Welcome to the second installment in this series surveying business and regulatory issues for Oregon psilocybin program players. In part one, I covered the general process and schedule of Oregon Health Authority (OHA) rulemaking, by and through the Oregon Psilocybin Advisory Board. I also covered residency requirements, further restrictions on ownership, and taxation issues.
In each of these posts, I plan to cover OHA regulatory issues, alongside broader concerns for operators “trafficking” in psilocybin as a federally controlled substance. Today, I’ll cover banking, raising money, and the rules around siting a psilocybin business here in Oregon.
Banking an Oregon psilocybin business
State licensed psilocybin is sui generis, and the best we can do is analogize to cannabis in some cases. Banking is one of them. With psilocybin, I expect banking for state-licensed businesses will be no fun at all.
In the marijuana world, just a few Oregon credit unions are open to onboarding businesses. Those include longtime Harris Bricken client Salal Credit Union, as well as Maps Credit Union and Wauna Credit Union (in a very small corner of the state). Those three outfits have been in the game for a long time, and the federal guidance pursuant to which they bank marijuana businesses in the FinCen Memorandum of February 14, 2014 (“FinCen Memo”).
A couple of things should be noted about the FinCen Memo. First, in cannabis years it’s as old as dirt. It reads like a relic of a bygone era in many respects. Second, companion guidance from the U.S. Department of Justice on “Marijuana Related Financial Crimes” was rescinded in 2018. This means banks and credit unions have even less structure to work from than a few years back. And third, the FinCen Memo only relates to marijuana. It doesn’t cover psilocybin or any other federally controlled substance.
If any bank or credit union accepts Oregon psilocybin business accounts next year, I imagine they would adopt practices similar to those used for marijuana business customers under the FinCen Memo. That’s really all there is to work from. But even the smallest of credit unions have members and boards to answer to, and stepping out to bank the psilocybin industry will be a real discussion.
For these reasons, I’m not betting on any chartered financial outfit opening accounts (even basic depository accounts) for Oregon psilocybin businesses in early 2023. I hope I’m wrong somehow. Unbanked status will bring many business headaches: e.g., cash management, recordkeeping, payroll and other payments, employee loan eligibility, etc. A lack of business banking also raises safety issues. Let’s all hope some enterprising credit union steps to the fore, or we get lucky with a federal guidance update.
Raising money in an Oregon psilocybin business
We have had fun raising a lot of money for Oregon cannabis businesses going back to 2015 or so, in all kinds of structures. I say “fun” in the way that going down a large rapids in a really small boat with no PFD can be fun. Raising money in psilocybin should be similar.
There are a couple of important things for businesses to understand about raising money in Oregon psilocybin. First, most of the time you accept an investment into your business, whether it’s under an equity, debt or hybrid instrument protocol, you’ve generally issued a “security.” Second, Oregon has the strictest securities laws in the country— including for lawyers and anyone who “participates in or materially aids in the sale” (see ORS 59.115(3); Prince v. Brydon, 307 Or. 146 (1988)). Finally, if a business venture fails–which some inevitably do–the knives may come out pretty fast. That can be true even if you’ve done things perfectly.
Does all of this mean you might as well skim on documents? No. It means the opposite. Strong issuance documents (alongside reasonable company governance) make it much, much harder for a plaintiff to prevail on securities-related claims. When raising money in psilocybin, I hope you will issue all of the standard private placement memorandum (PPM) warnings, such as:
- The Company is a highly risky business venture and investors may lose all of their investment.
- The Company may become involved in litigation that requires it to spend substantial amounts defending itself or its members per the indemnity provisions of its Operating Agreement and other company documents.
And then you’ll get to issue some fun ones specific to psilocybin, such as:
- Stringent rules and regulations apply to the Company’s operations, and the failure to comply with them could result in the suspension of cancelation of the Companies’ licenses to operate a [psilocybin service center].
- The production and processing of psilocybin mushrooms and related products remains illegal under the federal Controlled Substances Act, so that the company risks being accused of violating federal law, which is a felony offense.
In a good PPM, these disclosures may run a dozen or more pages. They cover a lot of ground and they are actually designed to give investors pause. This helps insulate the company, its principals and advisers from securities-related claims to the maximum extent possible. Our law firm has defended many, many cannabis industry operators in deals gone wrong over the years, and I can say with confidence that you definitely do not want to go there.
Siting an Oregon psilocybin business
One great thing about Measure 109 is that it preempts local ordinances and charters so that the program may “act uniformly throughout the state.” Still, cities and counties are allowed to “opt out” of allowing psilocybin licensees within their borders entirely. This must be done via a local initiative petition during a statewide general election. The next one of those is November 8, 2022, and you can expect to see many cities and counties preemptively opt out, especially east of the Cascades.
Any city or county that chooses to stay in will have some flexibility in regulating licensed psilocybin businesses. Specifically, all cities and counties are allowed to adopt local “time, place and manner” (TPM) regulations. Those regulations control things like where a psilocybin business can be located (i.e. which zones in a city or county, pursuant to a land use compatibility statement); and whether certain hours of operation are prohibited. One thing cities and counties aren’t allowed to do is require that psilocybin service centers site further than 1,000 feet apart.
Otherwise, the key with all TPM regulations is they must be “reasonable.” That standard is repeated throughout Section 81 of Measure 109. Sometimes people argue about what may constitute “reasonable” in a given situation, but courts tend to grant localities some deference there.
Finally, it must be noted that Measure 109 itself contains further restrictions on siting licensees. With licensed psilocybin service centers, for example, there are 1,000 foot and 500 foot buffers around schools (depending on the type of school at issue, and whether any “geographic barrier” exists). Service centers also cannot be located in neighborhoods zoned exclusively residential. All of this makes sense and is modeled off the cannabis regime.
The upshot here is that if you’re looking at establishing a psilocybin business anywhere but the City of Portland, it would be wise to first canvas the local city or county to ensure that nothing is planned to pull that locality out of the program. After that, and regardless of where you plan to be, you should also canvas the relevant locality for TPM ordinances that may be on the way. In certain areas, restrictive zoning may actually confer exclusivity, to the advantage of select licensees.
Ultimately, there will be plenty of siting options for Oregon psilocybin businesses, inside of Portland and elsewhere. Best of all, Section 80 of Measure 109 prohibits cities and counties from requiring psilocybin businesses to acquire local licensure. If you want to know why that’s a great idea, just go here.