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Medical marijuana firm touted its Arkansan roster, but filing didn't broach Canada stake

by Hunter Field | January 27, 2019 at 4:30 a.m. | Updated January 28, 2019 at 4:30 a.m.
This Sept. 11, 2018, file photo shows a marijuana plant in San Luis Obispo, Calif. (AP Photo/Richard Vogel, File)

Natural State Wellness Enterprises boasted an ownership roster full of prominent Arkansans when it secured one of the state's first medical marijuana growing licenses, but recent financial reports from the out-of-state company that will operate the cultivation facility raise questions about whether Natural State disclosed all owners in its successful permit application.

Harvest Inc., the Arizona-based cannabis company that plans to run Natural State Wellness' growing operation once its construction is complete later this year, went public on the Canadian market in November.

Harvest's financial disclosure reports -- required by Canadian securities regulators -- offer a glimpse into how medical marijuana companies operate, but they also prompt new questions about one of Arkansas' first cannabis cultivators.

In the application that Natural State submitted in 2017, the Newport company reported 27 different owners. Counted among them are John Allison, co-founder and chairman of Conway-based Home BancShares; Dustin McDaniel, the former state attorney general; several prominent doctors, lobbyists and attorneys; and a former state legislator. Their ownership together equaled 100 percent.

But in the ownership disclosure section, Natural State's application made no mention of the stakes that Harvest claimed in its Canadian market listing statement, which is publicly available from the Canadian exchange's regulators' website.

Harvest said it has "100% ownership and control" of Natural State Capital LLC, the sole manager and owner of all the common membership interests of Natural State Wellness Enterprises.

[RELATED: Complete Democrat-Gazette coverage of medical marijuana in Arkansas]

The application used by Arkansas' government asked prospective cannabis growers to list all "owners, stockholders, shareholders, members, officers, and board members."

The information about those parties was requested so the Arkansas Medical Marijuana Commission could confirm that all owners met the requirements for involvement in the state's cannabis industry, and so the commission could ensure that 60 percent of each growing company belonged to Arkansans.

Several business law experts interviewed last week said that, if Harvest's Canadian financial reports are correct, Harvest's subsidiaries' stakes in Natural State Wellness Enterprises should've been disclosed in the Arkansas application.

"Absolutely," said Carol Goforth, university professor at the University of Arkansas School of Law at Fayetteville. "Arkansas law does not differentiate between classes of ownership. ... They left off a member; what sounds like a major member -- the managing member."

After being asked about the omission Wednesday, a spokesman for Harvest and Natural State Wellness Enterprises, Ben Kimbro, said Friday that Natural State Capital was simply a management company and had no ownership stake in Natural State Wellness Enterprises.

However, Kimbro, after being pointed to Harvest's Canadian filings by the Arkansas Democrat-Gazette, later said that Natural State Capital did have an ownership interest, but it was only 1 percent.

Kimbro said Natural State Capital's ownership was included in Natural State Wellness Enterprises' Arkansas application, but he said he couldn't remember where off the top of his head. He said he'd look through the application and provide the reference Saturday. As of late Saturday evening, Kimbro had not provided it.

A variety of public records -- from the Arkansas Medical Marijuana Commission, Arkansas secretary of state's office and Canadian stock exchange -- show that Harvest is using a web of holding companies to control Natural State, which is one of Arkansas' first five marijuana businesses.

Harvest's parent company owns 100 percent of Harvest Arkansas Holding LLC, and both are based in Arizona, records show.

Harvest Arkansas Holding owns 100 percent of Natural State Capital LLC, an Arkansas-based company, according to records.

Natural State Capital is the sole manager and owns all of the "common" membership interest of Natural State Wellness Enterprises, the Arkansas-based company that holds the growing license, according to Canadian securities filings.

Meanwhile, the Natural State Wellness Enterprises owners listed in the cultivation license application that was submitted to the marijuana commission own "preferred" membership interests, according to the Canadian records.

Harvest's Canadian market-listing statement describes the roles of common members and preferred members.

Preferred members will receive all net available cash until they've received 200 percent of their initial capital contribution (about $9.7 million collectively). After that, those members will receive 5 percent of their initial investments annually, according to the Canadian documents.

Natural State Capital, the Harvest subsidiary, will be entitled to all remaining profits as the sole owner of common membership units, once the preferred members have received 200 percent of their initial investments, according to the Canadian documents.

Generally, publicly traded cannabis companies use stock exchanges outside the U.S. because the drug remains federally illegal here.

Arkansas Alcoholic Beverage Control, which regulates the state's medical cannabis industry, wasn't aware of the ownership issue until asked about it Friday by the Arkansas Democrat-Gazette. Scott Hardin, a spokesman for the agency, said the enforcement arm plans to investigate the matter. Hardin said Natural State has never given notice of a change in ownership.

Robert Steinbuch, a law professor at the University of Arkansas at Little Rock William H. Bowen School of Law, explained that Natural State Wellness' ownership structure, as reported to Canadian market regulators, is fairly common for limited liability companies.

"All owners are members, and all members are owners," Steinbuch said. "Some control goes to common or general shareholders, and those that are not intimately involved in management of the company generally are passive investors and that generally is preferred membership.

"I don't know what the disclosure requirements for selling pot are, but if asked to disclose ownership, certainly you'd start with disclosure of common shareholders."

The legal experts interviewed last week said the Natural State Wellness Enterprises operating agreement described in the Canadian filings seems to indicate that the Harvest subsidiary owns a substantial stake in Natural State Wellness.

Goforth, the law professor, said the common members, as described in the Canadian market statement, have an equity stake because they stand to receive profits down the road.

Arkansas became one of 33 states where medical cannabis is legal after Arkansans approved Amendment 98 to the Arkansas Constitution in 2016.

After a series of legal and bureaucratic delays, the state issued the first five growing permits in July, and it's in the process of licensing 32 dispensaries.

The drug is expected to hit the market in April.

Since July, unsuccessful applicants have lodged a series of formal complaints with state regulators about the five licensed cultivators. Most of the protests have been dismissed, but the director of the Alcoholic Beverage Control Administration is considering how to handle a residency discrepancy that investigators found in the documents submitted by an owner of another cultivation company -- Natural State Medicinals Cultivation of White Hall.

Investigators will now try to determine whether Natural State Wellness Enterprises improperly omitted any ownership interests from its application.

Penalties range from a fine to suspension or revocation of a license.

A Section on 01/27/2019

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