The Misrepresentation You Missed: Why to Vet Before You Apply

This post is part of a series exploring how state regulator background checks are used in the legal cannabis industry. Prior posts looked at “good moral character” clauses,  background checks on minority investors, and the scope of these checks in Massachusetts. 

In late 2017, both California and Massachusetts published preliminary or draft regulations for their new adult-use cannabis industries. We want to highlight a couple of items that demonstrate the increasing sophistication of the licensing process in these states, as well as the way that operations in one state can affect your licensing in another.

First, misrepresentation in an application is grounds for denial or revocation of a license.

It shouldn’t shock anyone that if you lie to the licensing authority when you submit your application, that puts your license at risk. But what about the lies that you don't even know you're telling? 

“...what about the lies that you don’t even know you’re telling?”

Consider this: As part of your application in California and in Massachusetts, you will be required to submit information about your board members, directors, executives, managers, and others with a significant financial interest in your cannabis business. For example, in Massachusetts, the information you are required to disclose about those individuals includes:

• Whether they’ve ever been subject to any civil or administrative action relating to “any profession or occupation or fraudulent practices”

• Whether they’ve ever been disciplined by any state in connection with a professional license

In our experience conducting investigative due diligence on senior executives, we’ve found that one of the most common resume lies is an individual claiming to hold a current professional license – like a CPA or an attorney – who is actually not in good standing with the state where they were licensed. And one of the most common omissions? Failing to mention that you were once licensed but lost your license due to malpractice. According to HireRight, 85% of employers uncovered a lie or misrepresentation on a resume in 2017, so this certainly isn’t limited to the cannabis industry.

Here's the problem: Your state regulator could be within their rights to require you to replace an executive or investor on your application, or even reject your whole application, if they discover this type of misrepresentation.

Second, revocation or denial of a license in one state could result in the same in another state.

Applicants in Massachusetts must disclose whether any of the individuals on their application has previously made “any attempt to obtain a registration, license, or approval to operate in any state by fraud, misrepresentation, or the submission of false information” or been a member or executive of a business attempting the same (MA draft regulation 500.101 (2)(xiv)). Similarly, in California, each individual must disclose the details of any suspension or revocation of a commercial cannabis license against them individually or against a business entity in which they were an owner or officer (CA proposed regulation 5002 (20)(M)). Regulations in both states go well beyond limiting their checks to issues involving the individual directly -- they also want to know that the businesses with which they've been affiliated have been well-run.

“Applicants should not assume that a failure to abide by regulations in Colorado won’t affect their operations in Massachusetts.”

Is disclosure enough? No. It looks like the suspension or revocation of a license in another state can be grounds for denial of a license in both California and Massachusetts, depending on the cause for the action in the other state (MA DR 500.400 (E)). Applicants should not assume that a failure to abide by regulations in Colorado won't affect their operations in Massachusetts.

What could this look like in practice?

Imagine this: A group is applying for a dispensary license in Massachusetts. They’ve selected Jane to be the dispensary’s president, in part because she has industry experience in California, where she has an ownership stake in a licensed cannabis business. But the group didn’t know that her California business’s license is currently being reviewed for potential violations.  According to Massachusetts’ draft regulations, the existence of an open or unresolved marijuana business-related license violation in any other jurisdiction can be grounds for mandatory disqualification of an agent license. Suddenly, the group needs a new president.

So what’s a proactive applicant to do?

Vet your team thoroughly, and be aware that a standard background check provided by a company without cannabis industry expertise may not tell you everything you need to know. A basic background check is not going to include looking into the status of licenses held by other marijuana-related businesses with which your executive team, directors, or investors are affiliated. Better to find that out before you apply, rather than scrambling to replace members of your team in the middle of the licensing process.

“Better to find that out before you apply, rather than scrambling to replace members of your team in the middle of the licensing process.”