January 22, 2025 By Michael McQueeny , Jesse Harlan Alderman
Medical cannabis in the Commonwealth of Kentucky is now legal as of January 1, 2025, with increasing opportunities for businesses and patients alike.
Investors and market participants should be aware that, although cross ownership of more than 10% across license classes is prohibited, the Governor himself has signaled that there are many opportunities for combining economic interests, such as Management Services Agreements. Meanwhile, licenses can freely be sold and the relocation process for lottery winners is in full swing.
Expect a reshuffling of the deck chairs in the coming weeks and months.
Medical Cannabis Licensing to Date
Governor Andy Beshear took an aggressive posture towards the launch of the regulated medical cannabis marketplace, stating a goal of beginning medical cannabis sales in early 2025. At the end of 2024, the Kentucky Office of Medical Cannabis (“OMC”) awarded the following licenses by lottery:
- 10 Tier I (2,500 sq. ft.) Cultivators.
- 4 Tier II (10,000 sq. ft.) Cultivators.
- 2 Tier III (25,000 sq. ft.) Cultivators.
- 10 Processors.
- 48 Dispensaries.
Now, for all those selected (or those looking to partner with those selected), the hard work begins.
Forward Looking Opportunities
In short, Kentucky recognizes that lottery winners will benefit from the experience and knowledge of accomplished partners. The Governor has stated that license recipients may benefit from the “significant experience that may get [the license] to the market, and get it [there] faster.” As Kentucky’s history to date has confirmed, the focus here is getting licensees operational as quickly as possible in order to benefit the growing number of citizens registering to become medical cannabis patients in the Kentucky marketplace. As of January 7, 2024, Governor Beshear announced that 760 Kentuckians had already applied for a medical card through an online portal launched just last week, notwithstanding the fact that no medical cannabis licensees have yet to commence operations.
The Governor’s statements also provided greater clarity as to what was previously perceived as regulatory gray areas related to permissible economic interests that entities and their owners may hold across the supply chain. The short answer is that financial backing and/or management services provided by holders of licenses in other classes is permissible. The devil will be in the details, and we encourage consultation with our National Cannabis Practice or other counsel in determining the permissible scope of these relationships.
While owners are limited in many material respects (owners of dispensary licenses cannot also be owners of cultivation licenses and ownership is limited to one dispensary per region), those same limitations do not apply to those providing financial support or management services. Notably, whereas transfers of licenses and changes of ownership must be affirmatively approved by OMC through the process identified above, adding new financial backers or management services providers require no such formal approval, and instead, merely requires a duty to report these changes to the OMC. This duty to report and disclose information to the OMC related to those individuals and/or entities is the same as would have been required in the initial application.
Like any new cannabis market, there are growing pains and learning curves associated with the unique nuances of the state in question. Kentucky has modeled itself as patient-first, providing effective and efficient regulations for onboarding the capital, know-how, and experience necessary to help the market flourish. Kentucky, even in its early days, has shown that it has learned from many of the markets that have come before it, and designed itself to be effectively focused on what is necessary to get its market open and operational and servicing patients as quickly as possible.
Clear and Concise Guidance Regarding Changes of Owner, Transfers of License, and Changes of Location
The OMC has provided relatively clear regulations and guidance on how licensees can raise money, including from other license holders.
First licenses can be freely sold and licensees can take on new investors. The OMC has provided clear cut guidance on the materials required for changes of ownership, and even transfers of licenses.
Kentucky law expressly permits the sale of medical cannabis business licenses. Specifically, KRS 218B.080 identifies that with respect to the requirements for licenses, issuance, and renewal, “[t]he cabinet shall approve a license holder’s sale of a license . . . if the purchase and any new facilities meet the requirements” of the law. The pertinent restriction is that OCM may deny a licensee’s sale of a license to any proposed purchaser who currently holds a license in a different cannabis business category than being offered for sale (except for a cultivator seeking another cultivation license in the same or different cultivation tier). Disclosures require transaction details, including the sales price, anticipated closing date, reasons for requesting the sale, etc., as well as providing a transition plan for transferring the license from one purchaser to another. Additional disclosures related to the proposed purchaser must also be provided, including disclosure as to whether the purchaser holds any type of cannabis business license issued by the Commonwealth. Other required disclosures are similar to the initial disclosures made at the time of application, albeit for the new acquiring entity.
The OMC has also provided definitive guidance related to changes of ownership. Pursuant to 915 KAR 1:020, Section 8, to request a change of cannabis business ownership, the licensee must submit a written request to OMC. The request must include information related to the proposed, change, including whether it provides a reallocation of ownership or control among existing owners, and/or new allocation of ownership to new persons/entities who will have ownership or controlling interest. Importantly, and unlike other markets with residency restrictions, social equity programs or holding periods, there is no requirement that a set percentage of owners from the original application remain on the cap table post-closing.
Finally, the OMC has provided guidance with respect to changes of location for licensees. In accordance with 915 KAR 1:020, Section 9, changes of location are permissible, subject to certain limitations. For instance, for dispensary licenses (which are awarded to a specific region), the OMC will not approve a change of location that is outside the boundaries of the medical cannabis region for which the license was issued, to a county within that region that already has a dispensary located there (state rules mandate only one dispensary per county), or for a property that is not otherwise in compliance with sensitive use set back restrictions set forth in regulation. Any request for a change of location must be accompanied by certain mandatory information, including, but not limited to, evidence that the licensee has authority to use the new proposed site, as well as a site plan for that individual site.
Other Resources
For those interested in additional information regarding Kentucky, please review Foley Hoag’s prior webinars, “Kentucky: The Next New Market,” and “Kentucky Medical Cannabis: Applications Go Live,” as well as some of our prior blogs and articles.
