At the September 16 meeting of the Boston Cannabis Board (the “Board”), the Executive Secretary announced an important policy shift that will make doing business in Boston more friendly. Specifically, the Board intends to allow owners of licensed companies to sell and/or transfer shares within the company. We are currently awaiting the draft proposal.
From the beginning of the Boston cannabis program, everyone has recognized that the lack of capital is the most limiting factor, especially for Equity Applicants. Yet the ordinance and regulations that created the Board included language that did not allow for any transfer of a licensee or any portion of the licensee whatsoever. None. The impulse might have had good intentions – perhaps to prevent speculative activity of larger companies and to protect small operators. In fact the rule would make funding less available and more expensive, and would hurt small operators more than larger ones. It also prevents many local applicants from realizing gains on their entrepreneurial efforts.
A small cannabis operator seeking to open a retail facility might be able to make it through the already expensive costs of permitting, but when it comes time to invest six to seven figures in construction and buildout, an infusion of new funds is essential. That the federally illegal industry is under-banked only compounds this problem. Outside investors, then, become the only option. If companies are not allowed to trade equity in the company for investment, their choices for capital become even more attenuated.
Investors with a million or more dollars are not looking for an annual dividend as though they were investing in a publicly-traded stock (which by definition may be transferred). They look to build a business and then realize the gain from those efforts. Funding start-ups is a risky proposition, and made more so with limiting regulations. Investors therefore expect greater returns. Most entrepreneurs are not investing for long term results, and capital sources clearly are not.
Other funding alternatives such as management agreements and supply arrangements are available, but if these are done simply as substitutes for providing a capital source with a greater return, they are still imposing unneeded costs and burdens on the entity. There also are limits to which of these alternatives will be deemed acceptable by regulators.
There is also another impact of the transfer restrictions. If community investors cannot be sure that they can sell their investments, then investing in the new business is too risky for those concerned with future college expenses, retirements or other life events. They must leave their capital in the control of the operator, with no way to withdraw.
It’s worth pointing out that the state has already established a standard with regard to transfers. The Commonwealth Cannabis Commission allows for transfers of less than 10 percent of a company’s stock without approval, and approval may be sought for transfers in excess of that amount, which is generally granted if the background checks are acceptable.
In the end, preventing an operator from exchanging a portion of their business’ equity for investment, and restricting ordinary transfers (subject to background checks on the transferee) will hurt all businesses, but especially the smaller company, and favor the well-financed large companies.
So far Prince Lobel has had participation in all the public hearings that the Board has conducted since its first meeting earlier this year. We are encouraged by the Board’s early performance, and look forward to seeing more improvements, like this one, that result in better options for the consumer, the patient, the company, and ultimately, the city itself.
For more information, please contact the author of this alert, Cannabis group co-chair Mike Ross (mross@princelobel.com; 617-456-8149) or any member of the Prince Lobel Cannabis team.