Charles Feldmann, Esq.
What’s the law about?
In an effort to increase sources of capital for MJ business owners, on
January 1, 2017, non-Colorado residents may invest in MJ business companies
– a major change from the previous law, which stated that only individuals
who had been residents of the state for 2+ years could have ownership options.
Who can invest now?
Generally, any U.S. citizen that is either an individual or a closely held
business entity. Businesses with these types of investors have different,
stricter regulatory requirements than businesses that contain only Colorado
residents, though, which set limitations on the number of investors and
their active involvement with the company.
can’t invest in MJ Businesses?
Two major categories remain wholly excluded: publicly traded companies
and international citizens or businesses.
Does the law change investment options for CO residents?
Yes, in a good way. While Colorado resident investors previously had to
have been residents for two years prior to being able to invest in an
MJ business, the new law drops this residency requirement to one year
prior to the application date. However, even if an investor has relocated
to Colorado but not yet established in-state residency for a year, he
or he may still may utilize the investment options available to U.S. citizens.
I am an owner in a CO MJ Business company. Do I need to change any operations
because of the laws?
As long as your operations legally comply with the current requirements,
you do not need to alter any operations as a result of the new laws. The
laws are intended to open doors for new capital and make very few changes
to pre-existing, compliant businesses. However, it may be helpful to be
aware that some procedural aspects will alter: specifically, the State
Licensing Authority will change some aspects of licensing fees (“annual”
has been removed from some of the pre-existing laws), and procedural aspects
of background checks and fingerprinting may be adjusted as well.
What types of investors are allowed?
The new law makes room for several kinds, ranging from banks to individual
employees of the company.
Investors fall within two categories: Indirect Beneficial Interest Owners
(IBIOs) and Direct Beneficial Business Owners (DBIOs).
Who can be an Indirect Beneficial Business Owner (IBIO)?
- Qualified Institutional Investors, which include banks, insurance and investment
companies, investment advisers, collective trust funds, employee benefit
plans and pension funds, state or federal pension plans, and any other
entities the State Licensing Authority elects to authorize.
- Permitted Economic Interest Holders
- Licensed Employees Receiving Profit Shares from an Employee Benefit Plan
- Intellectual Property Royalty Recipients
- Other Similarly Situated Individuals/Entities, as determined by the State
What are the rules and regulations for IBIOs?
The State Licensing Authority will determine the parameters and qualifications
for this category of investor. However, some limitations have already
been established through the new bill. Here are the important ones:
- A Qualified Institutional Investor (QII) is limited to owning 30% or less
of a Colorado MJ business. The QII must also be approved, meaning that
it meets the federal definitions for that entity. For example, a bank
that wishes to invest must meet the federal Securities and Exchange Act
definitions and requirements.
- Intellectual Property Royalty Recipients must ensure that the royalty is
associated with the use of intellectual property by a licensee, and that
the royalty is commercially reasonable, which will be determined and defined
by the State Licensing Authority.
- Permitted Economic Interest Holders must be a natural person and a U.S.
Citizen. Furthermore, while the law has changed many aspects of investor
regulations, the definition of what constitutes a Permitted Economic Interest
continues to include “any unsecured, convertible debt instrument,
including option agreements, warrants, or any other rights to obtain an
ownership interest” that is contingent on the holder qualifying
and obtaining a license as an owner.
- No publicly traded companies may invest in a Colorado MJ business.
Who can be a Direct Beneficial Interest Owner (DBIO)?
Direct Beneficial Business Owners may be any U.S. citizen or closely held
business entities (that consist of individuals that are U.S. citizens)
who own 5% or more of the MJ business. Additionally, the law creates a
category for Qualified Limited Passive Investors, who own less than 5%
of stock shares in the company.
What are the rules and regulations for DBIOs?
This depends largely on whether the MJ business consists entirely of Colorado
residents who have been residents for one or more years prior to application,
or if the business contains some out-of-state or non-resident investors.
Also, no publicly traded companies may invest in a Colorado MJ business.
Colorado Resident-Only MJ Businesses:
- An MJ business consisting entirely of investors that meet the 1+ year Colorado
residency requirement prior to application may have an unlimited number
of them, provided that all of the businesses DBIOs are within this category
- This category of investor does not have to undergo the Finding of Suitability
application process prior to obtaining a license that is required for
MJ Businesses Containing 1+ DBIOs Not Meeting One-Year Minimum CO Residency
- An MJ business that has one or more non-Colorado resident/out-of-state
investors is generally limited to containing no more than 15 DBIOs total.
However, in instances where a business wishes to obtain more than 15,
the State Licensing Authority may review the request and increase the
limit. This limitation includes all parent and subsidiary entities of
the DBIOs. Grant of an increase depends on factors such as the market
and availability of capital for the business.
At least one officer must have been a Colorado resident one or more years prior to
All day-to-day operational control officers must have been Colorado residents
one or more years prior to application date.
What do non-resident DBIOs need to do to invest?
If the investor wishes to be a Qualified Limited Passive Investor, he will
have to participate in a limited initial background check. Should the
check provide reasonable cause for further inquiry, a full background
check may be required. In addition, further parameters and qualifications
for this type of investor will be set by the State Licensing Authority.
All non-resident DBIOs (including Qualified Limited Passive Investors)
must apply with the State Licensing Authority for a Finding of Suitability
prior to applying for a license as a MJ business owner. Not competing
this step prior to applying is grounds for denial of the license.
I have a non-Colorado resident who wants to invest in my company. What
should I know?
The first step is identifying what type of investor an individual (or closely
held business entity) wants to be. The potential investor should be aware
that an application for a Finding of Suitability to the State Licensing
Authority is mandatory, and a background check may be required. Upon approval
of the Finding of Suitability, the investor will then have to apply for
a license with the State Licensing Authority. Finally, as an owner, you
are responsible for ensuring that the addition of this investor will not
violate any of the requirements for DBIOs under the new law.