Up in Smoke: Avoiding Disqualification in Cannabis Licensing

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Avoiding Disqualification: Conditions under which the Board may refuse to grant licenses

In a fairly straight forward affair Virginia’s new cannabis law signals a few noteworthy disqualifications for potential applicants to be wary of. Below are the areas where the board may say no to an applicant and a discussion for some of the more intriguing ones.

First we need to know who is an “applicant”

The law views potential applicants as fitting under a wide variety of different types:

  1. The applicant themselves,
  2. A general partner in a partnership,
  3. If the applicant is an association, any member thereof,
  4. A limited partner of 10 percent or more with voting rights
  5. If the applicant is a corporation, any officer, director, or shareholder owning 10 percent or more of its capital stock,
  6. If the applicant is a limited liability company, any member-manager or any member owning 10 percent or more of the membership interest of the limited liability company 

Anyone or anything fitting under one of the defined applicant categories will be scrutinized by the board, so any businesses looking to apply should take stock in whether or not they or any of their listed associates may lead to a disqualification.

The board may disqualify any applicant who

  1. Is not 21 years of age or older;
  2. Is not a resident of the Commonwealth;
    1. Virginia needs to be careful with this requirement as residency requirements have faced tons of litigation over constitutional concerns in other states.
  3. Has been convicted in any court of any crime or offense involving moral turpitude (emphasis added) under the laws of any state or of the United States…; 
    1. Moral turpitude is largely defined in case law and not by statute. In Virginia, The Virginia Supreme Court has suggested that while the common understanding of moral turpitude is a crime that includes “an act of baseness, vileness, or depravity in the private and social duties which a man owes to his fellow man, or to society in general, contrary to the accepted and customary rule of right and duty between man and man,” it has not clearly laid out all crimes that do or do not comport. Virginia’s court does however appear to distinguish between crimes involving dishonesty or fraud as fitting where other crimes not involving an element of dishonesty do not.
  4. Knowingly employs someone younger than 21 years of age;
  5. Is not the legitimate owner of the business proposed to be licensed, or other persons have ownership interests in the business that have not been disclosed; 
    1. One area of continued focus should be about real opportunity for minority ownership and wariness of the potential token ownership. This will be particularly important for prioritized social equity licenses. Some states have faced a backlash as certain businesses actively manipulated the social equity licensing by giving “temporary ownership share(s) to minority investors with limited company involvement in an effort to increase their applications’ diversity score.”
  6. Has not demonstrated financial responsibility sufficient to meet the requirements of the business proposed to be licensed; 
    1. I am wondering myself what this looks like in light of the law also wanting to advance the interests of applicants who come from economically disadvantaged communities and for those who will be seeking the no-interest or low interest social equity based loans. For many who will be seeking to enter this market from an economically disadvantaged background, I wonder if this will be an insurmountable barrier to entry.
  7. Has misrepresented a material fact in applying to the Board for a license;
  8. Has defrauded or attempted to defraud the Board, or any federal, state, or local government or governmental agency or authority, by making or filing any report, document, or tax return required by statute or regulation that is fraudulent or contains a false representation of a material fact; or has willfully deceived or attempted to deceive the Board, or any federal, state, or local government or governmental agency or authority, by making or maintaining business records required by statute or regulation that are false or fraudulent;
    1. Seems like a long winded repeat of number 7, but I think we have a theme around the moral turpitude issue…
  9. Is violating or allowing the violation of any provision of this subtitle in his establishment at the time his application for a license is pending;
  10. Is a police officer with police authority in the political subdivision within which the establishment designated in the application is located;
  11. Is a manufacturer, distributor, or retailer of alcoholic beverages licensed under Chapter 8 (§ 4.1-800 et seq.) of Title 4.1 or a retailer of tobacco or tobacco products;
    1. Maybe it’s a good time for some of those tobacco retailers to consider a new industry?
  12. Has been sanctioned by the Board of Pharmacy pursuant to § 54.1-3316 and regulations promulgated by the Board of Pharmacy for a violation pursuant to Article 4.2 (§ 54.1-3442.5 et seq.) of Chapter 34 of Title 54.1; or
    1. See MedMen in Virginia.
  13. Is physically unable to carry on the business for which the application for a license is filed or has been adjudicated incapacitated. 

Though there are no requirements for an applicant to have secured any properties prior to the final stage of the application process, the board nonetheless may also disqualify an applicant if “the place to be occupied by the applicant” 

  1. Does not conform to the requirements of the governing body of the county, city, or town in which such place is located with respect to sanitation, health, construction, or equipment, or to any similar requirements established by the laws of the Commonwealth or by Board regulation;
  2. Is so located that granting a license and operation thereunder by the applicant would result in violations of this subtitle or Board regulations or violation of the laws of the Commonwealth or local ordinances relating to peace and good order;
  3. Is so located with respect to any place of religious worship; hospital; public, private, or parochial school or institution of higher education; public or private playground or other similar recreational facility; child day program; substance use disorder treatment facility; or federal, state, or local government-operated facility that the operation of such place under such license will adversely affect or interfere with the normal, orderly conduct of the affairs of such facilities, programs, or institutions;
  4. Is so located with respect to any residence or residential area that the operation of such place under such license will adversely affect real property values (emphasis added) or substantially interfere with the usual quietude and tranquility of such residence or residential area;
    1. This is another interesting issue the law raises. How does the board go about determining what will adversely affect real property values? In a recent study by the National Association of Realtors suggests that “the majority of members have not seen a change in residential property values near dispensaries.” So I will be curious what metrics the board comes up with to evaluate this criteria. If it is too loosely defined we may see some problematic zoning decisions in localities that just want to make it more difficult for any cannabis business to exist there.
    2. Scent nuisance is an easy issue that cannabis businesses should be wary of and plan for.
  5. When the applicant is applying for a retail marijuana store license, is located within 1,000 feet of an existing retail marijuana store; or
  6. Setting up a retail store in a way that law-enforcement officers and special agents of the Board are prevented from ready access to and reasonable observation of any room or area within which retail marijuana or retail marijuana products are to be sold.

Catch All Disqualification Language

  1. The number of licenses existing in the locality is such that the granting of a license is detrimental to the interest, morals, safety, or welfare of the public.
    1. This seems like a wide lane from which the board may deny an applicant and it is worth questioning how exactly the board will go about defining “morals.” The law suggests that the board may evaluate based on total density of retail marijuana stores in a community, the character of, population, and density of all related licenses in the community, and based on any bona fide objections filed with the board from the community.

The bottom line here for potential applicants, 1) know who on your team can get you disqualified and have a mitigation plan, 2) get your financial affairs in order and have the clear capital plan to establish a successful cannabis business, 3) make sure everything in your application is accurate and honest.

 

 

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