When Do Investors Need to Subject Themselves to Disclosure as a Financial Interest Holder?

September 15, 2021

Welcome to our Q&A with partner, Jennifer Gumer!

As a partner at CGL and our Regulatory and Compliance Practice Lead, Jennifer provides strategic counseling, practical advice, and expert advocacy to clients with production needs. As an Adjunct Professor of Law and Bioethics, she is uniquely qualified to handle all interactions with federal, state, and local regulators who oversee product development, manufacturing, and marketing activities, including the FDA and Local Hemp Regulators.

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Q: When do investors need to subject themselves to disclosure as financial interest holders? 

It’s no secret that owners of cannabis businesses are often subject to rigorous and onerous disclosure. But are you aware that investors and other ‘financial interest holders’ must disclose certain personal details too? 


Under the relevant regulations,  “financial interest holder” is broadly defined and anyone who falls within this broad definition must be disclosed to the state. The state essentially wants to know all entities and individuals that stand to profit off of California’s legal cannabis market. Since the potential consequences of failure to disclose are steep, it’s well within the interest of licensed cannabis businesses to get it right. 


Who Qualifies as a Financial Interest Holder under California law?

Essentially, any investor who is not considered an owner of a cannabis business and who:

  • Enters an agreement to receive a portion of the profits of a commercial cannabis business; or 
  • Invests in a commercial cannabis business; or 
  • Provides a loan to a commercial cannabis business; or
  • Enters any other equity interest in a commercial cannabis business (save for those who are specifically exempted, more on this later). 


Additionally, the following agreements are specifically referenced as triggering financial interest holder disclosure requirements: 

  • Employees who enter profit share plans with a commercial cannabis business. 
  • Landlords who enter a lease agreement with profit sharing provisions. 
  • Consultants, agents, and brokers who provide services in exchange for a share of the profits in the commercial cannabis business. 
  • Sales staff who earn a commission. 


In circumstances where a corporate legal entity is the financial interest holder, the owners of that entity are all subject to disclosure. In other words, ​​individuals cannot avoid disclosure by hiding behind complex entity structures. Again, if you’re profiting off of a licensed cannabis business in California, the state wants to know who you are.


While the above agreements are specifically included, there may be situations outside of these examples where a person should be declared as a financial interest holder and subjected to disclosure. If you’re uncertain, it’s best to consult your attorney.


Are there any exceptions to the financial interest holder disclosure requirements?

The following legal persons are specifically exempted from disclosure:

  • Banks or other financial institutions whose interest constitutes a loan; 
  • Investors whose only financial interest in the commercial cannabis business is through an interest in a diversified mutual fund, blind trust, or similar; 
  • Persons whose only financial interest is a security interest, lien, or encumbrance on property that will be used by the commercial cannabis business; and 
  • Persons who hold a share of stock that is less than 5 percent of the total shares in a publicly traded company.


What is the scope of disclosure for financial interest holders?

The scope of disclosure for financial interest holders is less onerous than that for owners. Financial interest holders, for instance, do not need to supply criminal background checks. However, they do need to provide their name, birthdate, and government-issued ID.


Consequences of Failing to Disclose Financial Interest Holders

The potential consequences of failing to accurately and timely disclose financial interest holders in a cannabis business are significant. Failure to disclose financial interest holders is considered to be a Tier 3 violation by the regulators, one of the most serious violations. While we are yet to see enforcement in this sphere, regulatory attorneys in California cannabis almost universally expect it to come. We have seen cannabis businesses accumulating bad disclosure habits in the absence of enforcement. It is worth rectifying these habits as early as possible, since you don’t want to be on the wrong side of the law when the regulators do turn their heads to enforcement. Especially since the penalties for tier 3 violations range from suspensions or fines through to revocation of the license. It’s also possible that the undisclosed financial interest holder could be subject to personal liability for the failure to disclose their interest.


The materials available at this website are for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem. Use of and access to this website or any of the e-mail links contained within the site do not create an attorney-client relationship between CGL and the user or browser. The opinions expressed at or through this site are the opinions of the individual author and may not reflect the opinions of the firm or any individual attorney.

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