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Adequate Capitalization Maryland Cannabis Application

Maryland Marijuana Consulting

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The following has been provided from the Natalie M. LaPrade Maryland Medical Cannabis Commission:

2a. Can the participation of investors identified in an application be contingent upon award of a pre-approval of a license?

Yes. Applications need to document sources of capitalization. Capitalization that is contingent upon the award of a pre-approval could be a documented source of capitalization.

3a. What if I am an individual as an investor, but not a business entity as an investor?  How do I satisfy the requirement to produce an audited financial statement?

The Commission requires that the investor/agent has a source of adequate capitalization which is founded on legitimate, legal sources.  This evidence can include the following documentation:

1)    Personal Tax Returns for the past five years;
2)    Tax returns for any business which they hold a majority interest for the past five years;
3)    Audited Current, Independent Financial Statement;
4)    Credit History; and
5)    Evidence of any lines of credit, etc.

4a. What qualifies as ‘documentation & source of adequate capitalization’? Do bank accounts count? Do Tax returns? If an investor is a corporation, does it need to provide its financial statements?

“Audited financial statement” means an audited financial statement that is:

(a) Performed by a certified public accountant licensed or with practice privileges in   Maryland pursuant to Business Occupations and Professions Article, Title 2, Annotated Code of Maryland;

(b) Prepared in accordance with the Professional Standards of the American Institute of   Certified Public Accountants; and

(c) In the case of a publicly owned corporation, in conformity with the standards of the Public Company Oversight Board.

If an investor is a corporation, then the corporation must supply the above documents as well.

5a. If an applicant is a newly formed entity, do each of the investor members have to submit tax returns?”

If an applicant is a newly formed entity, they are still required to submit audited financial statements demonstrating adequate capitalization.  In addition, the individual investor members each may be asked to provide the following additional documentation:

a. Personal Tax Returns for the past five years;
b. Tax returns for any business which they hold a majority interest for the past five years;
c. Audited Current, Independent Financial Statement;

6a. Do all financial statements submitted with the application have to be audited?

Yes. COMAR 10.62.08 & 10.62.19 requires audited financial statements.

7a. What are the minimum capitalization requirements for each license category?

The regulations do not establish mandatory capitalization requirements for any license category.  We recommend applicants meet with an expert in the field of financial planning to determine what should be adequate capitalization for their license category.

11a. In Stage 1 of the application, what is sufficient “documentation of adequate capitalization”?

The term “adequate capitalization” is not defined in the regulations.  Likewise, what adequate capitalization is dependent on the nature of the license.  For all applications, for stage 1 of the application, examples of documentation of capitalization, whether adequate or not, include: 1) Financial statements; 2) Deeds; 3) Evidence of any lines of credit; or 4) Annual Reports.

We expect applicants to discern which of the above, or information like the above, supports their application and demonstrates that as a licensee, the business entity responsible for running the grower/processor/dispensary will have sufficient capitalization to sustain the operations.  In the event that an applicant is unclear what adequate capitalization will be needed, we recommend that the applicant consults with an expert in the financial planning field.

12a. I have a question about the application.  In the FAQ’s there is a reference to “audited financial statements”.  There is no reference to this in the cited COMAR section, nor in the body of the application itself.  Outside of Question 3 which requires certification of adequate capitalization, is there an absolute requirement that any investor provides an audited financial statement?

For example, if a group is capitalized through a line of credit (the line of credit has no ownership stake in the business), would the line of credit and proof of funds in an account satisfy stage one application requirements?

For the purposes of Stage 1, applicants need not provide an audited financial statement but are obligated to demonstrate adequate capitalization.  An audited financial statement is one manner in which an applicant may endeavor to demonstrate adequate capitalization.  Evidence of a line of credit and proof of funds may be considered indicia of capitalization.  Applicants are also obligated to demonstrate the adequacy of the capitalization such that it is sufficient to sustain the proposed operations.

In Stage 2, an applicant will be required to provide the audited financial statements of any investors holding 5% or more of the company’s interest, as well as the company’s audited financial statement.  “Audited financial statement” is defined in relating to Grower applicants; 10.652.19.01 relating to the Processor applicants; and relating to the Dispensary applicants.

20a. In order to demonstrate adequate capitalization, are we required to pool all of our resources into one account prior to filing the application, or can we provide documentation demonstrating that the funding sources are available to fund the operations?

For purposes of the Stage One application, applicants may, but need not, pool their resources into joint accounts to demonstrate adequate capitalization.  Instead, they may supply the Commission with documentation which supports their proposition that, if selected, there are adequate funds to conduct the operations.  The Commission recommends that applicants seek the assistance and advice of a Certified Public Accountant.

22a. Can we provide a copy of an LOC to show that we have the capitalization to proceed successfully?

Among other documents, a line of credit may be indicia of adequate capitalization.

74e. When redacting names, should we also redact names of business entities the individual applicant may have an interest in?

This level of redaction is not necessary unless the business entities are also investors in the proposed business.  In other words, if the investor has a diversified portfolio, that portfolio may be helpful to a determination of whether or not there is adequate capitalization, but the companies listed in that portfolio do not need to be redacted unless those companies are also investors in the proposed business.

123e. In supplying the documentation in support of adequate capitalization, we have far too many documents to comply with the page limit.  What do we do?

It is well understood that applicants have the burden of demonstrating they possess adequate capitalization.  The Commission has also provided a list of documents which may be indicative of adequate capitalization.  If an applicant believes it necessary to support their application with documents numbering far in excess of the page limit, they should understand that the documents exceeding the page limit will not be scored.  This response is intended to be read in harmony with these prior statements.
For purposes of the stage one application only, in order that applicants are able to provide the necessary data, applicants may, if they choose, adopt the following procedure:

  1. Have a certified public accountant review the underlying documents and encapsulate the relevant data points from the documents and include them into a table(s), e.g., a summary chart or data table.
  2. This table/chart must be contained within the existing page limits; this is not in addition to the existing page limits.
  3. The applicant should, within those same page limits, include a statement which certifies that “the table/chart was compiled by a certified public accountant on the basis of documents he/she reviewed and that the data contained in the table is true, accurate, complete, and made under penalty of perjury.  Applicant understands that a misrepresentation may result in the termination of the application.”
  4. If an applicant is found to have misrepresented the data in the table/chart, the application or license may be denied or terminated.
  5. Applicants are advised that the Commission may require additional documents or information to be provided pursuant to its authority under the regulations and that the data contained in the tables may be scrutinized at any time.
  6. The Commission recommends that in providing their documentation in support of adequate capitalization, applicants not rely on summary charts or data tables alone.

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About Quantum9

Quantum 9, Inc. is a Chicago, IL-based cannabis consulting firm. We specialize in getting high net worth individuals and private equity cannabis business licenses to cultivate, manufacture and dispense marijuana. We have over 50 marijuana consultants that work for the company, and we have practiced in 12 countries. Our areas of expertise include permit acquisition, team building, employee training planning, and process planning. We help clients fully maximize the potential of any cannabis cultivation, processing, and dispensary business.

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