Understanding Regulatory Background Checks on Cannabis Dispensaries, Part I

Ambiguous "Character"

by Caroline Lambert and Tanya Hoke

This post is part of a series exploring how state regulator background checks are used in the legal cannabis industry. In Part I, we look at “good moral character” clauses; in Part II, we’ll investigate who is subject to these checks. As you’ll see, regulations vary significantly between states, and savvy applicants and investors need to understand how this may affect them.

One of the most important aspects of running a legal cannabis dispensary is securing a license to operate. In addition to requirements that you would expect, like state residency and a properly zoned location, some state regulations also require applicants and certain members of the proposed business to be of “good moral character.” Unfortunately, it’s often unclear what this phrase means in practice, who it applies to, and what the consequences are for an applicant.

For example, an applicant in Oregon can be rejected if she "is not of good repute or moral character" as determined by the Oregon License and Control Commission (OLCC). OLCC licensing decisions for other industries suggest that lack of good moral character is established when an individual is shown to have prior violations that suggest a disregard for the law, or “turpitude”, that is, when an illegal activity was intentional and included elements of fraud, deceit, harm to a specific person, or illegal activity undertaken for personal gain.

Statutes also allow the OLCC to consider factors such as alcoholism, financial irresponsibility, and inability to manage the establishment.  Although the OLCC can only consider aspects of moral character that are relevant to the exercise of the license involved, "relevance" is still pretty open to interpretation. 

Like Oregon, Colorado also refers to "good moral character" in its licensing application (see statute 12-43.4-306: Persons Prohibited as licensees). There, moral character is defined as including “the applicant’s, or his employees’, propensities toward criminal conduct." Colorado may use information from criminal records, criminal conduct involving moral turpitude, character references, educational achievements, and rehabilitation. But the state is generally less clear than Oregon in its definition of "turpitude," and what would rise to a “propensity” for criminality. We were interested to see that in some cases outside of the cannabis industry, courts have determined that Colorado’s “good moral character” factors are violations of the First Amendment.

Are they limiting themselves to state criminal background checks? Or should you expect them to also search Google, media archives, and your public social media posts?

More broadly, it isn’t entirely clear what kind of information state regulators in Oregon and Colorado are reviewing when making their “good character” assessments. Are they limiting themselves to state criminal background checks? Or should you expect them to also search Google, media archives, and your public social media posts? In our opinion, the lack of transparency on these criteria may leave the door open to unreasonable discrimination.

The Takeaway

Applicants should understand that regulators aren’t limited to reviewing your criminal record when evaluating your background. Given the ambiguity of “good character” clauses, it’s a good idea to understand how regulators may perceive your public profile and reputation, so that you can be proactive in addressing any issues that may come up.

In Part II, we’ll explore the question of who, exactly, is subject to having their background and reputation evaluated when applying for a license. Some states reserve the right to run checks on any shareholder in a cannabis business, while others don’t trigger checks until a 20% ownership stake is reached. Depending on the state you’re operating in or expanding to, really knowing your investors could be critical to maintaining your license. Read Part II.