Dear Pot Lawyer,
What does the OLCC really mean by “financial interest”?
We received a few questions about our recent article on alternating proprietors–specifically, what exactly qualifies as taking a "financial interest" in a cannabis business. As a bit of background, if you're a licensed cannabis business owner and want to bring on a new person or entity who will have a "financial interest" in your company, then you, the licensee, must submit a change in financial interest form to the OLCC, along with a few information forms for the new financial interest holders.
This doesn't sound too invasive, until you get to the bottom of the form and find that "each new applicant will be required to have fingerprints taken through Fieldprint." As you can imagine, in the current political climate, potential investors and lenders are never very enthused about getting fingerprinted by a government agency to disclose an interest in a cannabis operation.
In the good old days–prior to December 2017–a "financial interest" was broadly defined as "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." In other words, performance-based arrangements–such as royalty agreements, commissions, or sales-based rental agreements–qualify as a financial interest that must be disclosed and receive preapproval.
This definition specifically includes (but isn't limited to) some other arrangements that wouldn't normally seem to qualify under the broad definition: employees or agents receiving "out-of-the-ordinary" compensation, commercially unreasonable loans, and even giving gifts to licensees for use in the business. However, in the golden days, the rules specifically exempted lenders at commercially reasonable rates. This allowed for licensed businesses to borrow funds on short notice without waiting for prior approval. It also allowed venture capitalists to fill the void left by the lack of institutional financing without requiring that each venture capitalist undergo fingerprinting and background checks.
That all changed in late December, when the rules were amended to include any loan that "constitutes a substantial portion of the business cost," regardless of whether the terms are commercially reasonable. Frankly, this doesn't give licensees a lot of guidance, and we hope that the OLCC soon clarifies what it means by "substantial portion." We've seen anecdotal evidence that the OLCC considers "substantial" to mean about $50,000 or 50 percent of the value of the business, whichever is lesser. But without official guidance, licensees at the threshold are taking a risk whenever they decide to use this substantial portion exemption. Still, when an immediate infusion of funds is necessary, many cannabis licensees may find that it's easier to ask forgiveness than to get permission.