Hemp M&A Transactions: Diving into the Transferability of USDA-Issued Licenses

By Elliot Choi, Counsel; Michelle Bodian, Senior Associate Attorney; Charles Alovisetti, Partner

Nov 15, 2019

The USDA interim final rule, effective since October 31, has been widely summarized, including by our firm. Here we take a deeper dive into the ambiguities of transferring hemp licenses (i.e., M&A transactions) issued directly by the USDA and not by a state-administered hemp program.

As background, for States or Tribal territories where a plan for hemp production has not been outlined or approved, but the applicable State or Tribe has not prohibited the production of hemp, the USDA will administer their hemp program and farmers will obtain cultivation licenses directly from the USDA. In the long-term, this may not be a common occurrence, as most States and Tribes will likely want to be the primary regulators within their jurisdictions, but we still expect many USDA direct-issue licenses in the upcoming year as States and Tribes continue to draft their hemp plans and update their laws, regulations and policies to follow the USDA interim final rule.

The regulatory analysis for license acquisitions begins with two threshold questions. Can a USDA direct-issued license be transferred? If so, what are the regulatory requirements for such transfer?

First and foremost, the interim final rule provides that:

“[l]icenses may not be sold, assigned, transferred, pledged, or otherwise disposed of, alienated or encumbered.” (§ 990.22(b)(3))

End of story, right? Well... not exactly.

The rule further provides that:

“[a] license modification is required if there is any change to the information submitted in the application including, but not limited to, sale of a business, the production, handling, or storage of hemp in a new location, or a change in the key participants producing under a license.” (emphasis added, § 990.21(c))

This rule suggests that a license can be acquired in connection with the sale of a business so long as there is a license modification.

What does “sale of a business” mean

The interim final rule does not provide a definition for “sale of a business,” but perhaps an equity sale of the entity that was issued the license (or its ultimate parent) is permissible. This interim rule also allows for a “change in key participants” and this portion of the rule may provide another pathway to acquire a hemp license, although in limited circumstances.

A key participant is defined as:

“[a] sole proprietor, a partner in partnership, or a person with executive managerial control in a corporation.” (§ 990.1)

This definition, along with interim rule § 990.21(c) described above, may allow for the acquisition of a hemp license if the license is held by a sole proprietorship or a partnership so long as there is a license modification. It appears that this pathway would most likely be available only to LLCs.

What is required for a license modification (i.e., the regulatory requirements)?

The interim final rule is silent as to the requirements and process of a license modification. There may be some clarification in upcoming guidance documents and/or in the USDA license application materials, which have not been provided as of the date of this post (this post will be updated to reflect any such clarifications or materials).

Certain states have rules for cannabis licenses similar and related to the USDA interim final rule described above. These state rules prohibit license transfers and similar transactions, but also include rules that allow for certain changes (including changes to ownership of licenses) subject to regulatory approval. It appears that the combined purpose of these two rules is to ensure that any changes, including prohibited transfers of a license, are subject to regulatory notice, review and approval. In fact, M&A transactions involving cannabis licenses from some states have closed despite the rules prohibiting transfers— so there is potential for the USDA to allow for similar transactions involving USDA hemp licenses.

In conclusion, although the USDA interim final rule includes a prohibition on license transfers, there appear to be pathways to allow for M&A transactions involving USDA hemp licenses. These pathways include a license modification, which lacks sufficient detail at this time. It is also worth reiterating that this post applies to a USDA-governed program and state-approved programs may have different and possibly more stringent requirements. It is important to consult with experienced attorneys regarding any potential transfers of hemp licenses.