High Stakes
By Scott Foster, Esq.
The Massachusetts House of Representatives recently unanimously adopted House Bill 4206 (HR4206), which would introduce fundamental changes in how the Massachusetts cannabis industry is regulated and managed. These changes include:
• A complete overhaul of the structure of the Cannabis Control Commission (CCC), moving from five full-time commissioners appointed by the governor, the attorney general, and the state treasurer to three commissioners in total, each of whom is appointed by the governor acting alone, with only the chair serving in a full-time capacity;
• Increasing the number of retail licenses under common control from three to six, potentially paving the way for increased consolidation in the market but also allowing early entrants to sell their business to multi-state operators and realize a significant gain on their investment of time and money;
• Legalizing CBD gummies, hemp-infused beverages, and other CBD edibles, while clearly controlling the manufacture, distribution, and sales of these products; and
• Opening the door a bit wider for employee stock ownership plans, which allow employees to potentially realize significant retirement benefits from long-term employment while also saving on taxes.
Two significant changes are also a bit ‘half-baked’ at the moment, and the Massachusetts Senate could provide more clarity on the implementation of these changes when it begins deliberations.
Currently, no individual or entity can own more than 10% of more than three licenses per category (e.g., retail, manufacturing, and cultivation). HR4206 appears to increase that threshold to 35% by exempting “any person or entity that possesses a financial interest in the form of equity in a license of less than 35%” from these license caps.
However, HR4206 leaves in place the definition of a ‘controlling person,’ which includes “any individual who has a financial or voting interest of 10% or greater.” Under the current regulations, an individual cannot be a controlling person over more than three licenses per category. The Senate has the opportunity to reconcile these seemingly contradictory provisions.
HR4206 also proposes a new delinquency reporting system that mirrors that which the Alcohol Beverages Control Commission has in place with respect to alcohol sales in the Commonwealth.
Going forward, no marijuana establishment will be able to offer credit terms to another marijuana establishment of more than 60 days from the delivery of products. If a purchasing establishment does not pay its invoice within these 60 days, the selling establishment is required to notify the CCC of this non-payment within three days, at which point the CCC reviews the situation and will post the name of the delinquent establishment on a newly created ‘delinquency report.’
At that point, no other selling establishment will be able to offer the delinquent establishment any credit terms, and all future purchases must be paid in advance or cash on delivery. Further, the CCC will not process any change of control applications for the delinquent establishment until the past due amounts have been settled.
While this may sound reasonable, the reality is that a large number — some believe a majority — of the current establishments have accounts payable over 60 days. Since HR4206 does not explicitly apply retroactively, these currently overdue accounts would not be considered delinquent.
This raises multiple issues regarding the future allocation of payments, such as whether a future payment applies to the oldest invoice or the most recent invoice, and whether the purchaser can specify to which invoice a future payment should be applied.
Hopefully, the Senate will consider the nuances of these significant changes and provide the necessary clarity before the bill is finalized. Either way, given the broad support already seen for overhauling the current statute, cannabis businesses (and their lawyers) should be on alert for a significant shift in how they operate.
Scott Foster is a partner at Bulkley Richardson in Springfield; (413) 272-6258; [email protected]
