New Bill to Aid Private Equity Firms Applying for ABC License

The California Senate Committee on Governmental Organization is considering a bill to streamline the process for qualification of private equity firms seeking to hold an interest in a state alcohol beverage license.  SB 796 would add Section 23405.4 to the California Business and Professions Code, which would allow a private equity fund to hold a license and avoid having each and every investor of that fund qualified so long as certain conditions are met.  Those conditions are:

  1. The fund holds a passive interest, meaning that neither the fund nor any manager, employee or agent of the fund has any management, control, or involvement in the licensed business;
  2.  The fund advisors are registered under the federal Investment Advisors Act, and the fund advisors are subject to Section 275.204(b)-1 of Title 17 of the Code of Federal Regulations;
  3. No investor holds more than 10% interest — directly or indirectly — in the fund; and
  4. No investor has direct or indirect control over the investment decisions of the fund.

Although the investors of the fund need not be qualified under the new regulation, the Department of Alcoholic Beverage Control (“ABC”) may require the fund manager to execute an affidavit to confirm compliance with these requirements.

The proposed regulation does not apply to hedge funds, liquidity funds, real estate funds, secured asset funds, and venture capital funds.

Although the fund investors need not each individually submit detailed material and fingerprints in order for the fund to qualify for a license, the regulation specifically states:

“This section is not intended to allow a person, by reason of his or her investment in a private equity fund, to hold an interest in a license issued by the department if that interest is not otherwise permitted under this division.”

In other words, it appears that proposed legislation would bar a private equity fund from qualifying for an alcohol beverage license if any of its investors, for example, holds a disqualifying tied-house interest in another alcohol beverage license.

The full text of SB 796 as introduced on March 12, 2015 can be found here.


How to Deal with License Transfer Issues in the Sale of a Winery

As if there aren’t enough things to worry about when purchasing a winery – due diligence, seller demands, financing hassles – there’s the confusing matter of federal Alcohol and Tobacco Tax and Trade Bureau (“TTB”) and California Alcoholic Beverage Control (“ABC”) winery licensing compliance to grapple with.  Buyers want to get down to business as soon as possible, but regulatory compliance dictates otherwise. Those of us tasked with assisting a smooth transition for the winery buyer have the job of explaining the uncomfortable fact that TTB and ABC regulations do not mesh well under these circumstances.  The issues stem from conflicting federal and state rules and timelines for issuing new winery permits.
Taking a step back to the basics, a California Type 02 winery permit allows a winery to produce, bottle and sell its wine.  The federal equivalent is a federal basic wine producer’s permit and bonded winery registration.  Both federal and state licenses must be in place for you to operate your winery.
When a winery changes hands, typically the transfer is achieved via an asset sale.  The rationale for this structure is to avoid the buyer unintentionally assuming liabilities that might have been incurred by the old business.  Important as this is, it does present difficulties from a licensing standpoint.
Compliance on the state side is somewhat straightforward. The California ABC will issue a temporary permit to the new owner while the person-to-person transfer application for the Type 02 winegrower’s license is being processed. On the other hand, TTB does not issue a temporary permit to a new owner while a new winery permit application is being processed.  Instead, the new winery owner has to submit a change of proprietorship application to TTB, which is in essence an application for a new winery permit and registration.  It takes about 90 days from the time the application is submitted to obtain a new permit from the TTB, but most winery purchasers want to close much faster than that.  Therefore, despite the existence of a temporary permit on the state side, without having the federal basic permit, winery registration and wine bond in place, the purchaser still can’t conduct regular winery business.
The best solution to this tough situation is for the buyer and seller to enter into a transitional services agreement (TSA).  Under the TSA, the buyer leases the winery back to the seller after closing and the seller continues to conduct winery operations under its existing permits and bond until all of the buyer’s permits have issued.  This involves some cooperation between the parties after closing but is, in the view of the agencies, the best way to proceed in light of the regulations regarding changes in control of winery premises.
No one wants to start their newly purchased winery business by running afoul of federal and state regulations, so make sure to plan ahead and consider these licensing issues as part of the overall sales transaction.
Please contact Dickenson, Peatman & Fogarty at info@dpf-law for more information or assistance with these issues.
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