Gov. Polis Just Broadly Expanded Cannabis Investment Opportunities in Colorado
Starting in November, it will be possible for publicly traded companies to directly invest in Colorado cannabis businesses.
Colorado Governor Jared Polis signed off on a bill on May 29 that will greatly expand investment opportunities in the state’s cannabis market.
The bill will allow cannabis companies operating in Colorado to become publicly traded companies and expand the kinds of funding those companies could access come November when it goes into effect.
The governor officially signed off on HB 1090 Wednesday afternoon, a month after it passed its third reading in Colorado’s State Senate. Advocates say the new law will remove burdensome restrictions on who can own a cannabis business in Colorado.
Before HB 1090, Colorado had a rule that prohibited any corporation that was publicly traded from owning any part of a cannabis plant-touching business. Other states with legal cannabis, such as California, have no such rule.
What Colorado’s New Law Means for Cannabis Investment
Charles S. Alovisetti, a partner at the well-known national law firm Vicente Sederberg LLP, provided a breakdown of the bill to Cannabis Now that he coauthored with in-house law clerk Jason Adelstone.
Alovisetti and Adelstone first noted that, when the law goes into effect in November, in addition to the major change that it will permit public companies to get a license in the state, it will remove the current extensive disclosure process that is required for people if they own less than ten percent of a company.
Alovisetti spoke with Cannabis Now on Wednesday via email, just prior to the governor signing the bill. He said right now, Colorado has one of the strictest legal regimes in the country in terms of who can own a license — no public companies may own a business that holds a license and companies are limited to 15 investors if they have any owners that are out of state.
“Both those restrictions will end on November 1 and Colorado will then have a cannabis ownership system similar to other states,” said Alovisetti. “This is will be very beneficial to smaller businesses that have been struggling to raise money to grow and run their businesses.”
For other larger businesses, such as Medicine Man Technologies — a cannabis consultancy incorporated in Nevada but based in Colorado, the changes to Colorado law can provide them with the opportunity to solidify their business. Medicine Man Technologies, for example, consults for clients in 18 states and is listed on the OTCQX Marketplace, but its parent company, Medicine Man Denver, is a medical and recreational dispensary that has a license in Colorado.
“For as long as we have been operating in Colorado, we have not been able to take advantage of our leadership position in the state,” said Joshua Haupt, the Chief Revenue Officer for Medicine Man Technologies, in an email to Cannabis Now. “Now we can!”
He continued: “We intend to move very quickly to take advantage of this new legislation to seek the opportunity to further grow the company through acquisition, as well as organically… We’re obviously very bullish on what this means for our future.”
How Colorado Companies Have Navigated the Ownership Rules
We asked Alovisetti, if like in other instances, people had found ways to get around the regulations in the past.
“There were, and are, ways of investing in cannabis business as a public company that are compliant — as examples, there are currently no prohibitions on a public company lending a cannabis company money or being a landlord of a cannabis company,” he replied. “But those are indirect means of investing and most people want to be able to directly invest in, or own, the business holding the license. So the new bill makes the system more palatable for investors and creates opportunities for businesses.”
In his report with Adelstone, Alovisetti went on to warn everybody not to jump to conclusions too quickly, though, given that the state still has to draft the actual rules for how all this will work. If companies were to risk getting in the mix before the rules are in place, it might not sit well with regulators, who have previously penalized companies for getting into business deals before the deal was actually legal.
“The signing of HB 1090 opens a new era for the Colorado cannabis industry, “said Alovisetti and Adelstone. “Where the old law prohibited public corporations from owning even indirect equity stakes, the new law allows certain publicly traded companies to own licensed cannabis businesses within Colorado. And where the old law required at least one owner to meet the one-year residency requirement, the new law only requires all individuals with day-to-day operational control to be Colorado residents. The new law also allows non-U.S. citizens to own equity in a licensed business.”
HB 1090 will scrap a lot of the old categories of ownership in Colorado’s cannabis industry.
Three new categories will replace the ones that previously existed. The first category is a “Controlling Beneficial Owner,” which is where one unit runs the show, either a person or private equity firm that owns more than ten percent of the business. The second category is a “Passive Beneficial Owner,” where the owner is chill and likely doesn’t have too much to do with anything too hands on. Almost anyone who is not the Controlling Beneficial Owner with any part of the company will likely fall into that group except for the third category, the “Indirect Financial Interest Holder.” Those are people being compensated for their intellectual property.
The National Cannabis Industry Association’s media relations director Morgan Fox echoed Alovisetti’s hopes for small businesses having a new route to investment.
“I think the biggest impact it will have is opening up possibilities for a broader range of capital sources for businesses, especially for small businesses,” said Fox. “This is particularly important given the lack of traditional lending caused by the current federal banking regulations.”
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