Financing a Cannabis Business in Montana

Financing your cannabis business in Montana can be complicated by the conflict between state and federal law. Below are practical ways to finance your cannabis business in compliance with Montana law.

  1. Investment Vehicles

Investments can be equity investments or debt/promissory ownership. Equity investments include stock in a marijuana corporation and membership in a marijuana LLC. A debt investment is loaning money at a certain rate of return. Loans can be made through a qualified institutional investor, such as a bank, or a private transaction.  Because banking services are generally unavailable to marijuana businesses, they often want to use a private loan for capital.  Marijuana businesses need to be careful in how loans are structured because they can unintentionally create a financial interest in the marijuana company.

A person with a financial interest is subject to the requirements of the Montana Marijuana Regulation and Taxation Act (MMRTA) for owners, including Montana residency requirements. Both debt and equity investments should be pre-approved by the Cannabis Control Division (CCD). Under the MMRTA, a financial interest entitles the holder, directly or indirectly, to 5% or more of the net profit or net worth of the marijuana business. The term does not include interest held by a bank or licensed lending institution or a security interest, lien, or encumbrance but does include holders of private loans or convertible securities. If the private loan isn’t structured properly, it can be a financial interest requiring compliance with Montana law under § 16-12-203.

  1. Suitable Source of Funding for a Montana Cannabis Business

Under the MMRTA funding for a marijuana business must be from a “suitable source.”  Although there is no definition of “suitable,” a source of funding may be found unsuitable if the source is a person whose prior financial, criminal record, or other activities either: (a) poses a threat to the public interest of the state; (b) poses a threat to the effective regulation and control of cannabis (c) creates danger of illegal practices, methods, or activities in the conduct of the licensed business; or (d) has been convicted of a felony offense within five years of the application date or is on probation or parole under deferred prosecution for committing a felony offense.

The Montana CCD hasn’t affirmatively defined a suitable source of income yet; however, we expect it to write rules similar to the Alcoholic Beverage Control Division (ABCD) rules. Under the ABCD rules, prior department approval isn’t required on loans under certain conditions: (a) The loan is used to meet an obligation of the licensed entity that cannot be met with its existing operating accounts and reserves; (b) The funds loaned to the licensed entity must be those of the owner or borrowed from an institutional source; (c) An agreement between the licensed entity and owner must memorialize the loan and meet the department’s evaluation standards; (d) The borrower’s and lender’s financial records must accurately reflect the transaction. Failure to maintain adequate records will violate this rule. Although the CCD rules currently don’t require filing a non-institutional loan (NIL) form, we expect that to change.

Financing a Montana Cannabis Business – Quick Summation

These are difficult waters to navigate. We have lawyers at Gravis who are experienced in these areas and can assist your cannabis business with financing that complies with Montana law. Please contact us for a consultation to help you with your cannabis business.