Cannabis license sellers in New York run up against TPI rules

The New York cannabis industry is finally starting to gain momentum, but some licensees are already ready to get out.

The reasons for exist run the gamut from founder fatigue after two years of struggling to desire to just be a license flipper. But no matter the reason, they all run up against the TPI wall.

The true parties of interest, or TPI, provision was an attempt by state regulators to to ensure transparency, fairness and compliance within the industry. These rules were aimed at preventing monopolization, licensing of illicit operators and conflicts of interest. They also wanted encourage small business owners, particularly minority and social equity owners.

However, the rules have also challenged those who want to create wealth by selling versus operating a business. New York regulators have set about revising the rules in response to the concerns, but for now, the landscape remains confusing for sellers.

Adding to that confusion, the state issued a guidance document regarding TPI rules, but it has some discrepancies with the law as it is written, according to one lawyer.

Understaffed

The New York Office of Cannabis Management has acknowledged being understaffed and overwhelmed by the volume of license applications and requests around TPI. To address the issue – at least somewhat – the agency has allowed companies to name new TPIs as long as they stay under 49% ownership. Applicants can fill out a survey online, and the OCM will eventually review the request.

Jeff Schultz, a partner with law firm Foley Hoag, noted that the TPI survey is a big improvement, but it is also plagued with problems.

“The good news is that they are now allowing these things to happen, whereas you just couldn’t do it before and no one was going to, no one was going to get funded and no one was going to get bought out,” Schultz said.

The bad news, he said, is that the online portal is buggy and shuts on and off randomly, and while it allows a licensee to add a new TPI, it doesn’t actually mean the OCM has approved them.

“The survey discloses a new TPI with the caveat that the OCM may not get around to approving or denying a new TPI for an indefinite period of time. An indefinite period of time is not a great thing,” Schultz said.

In addition, licensees take on great risk by taking this path. “If six months from now the OCM comes back and says, ‘We’re denying this person as a TPI on your license,’ you have to deal with the consequences. That could be unwinding a transaction,” he added.

Unwinding deals in cannabis can be very complicated, especially with regard to pricing assets.

Some people might be willing to take that risk, because they need or want the money right away. Or worst case scenario, Schultz mused, a 49% owner could invest $500,000 and take over the operation and run it into the ground. If that new entity puts the company $20 million in debt and doesn’t get approval, they can walk away and leave the original licensee a diminished company and a requirement to return the investment dollars.

Guidance document

In order to help applicants understand the TPI issue, the OCM created a guidance document. However, according to Schultz, the document itself is problematic, starting with language that conflicts with the actual written law.

Specifically, the MRTA and regulations clearly state a license can be transferred.

“There are 20 references in the MRTA and the regulations that either directly or indirectly reference a transfer of the license, not transfer of the equity of the owner of the license. Very, very different and there are multiple reasons why that needs to be permitted,” he said.

“Then you have the guidance document, which is not law, that has a question in the Q&A section asking can you transfer a license from one entity to another? The answer is definitively no. People want to know what they can do.”

Schultz said he knows several parties that have received licenses not realizing the impact that a cannabis license could have on their main noncannabis businesses.

“They have to get out of it because the 280E tax situation is radioactive for their traditional business,”  Schultz said. However, the guidance document explicitly tells potential buyers that they can’t do a deal.

CAURD sellers

Selling is even trickier when it comes to justice-involved CAURD (conditional adult-use retail dispensary) licensees. Their only option is to sell 49% and give that party an option to buy it completely four years after the date of the issuance of the license at a predetermined price. Schultz said deals like that are happening, and in those cases, the justice-involved applicant is usually put on a salary because they are technically still supposed to have sole control.

Schultz, however, believes that a justice-involved licensee can sell to another justice-involved licensee. “I could see where Housing Works could buy another CAURD license and increase their footprint,” he said.

Further complicating the issue of selling licenses is that social and economic equity (SEE) licensees, such as those for women-owned businesses, can’t sell for three years unless it’s to another women-owned business.

Debts and taxes

Running these cannabis businesses has been very difficult, and many are in danger of failing already, with taxes owed and huge debts on their books.

“Most buyers don’t want the tax bill or the debt. However, the sellers can’t sell to pay off the creditors, and so they are forced into receivership and that’s expensive,” Schultz said. “Why not just let them monetize their license out of court, sell a f***ing license and pay off, and all the people that are owed money are part of our ecosystem? That’s a better solution.”

The OCM didn’t respond to several requests to discuss TPI rules and regulations.