Colorado cannabis companies are about to become a lot more competitive.
Colorado licensees, attorneys, accountants, and regulators gathered on Monday for the second of two work group meetings devoted to provisions surrounding House Bill 19-1090, a measure passed in May that will open the state’s adult use cannabis market to publicly traded companies and outside investment.
Prior to the bill’s passage, cannabis business owners felt that the state’s strict requirements regarding these types of investments left them behind operators in other states and without access to capital necessary to compete.
Building on small group discussions and a previous meeting hosted by the Department of Revenue’s Marijuana Enforcement Division (MED) in June, the participants walked through the second batch of proposals, with an emphasis on the scope of potential investors, mandatory disclosure of financial records, and divestiture of bad actors.
Early on in the meeting, Dominique Mendiola, Deputy Director of Policy, Licensing & Communications at the MED, said that the agency has received comments suggesting that it expand the number of securities exchanges that are open to Colorado cannabis companies, which currently include the Canadian Securities Exchange and the Toronto Stock Exchange.
The list of securities exchanges in the bill, said Mendiola, was “negotiated throughout the legislative session in the General Assembly,” though the measure does provide flexibility to expand.
Nevertheless, during public comment, a participant touched on the matter, saying: “I think it’s incumbent upon this group … to at least provide a pathway for exchanges to either apply or have a process by which they go through, rather than have to wait for an additional year of rulemaking.”
The disclosure of financial records was also debated. More specifically, some stakeholders took issue with a section of the proposed emergency rules entitled “Documents Required with Every Regulated Marijuana Business Application,” which, in addition to a balance sheet, an income statement, a cash flow statement, and, when applicable, audit financial statements, also calls for applicants to share their last federal income tax return. This, said Deputy Director Mendiola, “is intended to address [the MED’s] need to verify tax compliance, which is a statutory requirement.”
Opponents argued that filing income tax returns is not proof that taxes have been paid, as one can file a return and then choose not to fulfill financial obligations. Others who did not call for this requirement to be eliminated were still concerned with a sole proprietor being forced to divulge all income when only a percentage of it is affiliated with the cannabis industry. To this end, some stakeholders suggested that the MED only require applicants to enclose documentation tied to regulated cannabis tax forms and liens. However, as other participants pointed out, liens could potentially include income related to other businesses.
Another point of contention between regulators and stakeholders was the proposed divestiture of owners and investors who are deemed bad actors. Under the proposed emergency rules, bad actors must divest within 90 days from regulated cannabis business that are not publicly traded companies. Should the bad actor refuse to comply, the business must take “reasonable steps to secure divestiture,” including “initiating mediation, arbitration or litigation within 180 days after demanding voluntary divestiture.” Otherwise, the regulated business could lose its license.
In the same vein, a regulated cannabis business that is a publicly traded company “must pursue all lawful efforts to divest a Passive Beneficial Owner or Qualified Institutional Investor” within 90 days of being notified. Said company is also required to: (1) “complete the purchase of its shares for cash at the fair market value”; (2) “submit any applicable filing to the Securities and Exchange Commission or other securities regulatory body to divest the prohibited Person of their shares”; and (3) “commence legal action including mediation, arbitration, [and] litigation” within 180 days.
Participants complained that the MED “puts a financial burden on the licensee.” Another stakeholder signaled that when “saying we would have to purchase it back,” the agency is “assuming they want to sell to us.”
Mendiola admitted that the MED had found it challenging to identify other options. Some participants suggested forgoing divestiture and instead having regulated business strip investors of voting rights.
The MED took notes, but, said Mendiola, “If there isn’t removal of that owner from the business’s ownership structure, I think we would still have some concerns.”
The proposed regulations, the agency underscored, are not final and still subject to amendments.