Colorado recently modified its marijuana establishment ownership laws by creating a new class of ownership called the Permitted Economic Interest (PEI). As a result of this change, the Colorado Marijuana Enforcement Division will be promulgating new rules for individuals that wish to invest or loan money to licensed marijuana establishments through the issuance of convertible securities.

But before getting into what the PEI is and how it will work, let’s clear up a common misconception. The new PEI rules are not a repeal of Colorado’s residency requirement for owners of marijuana businesses. Out of state investors will still not be allowed to own or control Colorado marijuana establishments. They will, however, have a formalized process for investing in cannabis businesses with the possibility of becoming owners in the future so long as they meet the required qualifications.

How it works:

The PEI legislation modifies the statutory “Owner” definition for Colorado-licensed marijuana establishments to exclude the holder of a PEI. It also creates a new PEI class of ownership that will apply to qualifying U.S. residents holding convertible debt, options, warrants or other convertible equity interests in a licensed marijuana establishment. Persons who apply for and are issued a Permitted Economic Interest will be able to become owners of the cannabis business in the future so long as they meet Colorado’s ownership qualifications at the time they wish to convert their interest. At this time, ownership qualifications include being a 2-year Colorado resident.

What we can expect:

The PEI legislation is short on details, but we do know that that on or before January 1, 2016, the MED will create a new PEI application process as well as new rules related to PEIs. These rules are likely to include:

• Details for completing the application process, including background checks, proof of U.S. residency and disclosure of certain financial information for the person seeking the PEI qualification;
• Moral character qualifications – these are likely to be similar to current ownership qualifications – i.e. no felonies;
• Rules of PEI ownership, such as divestment provisions and restrictions on control of the cannabis business;
• Submission of all investment documents – MED will be checking these documents for the presence of certain clauses (and omissions of others) so as to conform with the PEI rules; and finally,
• License and application fees.

For most marijuana companies, the new PEI rules, once released, should look and sound similar to the legal advice they have been receiving over the last few years. Though, operators and investors will want to go back and re-read their convertible loans (and other security instruments) to ensure they remain in compliance. This is a slight administrative burden, but one likely outweighed by the entrance of new investors into the market – investors that have been previously on the sideline due to the uncertainties surrounding non-owner financiers – and many of these slightly more cautious individuals have a wealth of business experience to add to Colorado’s cannabis economy.