Authors: Jay Purcell, Shareholder; Duncan Delano, Shareholder; Natalie Diaz, Law Clerk
New York’s True Party rules are intricate and evolving. Here, we analyze some of the concepts implicit in New York’s True Party regime and its exceptions, based on the 5/23 Proposed Regs. This analysis is based on proposed regulations; in other words, this analysis will become obsolete as soon as final regulations are promulgated (likely second half of 2023).
Additional True Party Concepts
“Control” means “expressed or reserved…power to order or direct management, operations, managers or policies.”[1] Like the other definitions, it is capacious and lacks bright-lines. Notably, the definition of Control is silent about negative covenants; in other words, an investor without whose consent a licensee cannot do X, Y, or Z might reasonably argue that she lacks Control.
“Financial Interest” is an umbrella term[2] that means holding any form of equity or security in a licensee, including unexercised options and warrants, SAFEs, convertible notes; and, the right to compensation that exceeds 10% of a licensee’s revenue, 50% of its net profit or $250,000 annually. Financial Interest may also include the investments and compensation of a person’s parent, children, spouse and domestic partner.[3] We can’t predict the future, but the family-relations component of this definition is likely to change, because it is impossible for regulators and licensees to verify an investor’s parents’ and children’s participation in the New York cannabis industry. It is also bizarre public policy.
“Major Compensation” means 10% of a licensee’s revenue, 50% of its net profit, or $250,000 annually.
“Passive Investor” is the key exclusion from the True Party regime. A Passive Investor holds a Financial Interest that does not reach the level of a True Party, because the ownership interest does not exceed 5% of a public company licensee or 20% of a private company licensee and the ownership interest lacks Control or Influence. [4].
Plain English Meaning
- There are exceptions to New York’s True Party Rules
- Passive Investor means a Financial Interest not exceeding 5% of a public company and 20% of a private company, and lacking Control. Passive Investors are not True Parties.
- True Party means holding a Financial Interest, having Control, having a right to Major Compensation, or being spouse of any of the foregoing.
- Control means power to order or direct management, operations, managers or policies; and, serving as an officer, director, managing member, or similar role.
- Financial Interest means holding any investment or security (including unexercised options) or holding a right to Major Compensation. Every Financial Interest is either a True Party or a Passive Investor.
[1] 5/23 Proposed Regs 118(28).
[2] 5/23 Proposed Regs 118(42).
[3] 5/23 Proposed Regs 118(42) (“… actual or future right to ownership…of voting stock or equity investment, or compensation …either directly or indirectly, through…, spouse, domestic partner, parent or child”)
[4] 5/23 Proposed Regs 118(76); also excluded is a less commonly occurring 10% holder in a private ROD or microbusiness.
