How Cannabis Applicants Can Set Themselves Up for Capital Raising Success

With several states announcing the introduction and/or expansion of their cannabis programs, both state regulators and prospective operators are preparing for the application process. Appropriately, prospective applicants will be laser-focused on assembling the personnel and resources necessary to submit the best application possible. Applicants may be inclined to implement a very simple single-entity organizational structure in order to submit a straightforward application that is easy for regulators to follow and understand. While there is some merit to this approach, applicants should bear in mind that a successful application results in a provisional license or pre-approval that allows the applicant to proceed with developing the facilities described in their application within a specified time period, usually 12 months. To become operational, the application will need one key thing – money. During this preapproval period, all the applicant’s energy should be focused on becoming operational as quickly as possible.

If the applicant’s current organizational structure is not conducive to raising capital, it will need to amend its structure. Revising the organizational structure isn’t necessarily a simple or quick process, however, it will result in a change in ownership, which, in turn, will require regulatory approval.  Seeking regulatory approval of the reorganization will likely increase the time it takes to become operational, and any delay in becoming operational may result in the loss of market share that may never be regained. Additionally, if regulators determine that the reorganization adversely affects any scored parts of the application, the provisional license may be revoked. All of this could put the prospective operator right back at square one.

In order to avoid these potential delays, I advise my clients at the outset to implement an organizational structure designed to facilitate capital-raising efforts at the time the application is first submitted. Applying using a traditional holding company structure may require additional work on the front-end but will allow applicants to avoid delays and move at full speed to become operational.