Like many others, we were caught up in filing a slew of Minnesota adult use cannabis applications for our clients by March 14 (which, if you were paying attention, that deadline was extended to March 15 by midnight because of a crash with the Office of Cannabis Management (OCM) website). Every time a licensing window opens in a state with a new adult use cannabis program, there are lessons to be learned for clients, attorneys, and regulators, alike.
This post summarizes our reflections on the first Minnesota Adult Use Cannabis licensing window that was open to the general public:
- The OCM has two main standards by which it will evaluate these license applications: 1. completeness; and 2. whether an applicant is qualified or unqualified according to the state’s “minimum qualifications” to operate the business. And license applicants are not compared to each other either.
- The OCM specifically wanted to know about the potential long-term success of the business. We’ve operated in other highly regulated states that had a rule for everything but never really bothered asking whether the business acumen of applicants extended to things like financial reporting and tax planning. With this license application, the OCM asked applicants to describe current estimates of various business metrics like anticipated sales, revenue, and number of employees as well as calculating the expected growth in those areas. The OCM also asked applicants to describe how they plan to comply and maintain pace with GAAP accounting standards while also asking about how applicants plan to ensure that they timely file and pay their state and federal taxes.
- Applicants needed to have their corporate ducks in a row. People tend to get caught up in the operational substance of these lengthier applicants while paying little attention to corporate housekeeping. If you are a corporation, the OCM wanted to see articles of incorporation, bylaws, and shareholder agreements (if any) and any amendments thereto. If you are a limited liability company, the OCM wanted to see certificates of organization and operating agreements (even if you’re single member). And if you have a registered tradename, they wanted to see proof of that, too. Most importantly, if that corporate documentation doesn’t match the OCM-provided capitalization table regarding equity owners/true parties of interest, the OCM may deem the application incomplete (or, hopefully, would ask for clarification/amendment–see below on that).
- On disclosed financing and capitalization of the applicant business, the OCM wanted to know details about sources of funding (including bank account numbers). And the OCM also wanted to see all financing agreements and arrangements as part of ownership disclosures. Similar to the corporate documents, applicants tend to leave their corporate finance paperwork as a last minute to-do. And we cannot know if failure to include, for example, a promissory note will be grounds for denial based on incompleteness or if the OCM will follow up asking for the missing document first.
- Since real estate for a licensed premises wasn’t required upon filing, there are very likely to be lots of speculative plans and procedures contained in many of these license applications. OCM understands that though and expects that all application plans will be updated once folks secure their licensed locations. The question though is what changes the OCM will tolerate if updated plans are just a total departure from initial license filings.
- It appears that the OCM is going to see many similar answers throughout these license applications where a lot of applicants simply utilized AI tools like ChatGPT to fill in the blanks with abundant lists of generic information. Given that no actual real estate was required on filing, it doesn’t take much to just ask AI to formulate a plan for compliance with Minnesota building codes or environmental concerns like waste disposal and water (as an example). And that is not to say that those AI-driven answers are incorrect or out of compliance; it’s just that the OCM may not see a lot of applicant-specific or customized responses at this point in the licensing process.
- The OCM put together fillable PDF worksheets with different sections of questions with a 4,000 character limit per fillable section. The question remains whether the OCM will deem a worksheet incomplete (and therefore ineligible to move forward) if applicants didn’t utilize all 4,000 characters to explain their plans and procedures. At the same, if it only takes 2,000 characters to fully answer an application question, should applicants really pay a penalty for not using more words just to fill the space?
- It is up to the OCM to determine both application completeness and whether an applicant is qualified to operate. What is unclear though is what standard the OCM will use to initiate following up with an applicant to secure additional information about an application response. State guidelines only dictate that “The [OCM] may request additional information from an applicant if the [OCM] determines that the information is necessary to review or process the application. If the applicant does not provide the additional requested information within 14 calendar days, the office may deny the application. If the office denies an application, the office will notify the applicant of the denial and the basis for the denial.” This begs the question about whether we’ll see another round of application denials from the OCM where applicants potentially don’t receive any follow up requests for additional information and/or are denied outright without explanation.
- We are likely to see a large volume of microbusinesses with retail endorsements (that can sell both adult use cannabis and lower THC hemp products) since there is no cap on or lottery for microbusinesses.
- This round of licensing has no impact on the issuance of lower-potency hemp licenses, which are anticipated this coming fall. The question is whether or not those licensees will be as regulated as adult use cannabis licensees and/or if their application processes will be as detailed and robust as adult use cannabis licensees.
What this means to you
Our take away is that overall: 1. the OCM very much cares about the longevity of its operators as it pertains to their ability to undertake these licensed operations; 2. there’s a good chance that many applicants utilized general AI to execute these applications, and we cannot know yet know if the OCM will take issue with seeing the same responses across applicants again and again; 3. we cannot yet know the exact standards the OCM will use to outright deny an application for being incomplete versus following up with an applicant for additional information before issuing a denial; and 4. this licensing window really doesn’t shed any light on what the licensing process will be like for existing and new lower THC hemp products.
If you filed for a Minnesota adult use cannabis license and have questions about the process or if you’re exploring future business strategies and/or operational compliance in Minnesota’s adult use cannabis market, contact Jeffrey O’Brien or Hilary Bricken.
