WeedPress: The Paper Trail

Hot Springs’ City Council passed Ordinance 1293 on Oct. 19, barring the sale, assignment, pledge or lease of city cannabis licenses and requiring city approval before any change in control. Here’s what it does, how it compares and when it may take effect.

By Jason Karimi, Publisher

Hot Springs has voted to make city cannabis licenses unsellable. Ordinance 1293 would bar licensees from selling, assigning, pledging or leasing their city licenses once it takes effect, and would require city approval before any change in control of a licensed cannabis business becomes effective. The City Council passed the measure Oct. 19, with every member present voting yes.¹,²

The ordinance rewrites part of Chapter 116, the city’s cannabis establishment licensing code, but its effective date remains unconfirmed. City staff’s draft listed a planned publication date that would make it effective Nov. 18, but WeedPress has not confirmed publication occurred.¹,³

What Hot Springs passed

The council approved first reading Oct. 5 and second reading Oct. 19, both by unanimous roll-call votes of members present, with no amendments recorded in the minutes.²,³ The text described here is the first-reading draft from the Oct. 5 council packet, where it is captioned “Ordinance 1292”; the minutes record the number being corrected to 1293. The signed final version is not posted on the city’s ordinances page.¹,³

The draft does five main things:¹

• No selling or leasing the license. No city cannabis license “may be sold, assigned, transferred, pledged, leased, or otherwise conveyed, directly or indirectly, to any other person or entity.”
• The licensee must stay in charge. A license holder “shall remain the owner and operator” of the business for the term of the license. Management, operating, revenue-sharing and consulting agreements that shift ownership, control or the financial benefit of the license to someone the city has not approved are prohibited.
• Changes of control need approval first. Any proposed change of control “shall require approval by the City prior to becoming effective.” The city may require a new application.
• Ownership changes must be reported. Any material change in ownership, controlling interest, principal officers, managers or board members must be reported to the city within 30 business days.
• Violations can cost the license. An attempted transfer or change of control in violation of the rule is grounds for suspension, revocation or non-renewal of the city license.

The ordinance also defines “controlling interest” as the power to direct a cannabis business’s management, policies or operations, “regardless of the percentage of ownership held,” and requires applicants to name managers and anyone holding a controlling or beneficial interest.¹

Why the city says it acted

The proposal came through the council’s Administrative and Finance Committee, which reported at the July 20 council meeting it was reviewing changes to “further clarify non-transferrable & ownership/control must remain w/approved applicant.”⁴ After the committee’s Sept. 14 meeting, the Sept. 21 council minutes noted that “possible changes in SDCL could guide direction of ordinance change.”⁵

At the Oct. 5 meeting, a city staff member, who is not identified in the recording’s machine-generated transcript, explained the reason before the first-reading vote. According to that transcript, the staff member said cannabis licensees across the state “will sell 99% of their ownership interest to someone else,” “keep 1%,” and “then the municipality has no authority over the new license.”⁶ The discussion did not name any Hot Springs business or transaction.

How it compares

State rules already address ownership transfers. A South Dakota Department of Health rule says transferring 50% or more of a medical cannabis establishment to a new owner requires a new state application. The department may allow smaller transfers if conditions are met, including that the city or county issues any required license to the new owners. The rule also says “nothing in this section shall be interpreted to require a city or county to approve a transfer of ownership.”⁷ State law lets cities adopt licensing ordinances that are “not in conflict” with the medical cannabis statute.⁸

WeedPress reads Hot Springs’ rule as reaching further than the state’s 50% line. Because “controlling interest” applies regardless of percentage, city approval would be required for a deal that hands over control even if the original owner keeps most of the shares, or only a sliver of them.

Rapid City and Sioux Falls take different approaches. Rapid City allows a license transfer if the licensee notifies the city and the buyer applies for its own city license; the buyer cannot operate until it holds both a city license and a state registration certificate.⁹ Sioux Falls allows transfers if the buyer meets the same requirements as the original licensee, and it requires a dispensary licensee to be the business’s “sole owner.”¹⁰ Hot Springs would ban license transfers outright and require approval before any change of control.

Who it affects

The Department of Health’s list, last updated Aug. 27, shows one state-registered medical cannabis establishment in Hot Springs: the Dakota Kind dispensary.¹¹ Secretary of State records list Dakota Kind LLC, at 1148 Jensen Highway, as a member-managed company in good standing, formed in October 2021, with Forrest D. Fanning as registered agent. The record does not list the company’s members.¹² The Fall River County Herald-Star has identified Fanning as Dakota Kind’s owner.¹³ Nothing in the city records reviewed by WeedPress links Ordinance 1293 to Dakota Kind or any specific sale.

The city’s zoning code allows no more than one dispensary per 1,500 residents.¹⁴ Hot Springs had 3,395 residents in the 2020 Census.¹⁵ By WeedPress’s arithmetic, 3,395 divided by 1,500 is about 2.3, which would leave room for no more than two dispensaries, depending on how the city counts population. The city’s fee schedule lists a $5,000 annual dispensary license.¹⁶ With dispensaries capped, a city license is a scarce asset.

When it takes effect

South Dakota ordinances generally take effect 20 days after publication in the official newspaper, and voters have the same 20 days to file a referendum petition, which would suspend the ordinance.¹⁷ The city’s draft shows a planned publication date of Oct. 29 and an effective date of Nov. 18. (The draft lists the year as “2022,” an apparent typo.) WeedPress has not confirmed publication happened. If publication occurred Oct. 29, Nov. 18 would be both the effective date and the referendum deadline.¹

An open question: the address clause

The city’s original 2021 rule barred license transfers and also barred a licensee from operating “at any place other than the address designated in the application.”¹⁸ The first-reading draft strikes that entire section. Its replacement says nothing about location. The public records reviewed by WeedPress do not say whether that omission was intentional, or whether other rules still tie a license to one address.

What it means and what to watch

• For license holders: Once effective, the ordinance would bar selling the license itself and require city approval before any sale of the business, investor change or management agreement that shifts its ownership, control or financial benefit. A violation could put the city license at risk.
• For buyers and investors: A deal involving control would mean seeking city approval, and possibly filing a new application, in addition to meeting state requirements.
• Dates to watch: Whether publication is confirmed, whether Nov. 18 holds as the effective date, and whether anyone files a referendum petition.

WeedPress sent an open records request to the City of Hot Springs on Oct. 31 for the signed ordinance, proof of publication and its cannabis license records, and will update this story with any response.