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Since joining Harris Bricken in 2010, Hilary has earned a reputation as a fearless advocate for local businesses. Hilary’s clients—start-ups, entrepreneurs, and companies in all stages of development—value her bold approach to business strategy.

Recreational marijuanaWhite House Press Secretary Sean Spicer spoke today at a press conference on how he expects the Department of Justice to handle state-legal marijuana in America. In response to a question on how the Trump Administration will handle recreational marijuana, Spicer had this to say:

Well I think that’s a question for the Department of Justice . . . I do believe you’ll see greater enforcement of it. Because again there’s a big difference between the medical use … that’s very different than the recreational use, which is something the Department of Justice will be further looking into.”

There’s a big difference between [medical marijuana] and recreational marijuana, and I think when you see something like the opioid addiction crisis blossoming in so many states around this country, the last thing we should be doing is encouraging people. There is still a federal law that we need to abide by when it comes to recreational marijuana.”

Regardless of Spicer’s factually wrong take on the relationship between marijuana and opioid use, marijuana industry folks should not fret just yet.  Out of everything Spicer had to say, the key point is that marijuana enforcement falls on the Department of Justice and Attorney General Jeff Sessions. The job of the Press Secretary is “to act as spokesperson for the executive branch of the United States government administration, especially with regard to the President, senior executives, and policies” and the fate of the marijuana industry is not going to be decided in one White House press conference by the White House Press Secretary. The Department of Justice has so far declined to comment on Spicer’s briefing. It also bears mentioning that the Cole Memo setting out how the Department of Justice will treat state-legal marijuana (both medical and recreational) is still alive and well.

The bottom line. Though it is certainly unsettling to listen to Spicer predict increased enforcement of recreational marijuana businesses and to use stupid opium trope to boot, it is not time to lose heart or cash out. Will the jobs-focused Trump Administration really want to shut down cannabis businesses in multiple states and add a slew of hard-working people to the unemployment rolls? I don’t think so, but of course only time will tell.

 

How to sell a California cannabis businessSince passage of the Medical Cannabis Regulation and Safety Act (“MCRSA“) and Proposition 64, one of the top questions our California marijuana lawyers have been getting from existing medical marijuana operators is “how can I sell my medical marijuana collective?” Of course, many collectives are not hard-pressed to find willing buyers. In the City of Los Angeles, for example, where only 135 Proposition D-compliant dispensary collectives are allowed to exist (which will also receive priority status from the City under the MCRSA and Prop. 64 in the event Measure M passes on March 7th), buyers are lining up to try to buy LA dispensaries that can get them into that market. There is also plenty of buyer interest in other California collectives that can demonstrate continuous operation and good standing with their local jurisdictions to qualify for “priority status” under both the MCRSA and Prop. 64.

But here’s the big issue: neither the MCRSA nor Prop. 64 repealed Proposition 215 and Senate Bill 420, which together make up California’s current and very vague medical marijuana laws. What this means is that all medical marijuana collectives must still operate as non-profit entities unless and until the application period opens for licenses under the MCRSA or Prop. 64. And just to further complicate matters, “collective” is an industry term of art; it is not a specific type of California legal entity and you are not going to find it in the California Corporations Code. One of the main reasons for California’s “collective model” is that the California Attorney General’s office issued a memo in 2008 with its interpretation of the medical marijuana laws that concluded those laws forbid the sale of medical marijuana for profit and, therefore, only “non-profit operation” would be allowed in the event qualified patients were to “collectively or cooperatively” cultivate and distribute medical cannabis to other qualified patients.

As a result of that 2008 memo, most qualified patients form nonprofit entities to handle their “commercial” medical marijuana activity. They typically form nonprofit mutual benefit corporations (“NPMBCs”) that they refer to as “collectives.” In turn, it isn’t possible to “buy” a collective. Why? Because there’s no equity or stock to purchase. Of course, there are other solutions to this non-profit conundrum, but they must be carefully considered and well thought out by both a prospective purchaser and the collective.

In NPMBCs, the articles of incorporation and the bylaws govern the collective’s every move and decision–but the bylaws really govern the day-to-day activity and decision-making authority of the members. For example, NPMBC bylaws will have provisions that dictate, among a slew of other things, admission of new qualified patient members and what they must do to maintain their membership in the collective. In addition, well-drafted bylaws also typically will address the voting rights of the members and directors. Under the California Corporations Code, a prospective purchaser cannot buy the stock of a NPMBC (because none is authorized or issued). The California Corporations Code does however permit membership transfers if the collective’s bylaws allow them, and these transfers are fairly unrestricted unless the bylaws specifically create restrictions around them.

Section 7320 of the Corporations Code governing NPMBC membership transfers states the following regarding the transfer of membership rights:

Subject to [member voting restrictions in the bylaws]:

(a) Unless the articles or bylaws otherwise provide:

(1) No member may transfer a membership or any right arising therefrom; and

(2) Subject to the provisions of subdivision (b), all rights as a member of the corporation cease upon the member’s death or dissolution.

(b) The articles or bylaws may provide for, or may authorize the board to provide for, the transfer of memberships, or of memberships within any class or classes, with or without restriction or limitation, including transfer upon the death, dissolution, merger, or reorganization of a member.

(c) Where transfer rights have been provided, no restriction of them shall be binding with respect to memberships issued prior to the adoption of the restriction, unless the holders of such memberships voted in favor of the restriction.

The ideal situation is usually one where the bylaws create two classes of membership: usually directors who manage the NPMBC and qualified patient members who access the NPMBC for medical marijuana, with the directors being the only ones who vote on management decisions affecting the NPMBC. The bylaws usually also allow for director membership transfers (presumably with a fee), without requiring a vote of every single qualified patient who has ever become a member of the NPMBC. In turn, directors can sell their memberships to prospective buyers who can then take over and operate the NPMBC until MCRSA and Prop. 64 licensing.

Unfortunately, nearly all of the NPMCB bylaws our California cannabis lawyers have seen on the deals on which they have worked are a mess, largely because most of the lawyers in California that do cannabis law are criminal lawyers not corporate transactional lawyers. Much of the time, the NPMCB bylaws do not contain a provision allowing for membership transfers or they require every single member of the collective vote on such a transfer because they lack multiple membership classes or voting exceptions. In these situations, it is sometimes possible to set up a system where the departing directors provide notice to every single qualified patient member that new directors could take over the board of directors and those new directors might vote to pay the departing directors a fee for services to be rendered to the NPMBC after-the-fact. For example, the new directors could vote to hire the departing directors in a consultant capacity and pay them a fee for that work. Though neither ideal nor efficient, this is one of various workarounds that can be done to transition the management of an NPMBC with bad bylaws.

The bottom line is that non-profit collectives cannot be “purchased,” and it takes good bylaws (or convoluted workarounds) to be able to transition from one group of directors to another. So, if you are looking to “sell” or “buy” a California cannabis business, be sure that the relevant bylaws allow for such a change and that your transition documents are in-line with what the bylaws actually allow. If such care isn’t taken, the buyer can be left with nothing but an empty wallet and the collective may find itself in direct violation of California’s Corporations Code and an expensive and painful lawsuit as well.

Cannabis Business LawyersOur cannabis business lawyers are always getting pitched on “creative solutions” to the cannabis industry’s banking problem. Because marijuana is still federally illegal, most banks will not provide financial services to marijuana businesses, even though FinCEN issued guidelines to allow financial institutions to provide bank accounts to the state-legal pot businesses. Many tout Bitcoin as the solution.

Bitcoin is viewed as the world’s first completely decentralized currency. Unlike the Dollar, the Euro, the Yuan, etc., no central government manages or backs Bitcoin. It is also called a “cryptocurrency” — a digital currency that uses encrypted services to generate units of the currency and to transfer funds.  You can read primers on it here and here. Using a Bitcoin wallet enables customers and businesses to engage in transactions without using paper currency and without going through an intermediary institution like a bank. Its chief appeal to the marijuana industry is that allows for currency transfers with little to no need for a bank. There are though significant issues involved with using Bitcoin in the marijuana industry and law enforcement associates Bitcoin with the illegal narcotics trade (see the Silk Road).

At the beginning of January, Washington State Senator Ann Rivers (who was instrumental in securing passage of SB 5052, which essentially wound down Washington’s existing medical marijuana cooperative system) proposed a bill to ban Bitcoin in Washington State’s marijuana marketplace. Senator Rivers says that her proposed bill to ban Bitcoin was brought to her by “an organization” looking to preserve “the transparency that we have in our legalized marijuana system in our state.” The eight-page SB 5264 adds to the definitions section of RCW 69.50.101 (Washington’s Controlled Substances Act) the term “virtual currency,” and then proceeds to ban it for marijuana sales. Under the bill, “virtual currency” would be defined as follows:

a digital representation of value used as a medium of exchange, a unit of account, or a store of value, but does not have legal tender status as recognized by the United States government. “Virtual currency” does not include the software or protocols governing the transfer of the digital representation of value or other uses of virtual distributed ledger systems to verify ownership or authenticity in a digital capacity when the virtual currency is not used as a medium of exchange.

The bill then states that “[a] marijuana producer, marijuana processor, or retail outlet must not pay with or accept virtual currency for the purchase or sale of marijuana or any marijuana product.”

The Bitcoin ban bill was debated at length in Olympia and Senator Rivers’ cited to the Cole Memo prohibiting the “shrouding” of anyone who participates in Washington’s marijuana industry as its justification. Senator Rivers contends that BitCoin can’t meet the 2014 FinCEN transparency guidelines. Tom Parker and Kenneth Berke of PayQwick also testified that Bitcoin does not satisfy FinCEN transparency guidelines and allowing it for Washington State marijuana businesses will invite federal enforcement and thereby harm the cannabis industry as a whole. On the other side of the argument, Ryan Hamlin and Jon Baugher of POSaBIT testified that BitCoin is perfectly traceable, auditable, verifiable, and transparent, and that the state needs to better understand BitCoin transactions before it bans its use in the marijuana industry. James Paribello, legislative liaison for the Washington State Liquor and Cannabis Board, testified that the Board essentially has no opinion on the use of BitCoin or its proposed ban, so long as the Department of Financial Institutions allows it, which it currently does.

Given the uncertainty of the state-legal marijuana industry under Trump and Sessions and the precarious staying power of the Cole Memo and the FinCEN guidelines, Bitcoin may just be too risky for Washington State’s marijuana industry. But if the state can get educated about and comfortable with BitCoin, virtual currency may be here to stay in the Evergreen State’s marijuana industry.

Stay tuned.

The Emerald TriangleCalifornia Cannabis: Trinity County is a legendary marijuana cultivation region in California. Since passage of the Medical Cannabis Regulation and Safety Act (MCRSA), the three counties that make up the Triangle, Mendocino, Humboldt, and Trinity, have all been examining local marijuana regulations for cultivation. With Proposition 64, it’s becoming ever more important for local governments to set rules for their local marijuana markets through local licensing and permitting, and the Emerald Triangle has begun doing exactly that.

To date, Humboldt has adopted regulations and their application window for cultivation permits has come and gone. Mendocino is still weighing permitting and zoning ordinances in deciding how to regulate cultivation within its borders. Most recently, Trinity County decided to extend its deadline for commercial cultivation registration to February 28th.

So, if you haven’t had the chance to apply for a Trinity cultivation registration permit, you still have a bit of time to do so. And here’s what you need to know to secure one of those coveted permits from the Trinity County Planning Department:

  1. Trinity is only allowing for cultivation under the MCRSA and Proposition 64 at this time. And under cultivation, Trinity will only permit Type 1, 1B, 1C or Type 2 or 2B cultivators, which represent relatively small-sized grows.
  2. Applicants have to show that they’re registered with the North Coast Regional Water Quality Control Board and that they’re in good standing with the Board’s order (#2015-0023) regarding waste discharge and water quality.
  3. Applicants have to apply for and secure a Board of Equalization (BOE) seller’s permit.
  4. You cannot have any “serious felony convictions” or a Schedule I, II, or III felony (excluding non-serious felony convictions for marijuana-related crimes).
  5. Applicants have to demonstrate at least one year of residency in Trinity County prior to the application date.
  6. Applicants have to submit an accurate site plan of the entire parcel.
  7. Applicants that are business entities have to provide a breakdown showing the ownership of the entity.
  8. Proof of a deed to the cultivation land or a lease authorizing cultivation on the proposed land is required.
  9. Applicants have to provide to the County one of the following documents:
    1. Documents of incorporation
    2. Documents of taxes paid to BOE
    3. Proof of contracts with dispensaries
    4. Receipt of a BOE Seller’s number
    5. Employer Identification Number
  10. Only one application countywide may be submitted on behalf of one person, entity, or per legal parcel.
  11. Grow site registration is limited to 500 applicants. Thus far, County records show only 12 registrations have issued.
  12. There are also various setback and zoning requirements where marijuana cultivation is not allowed, including the following:
    1. Within 1,000 feet of any youth-oriented facility, a school, any church, or residential treatment facility and within 500 feet of an authorized school bus stop.
    2. In any location where marijuana is visible from the public right of way.
    3. A legal parcel without a permitted/legal housing structure, or without an active building permit.
    4. Within the Trinity County jurisdiction of the Whiskeytown-Shasta-Trinity National Recreation area and within the lease lots within the Ruth Lake Community Services District.
    5. Within the Timber Production Zones with an exception for applicants who can show enrollment under/compliance with the Regional Water Board’s order #2015-0023.
    6. Within the R1, R2, and R3 zones.
    7. Within 350 feet of a “residential structure” on any adjoining parcels.
    8. Within 30 feet from any property line.

Applicants also must satisfy a variety of performance to keep their registrations, including noise level standards, surface water restrictions, water diversion restrictions, erosion restrictions, fencing, security and storage requirements, lighting restrictions, and applicable California Fire and Fish and Wildlife standards.

As for fees, for 2016 Type 1 and 2 grows, you’re looking at a $2,500 fee “plus $1,000 towards the general plan update.” For registration after 2016 (assuming the County still allows it), Type 1 and 1B cannabis grows will have to pay $4,000 plus $1,000 towards the general plan update, Type 1C grows will have to pay $2,000 plus $250 towards the general plan update, and Type 2 and 2B grows will pay $5,000 plus $1,000 towards the general plan update.

Trinity’s commercial cultivation program permit application is relatively straightforward. Applicants must first schedule an appointment with the Department of Planning and then submit their application (with all required documentation and attachments) at that appointment. The actual permit will only issue after your cannabis cultivation application is approved and and after an initial onsite inspection ensures your application actually reflects what you’ve built out and set up for your marijuana grow site.

With February 28 fast approaching anyone interested in securing a Trinity County cultivation license should definitely get moving right away to gather up the documentation necessary to submit a top-tier and timely application to the County.

 

Los Angeles Cannabis lawyersSince passage of Proposition 64 in California last November, our California cannabis lawyers have been getting calls nearly non-stop about what it takes to secure a license to operate a marijuana business in the City of Los Angeles. Some are asking us about buying a Proposition D-compliant dispensary state license now to secure a California retail cannabis license in the future.

Because of Proposition D, there is no legal avenue for anyone to start new marijuana businesses in the City of Los Angeles or for anyone to legally purchase any of the 135 existing Proposition-D compliant dispensaries. But the tides may be shifting for the L.A. marijuana scene. On March 7 of this year, Angelenos will be voting on two ballot initiatives that could bring more regulation and oversight to marijuana businesses within Los Angeles city limits and that may, under certain circumstances, allow for an expansion beyond the existing 135 marijuana dispensaries.

In case you missed it, Proposition D, which passed in 2013 and was implemented in 2014, was intended to reduce the number of dispensaries within Los Angeles city limits to 135 – the number of dispensaries operating before September 14, 2007. A 2012 UCLA study estimated that Los Angeles had at least 472 dispensaries, and the city estimated that in 2013, when Proposition D passed, the city had around 700 dispensaries. Over the last few years, the City of Los Angeles has shut down hundreds of medical marijuana businesses that failed to meet Proposition D requirements for immunity. But new dispensaries pop up to replace those that have been shut down. The city has also fought hard to enforce a ban on cannabis deliveries and the California Court of Appeals has upheld that ban.

Los Angeles’s medical marijuana situation is reflected in California’s Medical Cannabis Regulation and Safety Act (“MCRSA“) of 2015. The MCRSA requires all applicants to first secure “local approval” before they can receive a California state cannabis license, with local approval meaning some form of local license, authorization, or permitting. Under the MCRSA, Los Angeles essentially received a carve out to be able to continue enforcing its Proposition D, regardless of whether a marijuana business receives a state license.

Then, realizing that Proposition D does not qualify as local licensing, permitting, or even authorization (since it’s really just a registration and taxation measure), combined with the fear that Los Angeles may never enact any form of “local approval” to enable marijuana businesses to secure state licenses, the California State legislature, tried to pass AB 2385, which would have dropped the local approval requirement for Los Angeles. Under AB 2385, marijuana business applicants under the MCRSA that could show compliance with Proposition D would be eligible to receive a California cannabis license. However, the governor vetoed AB 2385. Because Proposition 64 itself provides no special treatment for Proposition D, Los Angeles marijuana businesses will still need to comply with local laws to open their doors under the new recreational laws. What all of this means is that Los Angeles could be stuck with Proposition D and that means it will either have no medical marijuana businesses at all or only the 135 existing dispensaries assuming they all go recreational.

Until perhaps March 7. On March 7th, Los Angeles will vote on two ballot measures to replace Proposition D, which can only be repealed and replaced by a vote of the people. The first ballot measure, called the Cannabis Enforcement, Taxation and Regulation Act (“CERTA“), is backed by the City of Los Angeles. The second ballot measure is called the Los Angeles Marijuana and Regulation Safety Measure and that one was drafted by the United Cannabis Business Alliance Trade Association (“UBCA”).

The CERTA measure sets the stage for the City to enact whatever rules and laws necessary to regulate City of Los Angeles “cannabis activity” in the context of California’s new marijuana laws, while also creating new criminal and nuisance penalties and implementing new business taxes on marijuana sales. It also gives priority status in “processing of applications” to the existing 135 Proposition D dispensaries, but it does not say that the City is limited to regulating only those 135 dispensaries nor does it forbid the City from creating regulations for other marijuana businesses like cultivators and manufacturers.

The UCBA  ballot measure is much more comprehensive than the CERTA. This measure would create the Los Angeles Department of Medical Marijuana Regulation to oversee the Collective Commercial Cannabis and Commercial Cannabis permit programs, which would cover both medical and recreational marijuana businesses. This measure would also allow for permitting of cannabis cultivation, manufacturing, transportation, testing, and distribution businesses. Like the City supported measure, this measure too will give licensing priority to existing 135 Proposition D dispensaries; it calls for mandating that the City continue to allow these 135 cannabis dispensaries to operate and for these dispensaries to get their required permitting ahead of any new dispensary applicants. It also provides that if not all of the 135 existing dispensaries apply for and receive the required permitting, the City may allow additional dispensaries to participate in the Los Angeles cannabis market and that the City cannot have less than 135 dispensaries in operation. The measure also sets forth how the permit application process will work and the zoning and setback requirements required for all permit applicants.

Importantly, as of December of last year, UCBA has decided to formally support the City ballot measure. Nonetheless, the UCBA measure will still be on the ballot in March.

Though Forbes is predicting L.A.’s medical marijuana market could reach $1 billion, that’s not going to happen anytime soon unless the City starts allowing for significantly more marijuana commerce. The March 7 vote is crucial to the future of marijuana in Los Angeles as it will determine who can run or invest in a marijuana business in the City of L.A. and what it will take to do so.

Stay tuned.

Cannabis Business LawyersAs cannabis business attorneys, we tend to have a good pulse on what is going on in the cannabis industry and especially on the false claims people make about the cannabis industry. I’ve previously written about the top ten industry red flags and the top ten industry red herrings. In this post, I discuss the top six bogus claims we keep hearing about the marijuana industry:

  1. President-elect Donald Trump and appointee U.S. Attorney General Jeff Sessions will not impair state-legal marijuana. Nobody can know or even predict what this new administration will do with state-legal marijuana. President-elect Trump has been all over the place on cannabis and who’s to say whether he will remain consistent on states’ rights when it comes to marijuana (despite his campaign rhetoric)? What we do know is that so long as Congress continues to renew the medical marijuana protections in the appropriations riders, state law-compliant MMJ operators are unlikely to be shut down by the Department of Justice. Unfortunately, the same cannot be said of recreational marijuana businesses. Both a lot and a little has been made out of Jeff Sessions‘ confirmation hearing, but the bottom line is that he really didn’t say much one way or the other that helps to discern what will happen with cannabis in the next four years. In the end, it’s anyone’s guess as to what Trump and Sessions have in store for state-legal marijuana.
  2. CBD-Oil is legal everywhere in the U.S. Many “CBD” companies tout this claim and many consumers believe it to be true. CBD is not legal everywhere. The DEA considers CBD with active THC to violate the federal Controlled Substances Act and it recently made this clear when it announced that it considers CBD derived from hemp to be illegal and made clear that it will be stepping up enforcement actions against online and interstate CBD sales. We’ve previously written on how the FDA goes after anyone making medical claims for CBD, whether for humans or pets.
  3. Florida medical marijuana is going to be huge. I have been getting a steady stream of calls and emails from folks wanting a Florida medical marijuana license or to start preparing for registration to start a Florida cannabis business under Amendment 2. Far too many of these people see Florida as an opportunity for nearly guaranteed riches. The problem is that Florida cannabis is already dominated by seven Charlotte’s Web nurseries and this will not change unless Florida opens its medical marijuana marketplace to others. Not only that, even if Florida allows new applicants for cannabis licenses, its application process will surely be expensive, lengthy, and full of red tape. So though Florida’s cannabis industry will eventually be huge, in the meantime, patience is called for and you should avoid any and all “how to get rich quick on Florida cannabis” seminars and pot “colleges.” In the meantime, here’s our primer on some of what you can and should do now to prepare for Florida licensing/registration.
  4. I’m just a landlord to a marijuana business so I cannot be criminally liableUnfortunately for landlords, they can face criminal prosecution for aiding, abetting and conspiracy under federal law and also asset forfeiture. Just look at what happened to the landlord in the Harborside case if you still believe otherwise — thankfully, that case was eventually dismissed. If you are a landlord to a cannabis business, you should get educated on your criminal liability and on federal and state forfeiture laws. Most importantly, your lease agreement should be drafted to ensure your tenant behaves.
  5. Yesterday, I was a criminal defense attorney. Today, I’m a marijuana securities and business lawyer. We hear of this sort of claim constantly and guess what, 99 times out of 100, you would be better off using a business lawyer with no cannabis experience than a criminal cannabis lawyer who now claims to know complex business and securities laws overnight. The sad truth is that criminal cannabis lawyers in states that have legalized cannabis are finding themselves without clients and they are having to scramble to re-brand themselves as cannabis business lawyers. But branding and reality are two very different things, and firms with actual expertise in both business law and marijuana regulatory law are far too often called on to clean up expensive messes left by these unqualified lawyers. For tips on how to choose an experienced cannabis business attorney, go here.
  6. The cannabis industry is worth billions so I need to invest now, now, now. I never tire of writing about the hustlers and hucksters who insist investors immediately dump gobs of money into the marijuana industry. I received an email just last week with the following advertisement:

 

The $100 billion marijuana industry is dominated by penny stocks. With legalization sweeping the country, these penny stocks have already begun skyrocketing in price. Take action TODAY, and you have a once-in-a-generation opportunity to turn a tiny $50 investment into an absolute fortune.

Federal illegality makes it difficult to secure a bank account and the IRS continues to tax the industry to death under 280e. Cannabis investors can face criminal liability (just like landlords) and they can find themselves subject to asset forfeiture for financially supporting illegal entities and activities. Due to the newness of this industry, fraud is not uncommon. Investment in the ancillary, support sectors (like tech or real estate development) is a bit more straightforward and a bit less risky, but all investors in cannabis need to be vigilant, especially until we get a better feel for what the Trump administration has in store for us. For more on marijuana stock fraud and scams, see here and here.

So the next time you hear anyone make a too-good-to-be-true statement about the cannabis industry, at least be sure to check it out before buying in.

Cannabis bankingThere has been a ton of speculation about what President-elect Donald Trump and his nominee for U.S. Attorney General, Jeff Sessions, will do about state-legal marijuana in the next four years. Some industry and political experts think a renewed War on Drugs is coming, while others believe neither Trump nor Sessions will undertake the politically unpopular task of undoing state-by-state cannabis legalization and some version of the status quo under the Cole Memo will prevail. What is likely to happen with access to banking for cannabis businesses under this new administration?  Next to 280e, the inability to secure and maintain a bank account is probably the biggest business problem for marijuana entrepreneurs.

Marijuana businesses and ancillary service providers (those businesses that provide services to the industry but that are not cultivating, manufacturing, or distributing marijuana) often cannot get bank accounts or bank financing because marijuana is federally illegal. Regulations issued by the Financial Crimes Enforcement Network (FinCEN) dealing with money laundering are what make it so tough for cannabis businesses to secure banking. The Bank Secrecy Act FinCEN enforces requires banks investigate their customers and neither negligently or knowingly do business with bad actors. State-legal marijuana businesses and even many ancillary businesses are viewed as bad actors for banks and so they generally avoid those businesses and the potential fines that can come with them.

Nonetheless, in 2014, FinCEN finally issued some guidance that allows financial institutions to at least provide bank accounts to marijuana businesses — no mention was made in this guidance about access to banking for ancillary service providers. Under these FinCEN marijuana guidelines, banks are expected to:

  • Verify with state authorities that a marijuana business is duly licensed and registered.
  • Review state license applications and related documentation the marijuana business used to obtain its state license to operate its marijuana-related business.
  • Request from the state licensing and enforcement authorities available information about the business and related parties.
  • Develop an understanding of the normal and expected activity for the business, including the types of products to be sold and the types of customers to be served.
  • Monitor publicly available sources for adverse information about the cannabis business and related parties.
  • Periodically refresh information obtained as part of customer due diligence using methods and timetables commensurate with the risk.
  • File Suspicious Activity Reports (SARs) with FinCEN for all of their marijuana business customers. Banks use SARs to notify regulators that someone may be using their services for an illegal purpose. There will be no direct consequences arising from these SAR filings, but this means the federal government knows exactly who you are as a marijuana business, and with whom you are banking.
  • File SARs if they believe one of their cannabis business customers has violated a state law or has failed to act in accordance with the Cole Memo.

With these guidelines FinCEN essentially dragooned banks into acting as on-the-ground investigators to snitch on marijuana businesses that are not being as compliant or careful as the federal government believes they should be. These guidelines do not change federal banking laws and they are pretty onerous, but they were a positive step towards alleviating the marijuana banking epidemic.

With eight states, including California, electing to legalize/”medicalize” marijuana this past November, I questioned in a recent blog post what FinCEN/the Department of Treasury will do with the 2014 FinCEN guidelines, especially with Trump soon to be our President. In December, Senator Elizabeth Warren (and several other senators) sent a letter to FinCEN requesting it issue increased guidance to banks, given we now have 29 states with some form of legal marijuana and no federal resolution of the banking issue. Specifically, Senator Warren and the other senators wrote that more guidance is necessary to address how ancillary services providers can secure financial services as the 2014 FinCEN guidelines are silent on this issue. The senators’ letter specifically stated that:

The 2014 FinCEN guidance did not distinguish between state-sanctioned marijuana businesses and the [ancillary] businesses that service the marijuana industry, leaving it up to individual financial institutions to determine how to classify and treat [ancillary] businesses. Limitations on access to financial services have become increasingly problematic for legal businesses and will only present a larger problem as more states legalize marijuana . . . since FinCEN’s 2014 guidance was released, less than 3% of the nation’s 11,954 federally regulated banks and credit unions have chosen to serve the cannabis industry.

The senators’ letter also accurately noted that an inability of cannabis businesses to bank promotes tax fraud and creates a public safety issue due to the large amounts of cash marijuana businesses must handle.

If Congress will not adjust the banking laws to accommodate state-legal marijuana businesses, pressuring banking regulators to change their enforcement policies is the logical next step and we need to see more congressional representatives and senators from marijuana-friendly states standing up for marijuana banking. If we expect the state-by-state democratic experiments with cannabis to succeed, we need to equip marijuana and ancillary businesses with the tools for success, including access to banking.

Cannabis litigation lawyerThough we are hoping 2017 will bring you nothing but prosperity when it comes to your cannabis business. But if you are headed to court in 2017 or even if you are just just sensing a company dispute stirring, the following five tips will help you avoid or mitigate the negative impact of a business dispute.

  1. Make your business relationships crystal clear from the start. The days of handshake deals regarding ownership in a cannabis business are over. You should do no deals of any real size without first getting everything in writing. Operating agreements, bylaws, and shareholder agreements exist to ensure that your company structure and the relationship between its owners is abundantly clear. When starting a company together, you and your fellow owners should have at least some understanding on how your company will be operated and on how such things like equity versus debt, voting rights, sweat equity, preferred returns, owner employment will be navigated. Most of the ownership disputes our cannabis litigation lawyers have handled have been because of badly done initial company contracts and filings.
  2. Perform due diligence on your partners. If you want to increase your odds of avoiding a dispute with your cannabis business partners, the most important thing you can do is to choose your partners wisely. What never ceases to surprise us is how often we are told by a party locked in a life or death ownership dispute regarding a cannabis business is that they barely knew their business partner before they started the business with them. If you are going to start a cannabis business (or any business for that matter), the first thing you should do is find out as much as you can about your putative partner’s financial and business history. You should do this before you sign away your soul and money to joining with this person on a business project. It’s neither rude nor unexpected to ask your potential partners for documentation showing their financial and criminal history–the state licensing regulators will ask for this information anyway. It is even more important to conduct thorough due diligence if you are buying into an existing cannabis business. At minimum, this due diligence should include investigating and analyzing the assets and liabilities of the company and its current owners. Your due diligence should also include confirming the appropriate standing of the company with state and local government regulators, and determining that the company and its principals understand how to comply with state and local laws as well as the Cole Memo. This is routine in every other industry and it must become routine in the cannabis industry as well.
  3. Get your own attorney from the start to protect yourself. More often than not, the company has an attorney looking out for the company’s interests. But it is important to realize that the company attorney is not your personal lawyer and that lawyer will almost certainly be conflicted out of any dispute between you and your business partners and/or investors. For this reason (and many others) you need your own lawyer providing you with your own counsel and protection regarding your role in the company and your ownership rights. This lawyer should also make sure that the written agreements work for you and not against you. This lawyer will also be an asset for you personally if any dispute arises. For more on how to avoid a dispute relating to your cannabis business, check out Five Tips on How to Avoid Cannabis Litigation and How to Avoid Costly Marijuana Business Disputes. For more on how to choose the right lawyer for your cannabis business check out How To Choose Your Cannabis Business Lawyer.
  4. Know your dispute resolution options. Well drafted corporate documents and contracts should cover most possible breakdowns in the business or the relationship and set out the options for handling internal strife. If there is a fight or a tie on a vote, what happens? How are problems resolved and when? Who makes what decisions and how? What about liquidating the business? What about selling an ownership interest and for how much? Can you sell just your membership interest or shares without going through a vote of the members? Can you keep running the business free of your partners if there’s a fight? What about dissolving the company and winding down? What happens if there is a contract breach? All of these things can and usually should be covered in your corporate governing documents or in any other contract you sign, and by doing so, you greatly minimize your likelihood of destructive problems down the road. Your company documents and contracts should also make clear exactly how disputes are going to be handled. Are you going to want your dispute made public in a court, or kept quiet in an arbitration or mediation? It is a lot easier to reach agreement on such things when you are starting your business or your relationship than when you are already in the midst of a hard fought dispute with costly lawyers.
  5. Make sure your lawyer knows what he or she is doing. When hiring a lawyer to help protect you when getting into a cannabis business, you should be sure to hire a law firm with lawyers who know both business law and cannabis law. And when confronted with a dispute involving your cannabis business, you need to be sure to hire a law firm with lawyers experienced in civil litigation (criminal litigation experience does not count here) and cannabis law, if possible. For more on choosing your cannabis lawyer, check out How To Choose Your Cannabis Business Lawyer.

Be careful out there, and have a happy 2017.

Cannabis moratoriumIt’s always a slap in the face to get blindsided by your local government at the 11th hour. And of course the same holds true in the cannabis industry. You’ve worked incredibly hard to secure your cannabis license from the state. You’ve spent a ton of money getting into compliance with state cannabis regulations (that keep on changing and affecting your bottom-line). And you’re likely paying sky-high rent to lease a space that for any other business would be less than half of what you pay. This is all while having to deal with federal marijuana laws that make it difficult to bank and jack up your tax rates. Then to run up against a local moratorium on cannabis businesses or a drastic change in local cannabis regulations after months of operation is yet another bitter pill to swallow.

When I-502 first passed in Washington State, there were debates and lawsuits over what Washington cities and counties could do when it came to opting out of I-502 altogether. I-502 was silent on this point and industry folks argued that cities and counties couldn’t ban marijuana businesses while local governments (and the state attorney general) argued that they could. Ultimately, with passage of HB 2136, the game of chicken between local governments and marijuana businesses came to an end since the legislature decided that cities and counties were free to ban marijuana businesses, though those that did would cease to receive marijuana tax revenues.

The issue of how cities and counties in Washington State may regulate marijuana businesses remains less than clear. Given the local government police powers and the fact that there is no right to have a marijuana business in Washington State, cities and counties see themselves as able to regulate marijuana businesses as they see fit, so long as their regulations are lawful and constitutional and comport with a local government’s duty and power to protect the health and welfare of its citizens.

Because of this, Washington State licensed marijuana businesses are finding themselves in situations where their local governments are re-thinking local regulations or just deciding to get rid of certain (but not all) marijuana businesses. Already this year, Douglas County banned and then re-regulated its cannabis producers and processors because of odor and neighbor complaints. Also this year, Chelan County opted to ban all marijuana producers and processors that were not actively operating on or before September 29, 2016.

Now Spokane County joins this list with its November 29 emergency moratorium on any new or expanded outdoor cannabis cultivation, citing multiple odor complaints received by the Spokane Regional Clean Air Agency and claiming that its existing outdoor marijuana producer rules and zoning do not “adequately mitigate the impacts associated with the outdoor production of marijuana.”

So long as Spokane County holds a public meeting on this emergency moratorium within 60 days of its passage, due process (i.e., notice and a hearing) challenges to this change are not likely to be viable. Spokane County can even extend this outdoor production moratorium to one year so long as it develops a working plan in that time leading up to final resolution of the issue.

The sad reality is that cities and counties in Washington State can usually get away with using well established laws to preserve the integrity of their zoning plans through interim zoning or via a moratorium and by pointing to allegations of immediate threats to public health and safety. If Spokane County eventually decides to attack existing outdoor cultivation, the chance of a legal attack against the County isn’t made any better due to the law of non-conforming uses.

We would like to see Spokane County go the way of Douglas County and find a way to keep new or expanded outdoor cannabis cultivation alive while balancing the interests of irritated neighbors. In some ways, an even bigger concern for these outdoor cannabis cultivators may be private legal action by their neighbors to stop all outdoor cannabis farming. For more on NIMBY and marijuana odor cases, go here, here, and here.

In any event, be sure to stay tuned to see what Spokane County does with outdoor cannabis cultivation.

In our California Cannabis Countdown, Tiffany Wu (of our San Francisco office) regularly analyzes the various local city and county ordinances governing California’s ever-changing cannabis industry (see here, for example). Local cannabis laws have always been important in California, but they’ve become even more important now that the Medical Cannabis Regulation California Cannabisand Safety Act (“MCRSA“) requires local government approval before you can get a state medical cannabis license. And though you don’t need that local approval before getting a state license under Proposition 64, you will have to be in compliance with local law before you can open and operate your adult use cannabis business in California.

Some California cities and counties have gone back and forth for months over what their local marijuana market should look like, with some even banning marijuana businesses altogether. Mendocino County, part of the famous Emerald Triangle, is no different, though it is getting closer to some form of comprehensive regulation even if it only addresses medical cannabis cultivation for now.

Mendocino County codifies its current medical cannabis regulations under Section 9.31 of its county code, which it amended in May of this year with an urgency ordinance. The County basically has two standards for current growers: growers cultivating no more than 25 plants per parcel, and growers cultivating more than 25 plants per parcel because they are authorized to do so by the County and/or the Sheriff as a result of having registered with the County by June 3 of this year.

Section 9.31 may end up being moot though since the County is looking to pass two new ordinances: one having to do with regulations and permitting for cannabis cultivation sites and the other having to do with zoning for the same. Copies of both proposed ordinances can be found here. Let’s start with the Medical Cannabis Cultivation Ordinance (“MCCO”).

Under the MCCO, should it pass, to be considered by the Agricultural Commissioners Office for a cultivation site MCCO permit, you will need to prove to the County that you had an existing, Proposition 215 and Section 9.31-compliant medical cannabis cultivation site prior to January 1, 2016. To prove the existence of such a site , the County will require the following:

  1. Photographs of any cannabis cultivation activities that existed on a legal parcel prior to January 1, 2016, including: ground level views of the cannabis cultivation activities and aerial views from Google Earth, Bing Maps, Terraserver, or other comparable services showing the entire legal parcel and the cultivation area in more detail. The date these images were captured must be noted.
  2. Photographs of any cannabis cultivation activities that currently exist on a legal parcel, including: ground level views of the cultivation activities from at least three different vantage points, and aerial views from Google Earth, Bing Maps, Terraserver, or other comparable services showing the entire legal parcel and the cannabis cultivation area in more detail. The date these images were captured must be noted.
  3. At least one additional document demonstrating proof of cannabis cultivation prior to January 1, 2016. A list of examples of the type of documentation that will meet this requirement are found in Appendix B to the application. Any reliable documentary evidence similar to that found in Appendix B which is deemed satisfactory to the Agricultural Commissioner, which establishes that medical cannabis was planted and grown on a parcel to be permitted prior to January 1, 2016, will likewise be accepted.

You can also re-locate your existing cannabis cultivation site if you can prove the above, but you will then be treated as a “new” grow, which really just means increased property setback restrictions. In addition to proof of a prior grow (and a bevy of other regulations relating to fencing, security, grow lighting, and track and trace requirements), MCCO permit applicants will be limited to two cultivation permits, one per legal parcel. There are ten different types of cannabis cultivation permits that vary by size and growing medium, including a nursery permit.

For all MCCO permit applicants, the following will be required by Mendocino County as part of the MCCO permit application:

  1. The name, business and residential address, and phone number(s) of the applicant.
  2. If the applicant is not the record title owner of the legal parcel, written consent from the actual owner allowing cultivation of medical cannabis on their property by the applicant with original signature of the record title owner.
  3. Written evidence that each person applying for the permit and any other person who will be engaged in the management of the collective is at least twenty-one (21) years of age.
  4. A site plan showing the entire legal parcel, including easements, streams, springs, ponds and other surface water features, and the location and area for cannabis cultivation on the legal parcel, with dimensions of the area for cultivation and setbacks from property lines. The site plan shall also include all areas of ground disturbance or surface water disturbance associated with cultivation activities, including: access roads, water diversions, culverts, ponds, dams, graded flats, and other related features. The site plan must include dimensions showing that the distance from any school, youth oriented facility, church, public park, or residential treatment facility to the nearest point of the cultivation area is at least 1,000 feet.
  5. A cultivation and operations plan which includes elements that meet or exceed the minimum legal standards for the following: water storage, conservation and use; drainage, runoff and erosion control; watershed and habitat protection; and proper storage of fertilizers, pesticides and other regulated products to be used on the legal parcel. Any fuel, fertilizer, pesticides, or other substance toxic to wildlife, children, or pets, must be stored in a secured and locked structure or device. The plan must also provide a description of cannabis cultivation activities including, permit type, cultivation area, soil/media importation and management, the approximate date(s) of all cannabis cultivation activities that have been conducted on the legal parcel prior to the effective date of this ordinance, and a schedule of activities during each month of the growing and harvesting season.
  6. A copy of the statement of water diversion, or other permit, license or registration filed with California Water Resources Control Board, Division of Water Rights, if applicable.
  7. An irrigation plan and projected water usage for the proposed cultivation activities, as well as a description of its legal water source.
  8. A copy of a Notice of Intent and Monitoring Self-Certification and any other documents filed with the North Coast Regional Water Quality Control Board (NCRWQCB), demonstrating enrollment in and compliance with (or proof of exemption from) Tier 1, 2 or 3, North Coast Regional Water Quality Control Board Order No. 2015-0023, or any substantially equivalent rule that may be subsequently adopted by the County of Mendocino or other responsible agency.
  9. If any on-site or off-site component of the cultivation facility, including access roads, water supply, grading or terracing impacts the bed or bank of any stream or other water source, you must show proof that you have notified the California department of Fish and Wildlife pursuant to Section 1602 of the Fish and Game Code and provide a copy of the streambed alteration permit obtained from the Department of Fish and Wildlife.
  10. If the source of water is a well, a copy of the County well permit, if available.
  11. A unique identifying number from a State of California Driver’s License or Identification Card for each person applying for the permit and any other person who will be engaged in the management of the cultivation operation.
  12. Evidence that the applicant or any individual engaged in the management of, or employed by, the cultivator has not been convicted of a violent felony as defined in Penal Code section 667.5 (c) within the State of California, or a crime that would have constituted a violent felony as defined in Penal Code section 667.5 (c) if committed in the State of California and is not currently on parole or felony probation. A conviction within the meaning of this section means a plea or verdict of guilty or a conviction following a plea of nolo contendere.
  13. A statement describing the proposed security measures for the facility sufficient to ensure the safety of members and employees and protect the premises from theft.
  14. If the applicant is organized as a non-profit collective, the applicant shall set forth the name of the corporation exactly as shown in its Articles of Incorporation, and the names and residence addresses of each of the officers and/or directors. If the applicant is organized as a partnership, the application shall set forth the name and residence address of each of the partners, including the general partner and any limited partners. Copies of the Articles of Incorporation or Partnership Agreement shall be attached to the application.
  15. The applicant shall provide proof of either a physician recommendation that the amount of cannabis to be cultivated is consistent with the applicant’s medical needs, the needs of the patients for whom the applicant is a caregiver, or a written agreement or agreements, that the applicant is authorized by one or more medical marijuana dispensing collectives or processors to produce medical marijuana for the use of the members of said collective(s) or processor(s).
  16. The Agricultural Commissioner is authorized to require in the permit application any other information reasonably related to the application including, but not limited to, any information necessary to discover the truth of the matters set forth in the application.
  17. Apply for and obtain a Board of Equalization Seller’s Permit and collect and remit sales tax to the Board of Equalization if applicant intends to sell directly to qualified patients or primary caregivers.
  18. Written consent for an onsite pre-permit inspection of the legal parcel by County officials at a prearranged date and time in consultation with the applicant prior to the approval of a permit to cultivate medical cannabis, and at least once annually thereafter.
  19. If applicable, clearance from CalFire related to compliance with the requirements of Public Resources Code Section 4290 and any implementing regulations.
  20. For activities that involve construction and other work in Waters of the United States, that are not otherwise exempt or excluded, include a copy of a federal Clean Water Act (CWA) Section 404 permit obtained from the Army Corps of Engineers and a CWA Section 401 water quality certification from the NCRWQCB.
  21. For projects that disturb one (1) or more acres of soil or projects that disturb less than one acre but that are part of a larger common plan of development that in total disturbs one or more acres, are required to obtain coverage under the State Water Resources Control Board General Permit for Discharges of Storm Water Associated with Construction Activity Construction General Permit Order 2009- 0009-DWQ. Construction activity subject to this permit includes clearing, grading and disturbances to the ground such as stockpiling, or excavation, but does not include regular maintenance activities performed to restore the original line, grade, or capacity of the facility.

If the Agricultural Commissioners Office approves you for an MCCO permit, you’ll then be kicked over to the Department of Building and Planning Services for zoning compliance. Under the County’s proposed zoning ordinance, cannabis cultivation of varying parcel and canopy sizes will be allowed in the following zones: RR 2, RR 5, RR 10, AG, UR, RL, FL, TPZ, I1, I2, and PI. And all permissible zoning will require either a zoning clearance, an administrative permit, or a minor use permit. Further, depending on the MCCO permit type, there are minimum lot size restrictions ranging from 5 to 10 acres. And also depending on whether you’re an existing cannabis grow or a “new” grow (based on whether you’re moving your existing grow), there are various property setback requirements you will have to follow to achieve compliant zoning.

Right now, the County is still deciding on whether to adopt these proposed ordinances, and they’re talking public comment on them until January 4, 2017. I list all of the above though just to emphasize how difficult and time consuming and expensive it will be to operate a cannabis cultivation business in Mendocino County. But the bad news is that we expect many other California counties to initiate similar requirements.

Stay tuned to see if Mendocino County will embrace the heavy regulations set forth above or go back to the drawing board on cultivation.