A few weeks back, we wrote about Oregon residency requirements contained in last month’s OLCC rules for Oregon marijuana businesses. Even for us lawyers, those rules were somewhat opaque. This may be attributable to the fact that the legislature gave OLCC very little guidance other than the HB 3400 requirement that “an applicant listed on an application… has been a resident of this state for two or more years.”
When the dust settled, the basic idea appeared to be that a licensed entity has to be at least 51% owned by a two-year Oregon resident, in one manner or another. Still, the rules adopted on October 22 had some issues as to who can apply (along with a few other issues, which aren’t addressed here). Last Friday, OLCC met to discuss some proposed amendments to the rules, and it adopted a few key changes regarding residency and the application process.
The new language is at OAR 845-025-1045(3)(d), 845-025-1045(6) and 845-025-1030(4)(b). These rules should be published on the OLCC website soon. To us, the rules are still opaque, and still seem to require gymnastics for non-residents and their Oregon partners. However, this is what we have to work with until the legislature hopefully does away with residency requirements once and for all in February.
OAR 845-025-1045(3)(d). This new rule requires that, for a legal entity applicant, “any individual who owns or controls at least 10% of the legal entity” must be listed as an applicant on an application. This addresses the odd situation we wrote about where an LLC applicant entity was required to list all of its members, but there was no similar provision regarding corporate applicants and their shareholders. Now, it’s a little strange the other way, in that an LLC member who owns just 1% of an applicant entity must be disclosed, but a shareholder of a corporation who owns 9% of an applicant entity need not be. But there you have it.
OAR 845-025-1045(6). This amended rule erases a distinction between “applicant” and “applicant legal entity” in the “legitimate owner” analysis. The rule now reads “an applicant will be considered by the Commission to be a legitimate owner of the business if the individual applicant or applicant legal entity owns at least 51% of the business proposed to be licensed; or one or more individual applicants or applicant legal entities in sum own at least 51% of the business to be licensed.” This appears to be more of a housekeeping change, designed to stave off confusion as to whether an applicant entity is somehow treated differently than an applicant individual in the legitimate owner context.
845-025-1030(4)(b). This amendment, contained in the “Application Process” section of the rules, relates back to the 10% owner criterion of OAR 845-025-1045(3)(d), and it requires that the OLCC receive information or finger prints for a criminal background check, as well as an Individual History Form, “for an individual listed as a person with a financial interest who holds or controls an interest of ten percent or greater in the business proposed to be licensed, or an individual who is a partner member or corporate officer of a legal entity with a financial interest in the business proposed to be licensed.”
So, those are the relevant changes. Unfortunately, the amended rules do not address two issues we previously raised. The first is that an LLC member or 10% corporate shareholder “not directly involved” in the business and therefore not an “applicant” under 845-025-1045(1), nonetheless becomes an “applicant” by virtue of ownership (without direct involvement) under 845-025-1045(3). The second, related issue is that 845-025-1045(10) still requires that “an individual listed as an applicant on an initial or renewal application, or identified by the commission as an applicant must maintain Oregon residency while the business is licensed.”
Under a plain reading of the amended rules, any non-resident LLC member or 10% corporate shareholder of an applicant entity could be viewed as an “applicant” herself, subject to the residency requirement of 845-025-1045(10). For this reason, the safest course for a non-resident appears to be to own her interest in an applicant entity by and through an LLC or corporation, established expressly for that purpose. Presumably, the ownership entity would not be identified as an “applicant” under 845-025-1045(3) and would not be subject to residency requirement of 845-025-1045(10).
Overall, this system is creating plenty of work for Oregon cannabis lawyers and plenty of revenue for the Oregon Secretary of State (and probably other Secretaries, too), which shouldn’t really be the point of any of this. Fortunately, the OLCC has advised us that they will be publishing examples of specific scenarios involving nonresidents, soon, and they will answer questions on these issues at the upcoming licensing workshops held around the state. Stay tuned.