Vince Sliwoski
by

Now that the OLCC rules have been out for a couple of weeks, we have had a long, hard look at Oregon’s two-year residency requirement as it relates to recreational marijuana licensees. That stricture applies to every license “applicant,” which is a term of art under the rules. Depending on where you sit, the residency requirement carries different implications. For some it is an important safeguard for Oregon operators; for others, it is a clumsy roadblock that capital must find its way around.

Ballot Measure 91 did not contain residency requirements, but they were added by the legislature and they are codified in HB 3400. That statute requires “an applicant listed on an application” to have been an Oregon resident for two years. See Sections 12(b), 14(b), 15(b), and 16(b) (producers, processors, wholesalers, and retailers). The OLCC was stuck with that in rule-making, despite an apparent change of heart by several members of the Joint Committee on Implementing Measure 91, who wrote last month to the OLCC that they wish to do away with residency requirements in 2016. “We now believe that broad residency requirements and significant limits on outside investment could do more harm than good,” the legislators said. Other key voices, like the Oregonian, agreed.

Oregon cannabis residency requirementsBecause of the last minute groundswell against residency requirements, the OLCC fashioned a rule that allows the commission to keep license applications by non-residents under review until 30 days after the 2016 session. OAR 845-025-115(1)(a). Though this was welcome news for out-of-state players (and their Oregon partners), it does not afford a clean point of entry for non-residents who wish to act as more than passive investors. To understand the specific contours of the residency requirement and how it affects these non-residents, one must dive deeply into the rules. And that takes some focus!

The rules generally distinguish “applicants” from those “who are not applicants but have a ‘financial interest’ in the business.” 845-025-1030(3). An “applicant” includes (1) any individual with a “financial interest” in the business for which licensure is sought that is also “directly involved in controlling the ordinary course of [] the business.” 845-025-1045(1)(a). It also includes any legal entity with a “financial interest” in the proposed licensed business that is also “directly involved in controlling the ordinary course of [] the business.” 845-025-1045(1)(b). The rules clarify that an individual or legal entity will not be considered to be “directly involved in the ordinary course of business” solely by (a) being a member of the entity, (b) being an employee or independent contractor, or (c) participating in matters that are not in the ordinary course of business. 845-025-1045(5).

The term “financial interest” is broadly defined as “having an interest in the business such that the performance of the business causes, or is capable of causing, an individual or a legal entity with which the individual is affiliated, to benefit or suffer financially.” 845-025-1015(15). This includes, but is not limited to, (a) receiving, as an employee or agent, out-of-the-ordinary compensation, (b) lending money, real property or personal property to an applicant or licensee for use in the business at a commercially unreasonable rate, (c) giving money, real property or personal property to an applicant or licensee for use in the business, or (d) being the spouse or domestic partner of an applicant or licensee. 845-025-1015.

Read together, these rules appear to safeguard passive investors, who would not be considered applicants so long as they have limited involvement in the business. At first blush, the rules also seem to indicate that an individual who merely owns shares or a membership interest in a corporation or company, is not subject to the residency standard. Unfortunately, however, 845-025-1045(3) provides that if a legal entity is designated as an applicant, then all members of the legal entity must also be “listed as an applicant” (and strangely, there is no mention of shareholders here, just directors and principal officers of a corporate entity, LLC members, and partnership partners). Moreover, 845-025-1045(10) requires that “an individual listed as an applicant on an initial or renewal application, or identified by the commission as an applicant must maintain Oregon residency while the business is licensed.” This rule appears to require that all members of a limited liability company, and all directors and principal officers of a corporation, be Oregon residents. Could this be what the OLCC intended?

Note that 845-025-1045(3) and 845-025-1045(10), read together, appear misfit with 845-025-1045(5). For example, an LLC member who is “not directly involved” in the business and therefore not an “applicant” under 845-025-1045(1), nonetheless becomes a “applicant” by virtue of LLC ownership (without direct involvement) under 845-025-1045(3). This result may be due to the OLCC’s efforts to distinguish between “legitimate owners” and other owners for purposes of the HB 3400 residency requirements. It’s not clear.

In any case, the rules provide that at least one applicant or the sum of applicants listed on an application must be a “legitimate owner” of the licensed business. 845-025-1045(4). An individual applicant or applicant legal entity will be considered a “legitimate owner” if (a) the individual applicant or legal entity applicant owns at least 51% of the business proposed to be licensed, or (b) one or more individual applicants or applicant legal entities in sum own at least 51% of the business proposed to be licensed. 845-025-1045(6). Ownership means “direct or indirect ownership of the…membership interests, or other ownership interests of the business proposed to be licensed.” 845-025-1045(8).

For non-residents and would-be investors, it is critical to note that the following factors, on their own, do not constitute ownership: (a) preferential rights to distributions based on return of capital contributions, (b) options to purchase an ownership interest that may be exercised in the future, (c) convertible promissory notes, or (d) security interests in an ownership interest. 845-025-1045(7). Many non-residents will use these vehicles to take contingent interests in a licensed business. Those interests would be exercisable in 2020, when the residency requirements sunset, or earlier if the legislature addresses these issues. Hopefully, that happens in the next session.

For now, the OLCC advises us that due to a myriad of questions they have received on the “applicant” and residency issues, they will be publishing examples of specific scenarios with applicant entities involving nonresidents. That should happen next week at the latest. The OLCC also advises that we should see the form of applications in early December. Finally, potential licensees should be encouraged to know that every application will be assigned to an OLCC investigator, who will work with the application’s point of contact on certain issues that could trigger an application denial. This would include residency issues.

5 responses to “Oregon Cannabis and Residency Requirements: It’s Complicated”

  1. This really puts a damper on the idea of large outside money coming into OREGON. What happened to their original mode of thinking. OREGON come guys are you really going to follow the lead of two other states in which the markets are a disaster. I was partnering up to bring multiple ?? millions to town and not alone. There going to botch it watch them.THEY NEED TO OPEN IT UP JOIN THE RECIPROCITY STATES AND LET IT FLOW….. THE FRICKEN POLITICIANS FORGET WHO THEY WORK FOR. THE PEOPLE PASS AN INITIATIVE AND THE GOVERNMENT CHANGES IT RIGHT OFF THE BAT.

    THIS IS THE GOVERNMENT ELECT, TELLING THE PEOPLE ‘WE DO NOT CARE WHAT LAW YOU PASS WE WILL CHANGE IT TO MATCH OUR PROGRAM. IF IT PROVIDES TO MANY FREEDOMS IT SIMPLY CANT BE! IF ITS TO SIMPLE AND STRAIGHT FORWARD WE CAN NOT ALLOW THAT! WTF????? WE ELECT THESE INDIVIDUALS TO REPRESENT AND CARRY OUT OUR WILL!

    IF WE THE PEOPLE WANTED ADDITIONAL CONDITIONS AND RED TAPE AND GOVERNMENT INVOLVEMENT WE WOULD HAVE PUT IT IN THE MEASURE. PEOPLE WE HAVE TO STOP THIS. THEY HAVE TO STOP DOING AS THEY PLEASE AND START DOING WHAT WE TELL THEM. OR STOP VOTING PEOPLE AND LET THERE SYSTEM COLLAPSE.

    THIS WOULD HAVE BROUGHT BILLIONS AND BILLIONS OF DOLLARS TO OREGON. LAST TIME I CHECKED ! OREGON NEEDED IT! THIS IS THE BEST OPPORTUNITY OREGON HAS HAD TO RESTORE THERE ECONOMY AND CREATE UNFORESEEN NUMBERS OF JOBS, SINCE THE COLLAPSE OF THE TIMBER INDUSTRY.
    i AM SEEING THIS EVERYWHERE GOVERNMENTS SIMPLY WILL NOT LEAVE PUBLIC INITIATED POLICY ALONE. THEY ARE OUT OF LINE ! WE NEED TO WRITE A BALLOT MEASURE THAT PREVENTS THEM FROM ALTERING A MEASURE BROUGHT BUY THE PEOPLE AFTER IT IS PASSED. A HANDS OFF POLICY. LEAVE OUR DESIRES ALONG.

    Aidin Penn

  2. I had the very same impression when I read through the rules, with some apparent contradictions. The intent appears to be the primary business operators should be 51% Oregon resident, although outside money would be accepted. Regarding JT’s comment as to what “workaround” there could be, I would recommend partnering with a local grower.

  3. If anyone really knew how they pass bills in the Oregon Legislation. All bills are not actually written by our legislators, they run them through committees, the big one is the Judicial committee in the house and the senate. This would be fine if it wasn’t loaded up with members of a very specific special interest group, they would be members of a tough club to get into, and that club is the Oregon State BAR. All the laws that sound like they were written by lawyers, we’ll…that’s because they are written by lawyers whose presence in our legislative bodies contaminates every aspect of the separation of powers in our Constitution, the BAR controls our courts, that’s where they should stay, and not in our legislature, this UNION of lawyers should stay out of our legislative process. Our legislature merely goes through the motions of voting on the bills written by the BAR namely in the person of a man named Dexter Johnson, he’s the BAR’s goto guy when the BAR seeks to gain control over our legislative process. If the BAR wants a bill written they can make money off of it, they just do so. Just follow the money, the money that Kate Brown handed off to the BAR so they could help indigent people, as yet the actual amount she signed a bill to release these funds to the BAR, it has not been disclosed how much that trust fund the DOJ was holding onto as they claimed they could not find out who the money belonged to , so they just fed it right back to the BAR, not only did Kate sign this bill into law, she sponsored it as the Secretary of State. And she too is a member of the Oregon State BAR, REALLY COOL how she could pull this one off is beyond me. Now it’s time for the accounting of just how much was handed out to the BAR like it was trick of treat money…candy for the lawyers to feast on…Just wait till the February session in Salem, BIG changes are coming in our legal cannabis campaign, and this isn’t just about a plant any more, it’s gotten WAY BEYOND THAT NOW! It’s about getting the government out of our personal choices, and our freedom is only thing we should be watching very carefully as this session get’s started. Peace..

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