Oregon Psilocybin: Business Issues

We’ve been taking early calls on Oregon psilocybin for over a year, going back to when Measure 109 passed. I’m always happy to talk to people, but there simply isn’t much to do yet. Currently, the Oregon Psilocybin Advisory Board (“Board”) and its subcommittees are meeting to formulate recommendations on program rules. Eventually draft rules will appear, and then final rules, and then license applications. But the application process won’t kick off until January of 2023 at best.

Still, some preliminary conversations are worthwhile. We follow the Board’s progress closely, including through the contributions of our own Mason Marks, Chair of the Licensing Subcommittee (see our summary of last week’s meeting here). We also understand the structure of Measure 109 very well. Personally, I don’t mind talking to people interested in what we are rolling out here in Oregon—even if most of these conversations end along the lines of: “It doesn’t make sense for you to hire us yet. Call me when the rules come out.”

So when will rules come out? Look for expedited rules on training programs, products and testing sometime in May of 2022. Then, the Board has until June 30, 2022 to make its final recommendations to the greater Oregon Health Authority (OHA). Final psilocybin program rules will likely issue closer to the December 31, 2022 deadline. In my thinking, we should have a pretty good idea of what’s in play by the fall. Many business applicants will begin ramping up around that time.

In the meantime, I want to sketch out some big picture issues that interested parties should appreciate about the Oregon psilocybin program. These issues often surface in calls and other inquiries. They are structural to Measure 109 and fundamental to conflicts-in-laws issues, but they catch a lot of people by surprise.

I’ll start today with three major issues that are top of mind for me. In the coming weeks, I’ll write a follow-up post or two identifying some more.

There is a residency requirement

Unfortunately, there’s a residency requirement. Fortunately, it sunsets after two years. Cue the crazy business structures.

The residency requirement plays out a little differently depending on the ownership structure of the business at issue, and the type of license sought. For instance, anyone wishing to be licensed as a psilocybin facilitator (trip sitter, basically) must “provide proof that the applicant has been a resident of [Oregon] for two or more years.” For non-personal licenses—e.g., a license to operate a psilocybin service center, or a manufacturing site—a “direct owner” concept exists. In short, at least 50% of the ownership group of any licensed entity must be held by one or more two-year Oregon residents.

Anyone who has talked with me about this topic or followed my writing on cannabis over the years will know that I dislike residency requirements. They are legally dubious, hard to enforce and problematic for businesses. That said, the policy consideration of keeping Oregon psilocybin “cottage”, at least for a minute, seemed to carry the day in 109 drafting. Potential owners and investors should pay careful attention to what the OHA rules provide, and work with an experienced business lawyer used to grappling with these strictures.

It’s also possible the Oregon legislature decides to muck around with this, as it regrettably did with cannabis. Please watch out for that, too.

There are other limits on ownership, even for Oregon residents

Measure 109, Section 21, provides that an individual can hold a “financial interest” in only one psilocybin manufacturer, and no more than five service centers. The term “financial interest” isn’t defined; that’s a job for OHA. But if the agency takes a cue from the cannabis rules, we may see a definition like the one currently found in OAR 845-025-1015(35):

“ ‘financial interest’ means having an interest in an applicant [or] licensee 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.”

The cannabis rules then proceed to list various examples of what does, and does not, constitute a financial interest. The psilocybin rules will likely do the same.

In any case, it is clear that the Measure 109 drafters intended to keep Oregon psilocybin smallish to start. Verticality will be allowed, in the sense that the same individual may own a holding company, for example, which owns a psilocybin production center and couple of service centers. But the limitations will be pretty strict beyond that.

Finally, with respect to the rules generally, one helpful fact is that the gentleman charged with drafting them is a lawyer named Jesse Sweet. Mr. Sweet also served as a primary drafter of the OLCC’s marijuana rules back in the day. During his tenure, the OLCC made changes to its residency rules, “financial interest” rules, and related guidance for cannabis businesses. It’s a boon for OHA and Oregon psilocybin to have someone experienced in the role here.

You might have to pay a ton of tax

Notwithstanding Measure 109, psilocybin (like psilocin) is still listed on schedule I of the federal Controlled Substances Act. This means that any business “trafficking” in psilocybin will be subject to IRC § 280E to some extent.

As with cannabis, the applicability of § 280E will also vary by business and business type. Psilocybin manufacturers and service centers will both feel the bite of § 280E. Of the two, service centers will have it worse because they won’t be able to categorize much as “cost of goods sold” (COGS)– aside from direct wholesale inventory costs.

My guess is we will see certain service centers try to avail themselves of “separate trade or business” status, by bifurcating business lines. (Hey, we’re also an art gallery!) Certain efforts may be defensible, but there are fairly clear “dos and don’ts” with this, as people have learned—usually the hard way—from the cannabis tax cases.

Finally, as to licensed facilitators, these professionals may be able to take the position that § 280E does not apply to their earnings. But I’ll leave this to the psilocybin CPAs.

Speaking of which, stay tuned for part 2 of this series. I’ll write that one next week.