaces.  Retail marijuana sales were set to have a 15 percent tax imposed.  Some Arizona residents expressed concern that decriminalization would not keep up with the new law.  They pointed out that any possession of plants in excess of the limit could still have been charged as a felony.
  • California (Passed) – Proposition 64 makes recreational marijuana legal all along the West Coast and many people argue will mark a path to federal legalization.  Also known as the Adult Use of Marijuana Act, the law allows for adults to possess up to an ounce of cannabis and purchase dried flower and cannabis products from licensed retailers as well as grow six plants for personal use.  Initial taxes imposed include a 15 percent excise tax on retail sales plus a cultivation tax per volume.  Proponents estimate that the Act could result in $1 billion annually in state tax revenue.  One major concern, however, is that large, well-funded investors will swallow up smaller family farmers formerly engaged in the state’s medical marijuana program.  One LA-based private equity fund plans to deploy $75 -$100 million over the next few years to acquire property and build out cultivation centers and dispensaries in Southern California.
  • Massachusetts (Passed) – Question 4 provides for adults to possess up to one ounce of marijuana, keep up to 10 ounces at home, and grow up to six plants.  Marijuana sold by licensed retailers is subject to an excise tax of 3.75 percent in addition to the state’s 6.25 percent state sales tax.  Some concern exists regarding the timetable to get the legal regime up and running.  It took about 3 years for the first medical marijuana dispensary to open after passage of Massachusetts’ medical marijuana law.  Some have also expressed worries that the 3.75 percent tax will fall short of the funds necessary to launch the state’s regulatory scheme which includes the creation of a cannabis control commission.
  • Maine (Passed) –  Question 1 allows people 21 years of age and older to use marijuana recreationally.  The measure would permit each adult to grow up to six plants for personal use and would levy a 10 percent sales tax on retail marijuana and marijuana products while restricting use to private residences.  Under the measure, municipalities could regulate the number of retail stores or ban them entirely.  One concern voiced by legalization proponents is the state-wide cap on canopy space and language which designates 60 percent of licenses for large growers and only 40 percent for small growers.
  • Nevada (Passed) – Question 2, also known as The Regulation and Taxation of Marijuana Act, expands moves already made by some Nevada counties to adopt medical marijuana regulations.  The Act makes it legal for adults age 21 and over to purchase marijuana for recreational use, possess up to an ounce of marijuana, and grow up to six plants at home (if that residence is more than 25 miles from a licensed dispensary).  Wholesale marijuana is subject to a 15 percent excise tax.  Unlike Oregon, the Act limits the number of retail licenses by each county’s population.  Counties with fewer than 55,000 residents could only have 2 retail establishments.

Medical Marijuana

Four states have joined the ranks of 25 states and the District of Columbia in passing or expanding some form of medical marijuana law (not including CBD-only laws):

  • Arkansas  (Passed)  – Issue 6, also known as the Arkansas Medical Marijuana Amendment, is a constitutional amendment that allows an independent commission to grant licenses for up to eight grow facilities and 40 for-profit dispensaries statewide.  It does not provide for home growing.  A second measure, Issue 7, was disqualified by the Arkansas Supreme Court due to lack of compliance with registration and reporting laws for paid canvassers.  This measure would have allowed for some home growing for patients who live more than 20 miles from a cannabis care center.
  • Florida  (Passed) – Amendment 2 provides for the state Department of Health to register and regulate dispensaries and issue ID cards to marijuana patients and caregivers.  Individuals with medical conditions such as HIV/AIDS, epilepsy, multiple sclerosis, PTSD, and Crohn’s disease would be eligible for a card with approval from a licensed Florida physician.  Because Florida’s demographics include 20 million residents, many of whom are seniors, baby boomers, and veterans, many see the passage of Amendment 2 as a lucrative business opportunity.  One newly-formed venture capital firm is currently raising $15 million to fund various medical marijuana-related ventures.
  •  Montana  (Passed) – Ballot Issue 14, also known as I-182, expands legal access to medical marijuana.  It repeals the three-patient limit and other requirements like unannounced inspections and review for physicians who provide certifications.  Newly added qualifying conditions include chronic pain and PTSD.  The implementation of the law could be delayed for months because of an error written into the measure.  The initiative aims to immediately repeal the three-patient limit, but the measure’s language indicates that the limit would not be lifted until June 30, 2017.
  • North Dakota  (Passed) – Initiated Statutory Measure No. 5 or The North Dakota Compassionate Care Act allows for the possession of up to 3 ounces of marijuana for conditions such as HIV/AIDS, cancer, epilepsy, and glaucoma.  It also provides for patients who live more than 40 miles from a licensed dispensary to grow up to eight plants.  The most vocal opponent to this measure was the North Dakota Medical Association.  It claimed that the petition “would be very difficult to implement in a safe and cost-effective manner.”

While these results undeniably illustrate a broad movement by states across the nation to legalize marijuana use in some form, our experience in watching what it takes for an initiative to go from “passed” to fully-implemented suggests that there is a lot that can happen, and there may be more uncertainty regarding what will be required of the industry in each of the states (at least in the short term).  We look forward to assisting our existing clients (as well as new ones) as they navigate the waters in these new markets.

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On September 30, we blogged about the OLCC and OHA’s emergency rulemaking in the face of the October 1 labeling, packaging, and testing deadline. One of the rule changes reduced the OLCC’s requirement for pesticide testing for usable marijuana.  The new rule calls for OLCC staff to assess pesticide testing capacity for the limited number of licensed labs approved for such testing.  After making the assessment, the rule requires the OLCC to issue an order dictating the percentage of usable marijuana a producer must test for pesticides.  Last week, the OLCC issued its first order.  The order states that each producer must submit 33% of its harvest lot batches to pesticide testing.  The entire text of the order can be found here.

The OLCC will most likely issue future orders which increase the percentage of pesticide testing required. We will post future blog entries as each order is published.

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Many people have been asking about what to do if their container is too small to fit all of the required label information. Think tinctures, single-serving shots, or small edibles. Fortunately, the OLCC and OHA heard these concerns and created special rules for small containers. If your container is too small to include all required label information, you may now use additional packaging for display purposes to include this required information.

Minimum Information on Small Container

The container actually holding the marijuana item must contain:

  • Information in a minimum 8-point font, Arial, Helvetica, or Times New Roman;
  • A principal display panel containing required information (product identity, universal symbol, net weight) if required for the type of marijuana item;
  • Business or trade name and licensee or registrant number;
  • For OLCC licensees, package unique identification number;
  • For OHA registrants, batch or process lot number;
  • Concentration of THC and CBD; and
  • Required warnings.

Additional Information

All other required information must be included on:

  • a leaflet or hangtag that will accompany the marijuana item; or
  • an outer package.

If an outer package is used, all required information must be listed on the outer packaging, even if some of it has been included on the inner container.  In other words, outer packaging must have a full label.

Check back next week for more updates, including details on the registration procedure for OHA processors, what to do with unsold dispensary inventory on October 1st, and more!

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If you are an Oregon marijuana business owner, you will need to ensure compliance with not only new labeling rules, but also new packaging rules. The general rule to remember is that all marijuana items must comply with these packaging rules at retail sale to the end consumer. This rule applies to OLCC licensees immediately, and OHA registrants on and after October 1, 2016.

OLCC retailers and OHA-registered dispensaries will want to pay particular attention to the new packaging rules as they are ultimately responsible for ensuring that marijuana items leaving their businesses are properly packaged. With that said, any marijuana business that wants its product to be sold to consumers in their own packaging – without first being placed in “exit packaging” (which is explained below) – will also need to ensure that their products are properly packaged.

Pre-Approval

All packaging must be “pre-approved” by the OLCC. Both OLCC licensees and OHA registrants can pursue packaging pre-approval through the OLCC’s licensing portal (this is the same method used to obtain labeling pre-approval).

The OLCC will publish a list of pre-approved packaging. Any OLCC licensee or OHA registrant may use pre-approved packaging without first seeking permission from the OLCC. If you plan to use a pre-approved package from this list, be aware that:

  • the OLCC has not yet published the list;
  • once the OLCC does publish the list, there is no guarantee that the packaging you plan to use will be on the list; and
  • if you plan to use pre-approved packaging, but of a different size or color than is specified on the list, you may not use that packaging without first obtaining pre-approval from the OLCC.

General Requirements for Packaging

The general rule is that packaging used in retail sales to end consumers must:

  • protect marijuana items from contamination or exposure to toxic and harmful substances;
  • not be attractive to minors; and
  • be child-resistant.

There are three types of child-resistant packaging:

      1. Single Use. This packaging loses its child-resistance once opened; it may be used for usable marijuana (dried flower), single-serving edibles, single-serving topicals, single-serving concentrates, and single-serving extracts. singleusepackage
      2. Continual Use. This packaging maintains its child-resistance throughout the life of the marijuana item within; it may be used for usable marijuana, edibles, topicals, concentrates and extracts. continualusepackage
      3. Exit Packaging. This packaging can be used at the point of sale to enclose non-child resistant packaging. Use of exit packaging ensures that the sale to the end consumer complies with the new packaging rules. exitpackaging

For a complete list of packaging requirements and restrictions, see Oregon Administrative Rules 845-025-7000 to 845-025-7060.

Exception to the Child-Resistance Rule

Packaging does not need to be child-resistant if the product being sold is a marijuana seed or immature marijuana plant. Regardless of this exception, all packaging – including non-child resistant packaging and exit packaging – must be pre-approved by the OLCC.

Transportation Packaging

An additional rule applies to all transfers of marijuana items among OLCC licensees. In short, these transfers must use shipping containers and must be labeled with a UID tag prior to transport. For a complete list of requirements and restrictions applicable to these transfers, see Oregon Administrative Rule 845-025-7700.

For more information, please visit the OLCC’s page for packaging and labeling pre-approval. There you will find links to guides, workshop presentations, and frequently asked questions. If you have further questions, please contact one of our compliance attorneys and we will be happy to assist you with your packaging or other needs.

Tune in tomorrow for information on how small packages (e.g., 5ml plastic screw top containers) can comply with the new packaging and labeling rules.

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Whether you are involved in the medical or recreational side of the Oregon cannabis industry, you will likely be required to comply with new labeling regulations on and after October 1, 2016. These regulations, contained in Oregon Administrative Rule 333-007-0010 to 333-007-0100, apply to all recreational licensees at all times during licensure, and most medical registrants. These labeling requirements do not apply to you if you are:

  • A grower providing usable marijuana or an immature plant to a patient who designated you as their grower or to the caregiver of a patient who designated you as their grower; or
  • A designated caregiver who is transferring a marijuana item to the patient who designated you as their caregiver

Generic Labels

A label that provides only the necessary information required by the rules, and no graphics, photographs, or logos, is considered a “generic” label and requires no pre-approval. You are not required to provide notice to OLCC that you will be using a generic label.

Pre-Approved Labels

All other labels require pre-approval from OLCC before they may be placed on a marijuana item. OLCC licensees and OHA registrants may submit labels for pre-approval through the OLCC’s licensing portal. Although not ideal, if you are unable to obtain pre-approval prior to October 1, 2016, you may use a generic label until you are pre-approved. Going forward, certain label information may be changed without the need for a new pre-approval. The OLCC has been working on detailing what label information this applies to (e.g. strain, net weight, test results, etc.). We will update you as we learn more.

General Requirements for Labels

A container holding a marijuana item must have a principal display panel (PDP) that provides:

  • The product’s identity;
  • The universal marijuana symbol at a minimum size of .48” x .35 inches; universalsymbol
  • If applicable, the medical grade symbol at a minimum diameter of .35 inches; and medicalsymbol
  • Net weight in US Customary and metric units.

Labels must:

Pictograms may be used in place of written label information where appropriate, such as for activation time.  activationpictogram

Specific Labeling Requirements by Product Type

Follow the links below to find administrative rules containing lists of labeling requirements for each different product type.

Prohibitions

A label may not contain any untruthful or misleading statements. These include:

  • Use of the term “organic” unless the product has been certified;
  • Claiming that the product is gluten-free, unless labeling follows FDA labeling requirements for gluten-free products; and
  • Health claims that have not been substantiated by the totality of publicly available scientific evidence, for which there is scientific agreement among experts.

A label must not be attractive to minors. This includes:

  • Brands or designs that resemble a product marketed to children;
  • Brands or designs typically marketed to children;
  • Cartoons; and
  • Images of minors.

For more information, please visit the OLCC’s page for packaging and labeling pre-approval. There you will find links to guides, workshop presentations, and frequently asked questions. If you have further questions, please contact one of our compliance attorneys and we will be happy to assist you with your labeling or other needs.

Tune in tomorrow for information on packaging requirements under the new rules.

 

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We get this question a lot.  Can I have six mature medical plants and four home grow plants?  The answer is YES, (assuming you are over 21 and a patient growing at home).

The Oregon Department of Justice has published an opinion regarding the intersection of the laws that govern Oregon’s medical and recreational marijuana programs.

In summary, an OMMP grow site located at a patient’s residence may have:

  • 6 mature medical marijuana plants (a per-patient limit), and
  • 4 recreational marijuana plants (a per-household limit).

In addition, a patient may possess up to:

  • 24 ounces of usable medical marijuana (a per-patient limit), and
  • 8 ounces of usable recreational marijuana (a per-household limit).

There are different usable marijuana possession limits for growers, depending on whether the grower is producing marijuana at a patient’s residence.

Members of the public may possess only:

  • 4 recreational marijuana plants at his or her household (a per-household limit),
  • 8 ounces of usable recreational marijuana (a per-household limit), and
  • 1 ounce of usable marijuana in a public place.

The opinion also concludes that the limits in the Oregon Controlled Substances Act apply to possession of marijuana concentrates and extracts. Both patients and members of the public must abide by the following possession limits:

  • 16 solid ounces of marijuana products or concentrates,
  • 72 liquid ounces of marijuana products, and
  • 1 ounce of marijuana extract purchased from a licensed retailer or dispensary.

While members of the public may make their own marijuana concentrates, edibles, or other cannabinoid products for personal consumption, it is still illegal to process marijuana extract without a license issued by the Oregon Liquor Control Commission or Oregon Health Authority. The entire opinion is available here: http://www.doj.state.or.us/agoffice/agopinions/op2016-2.pdf.

The information in this blog post is a summary. These laws and rules are nuanced, and are applied differently based on several factors, such as location of possession. Contact a member of our compliance team with any questions.

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In Part 3 of this series, I discussed the residency rules for Ballot Measure 91 businesses that the Oregon Liquor Control Commission (“OLCC”) distributed to members of the Rules Advisory Committee on August 14. The OLCC has not yet made any changes to those rules. However, there is some news to report.

On September 3, Amy Margolis and I met with Steve Marks (Executive Director) and Jesse Sweet from the OLCC to discuss the residency rules. The purpose of the meeting was not to debate the merits of the OLCC’s policy decisions regarding residency. Rather, we were there to: (1) find out what the OLCC’s policy was in the first place; and (2) discuss ways in which: (a) the language in the rules could be clarified; and (b) certain common business organization structures could be specifically addressed. Our firm’s only goal was to attempt to assist the OLCC in making the rules as clear as is reasonably possible, so that license applicants will have some relative certainty (before they file their applications!) that their business organization structures are permissible under the rules. We informed the OLCC that our firm does not support residency requirements and that, in fact, we were reserving the right to assist one or more of our clients in challenging the residency rules.

OLCC’s Current Policy

We were informed that the OLCC’s policy is as follows:

  1. Ownership – 51% of the ownership interests must be owned by two-year Oregon residents.
  2. Management – 100% of the individuals who are directly involved in the operation or management of the business must be two-year Oregon residents.

In Part 3 of this series, I expressed skepticism that the OLCC meant what it was actually saying in the August 14 version of the rules. Either my skepticism was valid or my analysis was partially incorrect, because my interpretation of the OLCC’s August 14 rules concerning management that I stated in Part 3 is not consistent with the OLCC’s management policy stated above. No matter. I now am suggesting that everyone should ignore my management conclusion from Part 3 and consider the above management policy to be the OLCC’s current position, even if the current version of the rules doesn’t exactly say that.

Clarifications / Safe Harbors

At the meeting and in subsequent correspondence, I proposed several clarifications and safe harbors to the OLCC.

On the ownership side of things, I proposed clarifications and safe harbors for: (1) options to purchase ownership interests; (2) convertible promissory notes; (3) preferential distribution rights based on return of capital contributions; and (4) security interests.

On the management side of things, clarifications and safe harbors are particularly important because the numerical threshold (100%) is so high and the substantive threshold (“direct involvement in the operation or management of the business”) is so vague. Of utmost importance, is what exactly does “direct involvement” mean? In Part 2 of this series, I noted that the term “direct involvement “ is not a phrase that is typically used by businesses or business law attorneys. Without clarification, there is simply no understanding what it means. I proposed limiting its definition to participation in the control of day-to-day ordinary course of business matters. There is statutory precedence for such line-drawing. Under the Oregon Business Corporation Act, the Oregon Limited Liability Company Act, and the Oregon Limited Partnership Act, certain major decisions are “kicked up” to the ownership level, while day-to-day ordinary course of business matters are dealt with at the management level. For example, the Oregon Limited Liability Company provides that in a manager-managed LLC, all decisions are made by the managers, except for certain major decisions (which are specified in the statute) that require the consent of the members. See ORS 63.130(2-4). For the OLCC’s residency requirements, it would be beneficial to know that the right to vote on certain decisions that are outside the ordinary course of business does not constitute “direct involvement” in the operation or management of the business.

Legal and Political Pressure

All of our clients should assume that the OLCC’s current policy will, in fact, end up being the policy in the final version of the rules. However, there is always a chance that the OLCC could be affected by certain legal and political pressures.

1. Legislative Counsel Committee Legal Memorandum – At the request of Representative Ann Lininger, Oregon’s Legislative Counsel Committee issued a memorandum that concluded that Oregon House Bill 3400 does not permit the OLCC to impose residency requirements on mere owners of a business. The memorandum was written by Deputy Legislative Counsel Mark Mayer and is dated July 28, 2015 (although it was just recently delivered to us). The memorandum’s legal conclusion is as follows: “For purposes of [Ballot Measure 91 and Oregon House Bill 3400], an “applicant” is a person that participates in the management of the business, owns the business outright or otherwise has the power to control the operations of the business. An “applicant” is not a person that merely has an ownership interest in the business.” The OLCC’s current 51% ownership policy directly conflicts with this legal opinion, and so it will be interesting to see if the OLCC agrees or disagrees with the memorandum.

2. Legislative Days – Members of the Oregon legislature are convening for “Legislative Days” from September 28 through September 30. During Legislative Days, various committees hold informational hearings to hear updates on the implementation of past legislation and to consider potential future legislation. The OLCC’s position on residency requirements could be a topic of discussion, especially in light of the Legislative Counsel Committee’s memorandum.

3. Legal Challenge – A lawsuit could be filed challenging some or all of the residency rules. The ownership requirements could be challenged based on the reasons set forth in the Legislative Counsel Committee’s memorandum. Additionally, all of the residency requirements could be challenged on a constitutional basis. In a subsequent part of this series, I will discuss why the residency requirements probably violate the U.S. Constitution.

4. Oregonian Editorial Board – On September 5, 2015, the Oregonian Editorial Board published an editorial opposing residency requirements for owners.

What to Do

Our overall advice has not changed. If your business is seeking an investment from one or more out-of-state investors, or if your business already has one or more out-of-state owners, and if you haven’t already discussed the issue with us, contact us today to do so. Additionally, if your business is made up entirely of out-of-state owners, and if you haven’t already done so, you should begin searching for one or more Oregon residents who you might be willing to make a co-owner or a manager, director, or officer.

Continue to stay tuned to our blog, as we will post any updated residency information when we receive it.

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On August 14, the Oregon Liquor Control Commission (“OLCC”) distributed to members of the Rules Advisory Committee (“RAC”) a revised draft of the rules that will affect the residency requirements for Ballot Measure 91 businesses.

There are several significant changes from the initial draft of the rules (which initial draft was discussed in Part 2 of this series).

Here are the latest versions of the most relevant provisions:

Definitions

() “Applicant” means any person or legal entity having a financial interest in the business for which licensure is sought and who is directly involved in the operation or management of the business
(a) Direct involvement in the operation or management of the business may be indicated by, but is not limited to, the following behaviors, benefits or obligations:
(i) Any person or legal entity that exercises control over, or is entitled to exercise control over, the business;
(ii) Any person or legal entity, that incurs, or is entitled to incur, debt or similar obligations on behalf of the business;
(iii) Any person or legal entity, that enters into, or is entitled to enter into, a contract or similar obligations on behalf of business [sic];
(iv) Any person or legal entity that identified [sic] as the lessee of the premises proposed to be licensed.

() “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, and such interests include but are not limited to:
(a) Receiving, as an employee or agent, out-of-the-ordinary compensation, either in the form of over-compensation or under compensation;
(b) Lending money, real property or personal property to an applicant or licensee for use in the business;
(c) Giving money, real property or personal property to an applicant or licensee for use in the business; or
(d) Being the spouse or domestic partner of an applicant or licensee. For purposes of this subsection, “domestic partners” includes adults who qualify for a “domestic partnership” as defined under ORS 106.310.

845-025-XXXX
Applicant and Licensee Qualifications

(1) An applicant must:
(a) Be at least 21 years of age; and
(b) Be the legitimate owner of the business proposed to be licensed; and
(c) Until January 1, 2020, have been a resident of Oregon for at least two consecutive two years [sic] prior to the date the initial or renewal application was submitted.
(2) Individuals listed as applicants on an initial or renewal application, or identified by the commission as an applicant must maintain Oregon residency while the business is licensed.

845-025-XXXX
Legitimate Ownership

In determining whether an applicant is the legitimate owner of the business proposed to be licensed or subject to license renewal the Commission:
(1) Must consider whether at least one applicant owns at least 51% of the business proposed to be licensed or whether one or more applicant [sic] in sum owns at least 51% of the business proposed to be licensed; and
(2) May consider whether an individual or legal entity other than an applicant, or an employee acting under the direction of an applicant, is directly involved in the operation or management of the business.

This is my best analysis of what the latest versions of the rules say:

1. Two-year Oregon residents must own at least 51% of the business. The OLCC has provided for this in a rather roundabout way by adding the “legitimate owner” requirement to the Applicant and Licensee Qualifications provision, and then by saying that the OLCC, in determining the identity of the legitimate owner, must consider who (individually or in the aggregate) owns 51% of the business. See clause (1)(b)) of Applicant and Licensee Qualifications and clause (1) of Legitimate Ownership.

2. If any single individual controls the business, or if any single individual has the unilateral authority to take certain actions on behalf of the business (such as incurring debt or entering into contracts), then that individual must be a two-year Oregon resident. The OLCC’s language is not clear here, but this appears to me to be the most likely interpretation. Under the rules, an individual is not an “applicant” unless the individual is “directly involved” in the operation or management of the business. “Direct involvement” means controlling the business or having the right to take certain actions on behalf of the business. If there is a single owner who completely controls the business, then the rule is clear and can be simply applied. However, consider a multiple-owner scenario where a business is owned only by minority investors, some of whom are residents and some of whom are non-residents. For example, assume that a business is owned by four individual shareholders (25% each) and that all four shareholders are also directors. Then assume that the shareholders/directors adopt a common “majority rules” approach, where a majority of the shareholders/directors (three out of four) make all decisions on behalf of business. Finally, assume that two of the shareholder/directors satisfy the two-year Oregon residency requirement and the other two do not. Under this common scenario, no individual person controls the business and no individual person has the unilateral ability to do anything without the majority’s approval. Who then, from the OLCC’s perspective, would be “directly involved” in the operation or management? Because the definition of “direct involvement” in the latest version of the rules does not contain the “individually or in the aggregate” concept that appears in the Legitimate Ownership provision, it stands to reason that each individual person must be analyzed on his or her own to determine whether the individual controls the business or has the right to take certain actions on behalf of the business. Consequently, under the above multiple-owner scenario, I would say that none of the individuals is directly involved in the operation or management of the business.

Some observations:

Observation #1 – If my interpretations are correct, then the revised rules appear to be a complete flip-flop from the initial draft of the rules. As was noted in Part 2 of this series, in the initial draft of the rules, the OLCC seemed much more concerned with non-resident managers than non-resident owners. However, under the revised draft of the rules, the focus seems to be primarily on making sure: (1) that 51% of the owners (individually or in the aggregate) satisfy the residency requirements; and (2) that no single individual non-resident controls the management of the business.

Observation #2 – I’m a bit reluctant to say this, but at this point I believe it has to be said. Both drafts of the OLCC’s rules regarding residency are worded so poorly, and are so vague and ambiguous, that I essentially don’t have much faith in my own analysis of what the rules actually mean. Or to be more accurate, I don’t have much faith that the OLCC’s rules say what the OLCC actually means. Or even worse, it’s entirely possible that the OLCC does not even know what it wants to say in the first place. The rules regarding “direct involvement” in management are not clear even when considering the most basic and simple organizational structures. And there are many other more complicated (but quite common) organizational structures that are not even being contemplated by the OLCC. Additionally, the OLCC’s way of drafting open-ended non-exclusive definitions (“Direct involvement . . . may be indicated by, but is not limited to . . . .”), together with the absence of any safe harbors, will make compliance a virtual guessing game in many scenarios.

Observation #3 (editorial comment) – In my opinion, it is practically unconscionable that the residency requirements have not yet been finalized. The Oregon Medical Marijuana Act never contained any residency requirements for ownership or management. Ballot Measure 91 intentionally did not contain any residency requirements for anyone. The Oregon legislature, in an unfortunate move, imposed a residency requirement on somebody, but then failed to say who. And now the OLCC is struggling with what it wants to do on this issue. From a policy perspective, residency requirements have absolutely nothing to do with public safety, with the ability of the OLCC to conduct criminal records checks, with law enforcement, with the eight Federal enforcement priorities set forth in the “Cole Memo,” with Oregon tax revenues, with local jurisdictions, or with anything else, other than good old-fashioned economic protectionism. And for that very reason, from a legal perspective, residency requirements probably violate the U.S. Constitution (which I will discuss in a subsequent part of this series). In just a bit more than four months, hundreds and hundreds of businesses will be submitting license applications to the OLCC. And a substantial number of those businesses have no idea if their current ownership and management structures will be legal under the OLCC’s rules. Organizing and capitalizing businesses takes a significant amount of time, energy, and money. Reorganizing and recapitalizing businesses so close to the opening day of applications will cause a substantial number of businesses to spend time, energy, and money that is better spent on safety, compliance, higher employee wages, and other matters. For the sake of the entire industry, this issue should be decided and finalized as soon as possible. And just as importantly, the rules must be absolutely clear on the front end. If the rules are vague, ambiguous, or too simplistic, and if the applications of businesses are denied based on some 2016 after-the-fact policy interpretation by the OLCC, there is certain to be litigation and finger-pointing.

Recommendation to the OLCC

At this point, the OLCC should seriously consider taking a more benign and objective approach to residency. The OLCC would be well within its statutory authority to require only that a single individual on the application be a two-year Oregon resident, or that some other relatively minimum threshold be satisfied. This would have the following positive effects: (a) businesses would be better capitalized overall, and would be able to spend more money on “industry best practices” instead of being forced to spend money on corporate legal fees, owner buyouts, and other reorganization matters; (b) the process of reviewing initial applications by the OLCC would be simplified; (c) the process of reviewing change forms for future changes of ownership or business structures would be simplified; (d) the likelihood of one or more lawsuits being filed against the OLCC alleging the unconstitutionality of residency requirements would be practically eliminated; and (e) the likelihood of individual lawsuits being filed against the OLCC alleging the improper denial of an application based on unclear residency requirements would be substantially reduced.

To the extent that the OLCC is dead set on promulgating rules that impose significant residency requirements, the OLCC should promptly consult with one or more experienced business law attorneys to ensure: (a) that there are no ambiguities in the rules; (b) that the rules are sophisticated enough to capture scenarios that are common in organizing and structuring businesses; and (c) that the rules contain safe harbor provisions that make clear that certain organizational and management structures will not violate the rules.

What to Do

If your business is seeking an investment from one or more out-of-state investors, or if your business already has one or more out-of-state owners, and if you haven’t already discussed the issue with us, contact us today to do so. Additionally, if your business is made up entirely of out-of-state owners, and if you haven’t already done so, you should begin searching for one or more Oregon residents who you might be willing to make a co-owner or a manager, director, or officer.

Continue to stay tuned to our blog, as we will post any updated residency information when we receive it.

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On July 17, the Oregon Liquor Control Commission (“OLCC”) distributed to members of the Licensing, Compliance, and Enforcement Technical Advisory Subcommittee an initial draft of certain rules that would affect the residency requirements for Ballot Measure 91 businesses.

The most relevant provisions relating to residency are as follows:

Definitions

() “Applicant” means any individual:
(a) Having a financial interest in the business for which licensure is sought and who is directly involved in the management of the business; or
(b) Who owns 51% or greater interest in the business proposed to be licensed; or
(c) Any individual who is a managing member, partner or director or officer of a legal entity if the legal entity owns or operates the business for which licensure is sought.

() “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, and such interests include but are not limited to:
(a) Receiving, as an employee or agent, out-of-the-ordinary compensation, either in the form of over-compensation or under compensation;
(b) Renting or leasing real property to an applicant or licensee for use by the business;
(c) Lending money, real property or personal property to an applicant or licensee for use in the business;
(d) Giving money, real property or personal property to an applicant or licensee for use in the business; or
(e) Being the spouse or domestic partner of an applicant or licensee. For purposes of this subsection, “domestic partners” includes adults who share the same regular and permanent address and would be financially effected by the success or failure of the business as well as adults who qualify for a “domestic partnership” as defined under ORS 106.310.

845-025-XXXX
Applicant and License Qualifications

(1) An applicant must:
(a) Be at least 21 years of age; and
(b) Until January 1, 2020, have been a resident of Oregon for at least two consecutive two years [sic]prior to the date the initial or renewal application was submitted.
(2) Individuals listed as applicants on an initial or renewal application, or identified by the commission as an applicant must maintain Oregon residency while the business is licensed.

Here is my analysis:

Observation #1 – The OLCC seems much more concerned about non-resident managers than non-resident owners. For example, it appears that a non-resident individual could own up to a 50.99% interest in a licensee, so long as the non-resident individual is not a manager, partner, director, officer, or otherwise directly involved in management. In fact, it would appear from the rules that 100% of the ownership interests of a licensee could be owned by non-residents so long as: (1) no individual non-resident owned a 51% or greater ownership interest; and (2) the owners hired an Oregon resident to be the sole manager of the business.

Observation #2 – Certain words and phrases in the rules are either ambiguous, or are not sophisticated enough to capture scenarios that are common in organizing and structuring businesses.

For example, the term “directly involved in the management” is not a phrase that is typically used by businesses or business law attorneys. The phrase may have come from Representative Ann Lininger’s oral legislative history (which was mentioned in Part 1 of this series), where she stated that the definition of applicant was intended only to include a person who “directly manages” the business. However, the line between “direct” and “indirect” involvement in the management of a business is definitely not self-evident. A more commonly-used phrase (and perhaps this is what Representative Lininger and the OLCC are trying to get at) is the term “ordinary course of business”, which is usually used to distinguish between: (1) day-to-day operational decisions that are generally made by managers or officers; and (2) more significant decisions that are generally made by members, shareholders, and directors. However, even that distinction is unclear, and what might be the ordinary course of business for one company may not be the ordinary course of business for another. Another commonly-used phrase is “control,” which usually means that one or more individuals have a majority of the voting power.

As another example, the term “51% or greater interest” could, in some circumstances, be ambiguous. Not every entity has only one class of ownership interests, and some owners may have the right to receive preferential returns for a period of time. In a typical preferential return scenario, a cash investor may have the right to receive 100% of the distributions from the entity until such time as the investor recoups the entire amount invested, and then, after receiving such amount, would have the right to receive a lesser percentage of all future distributions. Depending on the numbers and percentages before and after recoupment, it may be unclear whether an individual would be considered the owner of a “51% or greater interest.”

Observation #3 – The policy behind the rules is difficult to discern. Like most sets of line-drawing rules, there are scenarios that can be articulated that make the rules seem nonsensical. For example, a corporation having only Oregon shareholders and only Oregon directors would nevertheless be disqualified merely because it hired a single non-resident officer as an employee. On the flip side, as was noted above, an entity having no Oregon owners could obtain a license merely because it hired an Oregon resident to be the sole manager.

Observation #4 – The draft rules may be inconsistent with Sections 12, 14, 15, and 16 of HB 3400. As was mentioned in Part 1 of this series, the phrase “an applicant listed on an application” in Sections 12, 14, 15, and 16 of HB 3400 arguably indicates that only one individual listed on the OLCC application needs be an Oregon resident. Also, although the OLCC may have considered Representative Lininger’s oral legislative history when drafting clause (a) of the definition of “Applicant,” the OLCC disregarded the other portion of her legislative history where she stated that the definition of “Applicant” for residency purposes was intended only to include a person who “directly manages” the business. Therefore, clauses (b) and (c) of the definition of “Applicant” in the draft rules are inconsistent with Representative Lininger’s legislative history. (In a subsequent part of this series, I will discuss the possibility that the residency requirements for a marijuana license violate the Commerce Clause of the U.S. Constitution.)

Recommendation to the OLCC

To the extent that the OLCC is going to promulgate rules that impose residency requirements, the OLCC should consult with one or more experienced business law attorneys to ensure: (1) that there are no ambiguities in the rules; and (2) that the rules are sophisticated enough to capture scenarios that are common in organizing and structuring businesses. Additionally, and ideally, the rules should contain “safe harbor” provisions that make clear that certain business organizational structures will not violate the rules.

What to Do

If your business is seeking an investment from one or more out-of-state investors, or if your business already has one or more out-of-state owners, and if you haven’t already discussed the issue with us, contact us today. Additionally, if your business is made up entirely of out-of-state owners, and if you haven’t already done so, you should begin searching for one or more Oregon residents who you might be willing to make a co-owner or a manager, director, or officer.

Stay tuned to our blog, as we will post any updated residency information when we receive it.

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Ballot Measure 91 intentionally did not include any residency requirement for anyone who owned or who was otherwise involved with a licensed marijuana business. Since 2014, the Oregon Medical Marijuana Act (“OMMA”) required the person responsible for (“PRF”) a medical marijuana facility (“MMF”) to be an Oregon resident. However, because there was no requirement that the PRF had to be an owner of the MMF, OMMA never contained any residency requirements for anyone who owned an MMF. OMMA did not license growers or processors, and so those businesses were never subject to any residency requirements.

House Bill 3400, which was signed by the Governor on June 30, 2015, has changed all of that.

Ballot Measure 91

For Ballot Measure 91 businesses, HB 3400 imposes a two-year residency requirement. Who exactly needs to be a resident? Unfortunately, we don’t know yet because the legislature has, somewhat surprisingly, delegated that decision to the Oregon Liquor Control Commission (“OLCC”).

For producers, processors, wholesalers, and retailers, HB 3400 requires that “an applicant listed on an application” must have been an Oregon resident for two years. See Sections 12, 14, 15, and 16. Who has to be listed on an application? HB 3400 doesn’t say. And that’s how the legislature has, in a rather subtle way, delegated the decision to the OLCC.

For some context, the OLCC has defined “applicant” under the Oregon Liquor Control Act (the “Liquor Act”) to include all of the individuals and legal entities who own or have an interest in the business. For each corporation or other legal entity, this means: (1) each principal officer; (2) each director; (3) each person or entity who owns or controls 10% or more of the entity’s stock or who holds 10% or more of the total membership interest in the entity or whose investment interest is 10% or more of the total investment interests in the entity; (4) each manager of a limited liability company; and (5) each general partner of a limited partnership. The Liquor Act does not contain any residency requirements however. And so that rather broad definition of “applicant” in the Liquor Act is solely for other purposes, including criminal records checks.

The exact language in HB 3400 for residency purposes is a bit peculiar. The phrase “an applicant listed on an application” is unique and does not appear in the Liquor Act. The phrase seems to contemplate that a Ballot Measure 91 application, like a Liquor Act application, will include a list of one or more individuals and legal entities. And the phrase “an applicant” could indicate that only one of those must be an Oregon resident. (The legislature easily could have said “each applicant listed on an application” must be a resident, but it didn’t.) The “an applicant” phrase can also be compared and contrasted to the criminal records provision in HB 3400, which states that the OLCC may require the fingerprints of “any individual listed on an application.” See Section 10. And finally, there’s some oral legislative history from Representative Ann Lininger, where she states that the definition of “applicant” for residency purposes was not intended to apply to every investor, but rather was intended only to include a person who “directly manages” the business. See Representative Lininger’s testimony at the 1:12 mark.

Still, at this time, the only thing we know for sure is that at least one individual listed on each producer, processor, wholesale, and retail application must have been an Oregon resident for two years. Presumably we will know more when the OLCC publishes the initial draft of its rules under Ballot Measure 91.

Handlers

Individuals who perform work for or on behalf of a Ballot Measure 91 marijuana retailer must obtain a permit from the OLCC. HB 3400 does not impose any residency requirements for such individuals. See Sections 19 and 20.

Laboratories

Laboratories that test marijuana items (under both Ballot Measure 91 and OMMA) must be licensed by the OLCC. HB 3400 does not impose any residency requirements for anyone who owns or who is otherwise involved with a licensed laboratory. See Sections 92(7) and 93.

OMMA

HB 3400 imposes residency requirements for medical marijuana producers, processors, and dispensaries that will be registered by the Oregon Heath Authority (“OHA”).

For medical marijuana producers, the residency requirement applies to: (1) the PRF of the marijuana grow site; and (2) any other person whose name is included in the application. See Sections 81(2)(b) and 173(1). Other than the PRF, HB 3400 does not say who has to be listed on a medical marijuana producer application. Therefore the legislature has, for medical marijuana producers, delegated to the OHA the decision of who exactly needs to be a resident.

For medical marijuana processors, the residency requirement applies to each individual responsible for the marijuana processing site. See Section 85(2)(b). This language is slightly different from the PRF language for medical marijuana producers, although the reasons for the difference are not evident. And for some reason, Section 173, which adds the potentially broad “any person whose name is included in the application” language, does not apply to processors.

The residency requirements for medical marijuana dispensaries are the most stringent. For dispensaries, the residency requirement applies to: (1) each individual responsible for the medical marijuana dispensary; and (2) each individual who has a “financial interest” in the dispensary. See Sections 86(2)(a), (b), and (d) and 173(1). The term “financial interest” is not defined in HB 3400, and so the OHA will presumably define the term in its rules. However, by the plain meaning of the term, the definition would almost certainly include each direct and indirect individual owner of the business, and perhaps even unsecured lenders, third parties whose compensation is based on a percentage of revenues or profits, and others.

The residency requirement for the PRFs and the individuals responsible for the registered sites is two years. For medical marijuana producers and retailers, the residency requirement for all other persons included in the application is two years, unless a person first registered with the OHA on or before January 1, 2015, in which case it is one year. See Section 173(1).

Operative Dates

HB 3400’s residency requirements for Ballot Measure 91 businesses become operative on January 1, 2016. See Section 178(1).

HB 3400’s residency requirements for medical marijuana businesses become operative on March 1, 2016. See Section 179(1).

What to Do

If your business is seeking an investment from one or more out-of-state investors, or if your business already has one or more out-of-state owners, and if you haven’t already discussed the issue with us, contact us today to do so. Additionally, if your business is made up entirely of out-of-state owners, and if you haven’t already done so, you should begin searching for one or more Oregon residents who you might be willing to make a co-owner.

Stay tuned to our blog, as we will post any updated residency information when we receive it.

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