When it comes to cannabis licenses, every state has its own statutory and regulatory quirks that create traps for the unwary. In Michigan, one is the Marijuana Regulatory Agency’s (“MRA’s”) strained interpretation of the limit on the number of grower licenses a person may hold under the Michigan Regulation and Taxation of Marihuana Act (“MRTMA”).
Section 9 of MRTMA prohibits the MRA from issuing a license if doing so would mean that “a person who holds an ownership interest in the marihuana [business] . . . will hold an ownership interest in more than 5 marihuana growers.” MRTMA defines the term “marihuana grower” as “a person [or entity] licensed to cultivate marihuana.” But in applying Section 9’s limitation, MRA interprets the term “grower” to mean a singular grow license.
Since the largest grow license statutorily created by MRTMA allows a licensee to cultivate 2,000 plants, MRA’s view that MRTMA limits anyone to five licenses would mean that a licensee would be limited to 10,000 plants. For a variety of reasons, MRA did not want to enforce the limit according to its own statutory reading. So MRA administratively created the “excess grower license,” each of which allows a licensee another 2,000 plants. (Rule 420.23 describes this license.)
Concerned about the adult-use market displacing supply for medical patients, MRA tied the ability to have excess grower licenses to holding medical grower licenses. To be eligible for excess grower licenses, a licensee must have MRA’s maximum of five “Class C” adult use licenses. A licensee must also have the number of Class C medical licenses that will allow a capacity equal to or greater than the desired capacity under the licensee’s excess grower licenses. This is where it becomes fun for lovers of math. Michigan’s Class C medical licenses allow 1,500 plants. Thus, for a licensee to get a single 2,000 plant excess grow license, the licensee must hold at least two 1,500 plant Class C medical licenses. To obtain two excess grow licenses (4,000 plants), the licensee would need to hold three Class C medical licenses (4,500 plants).
MRA’s Application of the Section 9 Limit and Excess Grower Eligibility Requirements
In applying the Section 9 limit, MRA’s position is that even a de minimis indirect ownership interest in a grow license counts against the license limit. This becomes a significant problem if someone is an investor in more than one cannabis business that possesses grower licenses. For example, suppose Person A holds a 1% interest in Licensee X, which has three Class C adult use grower licenses. Person A then partners with Person B and has a 50% interest in Licensee Z, which has three Class C 2 adult use grower licenses. If either Licensee X or Licensee Z wanted to obtain an additional adult use grower license, that would cause Person A to hold an interest in a total of six Class C adult use licenses. In that circumstance, MRA denies the Licensee’s application for the additional grower license.
MRA has also expanded the scope of the Section 9 limit to include a person’s spouse, because the definition of “applicant” in Michigan’s Medical Marihuana Facilities Licensing Act and in MRA’s Rules includes the spouse of an owner. Even though MRTMA defines “person” as “an individual, corporation, limited liability company, partnership of any type, trust, or other legal entity,” MRA layers the applicant definition from a different statute over the MRTMA definition. Thus, using the example above, if Person A’s spouse was the holder of the 50% interest in Licensee Z, both licensees would still be barred from obtaining more Class C adult use licenses.
MRA then compounds the problem further. Because MRA’s excess grower rule requires the licensee to hold five Class C adult use licenses as a predicate to obtaining excess grow licenses, Licensees X and Z are also ineligible for those licenses.
MRA’s interpretation of the law and its rules can lead to the denial of licenses even when a licensee has no idea that one of its investors has an interest in another business with grow licenses. (We counsel our clients to include a provision in subscription agreements prohibiting investors from holding an interest in any other Michigan company with grower licenses, hardly an incentive for investment.) MRA’s interpretation also means that companies cannot hold grower licenses in different subsidiaries but must use the exact same entity to hold all of their grow licenses. And with medical sales in Michigan accounting for 20% of the market while medical flower accounts for over a third of flower inventory, licensees spend money to hold medical grower licenses solely to qualify for excess grow licenses—without ever cultivating any product under those medical licenses.
To this point, MRA has not been willing to solve these issues. Although MRA’s entire set of administrative rules is undergoing revisions, MRA has decided not to alter the excess grower rule in any meaningful way.
In an effort to force some resolution, one Michigan cannabis licensee has requested a formal declaratory ruling on MRA’s legal interpretation. MRA has until the middle of February to determine if it will in fact issue such a ruling. If MRA decides to do so, we will publish a report. In the meantime, cannabis growers in Michigan businesses should carefully vet potential investors, so they do not suddenly find themselves unable to expand.