The Wynn allegations are also already influencing debates around licensed cannabis operators in Massachusetts. We take a look at what the MGC’s vetting process and its response to the latest reporting on Wynn can teach the legal cannabis industry.
Cannabis businesses that are hoping to expand across state lines should absolutely be aware of the triggering levels for regulatory background checks in different states. Just because an investor is a minority owner doesn’t mean they can avoid regulatory scrutiny.
Leaders of successful cannabis businesses are significantly outnumbered by potential investors and partners who want in. It can be difficult to separate partners with integrity from those whose interests aren’t sufficiently aligned with your goals for your business.
With that in mind, I was interested to see this article from Aspen Daily News discussing the collapse of a relationship between a Colorado dispensary and its investors. I recommend reading the article in full, but the short of it is this:
- In 2015, the dispensary signed a series of promissory notes valued at about $2 million with two investment firms.
- In November 2016, the investment firms sued the dispensary alleging that the business defaulted on its loans.
- In December, the dispensary counter-sued, alleging that the investors "did not actually give them the money." Instead, in their capacity as "expert business consultants," the investors allegedly used the funds to hire "unqualified" employees that the company's owners did not known and did not need.
- The investors' response to the dispensary's counter-claim is pending as of this post.
We fully expect that the cannabis industry will see more conflicts like this one. Hilary Bricken from Harris Moure PLLC wrote in mid-2016 that her law firm was seeing a "massive spike in cannabis business owners suing their fellow owners."
Ownership disputes aren't unique to the cannabis industry, but these disputes are complicated in unusual ways in this industry. For example, regulatory restrictions on who can invest in a state-legal cannabis business make the pool of possible partners much smaller. In addition, issues in an individual's background that wouldn't affect their ability to do business in another industry -- like a 15-year old conviction for possession -- may disqualify them from participation in a cannabis business in certain states.
Before you partner with a co-founder, co-owner, or investor, do your due diligence:
- Are there any issues in this person's background that may be a problem for your state regulators? What if you decide to do business together in another state?
- What is your partner's business track record? How have other companies with which they've partnered fared?
- How will the partnership be structured? What degree of control will they gain over your business?
- The case referenced above is Stillhouse Investments, LLC, et al v. Colorado Medical Marijuana Supply, Inc., et al in the Colorado District Court (Pitkin County).
- Read Hilary Bricken's excellent article
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