Michigan’s Medical Cannabis Industry Could Go To The Highest Bidder

As the old adage goes, “it takes money to make money.” At least that is the way cannabis seems to be heading in Michigan, as they develop new medical cannabis regulations. 

In September 2016, the Michigan Legislature passed House Bills 4209, 4827, and 4210. Michigan Governor Rick Snyder signed these bills into law—creating a directive to form a regulatory framework for medical cannabis. The state is instructed through these bills to have the system ready to take applications for licenses by December 15, 2017.

The first thing Michigan did was put the Department of Licensing and Regulatory Affairs (LARA) in charge of developing the structure for this new business. This has caused consternation among Michigan residents, who are watching the birth of their legalized medical cannabis industry. The biggest issue that LARA currently faces is the financial tangle of licensing.

The first financial flag that jumps out at a potential licensee is the nonrefundable fees. “In addition to fees associated with a state license, a municipality may require a nonrefundable fee of up to $5,000 to operate within its boundaries,” states the LARA frequently asked questions (FAQ) document.

The state fee is projected to be in the $4,000 to $8,000 range. LARA says this is dependent on the number of applications received. This nonrefundable fee must be submitted before an application will be processed. The application also includes a background check that even Mother Teresa herself would be unlikely to pass. 

On November 8, 2017, LARA released another blow to the pocketbook, informing potential licensees of the capitalization requirements set forth by the Bureau of Medical Marihuana Regulations (BMMR). These regulations are declared “subject to change,” like the application fee.

•Grower: Class A (500 plants) – $150,000
•Grower: Class B (1,000 plants) – $300,000
•Grower: Class C (1,500 plants)  – $500,000
•Processor – $300,000
•Provisioning Center (or dispensary) – $300,000
•Secure Transporter – $200,000
•Safety Compliance Facility (or testing lab) – $200,000

Within the bulletin is a breakdown of the required assets, which must be validated by CPA-attested financial statements. Liquid assets, which convert quickly into spendable form, must form 25% of the capitalization amount. Such assets include:

•Checking accounts
•Savings accounts
•Cannabis infused inventory
•Certificates of deposit
•401k accounts
•Stocks and bonds

The remainder of the capitalization amount can take the form of more liquid assets or non-liquid assets such as real property, supplies, equipment, and fixtures. Everything must be clear of liens or encumbrances. 

“By allowing current medical marihuana inventory and start-up equipment—as well as 401(k) accounts, CDs, and other common investments—to count toward a potential licensee’s capitalization requirements, we have taken the necessary steps to ensure that businesses of all sizes will be represented in Michigan’s burgeoning medical marihuana industry,” said BMMR Director Andrew Brisbo in the advisory notice.

When applying for a Provisioning Center license, the capitalization assets must be $300,000. That equates to  $75,000 in cash and $225,000 in other assets. This is not just pocket change and is out of reach for many small businesses and startups. The fear expressed in comments on LARA’s Facebook page is that this places a financial roadblock in front of the people wanting to break into the cannabis business in Michigan.

“Capitalization standards are an important part of the regulatory structure that will help ensure both business stability and safe, reliable access to medical marihuana for patients,” said Brisbo. “These requirements were developed after researching other Michigan industries and best practices from states with medical marihuana regulation.” LARA seems to be using the “but others are doing it” defense and points out that other states are charging high fees as well.

In Arizona there is a $5,000 application fee, and a dispensary must have at least $150,000 in start-up capital.

Massachusetts has an application of intent fee of $1,500 and a management and 0perations profile fee of $30,000. The required startup capital is $500,000.

In Hawaii there is a minimum requirement of an escrow account valued at $1.2 million. 

“Having a capitalization requirement can be beneficial because it ensures that the businesses granted a license are ready to immediately begin operations and meet the needs of Michigan’s medical marijuana patients,” says Josh Hovey spokesperson for the Coalition to Regulate Marijuana Like Alcohol. “However, it’s also important that the capital requirements not be too high because that can place the state at risk of turning away otherwise quality operators.”

As a result of Michigan’s regulations, potential applicants in Michigan are in a wait-and-see holding pattern. Many hope the fee structure and capitalization requirements become more affordable as LARA kicks regulations around while they consider the final framework that must be in place on December 15.