Michigan Capitalization Requirements – Yikes!

Michigan Capitalization Requirements – Yikes!

Michigan Capitalization Requirements
Michigan Capitalization Requirements

Michigan Capitalization Requirements – Yikes! was a HUGE eye opener today…we are not aware of any similar requirements in any other state. Succinctly, the rules are the most onerous that we have seen from any jurisdiction in the United States.

  • Entity capitalization must be “validated by CPA-attested financial statements.” There is guidance as to whether the language is referring to financial statements which are accompanied by a CPA actual report where an examination of financial statements has been completed. 

 

  • There is no guidance provided with respect to whether financial statements are required to be prepared under “Generally Accepted Accounting Principles” [“GAAP”] or whether a comprehensive basis of accounting  [“OCABA”] other than GAAP such as the accrual method of accounting for Federal Income Taxes is acceptable.

 

  • If we take the requirements literally as written, then a CPA that is involved in attestation of capitalization is
    • Subject to full requirements for Peer Review in the states where they are licensed.
    • Subject to all of the independence rules under Professional Standards.

The Michigan Medical Marihuana Facilities Licensing Act [“MMFLA”] contains a provision which states:

What are the capitalization requirements?

Applicants will be required to demonstrate capitalization amounts to operate and maintain the proposed marihuana facility as follows:

(a) Grower: Class A – $150,000

(b) Grower: Class B – $300,000

(c) Grower: Class C – $500,000

(d) Processor: $300,000 (e) Provisioning Center: $300,000

(f)  Secure Transporter: $200,000

(g) Safety Compliance Facility: $200,000

The capitalization sources can be demonstrated as follows:

  • At least 25% is in liquid assets. Liquid assets include assets easily convertible to cash. Examples of liquid assets may include, cash, marihuana inventory (in compliance with the administrative rules), CD’s, 401(k), stocks, and bonds.
  • Remaining capitalization may be evidenced in either additional liquid assets or non-liquid forms, for example, equity in real property, supplies, equipment, and fixtures.
  • Evidence must be provided proving that there is no lien or encumbrance on the asset provided as a source of capitalization.
  • Additionally, the capitalization amounts and sources must be validated by CPA-attested financial statements.

The Michigan Department of Licensing and Regulatory Affairs [“LARA”] has published a rule that addresses capitalization requirements.

Michigan Capitalization Requirements
Rule 11. Capitalization requirements.

(1) An applicant shall disclose the sources and the total amount of capitalization to operate and maintain a proposed marihuana facility.

(2) The total amounts of capitalization based on the type of marihuana facility specified in the application for a state operating license are as follows:

(a) Grower: Class A – $150,000.00.

(b) Grower: Class B – $300,000.00.

(c) Grower: Class C – $500,000.00.

(d) Processor: $300,000.00.

(e) Provisioning Center: $300,000.00.

(f) Secure Transporter: $200,000.00.

(g) Safety Compliance Facility: $200,000.00.

(3) An applicant shall provide proof to the department of the capitalization amounts in subrule (2) of this rule from sources as follows:

(a) Not less than 25% is in liquid assets to cover the initial expenses of operating and maintaining the proposed marihuana facility as specified in the application. For purposes of this subdivision liquid assets include assets easily convertible to cash, including, but not limited to, cash, CDs, 401(k), stocks and bonds, and marihuana inventory that meet the all the following conditions:

(i) The marihuana inventory is possessed by an applicant who is a registered qualifying patient or registered primary caregiver or by an applicant who applies for a state operating license and possesses marihuana inventory in compliance with the Michigan medical marihuana act.

(ii) No more than 15 ounces of usable marihuana or 72 marihuana plants may be utilized as marihuana inventory in this subdivision or utilized towards the capitalization requirement under this subrule.

(b) Proof of the remaining capitalization to cover the initial expenses of operating and maintaining the proposed marihuana facility may include but is not limited to additional liquid assets as described in subdivision (a) of this subrule or equity in real property, supplies, equipment, fixtures or any other nonliquid asset.

(4) The applicant shall provide proof that there is no lien or encumbrance on the asset provided as a source of capitalization.

(5) The capitalization amounts and sources must be validated by CPA-attested financial statements. The applicant shall disclose any of the capitalization sources that are foreign and a foreign CPA or its equivalent shall attest to the validation and a domestic CPA shall attest that foreign validation.

The Michigan CPA rules state:

What is the difference between a CPA license and a CPA registration?

If an individual only seeks to use the CPA title, the individual shall apply for a registration. If an individual seeks to use the CPA title and engage in the practice of public accounting, the individual shall apply for a license.

The situation becomes even more confusing when we not that the provision in the Michigan Medical Facilities Act only makes everything more confusing.

Sec. 701. – By 30 days after the end of each state fiscal year, each licensee shall transmit to the board and to the municipality financial statements of the licensee’s total operations. The financial statements shall be reviewed by a certified public accountant in a manner and form prescribed by the board. The certified public accountant must be licensed in this state under article 7 of the occupational code, 1980 PA 299, MCL 339.720 to 339.736. The compensation for the certified public accountant shall be paid directly by the licensee to the certified public accountant.

Michigan Capitalization Requirements

Author: abizcannabis

Managing Director & CEO of integrated transactional financial advisory, tax, and technology consulting firm - aBIZinaBOX Inc New York, Chicago, and OaklandCPA.CITP.CISM.CGEIT.CGMAExpertise with: Alt. Investments/Private Equity, Real Estate, Professional Services, CA Cannabis, Tech Start-Ups and Distressed Assets/DebtTechnology Certifications including:Advanced & High Complexity Cloud Integrator AICPA PCPS, CAQ,, IMTA, CITP ISACA CGEIT, CISMState CPA Societies in California, Florida, Illinois, New York and TexasExpertise with Regulatory Compliance - US - HIPAA, FINRA, SEC Rule 17(a)(3)/(4), eDiscovery, FINCEN - EU- EBA, ESMA, EIOPA UK - BoE, PRA, FCA