By Danica Hibpshman and Jessica Morgan
It is a common misconception that cannabis licenses themselves are transferrable when in fact, by statute, they are not. It is possible, however, to contract with a licensed business to purchase (or sell) the rights to hold a license, utilizing the OLCC change of ownership process. It is also possible in certain circumstances to move the location of the license as part of this ownership change process, if that is what the parties desire.
This regulatory process gives the illusion that licenses are being transferred, when in reality the buyer must submit their own application for a license by meeting all of the requirements of being a licensee with a compliant location. Both the buyer and seller must cooperate with OLCC and other state/local agencies to complete the process, and it is critical that both parties do proper due diligence to account for all the contingencies and dynamics these transactions can bring in their written agreements.
What is the timeframe for obtaining a license transfer?
Historically, it often took considerable time to obtain approval of an ownership transfer – a year or more was not unusual due to the OLCC application backlog. Currently, however, timeframes are much more predictable and quick.
After a buyer submits their application, the seller must submit paperwork to the OLCC requesting that a change of ownership (and change of location, if desired) be processed. From the time a selling licensee submits their required paperwork, a buyer’s application is typically assigned an investigator within 30-45 days. After this assignation, the process must be completed within 60 days or the buyer’s application may be inactivated. Many parties to license purchase agreements contract for termination provisions with these dates in mind, in the event of unforeseen obstacles preventing the buyer from completing the process in a timely manner.
What should buyers consider when seeking licenses to purchase?
Buyers should ensure they know the status of a license before entering into an agreement to purchase it. Is it still active? Is it subject to a pending compliance action or cancellation? What is the renewal date? Many licenses being sold may have impending deadlines or issues that could make transfer difficult (although usually not impossible if the information is known up front). Purchase agreements can be drafted with numerous representations and warranties to protect both parties from pitfalls caused by these issues, but the overall transaction goes much smoother if information is confirmed prior to signing a contract and starting the transfer process.
As part of purchasing a license, buyers must obtain a new Land Use Compatibility Statement (LUCS) or verification from the issuing jurisdiction that the prior LUCS is still valid. The OLCC requires this regardless of whether the license is staying in the same location, or will be in a location that was previously licensed. In some cities and counties throughout Oregon this process is relatively easy and quick. Other jurisdictions take much longer. Because having a new LUCS is a threshold requirement for obtaining a license, it is critical that buyers begin the process of obtaining a LUCS as soon as their choice for a potential licensed location is known.
There are many other considerations buyers should take into account before entering into an agreement to purchase a license. It is important to talk with legal counsel about the particulars of the license and location early in the process in order to best structure the terms of the arrangement while complying with OLCC requirements.
What should sellers consider when vetting potential buyers?
In addition to any assurances regarding a buyer’s ability to fund the transaction, sellers of a license should consider the potential buyer’s ability to meet all regulatory requirements for obtaining a license. There are many different pitfalls to the licensing process that buyers may be largely unaware of, such as criminal histories, location issues (if a new location is being sought as part of the license transfer), or negative compliance history. Your attorney can help determine what specific due diligence might be warranted to vet suitable buyers, before entering into any formal written agreements.
Can applications be bought?
The short answer is no. OLCC rules prohibits the outright buying and selling of applications, of which there still are many pre-June 15, 2018 applications that are eligible for issuance. There are some mechanisms to transfer interest in an eligible application, however, that do not conflict with OLCC restrictions. It is very important to consult with legal counsel if you are contemplating such a transaction, as there are many nuances and obstacles to consider as you navigate the regulatory process.
Can a buyer start operating the business before the license is transferred?
No. Until the OLCC approves a new buyer’s license, the selling licensee must stay in control of the licensed business in most respects. However, the parties can enter into certain types of management services agreements while awaiting regulatory approval that allow some level of transition from seller to buyer during that time. These types of arrangements can be prepared in compliance with OLCC regulations, but the actual operations and control must also comport with OLCC regulations as well. To avoid any potential compliance issues (which could slow down the transfer of the license), it is important to have your attorney carefully prepare these agreements, and advise on the day-to-day management activities in which the buyer and seller may engage.
If you have any questions on selling or obtaining the rights to a cannabis license, please contact Jessica Morgan (jessica.morgan@tonkon.com or 503.802.2165), or one of Tonkon Torp’s experienced cannabis legal team for further assistance.
