Beer Distribution Law - November 2013

by Lewitt Hackman
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GOOD NEWS FOR CRAFT BREWERS - POSTAL REFORM LEGISLATION

 

On October 30, Senator Charles Schumer (D-NY) launched a plan to lift the prohibition era ban on shipping alcoholic beverages by way of the United State Postal Service (USPS). Schumer believes this change will be worth $225 million in increased revenue for the USPS and will help protect jobs. The USPS will, however, have to compete with FedEx and UPS since these companies already allow licensed brewers and vintners to ship alcoholic beverages, albeit at variable shipping rates and with many restrictions. The change is supported by the U.S. Post Master General and the Brewer's Association, and Congress is expected to take up the Postal Reform bill soon to consider overturning the law banning the USPS from shipping alcohol, which has been on the books since 1909.

 

MORE GOOD NEWS FOR CRAFT BREWERS: SEC PASSES PROPOSED CROWDFUNDING RULE

In what is sure to be a boon for craft brewers, the SEC recently passed a proposed rule for the JOBS Act. The JOBS Act, or the Jumpstart Our Business Startups Act of 2012, was passed by Congress to allow crowdfunding. Crowdfunding permits private companies to raise capital by selling securities online without registering their offerings with the SEC. Before crowdfunding, private companies could only raise money through traditional lending or private placements-investments qualifying for special registration exemptions-sold to wealthy, "accredited investors"-large institutions or people making in excess of $300,000 a year or with an individual net worth exceeding $1,000,000 (excluding personal residences).

The proposed rule would allow a craft brewer to sell up to $1 million in equity every 12 months. Any investors with a net worth or annual income of less than $100,000 would be permitted to invest up to $2,000 a year. Any investors with a net worth or annual income of $100,000 or more could invest up to 10% of his/her annual income or net worth, but not more than a total of $100,000 every 12 months. Craft brewers would be required to sell their securities through a registered funding portal and make certain advance disclosures. Brewers would also be required to provide investors with a copy of their financial statements, and the financial statements would need to be audited for craft brewers seeking to raise more than $500,000. Once the SEC adopts its final rule, craft brewers should find crowdfunding to be an attractive alternative to traditional lending. 

 

COURT RULES MISSOURI'S RESIDENCY REQUIREMENT CONSTITUTIONAL

On September 25, 2013, the 8th Circuit Court of Appeals handed down an important decision in Southern Wine and Spirits of America, Inc. v. Division of Alcohol and Tobacco Control that affirms that states have the primary authority to regulate alcoholic beverages within their borders and to implement the three-tier system as they see fit pursuant to the 21st Amendment to the U.S. Constitution. Missouri's three-year residency requirement for wholesale liquor distributors is constitutional, so sayeth the court.

 

Under Missouri law, a company applying to obtain a wholesaler's license to sell alcoholic beverages containing alcohol in excess of 5% by weight to retailers must be a "resident corporation," meaning: (1) the entity must be formed under Missouri law; (2) its officers and directors must be legal voters and taxpaying citizens of the county in which they reside and have been "bona fide residents" of Missouri for at least three years; and (3) at least 60% of the financial interests of the licensed business must be legally and beneficially owned by Missouri resident shareholders.

 

Southern Wine and Spirits challenged the residency requirement, asserting it unconstitutionally discriminated against out-of-state corporations in violation of the Commerce Clause and the Equal Protection Clause. The court began its opinion by citing case law, stating: "The  Twenty-first Amendment [grants] States virtually complete control over whether to permit importation or sale of liquor and how to structure the liquor distribution system, [including] the [] prerogative to establish the so-called 'three-tier system.'" In rejecting Southern Wine's claims, the 8th Circuit ruled that while the residency requirement may discriminate as to those who may obtain a license within the three-tier system to distribute alcohol in Missouri, it does not discriminate against out-of-state liquor products or producers. The court went on to find that Missouri established a sufficient basis for its residency requirement since it is plausible that legislators believed Missouri wholesalers governed and owned by Missouri residents would be more apt to be socially responsible to promote temperance and respond to the concerns of the community. To read the complete case, click here.

 

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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