Capitalization for Marijuana Businesses in Michigan.

The Bureau of Medical Marijuana Regulation (“BMMR”) has issued an Advisory Bulletin explaining its views on minimum capitalization of a prospective licensee under MMFLA. There are some strange and unusual nuances at play in this proposed position. Keep in mind it’s always subject to change.

The announced minimum capitalization requirements for applicants are:

  • Growers
    • Class A – $150,000
    • Class B – $300,000
    • Class C – $500,000
  • Processors – $300,000
  • Provisioning Center – $300,000
  • Secure Transporter – $200,000
  • Safety Compliance Facility – $200,000

Remember, these minimum capitalization requirements are for each license the applicant seeks. For two provisioning centers, $600,000 split $300,000 per license application. For Class C growers, $2,000,000 for four class C licenses. I do not believe they’re going to give credit of $500,000 per license application for one $500,000 piece of land and buildings which houses all four licenses. That’s not how the Bulletin reads; separate and distinct amounts.

There’s now clarification as to what BMMR means as to “Cash” for the capitalization. As many will recall, there was commentary at the last Board meeting that all the above numbers would have to be in cash. BMMR has withdrawn from that position to now utilizing a minimum 25% cash requirement for the minimum capitalization requirement for each application. Thus, for a provisioning center, the minimum is $75,000 in cash. The rest has to be in unencumbered assets.

Three great questions just off the top:

1.  What’s the date on which that capitalization requirement is measured? Is it the date on which the application is submitted to BMMR? Is it the date on which the license is issued? If it’s the former, what happened to the $75,000 between the time the application was submitted and the license is issued? If it’s the latter, that’s going to require the CPA sitting in the parking lot counting $75,000 in cash in order to give the “CPA certified financial statement” to rush down to show to BMMR to get the license issued. 

2. What are liquid assets? Well the cash of $75,000 is easy. Someone’s 401K? On what date? Before or after penalties and taxes for withdrawal? Furthermore if the key here is to protect the public, 401K’s are exempt from creditors’ rights.  So you show up with a $100,000 balance in your 401K and stocks that on the date you selected were looking good, but no one other than you can get to it; creditors can’t and they can’t force you to.

3. Marijuana products. I’m intrigued as to how a CPA’s is going to establish value for that inventory and again, on what date? I understand GAAP. Is the CPA going to go in to the locked enclosure, (which of course they’re not allowed to be in by law) to do the inventory count? Are they going to weigh it? Very intriguing and interesting and again, on what date? The date the application is submitted? Where did all of that product go between then and four months later when a license is issued?

Another interesting issue.

The bulletin says “…there is no lien or encumbrance on the asset provided as a source of capitalization.” I guess you’ve got to own the building and land free and clear of mortgages and taxes. What if there’s an unpaid special assessment? What about the “lien for unbilled taxes for the following year”? It’s a lien by law. The equipment, cars, vehicles, etc. can’t be pledged to anyone as collateral if you want their values to count.

Fun times ahead as we begin to sort all of this out. We’re getting closer, though.