IDFPR Provides Key Guidance Regarding Management Service Agreements for Conditional License Holders in Illinois | Burns & Levinson LLP
On July 1, 2022, the Illinois Department of Financial and Professional Regulation (IDFPR)—the regulatory department charged with implementing and administrating multiple aspects, including licensing, of Illinois’ Adult Use Cannabis Program—published an Advisory Notice online providing information to conditional dispensary licensees (Conditional Licensees).
Buried amongst otherwise relatively straightforward guidance regarding rules related to business operations and timing expectations for the conditional license process was new crucial guidance regarding the use of Management Service Agreements (MSAs) by Conditional Licensees.
The IDFPR stated that MSAs require new Principal Officers to be added to the ownership structures of Conditional Licensees. Conditional Licensees are barred from changing their Principal Officers until they have received an active license—so the IDFPR’s declaration effectively prohibits the use of MSAs by Conditional Licensees.
The IDFPR’s stance is somewhat surprising given the definition of “Principal Officer”:
Principal Officer includes a cannabis business establishment applicant or licensed cannabis business establishment’s board member, owner with more than 1% interest of the total cannabis business establishment or more than 5% interest of the total cannabis business establishment of a publicly traded company, president, vice president, secretary, treasurer, partner, officer, member, manager member, or person with a profit sharing, financial interest, or revenue sharing arrangement. The definition includes a person with authority to control the cannabis business establishment, a person who assumes responsibility for the debts of the cannabis business establishment and who is further defined in this Act. 410 Ill. Comp. Stat. Ann. 705/1-10.
Presumably, IDFPR has taken the position that all MSAs give a person “authority to control the cannabis establishment.” While some MSAs may bestow that level of authority on a management company, many would fall short of providing such sweeping power.
In any event, the IDFPR’s position will almost certainly leave some Conditional Licensees in a bit of a lurch. Conditional Licensees need to accomplish several important tasks prior to being issued an active Adult Use Dispensary License (an “Active License”) including, but not limited to:
- Completion of background checks and fingerprinting for all Principal Officers.
- Receipt of zoning approval from the local government in which its proposed dispensary will operate in and delivery of the following documents to the IDFPR by the Conditional Licensee:
- Notice of Proper Zoning Form
- Copy of the local government’s laws permitting Adult Use Dispensaries
- Proof of one of the following:
- Zoning approval;
- Conditional zoning approval; or
- Status of a request for zoning approval
- Proof of one of the following:
- Proof of land ownership;
- Sales contract; or
- Landlord’s consent
- Submission of a floor plan containing the following, at a minimum:
- A description of the air treatment system used to reduce odors
- Locations of all holdup, panic, glass break sensors, and motion detectors
- Locations of all cameras, including the direction they face, if applicable
- A map that identifies general, limited, and restricted access areas
- Locations of point of sale systems
- Purchaser ID verification locations
- Descriptions of any pass-through drawers in and out of a vault or a day-time storage area
- A location where cannabis will be received from transporters
- A location where cannabis will be destroyed when necessary
- A title for each room and closet in the dispensary
- Passing final inspection, which requires the completion of the dispensary buildout in accordance with required law and the Floor Plan.
Many Conditional Licensees may be prepared to complete the tasks described above (and more) without the need of any management services, but other Conditional Licensees—particularly those with less industry experience or capital—may have already, or may have been planning to, engage management companies with the professional expertise and infrastructure to help them complete these tasks.
It is unclear, at this point, if there is a viable workaround for Conditional Licensees to seek the expertise and help that some will need without violating the IDFPR’s position on MSAs. One solution could be the use of consulting services agreements that limit the authority of the consultants. But at this time, it is unclear what the IDFPR’s position is on such agreements–consulting agreements and MSAs often read similarly and grant similar rights; the IDFPR could deem over-reaching consulting services agreements to be MSAs in sheep’s clothing. Another potential solution is separating those broad services generally contained in a single management agreement into several more precise agreements with multiple parties providing the services rather than one manager; but this could lead to increased legal and administrative costs, and Conditional Licensees will still run the risk that any single service agreement could be interpreted by IDFPR as creating a Principal Officer in violation of Illinois law.
One thing is for certain, until the IDFPR provides more insight, Conditional Licensees should be sure to seek the advice of qualified counsel to help navigate and consider these issues prior to entering into service relationships with third parties.