California cannabis priority licensingAs part of our series on the initial rules implementing California’s Medical Cannabis Regulation and Safety Act (“MCRSA”), this post will break down the issue of “priority” in licensing – meaning, whose state medical cannabis license applications will be processed first once the licensing window opens early next year. Under the MCRSA, and pursuant to AB 266, at Article 4, Section 19321:

“In issuing licenses, the licensing authority shall prioritize any facility or entity that can demonstrate to the authority’s satisfaction that it was in operation and in good standing with the local jurisdiction by January 1, 2016.”

This language left us with a couple of questions, including how to define “operation” and “in good standing with the local jurisdiction.” But the Bureau of Marijuana Control provided answers to these questions in the proposed text of the regulations applicable to all medical marijuana license applicants and licensees. In keeping with, and expanding upon, the above statement from the MCRSA, the proposed rules state:

“Priority review of the application shall be given to applicants that were in operation and in good standing with the local jurisdiction by January 1, 2016, and whose business ownership or premises are currently the same as they were on January 1, 2016. Priority applications shall be processed for review in the order in which they are received.”

The rules define “operation” as the date on which the applicant began actively conducting the same commercial cannabis activity as the license type for which the applicant is applying. And for purposes of the rule, “actively conducting” means “engaging in the transportation, distribution, testing, or sale of medical cannabis goods as authorized by the local jurisdiction.” So if you merely had an entity formed by January 1, 2016, or were operating in contravention of local law, you will not qualify for priority review under the proposed rules.

To prove the date on which an applicant began actively conducting commercial cannabis activity, the applicant must attest to the date under penalty of perjury, and must provide evidence of the date operations began, which may include:

  1. Articles of incorporation;
  2. Certificate of stock;
  3. Articles of organization;
  4. Certificate of limited partnership;
  5. Statement of partnership authority;
  6. Tax form;
  7. Local license, permit, or other written authorization;
  8. Receipts; or
  9. Any other business record.

The proposed rules also provide clarification as to what an applicant will need to provide to show “good standing” with their local jurisdiction. Proof of good standing must be evidenced by a document issued or signed by the local jurisdiction that contains the following:

  1. Name of the applicant;
  2. Address of the premises to be licensed;
  3. License type that the applicant is applying to the bureau for;
  4. Name of the local jurisdiction;
  5. Name of the local jurisdiction office that issued the license, permit, or other authorization for the applicant to conduct commercial cannabis activity in the jurisdiction as required by Business and Professions Code section 19320;
  6. Name and contact information for the person authorized by the local jurisdiction to sign on its behalf;
  7. Signature of the person authorized to sign on behalf of the local jurisdiction; and
  8. A statement to the effect of: “The above named party has been issued a license, permit, or other authorization from this jurisdiction to conduct commercial cannabis activity. The above named party began operation and was in good standing in this jurisdiction on or before January 1, 2016.”

Of course, the proposed rules wouldn’t be complete without at least some ambiguity. The rules not only state that an applicant must have been operating and in good standing with the local jurisdiction prior to January 1, 2016, but also that the applicant’s “business ownership or premises are currently the same as they were on January 1, 2016.” We are still seeking clarification from the BMCR on this one, as it is unclear whether the entity structure and ownership must be exactly the same, whether a board member of a non-profit mutual benefit corporation could apply on behalf of that company, whether ownership doesn’t matter so long as the premises are currently the same as they were on January 1, 2016, etc. This provision leaves room for interpretation, and we anticipate having a better idea of what this requirement will entail by the time the rules are finalized.

Even though there is some ambiguity in the proposed rules, if you think you may qualify for priority review in licensing, now is the time for you to begin gathering your documentation to prove the date on which you began operating, as well as proof that you were in compliance with local law.

California cannabis manufacturing lawNow that California’s Department of Public Health (through its Office of Manufactured Cannabis Safety) has released its initial rules for cannabis manufacturing, our California cannabis attorneys are fielding numerous calls from existing cannabis businesses (along with new entrants into the field) with a simple question: How do these rules affect me? Last week we covered some of the technical provisions of the rules. Since the regulations for manufacturing come in at a hefty 95 pages, I thought it would be helpful to go over some more rules and how they can affect your cannabis manufacturing business in California. First, it’s important to note that these regulations may change after the public and interested stakeholders have a chance to comment on them, but this is still a significant first step in clarifying what was previously a confusing landscape. The regulations for manufacturing are a clear and effective attempt by California to enact robust regulation to comply with the Cole Memo issued by the U.S. Department of Justice. Here are some areas of importance for anyone looking to engage in cannabis manufacturing in the Golden State:

Types of Licenses. The regulations state that California’s Department of Public Health will issue four types of licenses: Type P, Type N, Type 6, and Type 7. Type N licensees can conduct infusions and can package and label their own products while Type P licensees can do only packaging and labeling for other licensed cannabis manufacturers. Type 6 (non-volatile) and Type 7 (volatile and non-volatile) licensees can conduct extractions and infusions, and can package and label their own products. If you obtain a license there are two important things you need to consider: 1) Unless you obtain a type 7 license you will need to submit a new application if you want to change the type of manufacturing you are conducting; and 2) You need to be sure your cannabis manufacturing operations are in a location that can be sustained because relocating any portion of your manufacturing operation to new premises will require you submit a new license application.

DON’T PROCRASTINATE! If you have a cannabis manufacturing business that is legally operating in California before January 1, 2018, you will be able to continue operating it until the Department of Public Health approves or denies your application. This is extremely important considering it’s the next best thing to getting priority of review – which only applies to cannabis manufacturers that were operating and in good standing with their local jurisdiction as of January 01, 2016.

DO YOU REALLY KNOW YOUR BUSINESS PARTNER?! We’ve already covered who is considered an owner under California’s new cannabis regulations and it’s important you go over the ownership classifications because it can have profound implications on your business. Your application can be denied for a number of acts that your business partner may have committed. Strict attention must be paid to past acts because these prior offenses can torpedo your application and they’re not all obvious. Ever heard of the California Food Sanitation Act? How about the Sherman Food, Drug, and Cosmetic Law? You don’t need to know them inside and out but you do need to make sure your business partner never violated either of those acts because they can be grounds for denying your application.

DON’T EVEN THINK ABOUT IT. The rules state that no applicant or associated applicant shall hold a Type 8 (testing) or Type 11 (distribution) license. The rules also state “a manufacturer licensee shall not manufacture, prepare, package or label any products other than cannabis products at the licensed premises.” If you hoped to merge your cannabis manufacturing operation with a non-cannabis business for increased efficiency, sorry but NO SOUP FOR YOU. Lastly, the rules prohibit a manufacturer licensee from subletting any portion of the licensed premises.

These proposed regulations for cannabis manufacturers could not have come out at a better time, as the lack of legal specificity for cannabis manufacturing had been dampening the enthusiasm and desire of those looking to operate a marijuana manufacturing business in California. Before these new rules issued, our California cannabis attorneys were starting to see a slow but steady increase in sophisticated clients looking to start a California cannabis manufacturing business, but even just since they have come out the number has soared.

California cannabis retailer rules
California medical cannabis retailer rules

This post is on California’s initial rules governing medical cannabis retailers as part of our ongoing series analyzing California’s initial medical cannabis rules pursuant to the Medical Cannabis Regulation and Safety Act (“MCRSA“). For information regarding the licensing rules for California cannabis manufacturers and cultivators, go here and here.

The MCRSA defines “dispensary” as “a facility where medical cannabis, medical cannabis products, or devices for the use of medical cannabis or medical cannabis products are offered, either individually or in any combination, for retail sale, including an establishment that delivers, pursuant to express authorization by local ordinance, medical cannabis and medical cannabis products as part of a retail sale.” There are  two kinds of dispensary licenses under the MCRSA: Type 10 for a general dispensary and Type 10A, defined as just a “dispensary.”

The MCRSA restricts vertical integration of cannabis licenses by limiting applicants to one or two licenses in certain separate licensing categories (Governor Brown’s Trailer Bill will change this if it passes this summer). A Type 10 licensee can only be a retailer and until January 1, 2026, a Type 10A licensee can be a retailer at no more than three retail locations by holding three separate Type 10 licenses: that of a manufacturer and a cultivator (so long as the Type 10A license has no more than four acres of total canopy size of cultivation throughout the state).

In addition to the mandatory submissions for “owners” and their spouses we discuss here, California cannabis retailers must also submit a complete list of every individual with a non-controlling interest in the retailer, though there are no indications non-controlling interest holders will be vetted by the state in the same way “owners” will be.

Retail applicants must submit all of the following to the State of California as well:

  1. A list of funds belonging to the retailer held in savings, checking, or other accounts maintained by a financial institution.
  2. A list of investments made into the retailer entity.
  3. A list of all gifts of any kind given to the retailer for its use in conducting commercial cannabis activity.
  4. Whether an owner or their spouse has a financial interest in any other cannabis license. “Financial interest” means an investment into a commercial cannabis business, a loan provided to a commercial cannabis business, or any other equity interest in a commercial cannabis business.
  5. A list of all convictions (excepting juvenile crimes and traffic infractions under $300 that didn’t involve alcohol, controlled substances, or dangerous drugs) as well as a rehabilitation list for each conviction.
  6. Application for fingerprints through the Department of Justice.
  7. Documentation issued by the local jurisdiction in which the applicant proposes to operate certifying the applicant is in compliance with all local ordinances and regulations, or will be in compliance with all local ordinances and regulations by the time the Bureau issues a license.
  8. Evidence that the proposed dispensary location is at least a 600-foot radius from any school. In addition, the retail premises must be in a contiguous area and may only be occupied by one licensee, and retailers cannot sublet any portion of the retail premises.
  9. If you have 20 or more employees, an attestation that the applicant has entered into a labor peace agreement and you must provide a copy of that agreement.
  10. A $5,000 surety bond.
  11. A scaled diagram of the dispensary premises that shows “the boundaries of the property and the proposed premises to be licensed, showing all boundaries, dimensions, entrances and exits, interior partitions, walls, rooms, windows, doorways, and common or shared entryways. The diagram must show the areas in which all commercial cannabis activities will take place, including but not limited to, limited-access areas.”
  12. A list of your quality assurance, security, and inventory practices.
  13. Proof of acknowledgement from the dispensary property owner that you can use the property for dispensing and a copy of your lease agreement if you have it. Or if you own the property, provide the deed.

Regarding retailer operational standards, the retailer is responsible for sufficiently tracking and tracing all of its inventory and for record keeping — certain records must be kept for at least seven years. The retailer must also follow all security, surveillance (including installation of 24-hour recording cameras of a certain pixellation that covers certain areas of the operation by a specific number of feet), alarm, and premises access requirements. The retailer is also responsible for cannabis waste-management destruction and disposal. And though California cannabis retailers cannot package or label any cannabis goods, they still must provide “exit packaging” for products, which basically means re-sealable and opaque child resistant packaging. And if a retailer discovers any defective product, it may return the medical cannabis goods only in exchange for a non-defective version of the same medical cannabis goods. So, no cash refunds.

As far as customers go, between the hours of 6 a.m. to 9 p.m., only verified qualified patients or primary caregivers over 18 can freely shop in the dispensary. Nonetheless, anybody younger than 18 can enter the dispensary to purchase medical cannabis goods if they are a medical cannabis patient accompanied by their parent, legal guardian, or primary caregiver. Customers are free to inspect medical cannabis goods through secured containers, but no sampling is allowed. A customer purchase no more than 8 ounces in a single day, unless their physician’s recommendation authorizes more.

Under the MCRSA, “delivery” means “the commercial transfer of medical cannabis or medical cannabis products from a dispensary, up to an amount determined by the bureau to a primary caregiver or qualified patient . . .  or a testing laboratory.” “Delivery” also includes “the use by a dispensary of any technology platform owned and controlled by the dispensary . . . that enables qualified patients or primary caregivers to arrange for or facilitate the commercial transfer by a licensed dispensary of medical cannabis or medical cannabis products.” So long as city or county law allows for delivery, dispensaries must deliver all product themselves; they cannot use a third party contractor or courier to do it. All deliveries must be done in person by a retail employee who’s at least 21, and all deliveries have to go to physical addresses in California. When making deliveries, dispensary employees cannot carry more than $3,000-worth of cannabis goods at any time. No delivery can be made to an address on “publicly owned land or any address on land or in a building leased by a public agency.” Finally, delivery hours are from 6 a.m. to 9 p.m.

These rules are currently in a 45-day comment period and are by no means final. So, stay tuned to see if and when the Bureau makes additional changes. I am sure these rules seem onerous to many of you, and they are. But for what it is worth, they are in many respects very similar to the laws in various other states where we have helped our clients secure cannabis licenses — Oregon, Washington, Colorado, Nevada and Alaska, for instance — and so as difficult as they may seem, it is certainly possible to satisfy them.
California cannabis cultivation license
California cannabis cultivation licensing procedures. Maze-like.

The Medical Cannabis Regulation and Safety Act (“MCRSA”) left us with many questions regarding how cannabis cultivation would be regulated. But now that the California Department of Food and Agriculture (“DFA”), through its CalCannabis Cultivation Licensing division, dropped 58 pages of proposed regulations for the Medical Cannabis Cultivation Program we have plenty of answers. Though these rules are not final, they provide us with the general framework for the forthcoming medical cannabis cultivation (and processing) licensing regime in California.

“Cultivation” means any activity involving planting, growing, harvesting, drying, curing, grading, or trimming of cannabis. And “Processing” means all activities associated with drying, curing, grading, trimming, storing, packaging, and labeling of nonmanufactured cannabis products. The rules define “Nonmanufactured cannabis product[s]” as dried flower, shake, leaf, and pre-rolls intended to be sold for use by medical cannabis patients. Nurseries are also encompassed within the cultivation rules, and are defined as licensees that produce only clones, immature plants, seeds, and other agricultural products used specifically for the planting, propagation, and cultivation of medical cannabis. The rules governing cannabis manufacturing, including extraction and infusion, were developed by the Department of Public Health.

The DFA will offer 14 different cultivation licenses (including the initial application fee – a higher annual license fee will also be required), as follows:

  1. Specialty Cottage Outdoor ($65) – an outdoor cultivation site with up to 25 mature plants;
  2. Specialty Cottage Indoor ($100) – an indoor cultivation site with 500 square feet or less of total canopy;
  3. Specialty Cottage Mixed-Light ($285) – a mixed-light cultivation site with 2,500 square feet or less of total canopy;
  4. Specialty Outdoor ($130) – an outdoor cultivation site with less than or equal to 5,000 square feet of total canopy, or up to 50 mature plants on noncontiguous plots;
  5. Specialty Indoor ($1,070) – an indoor cultivation site between 501 and 5,000 square feet of total canopy;
  6. Specialty Mixed-Light ($555) – an indoor cultivation site between 2,501 and 5,000 square feet of total canopy;
  7. Small Outdoor ($265) – an outdoor cultivation site between 5,001 and 10,000 square feet of total canopy;
  8. Small Indoor ($1,935) – an indoor cultivation site between 5,001 and 10,000 square feet of total canopy;
  9. Small Mixed-Light ($1,105) – a mixed-light cultivation site between 5,001 and 10,000 square feet of total canopy;
  10. Medium Outdoor ($765) – an outdoor cultivation site between 10,001 square feet and one acre of total canopy;
  11. Medium Indoor ($4,260) – an indoor cultivation site between 10,001 and 22,000 square feet of total canopy;
  12. Medium Mixed-Light ($2,435) – a mixed-light cultivation site between 10,001 and 22,000 square feet of total canopy;
  13. Nursery ($60) – cultivation of cannabis solely as a nursery; and
  14. Processor ($310) – a cultivation site that conducts only trimming, drying, curing, grading or packaging of cannabis and nonmanufactured cannabis products.

The basic background and corporate information required for the cultivation license application will be nearly identical to the information required of applications for manufacturing, retail, distribution and transportation licenses. Once the application becomes available in early 2018, applicants will need to submit required background information on all owners. An “owner” is the CEO or any person or entity within a publicly traded company that has, in aggregate, greater than a 5% ownership interest and, for all other business entity applicants, “owner” means any individual who has, in aggregate, greater than a 20% ownership interest (excluding the ownership of a security interest in, lien on, or any other encumbrance of the business entity applicant). And if there’s a business that has an ownership stake of greater than 20% in the entity applying to the state, its CEO and all directors are considered owners. Finally, an individual is considered an owner if he or she participates in directing, controlling, or managing the applicant. This includes “discretionary powers” to, among other things, direct and/or control the hiring and firing of personnel, contracting for the sale of goods on behalf of the applicant, and making policy decisions on behalf of the applicant.

As with the other license types, if an owner is married, their spouse does not need to go through the rigorous background check process or get fingerprinted, so long as he or she is not an Owner of the applicant, as defined above, although the spouse must nevertheless be disclosed to the state.

Applicant owners will need to provide the state with a detailed description of any criminal convictions, excepting juvenile adjudications and traffic infractions. Cultivation license applicants must also provide a statement of rehabilitation for each conviction. This statement must be written by the owner and contain all evidence the application would like the DFA to consider that demonstrates the owner’s fitness for licensure. Such evidence may include a certificate of rehabilitation under Section 4852.01 of the Penal Code, or dated letters of reference from employers, instructors, or professional counselors that contain valid contact information for the person providing the reference.

With regard to the cultivation site, applicants must provide evidence that the applicant has the legal right to occupy and use the proposed location. If the applicant is the owner of the location, this evidence should include a copy of the title or deed to the property. If the applicant is not the owner of the property, the applicant shall provide the DFA with the following:

  1. A document from the property owner that states the applicant has the right to occupy the property and acknowledges that the applicant may use the property for commercial cannabis cultivation;
  2. Property owner’s mailing address and phone number; and
  3. Copy of the lease or rental agreement, or other contractual documentation.

All cannabis cultivation sites must be located at least a 600-foot radius from a school, as defined by Section 11362.768 of the Health and Safety Code. Applicants will also need to show they have a valid seller’s permit, or are currently applying for a seller’s permit, have obtained a surety bond in the amount of not less than $5,000, payable to the DFA, have permits issued by the applicable Regional Water Quality Control Board or State Water Resources Control Board (the rules contain very detailed requirements for proving that water for cultivation is properly sourced), and have conducted a hazardous materials record search of the EnviroStor database for the proposed premises, among many other requirements.

Importantly, applicants will also need to show that they are either operating in compliance with, or that their location will comply with, applicable local law, and that the necessary local permits and approvals have been obtained. With local regulations varying widely from city to city, and county to county, it will be critical to get a head start on ensuring local law compliance for your cultivation business.

The details on “priority status” can be found here, and for cultivation businesses that do not meet the requirements for priority status, but were operating prior to January 1, 2018, the state will provide a grace period for operations during the license application status. If a cultivation business was in operation prior to January 1, 2018, it may continue to operate while its application is pending if a completed application is submitted to the DFA no later than 5:00 pm PST on July 2, 2018, and the continued operations of the applicant are the same activities in which the applicant is seeking licensure. If the license application is denied, the applicant must cease operating until a license is obtained.

The DFA will not restrict the total number of cultivation licenses a person is authorized to hold, so long as that person’s total licensed canopy does not exceed 4 acres. Unless a person has a Producing Dispensary license, that person shall be limited to one Medium Outdoor, or one Medium Indoor, or one Medium Mixed-Light license. Additionally, the rules state that multiple cultivation licenses and license types may be located on the same property, but each licensed premises must have a unique entrance and immovable physical barriers between each uniquely license premises.

We’ll be delving more deeply into the additional requirements for cannabis cultivation licenses in the coming weeks, including operational and site requirements. And we’ll also be breaking down the rules for cannabis transportation, distribution and retailers in a forthcoming post.

Stay tuned.

California Cannabis lawyersThough the Medical Cannabis Regulation and Safety Act (“MCRSA“) initially failed to specifically define the term “manufacturer,” California finally rectified the situation with the Department of Public Health’s Office of Manufactured Cannabis Safety‘s release of the initial MCRSA manufacturing rules last Friday.

“Manufacturer” now means the production, preparation, propagation, or compounding of cannabis products, including extraction processes, infusion processes, the packaging or repackaging of manufactured medical cannabis or medical cannabis products, and labeling or relabeling the packages of manufactured medical cannabis or medical cannabis products.

In addition, “manufacturing” or “manufacturing operation” means all aspects of the extraction and/or infusion processes, including processing, preparing, holding, storing, packaging, or labeling of cannabis products. Manufacturing also includes any processing, preparing, holding, or storing of components and ingredients.

We also know what nonvolatile and volatile solvents mean, which terms were previously undefined in the MCRSA.which This is important because it will determine what kind of California cannabis manufacturing license you’ll get. “Nonvolatile solvent” means any solvent used in the extraction process that is not a volatile solvent, including carbon dioxide. “Volatile solvent” means any solvent that is or produces a flammable gas or vapor that, when present in the air in sufficient quantities, will create explosive or ignitable mixtures. The state’s examples of volatile solvents include, butane, hexane, propane, and ethanol. A Type 6 cannabis manufacturing licensee can only use nonvolatile solvents, but a Type 7 licensee can use both nonvolatile and volatile solvents in its extractions and infusions.

There are also additional manufacturing license types in the initial rules that weren’t included in the MCRSA. A “Type P” license is for entities that only package or repackage medical cannabis products or label or relabel the cannabis product container to go to retail. Entities that engage in packaging or labeling of their own product as part of the manufacturing process do not need to hold a separate Type P license. There is also a “Type N” license for manufacturers that produce edible products or topical products using infusion processes, or other types of medical cannabis products other than extracts or concentrates, and that do not conduct extractions. The Type P and Type N licenses are subject to the same restrictions as a Type 6 license.

Overall, only certain kinds of extractions are allowed for the manufacturing licensee. The state mandates the only cannabis manufacturing allowed is mechanical extraction, such as screens or presses; chemical extraction using a nonvolatile solvent such as a nonhydrocarbon-based or other solvent such as water, vegetable glycerin, vegetable oils, animal fats, or food-grade glycerin; chemical extraction using a professional closed loop CO2 gas extraction systems; chemical extraction using a volatile solvent; and any other method authorized by the state. All chemical extractions must take place within a professional, closed-loop system, which also has its own state law requirements. The rules also contain strict packaging and labeling requirements, require all personnel to be sufficiently trained, and mandate that the manufacturing licensee must ensure strict quality assurance processes and protocol, including for recalls and product complaints.

Importantly, the manufacturing rules also tell us what kinds of manufactured products can be on the market in addition to their potency limitations. California isn’t going to allow cannabis-infused alcohol, caffeine, or nicotine products and no cannabis product can be made of “potentially hazardous food.” Potentially hazardous food means any food “capable of supporting the growth of infectious or toxigenic microorganisms when held at temperatures above 41 degrees Fahrenheit.” Products that have to be refrigerated at a temperature of less than 41 degrees and any dairy or meat products are also not allowed. Edibles can’t contain more than 10 milligrams of THC per serving or more than one hundred 100 milligrams of THC per package of finished product. And, for non-edible manufactured cannabis, no finished package can contain more than 1000 milligrams of THC.

Lastly, the initial licensing fee for a manufacturer license applicant is $1,000 for each application filed. Then the annual license fee is on a sliding scale based on the licensee’s annual gross revenue, starting at $2,000 if you’re making up to $100,000 on up to a $50,000 annual license fee if you’re making over $5 million yearly.

Overall, California’s manufacturing rules don’t break the mold. Their manufacturing standards appear to fairly closely track the other regulated cannabis states and even mirror some of the manufacturing regulations in the adult use states. And, though these are just the initial rules, we don’t expect much change other than the probable addition of more prohibited products to the list of no-gos, such as other states have done when it comes to gummy bears or other products that may appeal to kids.

California cannabis lawIt’s finally happened. Three of the California agencies implementing the Medical Cannabis Regulation and Safety Act (“MCRSA”) released their initial draft rules last Friday. These long-awaited rules make up the bulk of the regulatory standards for: transportation, distribution, and retailers (as developed by the Bureau of Medical Cannabis Regulation/Bureau of Marijuana Control); cultivation (as developed by the Department of Food and Agriculture through its CalCannabis Cultivation Licensing arm); and manufacturing (as developed by the Department of Public Health through its Office of Manufactured Cannabis Safety).

Within their 209 pages of regulatory mandates, these rules are a serious step toward California finally bringing its entrenched medical cannabis marketplace in line with federal enforcement priorities. Though our California cannabis attorneys will be blogging in depth about each license type and their respective regulations in the upcoming week, we wanted to first provide you with a brief overview of these initial rules. This post does that by highlighting the basic requirements under each set of the initial rules.

Under the initial rules, the basic background and corporate information submissions to the state are nearly identical for cultivators, manufacturers, retailers, distributors, and transporters. Each of these license types will have to submit to the state required background information on all owners. An “owner” is the CEO or any person or entity within a publicly traded company that has, in aggregate, greater than a 5% ownership interest and, for all other business entity applicants, “owner” means any individual who has, in aggregate, greater than a 20% ownership interest — excluding the ownership of a security interest in, lien on, or any other encumbrance of the business entity applicant. And if there’s a business that has an ownership stake of greater than 20% in the entity applying to the state, its CEO and all directors are considered owners. Lastly, an individual is considered an owner if he or she participates in directing, controlling, or managing the applicant, which includes “discretionary powers” to, among other things, direct and/or control the hiring and firing of personnel, contracting for the sale of goods on behalf of the applicant, and making policy decisions on behalf of the applicant.

If an owner is married, the spouse does not have to go through the intense background checking process or get fingerprinted so long as he or she is not an owner in or controlling the applicant. Either way though, the spouse must be disclosed to the state.

The rules also require applicants submit to the state the first and last name of a primary contact person for the application and the organizational structure of the applicant. Applicants must also submit a copy of their business formation documents. The rules nowhere prohibit out-of-state companies from applying for licenses so long as they are registered to do business in the State of California. All owners must be disclosed to the state along with their stated ownership interest in the applicant and they also must disclose if they (or their spouse) have a “financial interest” in any other licensee applicant, which includes any “investment in a commercial cannabis business, a loan provided to a commercial cannabis business, or any other equity interest in a commercial cannabis business.”

For retailers, distributors, transporters, and cultivators, owners must also supply a detailed description of any convictions, excepting juvenile adjudications and traffic infractions. Owners of retailers, distributors, and transporters need not disclose traffic infractions under $300 “that did not involve alcohol, dangerous drugs, or controlled substances.” Owners of manufacturing businesses must disclose all convictions substantially related to operating a manufacturing facility in addition to a specific list of other convictions that can be found at Section 40128(3)(A) of the manufacturing rules. Depending on license type, owners may or must also provide a statement of rehabilitation for each conviction.

Retailers, distributors and transporters will face the most financial scrutiny as the state will require that they submit the following:

  1. A list of funds belonging to the commercial cannabis business held in savings, checking, or other accounts maintained by a financial institution.
  2. A list of investments made into the commercial cannabis business; and
  3. A list of all gifts of any kind given to the applicant for its use in conducting commercial cannabis activity.

Notably, none of the rules for any license type contain any residency requirements on ownership, financing, or investment. These licenses will not be transferable and any change of ownership structure will require either a new license application or at least notification to the regulating agency before it can happen.

The rules also mandate that applicants provide a premises diagram along with other substantive information about their operations, including security layouts and plans, surveillance standards, standard operating procedures, and quality assurance controls and practices. All applicants must also submit proof of their right to their real property location that demonstrates they can use it for their specific license type. Every applicant that employs more than 20 employees must also provide a copy of its labor peace agreement to the state. And, though Governor Brown’s technical fix bill hasn’t passed yet, all license applicants must demonstrate either prior compliance with or the capability of compliance with local law before they can receive a California state license.

Priority status” has also finally been defined across the license categories. Generally, the MCRSA states that “In issuing licenses, the licensing authority shall prioritize any facility or entity that can demonstrate to the authority’s satisfaction that it was in operation and in good standing with the local jurisdiction by January 1, 2016.” All of license types must show their ownership or premises are currently the same as they were by January 1, 2016 and also that they are in “good standing.” Proof of “good standing” is generally met by providing the state “a document issued or signed by the local jurisdiction that contains: the name of the applicant; the address of premises to be licensed; the name of the office that issued the local license, permit, or other authorization; the name, contact information, and signature of the individual authorized to sign on behalf of the local jurisdiction; and a statement to this effect: The above-named party has been issued a license, permit, or other authorization from this jurisdiction to conduct commercial cannabis activity. The above-named party is currently in operation and is operating in good standing in this jurisdiction.” And in order to prove the date on which commercial cannabis activity began before January 1, 2016, all priority license applicants have to show their dated articles of incorporation, certificate of stock, articles of organization, certificate of limited partnership,  statement of partnership authority, tax form(s), local license, permit, or other written authorization, collective or cooperative membership agreement, receipts, or any other business record.

Overall, these rules are a pretty thorough first shot out of the gate for regulating commercial cannabis activity in California. Nonetheless, these are draft rules and that means what you are seeing now will no doubt be different from what comes out in their final version. The three California agencies tasked with these regulations will be holding public hearings in June to get feedback on these rules, so, if you are in the process of mapping out the future of your California cannabis business, you should keep an eye on these initial rules and their evolution so you can plan accordingly.

Oregon cannabis attorneys lawyersWe often work with Oregon cannabis companies that undergo ownership changes either during the licensing process, or shortly after license issuance. In some cases, this happens by design: the company is structured to take on investors, and the offering process overlaps with the state license application. In other cases, an LLC member or a corporate shareholder may depart due to a buyout or disagreement. Whatever the situation, ownership transitions require careful consideration of the state of the license, or pending application.

As with all states that license pot businesses, Oregon has rules around required disclosures before the state will issue a license. The look-see process in Oregon is similar to that for liquor licensing — and both licenses are given by the Oregon Liquor Control Commission (OLCC). In short, Oregon wants to ensure: (1) it is not issuing cannabis licenses to undesirable parties; (2) it can follow the money a cannabis business will generate (or at least try to); and (3) it has satisfied the feds that the state is running a tight ship. The specific disclosure criteria apply not only to license issuance, but to changes, as well.

Compared to other states, Oregon is straightforward when it comes to changing the ownership structure of a cannabis licensee– at least in the minds of us attorneys, and at least under the most recently adopted version of the Oregon rules. Here are two key rules to note:

  • OAR 845-025-1160(4) provides that “[a] licensee that proposes to change its corporate structure, ownership structure or change who has a financial interest in the business must submit a form prescribed by the Commission… prior to making such a change.”
  • OAR 845-025-1160(4)(d) provides that “[i]f a licensee has a change in ownership that is 51% or greater, a new application must be submitted in accordance with OAR 845-025-1030.

Let’s take them one at a time. Read literally, OAR 845-025-1160(4) requires any licensed cannabis business to notify the OLCC before making an ownership change. This would include a business bringing on a minority investor, given the broad definition of “financial interest” elsewhere under the rules. That said, OLCC policy is not to read this rule as written in every case. Instead, if a licensed cannabis business wishes to add a party who does not rise to the level of an “applicant,” it may do so prior to alerting the OLCC. For guidance on who must be listed as an “applicant,” start here.

When the rules around “financial interests,” “applicants” and changes in ownership were revised again in January, we had several Oregon cannabis clients undergoing structural changes. Our lawyers worked with the OLCC to gain an understanding of the new rules and policies in the context of these changes, but we cannot say whether the agency’s policies will remain flexible on the timing of disclosure of non-applicant ownership changes. That is the story today, however, and we are pleased that the OLCC has taken this pragmatic approach.

With respect to OAR 845-025-1160(4)(d) and ownership shake-ups of 51% or more, there is no wiggle room in the “new application” criterion. We have written before that you cannot sell an Oregon license: instead, the OLCC works with the new applicant and the outgoing licensee concurrently. Assuming the incoming party is eligible for licensure, the OLCC arranges with the departing licensee to surrender its papers on the day the new license issues.

Ultimately, we do not recommend that an applicant or licensee make changes of any type to its ownership structure without first alerting the OLCC and we strongly recommend our clients run these changes by us first as well. This ensures the proper steps are taken so as to avoid violating some internal company agreement or governing law and it also ensures that the company paperwork is properly executed, whether it’s a buy-sell agreement, admission agreement, or other species of contract.

Finally, we recommend that thoughtful consideration be given to business structure and composition before applying for licensure. It may be tempting to acquire your cannabis business license as quickly as possible and then sort out your ownership issues on the back end, but this approach creates headaches that may be difficult or even impossible to cure. It’s good to understand Oregon’s change-in-ownership rules, but it’s better not to have to use them.

Washington State cannabis lawyers

The Washington State Legislature recently passed SB 5131, which contains many tweaks to Washington’s cannabis laws. The measure now awaits signature by Washington Governor Jay Inslee. Here are ten ways SB 5131 could change Washington’s marijuana market if Governor Inslee signs it into law:

  1. Homegrown Marijuana. SB 5131 would allow licensed marijuana producers to sell immature cannabis plants, clones, and seeds to qualifying patients who enter the state’s medical marijuana database. Patients who choose not to enter the database may grow up to four plants in their homes under current Washington law and it’s not clear how those patients would legally acquire immature plants, clones, or seeds in light of SB 5131. Additionally, the Washington State Liquor and Cannabis Board (“LCB”) must examine the viability of allowing recreational users to grow their own marijuana in a way that complies with the enforcement priorities outlined in the Cole Memo.
  2. Retail License Ownership. Under this bill, a retailer or individual “with a financial or other ownership interest in” a retail license can own up to five retail licenses. Current Washington State law limits an individual from having an ownership interest in more than three licensed retailers.
  3. Forfeiting applications. The bill would require the LCB forfeit retail licenses that have been issued but are not operational and open to the public after two years unless the delay in opening and getting operational is due to circumstances beyond the licensee’s control. However, the LCB may not require forfeiture if the licensee has been unable to open because of a town or county’s moratorium prohibiting a retail cannabis store or because zoning, licensing or other regulatory measures prevent the retail store from opening.
  4. Processing Hemp. The LCB must study the viability of allowing licensed processors to process industrial hemp grown in Washington. This could eventually lead to legislation that would allow processors to purchase cannabis plant material from farmers licensed to grow industrial hemp. Currently, processors may only purchase products from licensed cannabis producers or other processors.
  5. Advertising. SB 5131 would make the following substantial changes to cannabis advertising laws in Washington.
    1. Advertising to Kids. The bill would prohibit marijuana licensees from taking “any action directly or indirectly to target youth in the advertising, promotion, or marketing of marijuana and marijuana products, or take any action the primary purpose of which is to initiate, maintain, or increase the incidence of youth use of marijuana or marijuana products.” This includes prohibiting using toys, movie or cartoon characters, or other images that would cause youth to be interested in marijuana. It also prohibits using a “commercial mascot” which is defined as “a live human being, animal, or mechanical device used for attracting the attention of motorists and passersby so as to make them aware of marijuana products or the presence of a marijuana business.” This includes inflatable tube displays, persons in costumes, and sign spinners. Cities and counties would be free to further restrict marijuana advertising.
    2. Outdoor Advertising. Billboards visible from any street, road, highway, right-of-way, or public parking area cannot be used to advertise cannabis, except that a marijuana retailer may use a billboard solely to identify the name or nature of  its business and directions to its retail store. Outdoor signs could not contain depictions of marijuana plants, products, or images that appeal to children. Outdoor advertising would be prohibited in “arenas, stadiums, shopping malls, fairs that receive state allocations, farmers markets, and video game arcades.” A limited exception would allow outdoor advertising at events where only adults are permitted.
  6. Gifting Marijuana. Adults twenty-one and over would be allowed to deliver marijuana to other adults so long as the marijuana is offered as a gift without financial remuneration and so long as the amount of marijuana gifted is no more than the amount an adult can legally possess in Washington — one ounce of useable marijuana flower.
  7. Licensing. This bill would allow a licensed marijuana business to enter into licensing agreements or consulting contracts “with any individual, partnership, employee cooperative, association, nonprofit corporation, or corporation” for goods or services, trademarks, and trade secrets or proprietary information. Licensees would be required to disclose these agreements to the LCB.
  8. Public Disclosure. SB 5131 would exempt trade secrets and other proprietary information of a licensed marijuana business from disclosure under Washington’s Public Disclosure Act.
  9. “Organic” Weed. The bill instructs the LCB to adopt regulations for marijuana similar to products certified as organic under federal regulations. The organic standard is granted pursuant to federal regulations and because marijuana is illegal under federal law, it cannot qualify under those federal standards. The LCB would adopt regulations so that marijuana could be grown in a way that mimics organic products. The products then could be labeled as compliant with the state’s standards.
  10. Tribal Oversight. SB 5131 would require the LCB receive approval from a federally recognized Indian Tribe before granting a license on tribal land.

Governor Inslee is likely to sign SB 5131 into law, though he may veto certain parts of the bill. Stakeholders in Washington’s cannabis market should keep an eye on this legislation and prepare to make changes necessary to comply with SB 5131 if and when it gets signed.

UPDATE: On May 16, 2017, Governor Inslee signed SB 5131 without vetoing any sections of the bill.

California cannabis San BernardinoCalifornia has 58 counties and 482 incorporated cities across the state, each with the option to create its own rules or ban marijuana altogether. In this California Cannabis Countdown series, we plan to cover who is banning, who is waiting, and who is embracing California’s change to legalize marijuana — permits, regulations, taxes and all. For each city and county, we’ll discuss its location, history with cannabis, current law, and proposed law to give you a clearer picture of where to locate your cannabis business, how to keep it legal, and what you will and won’t be allowed to do.

Our last California Cannabis Countdown post was on Yuba County, and before that, Marin CountyNevada County, the City of Lynwood, the City of CoachellaLos Angeles County, the City of Los Angeles, the City of Desert Hot SpringsSonoma County, the City of Sacramento, the City of BerkeleyCalaveras CountyMonterey County and the City of Emeryville.

Welcome to the California Cannabis Countdown.

Location. Ah, San Bernardino County, part of the fearsomely named Inland Empire. The county is located in southern California and it is the fifth most populous county in the state and the twelfth most populous county in the United States. With a geographical area covering 20,105 square miles, San Bernardino County is the largest county by area in the United States. When you fly into San Bernardino County for the first time you’ll probably take a second look at your ticket when you see Ontario as your destination. You will also notice the majestic San Gabriel Mountains and you’ll also feel the winds whipping off of them and making you wish you had driven and not flown.

History with Cannabis and Current Cannabis Laws. In 2011, the San Bernardino Board of Supervisors adopted ordinance No. 4140 banning medical marijuana dispensaries and outdoor cultivation in the Count’s unincorporated areas, with a minor exemption for one or two people to cultivate their own cannabis indoors. It wasn’t then surprising that the Board of Supervisors moved in 2016 to ban all commercial cannabis activities within San Bernardino County with ordinance 4309 (now Chapter 84.34 of the County Code). Section 84.34.040 of this new ordinance provides for the following exemptions:

The prohibition concerning commercial cannabis activity does not apply to a person with an identification card cultivating cannabis for his or her personal medical use or to a primary caregiver cultivating cannabis for the personal medical use of no more than five specified persons with identification cards, subject to the following requirements:

(a)     The cannabis is not sold, distributed, donated, or provided to any other person or entity.

(b)     A primary caregiver may only receive compensation in full compliance with Health and Safety Code § 11362.765, subdivision

(c)       Cultivation may only be conducted indoors at the private residence of the person with an identification card or the primary caregiver of the person with an identification card.

(d)       Cultivation shall be limited to no more than:

(1)         Twelve cannabis plants per person with an identification card or primary caregiver per private residence; and,

(2)       An aggregate total of 24 cannabis plants per private residence when more than one person with an identification card or primary caregiver lives at the private residence.

Proposed Cannabis Laws. Though San Bernardino County still stubbornly maintains a restrictive stance towards marijuana, the residents of the City of San Bernardino voted for Measure O on November 8, 2016. Measure O, known as the San Bernardino Regulate Marijuana Act of 2016, authorizes the City of San Bernardino to regulate both medical and recreational cannabis businesses consistent with California State law. Measure O’s implementation has however been delayed by two lawsuits asserting that its zoning restrictions too narrowly constrict the areas within the city in which a cannabis business can operate. Though it is unfortunate these lawsuits are delaying the issuance of City of San Bernardino cannabis licenses, it is at least good to see progress being made on cannabis in the Inland Empire. San Bernardino County and many of its cities still prohibit marijuana businesses but we see many other cities within the county and the rest of Inland Empire following the City of San Bernardino’s lead within the next year.

 

 

Marin County MarijuanaThough I just wrote about Marin County as part of our Cannabis Countdown series a few weeks ago, there have been major changes since then that warrant this update. Let’s start with a quick recap. In December of 2015 Marin County passed an ordinance (effective in February of 2016) giving its Board of Supervisors authority to license medical cannabis dispensaries in unincorporated Marin. This ordinance allowed up to four dispensaries in two zoned areas. Ten applications were submitted to the Marin County Board of Supervisors and open to public hearings.

I attended those meetings and left with the impression that most of the applicants were not properly prepared to deal with the public opposition they faced. The applicants were outmatched on issues like dispensary location and partner selection and they clearly had not invested sufficient time in garnering support from the local community. The County Administrator, Matthew Hymel, obviously felt the same way as he rejected all ten of the applications for a Marin County medical cannabis dispensary per the following statement:

After reviewing 10 vendor and site locations, the County Administrator has not approved any of the applications and has recommended a revised approach to licensing medical cannabis dispensaries in unincorporated areas.

After reviewing license applications and considering comments from the public, a volunteer advisory committee, and County staff, the County Administrator notified all the applicants that he was not approving their applications. Hymel said he plans to recommend that the Marin County Board of Supervisors consider a revised ordinance that would disconnect the selection of the operator from that of the location. In addition, he is recommending that the Board explore a delivery-only dispensary model to address concerns raised by residents at public meetings and via submission of written comments.

“This decision illustrates the challenge in finding the right combination of operator and location to provide patients with safe access to medical cannabis locally,” Hymel said.

The Community Development Agency (CDA) received 10 applications in designated locations where a medical cannabis dispensary could be permitted, and residents voiced opinions at three public meetings hosted this winter by CDA staff and members of the advisory committee. Of the 10 applications, eight were in the Highway 101 corridor zone and two were in the Central/West Marin zone. The 101 corridor applications included three in the Black Point area east of the Novato city limits, one in Santa Venetia near the San Rafael city limits, and four in the Tam Shoreline area between Mill Valley and Sausalito. The Central/West Marin applications included one in San Geronimo Valley and one in Marshall.

Although cannabis is considered an illegal drug by the federal government, Proposition 215 ensures that seriously ill Californians have the right to obtain and use cannabis for medical purposes upon receiving a recommendation from a physician. The County’s ordinance is consistent with the state’s Compassionate Use Act and Medical Cannabis Program. A licensed dispensary would have to be least 800 feet from schools, public parks, smoke shops, and other cannabis dispensaries to qualify for a license.

Medical cannabis dispensaries remain prohibited in unincorporated Marin, and none are open or permitted in any of the county’s towns or cities. The ordinance establishes a regulatory framework to license nonprofit patient collectives to meet the medical needs of local patients, many of whom have voiced the need for local dispensaries before the Board of Supervisors.

Though a big (perhaps fatal) setback for these ten applicants, these rejections open the door for businesses and individuals that want to operate a medical cannabis dispensary in Marin and are willing to invest the time and resources to obtain County approval. It’s important to note that 73% of Marin residents voted in favor of the Compassionate Use Act and nearly 70% approved the Adult Use of Marijuana Act so it’s clear Marin County amply supports medicinal and recreational cannabis, at least for those applicants who do not take that support for granted.

As we have often write on here, if you are looking to snare any sort of cannabis license, it is incumbent upon you (or at least your counsel) to know the sensitive local government and local populace issues in play. We’ve seen cities and counties time and time again change their minds on interim and permanent cannabis ordinances, each of which can tremendously impact our client’s bottom-lines. To position yourself to know when these changes are coming and to be able to influence them, you need to get to know your city or county council/commission’s voting agenda and make yourself a part of the local lawmaking process. Doing this can give you a place at the table in drafting or effect change on pending ordinances while at the same time enabling you to stay on top of potential and actual changes. Staying on top of local laws requires action and vigilance. If you are not going to stay alert so as to benefit your cannabis business, hire someone to do that for you.

Whenever a city or county is about to start issuing cannabis licenses for the first time, there will be a vocal part of the community that will come out forcefully against marijuana or against marijuana in their neighborhood. Fortunately, just being loud is not always going to be a winning position against a cannabis business that has spent the time engaging with the community in which it hopes to operate. There will eventually be cannabis businesses in Marin County, but first some fences need to be mended.