The 2024 Legislative Session brought some much needed clarity for cannabis licensing in Minnesota but also provided an unexpected, accelerated timeline. The updated legislation now outlines the application process, licensing requirements, and details the type of activity that is permitted for cannabis-licensed businesses. With this updated (and more specific) information, banks are now able to make an informed decision regarding their interest in engaging (or opting not to engage) with cannabis or cannabis-related businesses.
The Office of Cannabis Management on July 24 opened an online licensing portal only to “social equity applicants,” which include, for example, prospective cannabis entrepreneurs who are veterans or have been negatively impacted by previous cannabis laws. OCM will verify social equity status and, if confirmed, applicants will receive priority in licensing, with one-half of most license categories earmarked for social equity applicants.
Following this, OCM will conduct a second application process for all other qualified applicants at a date yet to be announced. During either licensing pool, if there are more applicants than available licenses, OCM plans to conduct a lottery system. If selected, applicants are granted a preliminary license within 90 days of the lottery closing. The initial portal is expected to close around Aug. 12.
One notable change from the previous framework is that applicants are no longer required to have all components of their business ready at the time of application. As part of the application, they must submit a detailed business plan. However, identification of the specific location of future operations may be finalized after an applicant has been selected for a preliminary license.
Once selected for a preliminary license, an applicant has 18 months to get up and running, which includes updating the OCM with the licensed business’s address, property description, location, and the local government to which it will be subject. Of note, applicants and licensees will be required to identify to OCM and update, if applicable, all investors and sources of financing throughout their existence. If a bank chooses to lend to a licensed business, they will be explicitly identified to OCM as part of this process.
After the expiration of the 18-month preliminary period, OCM may grant the business a full license or grant an extension of up to six months if the business needs more time to become operational. OCM also has the power to revoke a preliminary license prior to the end of the 18-month period.
During the preliminary license phase, applicants are subject to certain restrictions regarding what operations they may conduct, as well as the transferability of ownership interests.
What does this mean for my bank?
As a starting point, banks should decide if they are or are not going to engage with cannabis and cannabis-related businesses. Cannabis remains illegal at the federal level. Regardless of whether you will directly engage with cannabis businesses or not, you must have an internal policy in place.
If you elect not to directly engage with cannabis businesses, consider the scope of the prohibition on engagement and how your bank will monitor and conduct its due diligence to determine if a business is cannabis-related. Direct businesses that grow, touch or sell cannabis should be relatively easy to spot, but the same cannot be said about indirect businesses. Banks must ensure there are appropriate processes for ongoing monitoring and required practices surrounding documentation and SAR filing if matters come to the bank’s attention.
If your bank elects to engage with cannabis-related businesses, consider the following questions and topics:
- What is the scope of the bank’s engagement? Will it engage with all businesses (i.e. direct and indirect)? We recommend identifying tiers of cannabis-related businesses and outlining how the bank will or will not interact with businesses that fit into the different categories.
- Ensure there is a clear internal understanding of the licensing process and requirements so you can appropriately evaluate if you are or are not engaging with a licensed business. The banking relationship will likely start when the business is in the preliminary licensing phase, so there should be a process to ensure that the preliminary license will not be revoked prior to the end of the 18-month period and to confirm that the business receives its full license at the end of the same period.
- Prepare for appropriate up front and ongoing monitoring and due diligence, including meeting all regulatory requirements (e.g. filing all required SARs). Be prepared for additional regulatory scrutiny and ensure that all bank employees know the policy and procedures they are complying with.
The above summary is intended to provide a high-level overview, applicable to any bank. Winthrop’s experienced cannabis team is here to help you navigate these changing regulations. If you wish to explore these issues in more detail or if you have questions on the implications for your bank, specifically, please contact Amber L. Kraemer ([email protected]) or Gerry Fornwald ([email protected]).