Best Practices and Advice for Maintaining MRA Regulatory Compliance by Nick Galendez, Associate Attorney at Cannabis Legal Group

1. Best Practices and Advice for
MRA Regulatory Compliance
Nickolas Galendez
Associate Attorney

2. Compliance vs. Risk/Probability of
Negative Outcome?
 You cannot always be 100% compliant – mistakes will
happen and the industry is fast-paced
 Important to think about:
 What things do the regulators care the most about?
 What rules are the regulators not enforcing strictly?
 Will the regulators be less lenient in the future?
 What will trigger an investigation/enforcement
action?

3. Regulatory Compliance Overview
 When/how can regulatory compliance issues arise?
 Why does regulatory compliance matter?
 What are the possible punishments for violations?
 Best practices for maintaining regulatory compliance

4. Evolution of Cannabis Regulatory
Compliance in Michigan
(2008-Present)
BMMR

5. MRA Executive Director Andrew Brisbo
on Regulatory Compliance

6. When can regulatory
compliance issues arise?
 Pre-application – unable to submit
 During application process
 Initial state application/license
 Amendment to existing application/license
 Change of ownership/transfer
 During business operations
 Duty to notify/report
 Must allow inspections and cooperate with investigations
 Required to obtain pre-approval for proposed material changes
 During renewal – regulatory compliance “check-up”

7. How can regulatory
compliance issues arise?
 Example of Unclear Law/Rule = MMFLA Definition of Applicant (person who applies for state license)
 Managerial Employees (ability to control/direct affairs OR ability to make policy)
 An employee who has supervisory duties, meaning those employees who carry out policy but don’t set or
make policy or have the ability to control or direct the affairs of the marihuana facility, do not fall within the
context of a “managerial employee” in the MMFLA.
 Additionally, an employee who has the title of “manager” is not a “managerial employee” in the contet of
the MMFLA if they do not have the ability to control or direct the affairs of the marihuana facility and/or
they do not have the ability to set policy concerning the marihuana facility.
 “Person” holding a direct or indirect ownership interest of more than 10% in the applicant
 And the following for each type of applicant:
 Sole Proprietorship – individual/spouse
 LP/LLP – all partners (over 10%; no control/participation in company management) and spouses;
 LLC – all members/managers (over 10%; no control/participation in company management) and spouses;
 Corporations (public/private) – all officers/directors and stockholders (over 10%) and spouses;
 Multilevel ownership enterprise – whoever has the right to receive more than 10% of gross/net profit

8. How can regulatory
compliance issues arise?
 Example of “Better” Law/Rule = MRTMA Definition of Applicant (person
who applies for state license)
 Nearly identical to MMFLA, but contains additional guidance:
 Applicant does NOT include:
 Financer – person providing financing under bona fide financing agreement at a
reasonable interest rate
 Franchisor – allowed, but franchisor cannot have right to receive royalties
based on franchisee’s sales
 Landlord/Property Owner – must be reasonable rent on fixed basis under bona
fide lease
 Licensing (IP/Brands/Recipes) – must be reasonable payment under MRA-
approved agreement/contract

9. How can regulatory
compliance issues arise?
 Why does correctly identifying every “Applicant” matter?
 MMFLA Section 406/Rule 19(5)
 MRTMA Emergency Rule 19(9)
 Transfer, sale, or purchase of license
 The attempted transfer, sale, or other conveyance of an
interest in a license without prior [MRA] approval is grounds for
suspension or revocation of the license or for other sanction
considered appropriate by the [MRA]
BUT “only if the transaction would result in the transferee
meeting the definition of applicant.”

10. Why does regulatory
compliance matter?
 The regulators can deny your application or license if it contains false information
 MMFLA Section 401
 “A false application is cause . . . to deny a license.”
 MMFLA Rule 5(1)
 “Failure to comply with these rules and the application requirements in the act is
grounds for denial of the application.”
 MRTMA Emergency Rule 9(2)
 “Failure to comply with these rules and the application requirements in the act is
grounds for denial of the application.”
 The regulators need to at least prove you knew it was false
 MMFLA Section 402(2) – Applicant ineligible to receive a license if:
 (c) knowingly submitted an application that contains false information
 Adult-Use Emergency Rule 9(2)
 (b) knowingly submitted an application that contains false information

11. Why does regulatory
compliance matter?
 There are many other reasons your application for a license can be
denied:
 MMFLA Section 402(3)
 (a) integrity, moral character and reputation; personal and business
probity; financial ability and experience; and responsibility or means to
operate or maintain a marihuana facility
 (g) history of noncompliance with any regulatory requirements
 (h) defendant in litigation involving business practices
 MMFLA Rule 13(2)
 (a) Facility plan does not comply with law/rules
 (b) Facility substantially different from facility plan
 (d) Material misrepresentation on the application

12. Why does regulatory
compliance matter?
 There are many other reasons your application for a license can be
denied:
 MRTMA Emergency Rule 9(3)
 (c) history of noncompliance with any regulatory requirements
 MRTMA Emergency Rule 14
 (1) Failure to comply with law/rules
 (2)(a) Submitted application containing false information
 (2)(c) Failure to comply with rules/application documents
 (2)(d) Material misrepresentation on the application
 (2)(g) Establishment plan does not comply with law/rules
 (2)(h) Establishment substantially different from establishment plan
 (2)(j) Failure to provide notifications or reports to [MRA]

13. Why does regulatory
compliance matter?
 There are many other reasons your application for a license can be denied:
 * NEW * – Adult-Use Application Process
 MRTMA Emergency Rule 6(3), 8(4) and 8(5)
 Must respond to a Notice of Deficiency within 5 (calendar) days or risk denial
 MRTMA Emergency Rule 7(9)
 Must pass prelicensure inspection within 60 days of Step 2 application submission or
may be denied
 Recent MRA presentation to attorneys on adult-use application process:
 DO NOT PAY APPLICATION FEE UNTIL ALL SUPPLEMENTAL APPLICATIONS ARE SUBMITTED
 DO NOT SUBMIT STEP 2 UNLESS LOCATION IS 100% READY FOR INSPECTION

14. Why does regulatory
compliance matter?
 If your application is denied, you get to “appeal“
 Not an appeal - public investigative hearing w/ administrative law judge
 Must prove by clear and convincing evidence (high standard) that you are
eligible and suitable for a license
 If not a denial, the regulators may also delay processing of your
application or issuing a decision
 MMFLA Rule 5(3)
 The [MRA] may delay an application while additional information is
requested, including, but not limited to, requests for additional
disclosures and documentation to be furnished to the [MRA].
 Impacts timeline/ability to obtain license; delay operations or
transaction itself (-$)

15. Why does regulatory
compliance matter?
 You agree to actively help the regulators investigate and
prove non-compliance
 MMFLA Section 402(14) – “A licensee must consent in writing
to inspections, examinations, searches, and seizures.”
See also MMFLA Rule 6(4)(a); MRTMA Emergency Rules 5(3), 7(6)
 MMFLA Section 402(15) – “An applicant or licensee has a
continuing duty to provide information requested by the
[MRA] and to cooperate in any investigation, inquiry, or
hearing conducted by the [MRA].”
See also MMFLA Rule (6)(4)(d); MRTMA Emergency Rules 7(7) and
9(5)

16. Why does regulatory
compliance matter?
 You agree to actively help the regulators investigate and prove non-
compliance
 MMFLA Rule 15/MRTMA Rule 16 – Notification and reporting
 Up-to-date contact info and any changes to operations
 Proposed material changes (may require pre-approval)
 Change in owners, officers, members, or managers
 Change of location
 Municipal ordinance violation related to licensure
 Addition/removal of persons named in the application or disclosed
 Change in entity name
 Any attempted transfer, sale, or other conveyance of an interest in a license
 Any change/modification not part of facility/establishment plan or not inspected
 Must be reported within 1 business day
 Adverse reactions to product sold/transferred
 Criminal convictions, charges, or civil judgments against applicant or licensee
 Regulatory disciplinary action taken against an applicant or licensee

17. Why does regulatory
compliance matter?
 You agree to actively help the regulators investigate and prove non-
compliance
 MMFLA Rule 16/MRTMA Emergency Rule 17 – Diversion, theft, loss, or criminal
activity
 Must notify MRA, state police, and local law enforcement within 24 hours
 MMFLA Rule 17/MRTMA Emergency Rule 18 – Inspection; investigation
 The regulators have the right to investigate individuals/employees and have access
to business and records
 “Records” – anything used for recording information (physical and electronic
documentation)
 The regulators may enter business at any time, extends to any other place if
evidence of compliance or noncompliance is likely to be found

18. Why does regulatory
compliance matter?
 You agree to actively help the regulators investigate and
prove non-compliance
 NEW * for Adult-Use Applicants/Licensees
 MRTMA Emergency Rule 16(5) – Notification and Reporting
 Must notify MRA within 10 days of initiation or conclusion of any new
judgments, lawsuits, legal proceedings, charges, or government
investigations involving the applicant or licensee
 MRTMA Emergency Rule 19(8)
 MRA may take action against licensee for knowingly making
misrepresentation to the MRA during an investigation

19. What are the possible
punishments for violations?
 MMFLA Rule 19/MRTMA Emergency Rule 20 – Sanctions; fines
 Sanctions
 License denial
 Limitations on license
 Revocation, suspension, nonrenewal, administrative hold
 Orders to cease operations
 Fines
 Up to $5,000 (individual)
 Up to $10,000 or amount equal to daily gross receipts (whichever is
greater) for each day of violation
 Immediate suspension if violation jeopardizes health/safety
 Potential civil/criminal liability

20. Best practices for maintaining
regulatory compliance
 Implement and sustain good corporate governance practices
 Be liberal with reporting proposed changes
 Employees
 Changes to insurance
 Local license disclosures and other issues
 Participation in marijuana events

21. Best practices for maintaining
regulatory compliance
 Implement and sustain good corporate governance
practices
 Vague definition of “applicant” and “managerial employee
 Meetings/minutes are written evidence of decision-making
authority within company
 May be difficult to prove a negative during investigation

22. Best practices for maintaining
regulatory compliance
 Be liberal with reporting proposed changes
 Changing third-party integrator? (must be on approved list)
 MMFLA Rule 9/MRTMA Emergency Rule 11
(3) Any changes or modifications to the facility/establishment
plan must be reported to the MRA and may require preapproval
by the MRA
(5) The MRA may reinspect the marihuana facility/establishment
to verify the plan at any time and may require that the plan be
resubmitted upon renewal

23. Best practices for maintaining
regulatory compliance
 Be liberal with reporting proposed changes
 MMFLA Rule 21/MRTMA Emergency Rule 22
 (1) Any material change or modification to the building must be approved by the
MRA
 MMFLA Rule 34/MRTMA Emergency Rule 34
 (6)(b) – additional inspections required if:
 (i) Modifications to grow areas, rooms/storage, equipment
 (ii) Changes in occupancy
 (iii) Material changes to grower or processor facility
 (iv) Changes in extraction methods and processing or grow areas and building structures

24. Best practices for maintaining
regulatory compliance
 Employees
 Background Checks
 Must conduct before hiring, keep records, and implement policy requiring notice of any
new charges
 Do not only run an ICHAT (Michigan-specific)
 All public records searches can be inaccurate (including FBI)
 Contracts
 Include specific language regarding job duties/responsibilities
 Can be used to support argument that employee is not a managerial employee, only
supervising/carrying out policy
 BUT actions speak louder than words on the contract

25. Best practices for maintaining
regulatory compliance
 Changes to insurance
 Must have (1) “product liability”; (2) commercial general liability covering
premises liability
 Work with an insurance agent who is familiar with requirements
 Attestation J – confirmation by insurance agent that “no products liability exclusion
exists in the liability coverage . . . that would exclude the coverage mandated”
 Duty to report cancellation/changes
 1) 30 days’ prior written notice to MRA
 2) Submit new insurance policy within 30 days of written notice to MRA

26. Best practices for maintaining
regulatory compliance
 Local license disclosures and other issues
 Municipalities also have regulatory requirements, disclosures must be consistent with state application
(owners/managerial employees/operations/etc.)
 Compliance issues with agreements for local license (and possibly state license?)
 MMFLA Section 409
 A state operating license . . . is not a property right.
 Granting a license does not create . . . a property interest.
 A licensee or any other person shall not lease, pledge, or borrow or loan money against a license.
 Court of Claims Opinion – Green Genie, Inc. v. State of Michigan
 “The MMFLA cannot, by creating a license with all the traditional trappings of a property right,
arbitrarily ignore those characteristics and simply declare that no property right exists.”
 “[A] license under the MMFLA is plainly a property right”

27. Best practices for maintaining
regulatory compliance
 Participation in marijuana events
 Starting November 1, 2019, MRA will begin accepting applications for adult-use
establishments, including Marihuana Event Organizer and Temporary Marihuana Event
Licenses
 Proceed at your own risk if you decide to participate in a non-licensed event:
 MRA’s position:
 1. Any activities of a person who becomes an applicant for licensure may be considered as part
of the evaluation process for license eligibility under the MRTMA and the MMFLA.
 2. We are aware of the cannabis events.
 3. We will not begin taking applications for licenses under the MRTMA until November. There is
no authorization for activities of this type under the MMFLA.
 Relatively easy for MRA to obtain proof (social media postings/etc.)

28. Questions?
Nickolas Galendez
Associate Attorney
nick@cannabislegalgroup.com
734-771-2170