An old adage states that what you don’t know won’t hurt you. While this may be true in some contexts, it is certainly not the case when it comes to regulatory compliance for businesses licensed by the Michigan Cannabis Regulatory Agency (CRA).¹

In that arena, licensees, owners, managers, and advisors should know and understand precisely the events and circumstances that must be reported to CRA; how to make those reports in a proper and timely fashion; and recognize the consequences of failing to report. Failure to report may jeopardize a licensee’s financial stability or its ability to continue doing business altogether.

THE RULES

CRA is statutorily mandated to promulgate rules “to implement, administer, and enforce” Michigan marijuana law.² Those rules, designated R420.1 through R420.1004, “ensure the safety, security, and integrity of the operation of [medical] marihuana” facilities and “standards for safe cultivation, processing, and distribution of [adult use] marihuana.”

It is clear that the agency is very serious about its responsibility to ensure the safety and security of marijuana produced and sold by its licensees and used by consumers.³ To assist in early identification of potentially problematic situations, the rules impose obligations to call specific matters to CRA’s attention. However, ambiguities in these rules create risk of noncompliance for even the most well-meaning applicant or licensee.

APPLICANT OR LICENSEE?

Rules 420.14 and 420.15 are explicitly designed to identify matters that trigger an obligation for an applicant to notify CRA. Rules 420.802 and 420.804 impose similar notice obligations on a licensee. Though not defined in the rules, a “licensee” is typically understood to mean the specific person or entity to whom the license is issued. “Applicant” is a broader term that includes both the person or entity applying to hold a marijuana license as well as related and affiliated persons.⁴

At first blush, the rules for applicants and licensees may appear identical, but there are subtle differences between the sets. Many of the differences have minimal practical impact. However, some create material differences in the matters to be reported or the time frame for reporting. For example, the rules require licensees to notify CRA upon removal of an employee from a position for misconduct related to marijuana sales or transfers, but no such obligation applies to applicants. As another example, licensees have 10 business days to notify CRA of initiation of a lawsuit involving the licensee while an applicant has only 10 calendar days to provide this notification with respect to the applicant.⁵ If a licensee waits two weeks to notify CRA of a lawsuit, he or she has failed to comply with the time frame based on parallel status as an applicant.

For purposes of compliance with the CRA notice rules, all persons holding marijuana licenses and those associated with the licensee should first determine whether they are within the scope of the rules and then ensure they carefully review the correct rules pertaining to their statuses as licensees or applicants.⁶ Additionally, licensees should remember that they also fall within the definition of an applicant and should endeavor to comply with the more restrictive set of notification rules in the event of a conflict.⁷

WHAT TO REPORT?

Broadly speaking, CRA rules regarding notification pertain to two categories of events:

1) Material changes to business operations and

2) Unplanned adverse events involving the applicant or licensee. These can include criminal, civil, or disciplinary proceedings or charges asserted against an applicant or licensee, alleged municipal cannabis ordinance violations, the occurrence of an unwanted fire, or court appointment of a person to exercise control over the licensee.

Because CRA rules arise in the context of a highly regulated product, many matters triggering a notification obligation are expected. For example, applicants and licensees have an ongoing duty to keep CRA informed of up-to-date contact information including mailing addresses, phone numbers, and email addresses.⁸ However, other notification requirements contain broad language for categories of reportable matters without sufficient guidance to determine whether CRA would construe specific facts to be subject to them. A careful reading of the rules and regular reviews are important first steps, but licensees, applicants, and advisors should recognize that many of the words CRA uses in the rules are not explicitly defined. Many have a common-sense meaning, but sometimes one person’s common sense differs from another’s. When in doubt, asking CRA about its interpretation and practices and erring on the side of notification can avoid significant frustration — and potentially a formal rule violation citation and steep fine.

WHEN TO REPORT?

CRA rules include express deadlines to report unplanned adverse events. For example, under R420.14(4), an applicant has three business days to report criminal, civil, or disciplinary proceedings or charges even if those matters occur in another state or jurisdiction or have no connection to the licensee’s cannabis business.⁹

With respect to material changes to business operations, licensees and applicants are required to notify CRA prior to making the proposed change.¹⁰ While notification rules themselves don’t explicitly require CRA approval of the change, prior approval of material changes to a licensee’s business is required under other sections of the rules.¹¹ If there is any question as to whether a change constitutes a proposed material change under either the notification rules or the prior approval requirements, the licensee should contact CRA¹² to explain the situation and communicate any urgency with respect to the change.

HOW TO REPORT?

In addition to directions contained in its detailed instruction manual, CRA has created a variety of forms for licensees to provide required notices; they can be found at www.michigan.gov/cra/ resources/applications.¹³ According to the instruction manual, reporting forms must be filed using the CRA citizen access portal,¹⁴ so unless the person submitting the information to CRA has access to the licensee’s portal account, the information cannot be submitted. With that in mind, some preplanning is required in advance of material change. Licensees and applicants should designate approved portal users to submit prompt notification in cases when the reportable material change or event occurs suddenly.

BUT I DIDN’T KNOW...

Ignorance is not bliss. Based on interactions with CRA following formal complaints for failure of licensees or applicants to provide required notices of material changes and other reportable events, it appears that lack of knowledge has no weight with CRA. Its view is that licensees and applicants are required to know the rules and what they provide. For example, not realizing that an out-of-state disciplinary citation against an owner’s spouse is a reportable event does not excuse non-compliance.

Failure to comply with notification obligations may result in sanctions, fines, or both. Rule R420.806 elaborates on penalties that might be assessed for violation of the rules, which include serious consequences of license revocation, suspension, or nonrenewal. Based on the authors’ experience, penalties more commonly take the form of a fine levied by CRA against the licensee. Fines are often in the $5,000-$10,000 range, but can be much higher.

CONCLUSION

If you or your client are licensed by the CRA or hold an interest in a business with a CRA-issued license, sooner or later something will change or an event will occur that needs to be reported. You must implement structures to ensure you are aware of events affecting a licensee and its related applicants, focus on the challenges or opportunities those events may present, and also identify which events must be reported to CRA.

Taking time to become familiar with the rules and their ambiguities is worth the investment. And when a significant event occurs, reach out to legal counsel with cannabis expertise and experience to help you analyze the rules, navigate the notice process, and prepare the appropriate notice. When it comes to CRA notice requirements, what you don’t know may indeed hurt you.