Out of state investment in the Colorado marijuana business.
The State of Colorado has introduced a bill regarding marijuana ownership rules. SB 16-040 has passed the Colorado House and Senate and is now awaiting signature by the Governor. These changes would impact any new applications occurring on or after January 1, 2017. The changes apply to both medical and retail licenses.
These changes are generally beneficial to marijuana business owners, since they would allow marijuana businesses to obtain more funding from out of state lending sources. The bill creates three types of funding relationships: direct beneficial interest owner, indirect beneficial interest owner, and qualified limited passive investor.
Direct Beneficial Owner:
A direct beneficial interest owner is a person who owns part of the business. This could include members, managers, officers, and directors. Businesses can have as many direct beneficial interest owners as needed as long as the individual has been a resident of Colorado for at least one year. Non-residents can be direct beneficial interest owners as well, but need to receive a finding of suitability from the MED. Such investors include institutions like banks and insurance companies.
Indirect Beneficial Owner:
Indirect beneficial interest owners are permitted economic interests, and would include situations like intellectual property royalties, employee profit sharing, or institutional investors. Businesses may take advantage of qualified limited institutional investors, but those investors may own only 30% or less of the marijuana business. The bill does not specifically provide for the residency requirements of indirect beneficial owners, but it is likely that the MED will use a standard similar or less rigid than that for direct beneficial owners.
Qualified Limited Passive Investor:
Qualified limited passive investors are passive investors with less than 5% share in the business. The state licensing authority will run a limited background check on these individuals, and may conduct a more thorough investigation if needed. The MED will create regulations regarding these individuals, and the specific qualifications are not included in the bill. The intent is for these to be the most minor form of investor, presumably requiring the least review and lowest requirements. These investors must be United States citizens, but do not need to have any Colorado residency.
These three categories will allow new businesses to receive startup funds from out of state investors and be generally more permissive of different ownership structures. The hope is that this will benefit Colorado businesses and reduce the amount of illegal out of state money introduced.
The opportunity for out of state investment is beginning to open up. Since this is new, it is likely that the MED will struggle with defining the above categories and the approval process. As always, proceed with great caution and a conservative approach to such investment.
Be sure to read the full proposed changes here: