Limits on Out-of-State Ownership of Cannabis Businesses in California

For medical licenses, under MMRSA, there is no residency requirement for licensees. That means an out-of-state resident could apply for a state license direcly. Likewise, a California business entity could apply for a state license even if it is owned by an out-of-state resident. Note: we ordinarily like to support our analysis of statutes by linking directly to the applicable statutory text. Here, that is not possible because there is no statutory language on residency; it's just not there. But our read of the statute is confirmed by others, such as the Marijuana Policy Project.

For adult use -- i.e., non-medical -- licenses under AUMA, there will be a residency requirement during at least the first two years of license grants. This restriction expires December 31, 2019, though the legislature could extend it.

The residency requirement for natural persons -- living, breathing people -- is straightforward: a licensee must be able to demonstrate "continuous California residency from or before January 1, 2015".

For business entities like corporations or LLCs seeking a license, the rules are murkier. What it boils down to is that an "applicant or licensee" must not be "controlled" by any person who "cannot demonstrate continuous California residency from and before January 1, 2015."

"Control" is not defined in AUMA. Exactly what "control" means in this circumstance under AUMA will, almost certainly, be subject to regulations that will be enacted in 2017. But we can paint in broad strokes based on the statute.

At one end of the continuum is a 100% owner of the business with the ability to elect the board, or the ability to hire and fire management of the licensee. Such a person is almost certainly in "control" for these purposes. That would be true even if the business owner used several intermediate corporations or other business entities to hold their ownership interests.

At the other end of the continuum is an investor with a small equity stake, or a non-equity stake (such as a debtholder), and with no role in hiring or firing management. Such a person is unlikely to be in "control" for these purposes.

There are, of course, many cases in the middle, and they can get harder to characterize with certainty. The statute does give us some help, however, in the defintion of "[owner or owners]/auma#BP26001" that is limited for privately-held companies to those with 20% or more in equity, along with "the power to direct or cause to be directed, the management or control of the license." That suggests that, under the AUMA regime, an equity holder in a privately held company with less than 20% stake is unlikely to be considered controlling, though particular circumstances could change that conclusion.

For publicly-traded companies, ownership under AUMA extends to include the CEO and members of the board of directors. As a result, a publicly-traded license applicant would need to have an all-California resident board and a California resident CEO.