The Minnesota Office of Cannabis Management (“OCM”) conducted its license lottery for social equity applicants on June 5, 2025. Lottery winners received preliminary approval and must secure a business location and, in many instances, additional capital is required to commence operations.

OCM subsequently issued formal guidance as to changes of business ownership and control. Of particular importance to social equity licensees – which require 65% ownership by the verified social equity applicant – is the requirement that these licenses may only be transferred to another verified social equity ownership group during the first three years of operations. After three years, a social equity license can be transferred to any entity, including a non-social equity ownership group.

The restrictions on ownership transfers to non-social equity applicants for the initial three-year period pose some issues for businesses seeking additional capital, as a simple contribution of capital in exchange for percentage ownership is limited to a maximum of 35%. However, other funding mechanisms exist which could provide the ability for a larger percentage of equity ownership after the three-year waiting period ends. These mechanisms include convertible notes, simple agreements for future equity, commonly known as “SAFEs”, and options to purchase an equity interest.

A convertible note is a short-term debt instrument that converts to equity upon a predetermined conversion event. Investors offer the licensed business convertible notes in exchange for equity in the company to be issued sometime in the future at a predetermined valuation. At some later point, the principal amount of the note will convert to equity (in other words, an ownership stake in the company)—usually in the form of preferred shares and the accrued interest is usually paid in cash. Thus, it’s possible to issue a note to an investor which would defer the equity conversion for at least the three-year period in which the social equity applicant must retain 65% ownership of the licensed business.

A convertible note is recorded as debt on the company’s balance sheet up until the conversion event. After conversion, the note converts into equity in the company. As debt instruments, convertible notes also have a maturity date and a set interest percentage.

By contrast, a simple agreement for future equity (SAFE) is a financing contract that may be used by a startup company to raise capital in its seed financing rounds. The instrument is viewed by some as a more founder-friendly alternative to convertible notes.

A SAFE is an investment contract between a startup and an investor that gives the investor the right to receive equity of the company on certain triggering events, such as a future equity financing (often referred to as a “qualified financing”) or sale of the company.

The price of the equity that the SAFE holders receive on conversion is lower than the price of the securities issued to investors in connection with a qualified financing, based on both or either a discount rate or valuation cap.

While SAFEs may have similar conversion features to convertible notes, they lack a maturity date (i.e., until a conversion event occurs, SAFEs remain outstanding indefinitely) and interest accrual.

Finally, an option to purchase is the right to buy a specific number of shares of company stock (or units of membership interests, if the entity is a limited liability company) at a pre-set price, known as the “exercise” or “strike price.” The investor takes actual ownership of granted options over a fixed period of time called the “vesting period.” When options vest, it means that the investor has “earned” them, though they still need to purchase them.

Regardless of the funding mechanism selected, a licensee must disclose any such investor to OCM as a “financier” and, prior to any conversion or exercise event, OCM must be notified and review any proposed change of ownership and control.

One final note: all of these types of financing structures constitute a sale of securities, and thus reliance upon the advice and assistance of competent securities counsel to comply with applicable federal and state laws is critical. If you are a Minnesota cannabis business seeking assistance with fundraising and securities law compliance, please reach out to either Steve Levine or Jeffrey O’Brien.