I have helped people buy, sell and invest in hundreds of cannabis businesses. I've represented many hundreds more. One thing that makes my job harder, at times, is working with cannabis businesses that have misaligned public records and reporting.
There are three pillars of public reporting, or disclosures, that a cannabis business should strive to maintain with the utmost consistency: 1) ownership records filed with the secretary of state; 2) ownership records filed with state and local cannabis regulators; and 3) ownership records filed with taxing authorities. Internal records, such as a company's operating agreement or stock ledger, should also be consistent with information disclosed to government authorities.
Unfortunately, and for various reasons, many cannabis businesses have put misaligned information out there into the world. When it comes time to sell these businesses or their assets, or take on investment, or do standard things like acquire a bank account, contradictory information can be a huge problem.
Ownership records with the secretary of state
Businesses are created at the state level, typically by filing Articles of Incorporation (for a corporation) or Articles of Organization (for an LLC). Some states require more disclosure as to company ownership and management than others.
Generally speaking, when I oversee a filing, we disclose as little information as possible. Often, however, people take the opposite approach. There's nothing wrong with that, necessarily; but you need to be accurate. You also need to make updates when changes occur, and not just at the next renewal filing for the business.
Ownership records with state cannabis regulators
We see problems here regularly. Perhaps owners don't want to disclose someone with a problematic record that has ownership or control over the cannabis business; or perhaps an owner does not want to be publicly affiliated with the business; or maybe someone left, and nobody took responsibility for updating regulators.
In our experience, regulators, like bankers, will typically cross-check applications against other public filings. Specifically, they'll cross-check against the secretary of state registry referenced above. Explaining away inconsistencies is never any fun, and may not even be possible in some cases. It's generally best to apply for a license once everything is sorted. After the license is acquired, required "change" disclosures must be timely made.
Ownership records with taxing authorities
This type of filing doesn't fall into the same class as the two mentioned above. Generally, and with some exceptions, the IRS may not disclose a company's tax information to third parties unless permission has been given. Still, an LLC that is taxed as a partnership or an s-corporation will prepare a K-1 or 1120-S for each member. A corporation will list out officers and directors directly on its form 1120.
If a member receives a K-1, for example, but that member is not disclosed to state cannabis regulators as required by rule, that could cause problems in the context of a sale or other transaction. The best practice is to ensure that tax filings are consistent with other regulatory submissions, as well as with the company's internal agreements.
Wrapping up
Hopefully, your cannabis business has everything in order when it comes to public reporting, as well as internal documentation. If not, it's best to address the situation prior to a pivotal event, and prior to making additional filings. Inaccurate filings can sometimes move things along, but tend to add layers of complication down the line.
Your Cannabis Business: Consistent Filings Are Critical
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
