Potential Changes Coming in Cannabis License Transactions

Tonkon Torp LLP
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With a moratorium now in place on all recreational cannabis license types, the only way new participants can enter Oregon’s recreational cannabis industry is to purchase an existing license. And based on new direction issued by the Oregon Liquor and Cannabis Commission (OLCC) at their monthly meeting on July 21, 2022, the prospective pool of licenses available for purchase may be getting slightly smaller.

Previously, OLCC allowed licensees subject to cancellation or suspension due to other serious violations to settle with the agency and agree to sell their business in exchange for a surrender of the license. This process allowed OLCC the flexibility to resolve compliance actions without the need for formal hearings, which are costly and time-consuming endeavors for the agency and licensees alike. However, allowing this type of resolution resulted in large windfalls for the offending licensees, as cannabis licenses (of all types) have a market value of several hundred thousand dollars. With the moratorium in place, the value of licenses are unlikely to decrease until at least 2024.

At OLCC’s recent commission meeting, several commissioners voiced strong disfavor of this practice of “settling to sell” for licensees who commit egregious violations of the law, and directed OLCC staff to evaluate certain cases more harshly. Specifically, the Commission stated that bad actors should not be allowed an “easy off ramp” when they engage in activities such as criminal diversion of cannabis out of state, or intentional sales to minors.

Therefore, it appears that at least certain types of violations may prohibit licensees from selling their license as part of their settlement. Buyer beware: it is critical for buyers to engage in stringent due diligence before entering into any transaction to purchase a cannabis license to ensure the license is transferable.

Impact of this Change

This policy shift is a good move for OLCC, and is something many of the compliant segments of the industry will welcome. It is fundamentally inequitable that certain licensees spend exorbitant amounts of capital to strictly comply with the complex Oregon regulations, while others who choose to flagrantly violate the rules can reap large benefits if they are caught. Putting guardrails around the types of cases that are allowed to settle and sell will also potentially increase the pool of licenses available for the new “licensing reassignment” program, which OLCC is required to put in place per HB 4016.

Aren’t Licenses Nontransferable?

It is a misconception that cannabis licenses actually “transfer” to a new owner; under Oregon statute, they do not. However, the OLCC has historically allowed existing licensees to utilize the agency’s “change of ownership” administrative rules and process, which permits prospective buyers to submit an application for a new license and results in the existing license being surrendered once the buyer’s application is approved. Therefore, the transaction has the appearance of a “transfer”; in reality, the buyer obtains a brand new license and the seller’s ceases to exist.

Many licensees facing cancellation or suspension for serious violations and penalties opt to sell their license under the “change of ownership” process rather than incur the expense and risks of going to a hearing. This process has allowed new buyers to enter the market. We will have to wait to see how significantly these OLCC policy changes may limit the pool of available licenses.

What does this mean for potential license purchasers?

It is unclear what types of violations may prevent the sale of a cannabis license, but being aware of pending violations is going to be more critical than before. Prospective buyers should request information from sellers regarding any ongoing investigation or violation action as part of their due diligence, to make sure the license can engage in OLCC’s ownership change process. Additionally, making sure purchase agreements have solid representations and warranties from the seller regarding any potential violations or enforcement actions is critical. To make sure you are protecting yourself against potential pitfalls, please consult your legal counsel before entering into any agreement to purchase a cannabis license.

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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