• Kevin Elliott

Big business favored on medical marijuana?

December 15, 2017 marks the official start of Michigan's green gold rush, as the Bureau of Medical Marijuana Regulation begins accepting licensee applications from prospectors looking to enter what is expected to be a billion-dollar industry. But requirements still being hashed out in mid-November by state regulators have some concerned that those who have already staked a claim in the medical marijuana field will be left out of the state's regulated marketplace.

With the exception of certified caregivers, who are limited to growing a maximum of 12 plants per patient with a maximum of five patients, those hoping to get into the medical marijuana business will need to obtain a license from LARA, Michigan’s Department of Licensing and Regulatory Affairs. Those licenses fall into five categories: growers, who grow, cultivate cure and package medical marijuana for sale; processors, who purchase marijuana from growers and extract the active drugs from the plant for use in making marijuana-infused products, such as edibles, oils and tinctures; provisioning centers, which purchase and may sell medical marijuana and marijuana-infused products; secure transporters, which are the only ones who may transport medical marijuana between growers, sellers and processors; and safety compliance centers, or laboratories that test marijuana for contaminants and drug levels.

The new licenses and framework of the state's regulation system were established under Michigan's Medical Marijuana Facilities Act, which was approved by the legislature and governor in 2016. The law also calls for the creation of a five-member Medical Marijuana Licensing Board, which is responsible for implementing and administering the new act, including licensing, regulating and enforcing the licensing and regulation system. Operating within LARA, the act requires the board to write rules regarding license requirements, license fees, assessments and other criteria for determining the issuance of licenses. The board is also responsible for reviewing applications and issuing licenses, after December 15.

Under the facilities act, the five members of the state's Medical Marijuana Licensing Board, as well as members of their family, are prohibited from being on a board of a licensee or having financial interest in a licensee or applicant. Members must also disclose any legal or beneficial interests in real property that may be directly or indirectly involved with marijuana operations. Those disclosures must be filed with the governor's office, which isn't subject to Freedom Of Information Act requests. The governor's office spokeswoman said the office doesn't release financial disclosures from board members to the public, instead referring requests to LARA.

Under the act, all members of the board must be residents of Michigan, with no more than three being members of the same political party. One — board chair Rick Johnson — is appointed from three nominees submitted by the Senate Majority Leader; one — David LaMontaine — appointed from three nominees submitted by the Speaker of the House. The governor appoints the board chair and the three additional members: Nichole Cover, of Mattawan, a licensed pharmacist and healthcare supervisor for Walgreens who also serves as chair of the state's Board of Pharmacy; retired Michigan State Police Sergeant Donald Bailey, of Traverse City; and Vivian Pickard, of Bloomfield Hills, CEO of the Pickard Group consulting firm and former director of public policy for General Motors, and former president of the General Motors Foundation.

LaMontaine, of Monroe, is a business agent and executive board member for the Police Officers' Association of Michigan.

Johnson, of LeRoy, who serves as the board's chair, manages Common Cents Farm and served in the state legislature, including four years as Speaker of the House.

Johnson, who also spent a decade as a registered lobbyist in Lansing, came under scrutiny in October when the Michigan Campaign Finance Network revealed one of Johnson's former clients is considering pursuing a license from the board he chairs. The story also said Johnson filed financial disclosure information required under the law after being appointed to the board.

The board is currently working to complete and publish emergency rules for license applicants to follow, with final rules expected to be crafted in the following year. Meanwhile, state lawmakers and local municipalities are scrambling to enact additional oversight to shape the state's medical marijuana marketplace. This after medical marijuana was overwhelmingly approved by Michigan voters on a statewide ballot proposal in November 2008.

Legislators in 2016 approved three bills, including the Medical Marijuana Facilities Act, which created the framework for the state's licensing and regulation system that will allow licensed growers and dispensaries, as well as require testing for all medical marijuana for levels of active ingredients, as well as contaminants such as pesticides. The act also allows for the processing and sale of marijuana for edible products, oils and other marijuana-infused items, as well as requires the secure transport of marijuana and marijuana-infused items. Another bill that was passed in conjunction with the Facilities Act allows for the creation, sale and regulation of marijuana-infused items, and provides a retroactive criminal defense for those convicted of violating the state's law, which didn't previously address marijuana-infused items. The third bill created the state's marijuana tracking system, which is required to track all medical marijuana sales and operations, from seed to sale to the patient.

Under the Medical Marijuana Facilities Act, LARA has until December 15 to begin accepting applications for medical marijuana license facilities. Temporary emergency rules are expected to be released by late November, as LARA's Bureau of Medical Marijuana Regulation has issued a series of advisories detailing proposed rules.

Attorney and marijuana activist Matthew Abel, who founded the Detroit-based law firm Cannabis Counsel, PLC, and serves as executive director for Michigan's National Organization for the Reform of Marijuana Laws (NORML), said the proposed regulations have received a lot of push back from those hoping to enter the new marketplace. That includes both caregivers and small business entrepreneurs, as well as big business interests with millions to invest.

"The people who are the trailblazers in this will probably be left out," Abel said, referring to dispensaries and caregivers who currently support the state's 240,000-plus medical marijuana patients.

Under state law and the regulations being formed, caregivers are only permitted to sell medical marijuana to a certified patient who has listed them as their official caregiver. That means caregivers can't legally sell marijuana to dispensaries or random patients. Further, dispensaries currently operating without a state license must acquire a license by June 15, 2018 or shut down. Those dispensaries that continue to operate past the June 15 deadline will risk having their license denied by the state.

Applicants seeking any of the five license categories from the state will be required to undergo thorough background checks, which include a review of their criminal, business and financial history. The state also said it is imposing capitalization requirements from applicants, which includes the sources and total amount of the capitalization to operate and maintain the proposed marijuana facility.

In order to be granted a medical marijuana facility license, applicants will be required to demonstrate capitalization amounts of: $300,000 for processors; $300,000 for a provisioning center; $200,000 for a secure transporter; and $200,000 for a safety compliance facility. Grower licenses are divided into three classes: Class A licenses, which permit up to 500 plants, require $150,000 in demonstrated capitalization; Class B licenses, which permit up to 1,000 plants, require $300,000 in demonstrated capitalization; and Class C licenses, which permit up to 1,500 plants, require $500,000 in demonstrated capitalization.

The capitalization requirements are part of the proposed regulations being formed by LARA, and are not specifically included in the state's Medical Marijuana Facilities Act, which was passed in 2016.

"The state law has no capitalization requirement and some think there shouldn't be one at all," Abel said. "On one hand, you have to have enough money to pay the electric bill, but if I want to fall flat on my face, there are a lot of other businesses that fall flat on their face.

"Some people think they are trying to squeeze out the little guy. I think $500,000 for a 1,500-plant grow seems a little inordinate. Anyone who applies for a license has to give an estimate of gross annual revenue, and to do that you have to write a business plan. I'm not sure if that plan has to be released, but they should anticipate costs for the year. Anyone who goes into it would be foolish if they didn't have an idea to do that, so in a lot of ways the requirements are unnecessary. Yes, they need that much money, but that ought to be up to me to figure it out."

On November 8, LARA's Bureau of Medical Marijuana Regulation issued an advisory saying the licensing board may consider a variety of sources of capitalization, such as 401k accounts, certificates of deposit (CDs) and other common investments to count toward capitalization requirements. At least 25 percent of an applicants' capitalization must be in liquid assets, or be easily converted into cash.

"Capitalization standards are an important part of the regulatory structure that will help ensure both business stability and safe, reliable access to medical marijuana for patients," said Andrew Brisbow, the bureau's director. "These requirements were developed after researching other Michigan industries and best practices from states with medical marijuana regulations."

While most states that regulate medical marijuana facilities have at least some sort of financial review as part of the application process, some, such as Arizona, Connecticut and Nevada, require between $150,000 and $2 million in assets.

In addition to capitalization requirements, licensees will need to pony up tens of thousands of dollars for license fees and annual assessments to the state, as well as local licensing fees where they plan to locate. A non-refundable state application fee estimated to be between $4,000 and $8,000 will be required before an application is processed. That fee is intended to offset costs for LARA and state police for investigative services conducting background checks. An annual regulatory assessment is also due prior to the issuance of each license and may vary depending on the number of licenses anticipated to be issued. Under the law, the assessments must provide at least $500,000 annually to LARA for substance abuse disorder programs, in addition to five percent of the cost of the Michigan Department of Health and Human Services for substance abuse-related expenses. While assessment amounts weren't finalized prior to publication, LARA said Class A licenses are capped at $10,000, with Class B and C assessments expected to be between $10,000 and $57,000.

Additional state-originated costs to licensees include a three-percent tax on each provisioning center's gross retail or receipts; the actual cost of investigations and processing that exceeds the application fees; and

late renewal fees, if applicable.

While some small businesses hopefuls may be unable to meet the financial requirements set by the state, those with considerable funds at their disposal have additional options. For instance, LARA in its advisories has said it will allow for stacking and co-location of some licenses in a single facility, meaning a licensee may apply and be granted licenses for more than one type of activity. For instance, an applicant may apply for and be approved to co-locate a growing operation, processing center for producing oils and edibles, and a dispensary to sell all of the products at a single location. Further, growers are able to "stack" multiple Class C licenses at one location, allowing for multi-million dollar, "mega grow" facilities by stacking Class C licenses that allow for a maximum of 1,500 plants each.

While LARA has issued advisory bulletins on specifics of the regulations, there are emergency regulations that are expected to be issued in late November, and are still subject to change. Meanwhile, lawmakers seeking to address issues themselves are working to push changes through the legislature.

"They aren't showing us any drafts, they are just showing us trial balloons," said Abel. "They will be out in mid-November, and will be extended for six months. That gives the legislature time to go through the formal rule-making process. The whole process takes months, so there's not time for them to pass those (before the December 15 deadline). The emergency rules only need to be signed off by the governor. There will be permanent rules later."

Representative Jim Runestad (R-White Lake) has sponsored a bill in the state house that would place limitations on grower licenses to restrict the stacking of licenses at one single location to prevent "mega grow" operations. "I'm concerned about giant grow operations that could consume the whole industry and blot out the competition,” Runestad said. "Those who want mega grows think it’s the best for capitalism. But do we want a few billionaires or millionaires with a monopoly?"

Runestad said having a mix of both large and small grow operations is a good business model that could provide more competition and more options for patients. Unlimited licenses, he said, could lead to a monopoly which has the potential to snuff out small businesses, allowing super grows to control the market, raise prices and control policy.

"The very large operations are going to basically run off the smaller operators – that's the nature of it," he said.

Runestad said he may be open to more than one Class C grower license at one location but fewer than what he said would be considered a mega grow operation. He said he plans to meet with stakeholders to discern what an appropriate number of licenses at one location may be. Additionally, he said some questioned whether LARA should limit the total number of licenses it issues.

The bill, which was introduced on October 26, is currently being reviewed in the House Judiciary Committee, which is chaired by Runestad. "The testimony today was that 70 percent of these businesses will fail, and the primary reason is overproduction. There are other concern of producers sending it out to other states, or the people not making it going into the illicit market. I will take a look at whether capping makes sense or leaving it limitless," Runestad said. "It's not a federally legal product, so it's different than other businesses where an open market would dictate what's best. I think it does require the scrutiny of the legislature to make the best decision."

Another bill still working its way through the legislature is House Bill 5144, sponsored by West Bloomfield Republican Klint Kesto, who sponsored one of three bills that created the Medical Marijuana Facilities Act and created the state's Marijuana Tracking System Act. Kesto's new bill, introduced in