When the Commonwealth of Massachusetts first established the framework for its legal marijuana industry, Massachusetts law required dispensaries to form and operate as nonprofit corporations. This mandate forced founders and angel investors alike to implement overly complex corporate structures to legally stream revenue out of the nonprofit corporation to investor controlled entities to make investment in this high-risk industry palatable. A common example included the creation of for-profit management companies providing management and consulting services to the dispensary for a price, controlled by the very same parties providing seed monies to the nonprofit dispensary. Also, commonplace were investor-owned real estate holding companies which would lease space to the nonprofit dispensary, in turn generating reliable rental income for investors as an alternative means to see a return on their investment. Frequently, these contractual arrangements were used in tandem. The need for these complex corporate relationships, however, is obviated by a recent change in Massachusetts law.
Last month, the Massachusetts Department of Public Health (DPH) – the regulatory body which oversees the Commonwealth’s marijuana industry – released a guidance document outlining the steps by which a nonprofit dispensary may convert to a for-profit entity. This guidance document comes in the wake of a recent change in the law providing dispensaries with a statutory right to convert. The change in framework now allows investors to hold equity in dispensaries and to see direct profit distributions from their investments, thereby cancelling the need to implement traditional contractual relationships used in the industry.
While at first glance, the DPH guidance document appears to make the conversion process simple and straightforward, conversion is certainly not a simple as filing a form with the DPH. Dispensaries looking to convert from nonprofit to for-profit should be leery of undertaking the process in the absence of legal counsel. Beyond the regulatory processes in place with the DPH, conversion also implicates other Massachusetts’ laws and, if done incorrectly, could unnecessarily create tax consequences for investors. For example, the issuance of stock to investors when converting, if done incorrectly, could lead to large taxable events at both the federal and state levels. Accordingly, it is extremely important that investors and nonprofits considering for-profit conversion seek competent legal counsel from a well-rounded attorney with industry, corporate conversion and tax planning experience. To reach PLDO Partner Benjamin L. Rackliffe and Attorney Joel K. Goloskie to discuss this issue or other business matters, call 401-824-5100 or email [email protected] or [email protected] We welcome your comments, questions and suggestions.