Davis California cannabis
Davis California

California 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 the City of Santa Rosa, and before that that County and City of San BernardinoMarin 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.

LocationDavis is a city in Yolo County (please don’t yell “YOLO”). Within close proximity to California’s capital and home to UC Davis – one of the top 50 universities in the United States – the city of Davis has become an attractive destination for those in Northern California looking for affordable housing and a high quality (pun perhaps intended) of life. Davis also recently got a big shout-out from one of its native sons, Hasan Minhaj.

History with Cannabis and Current Cannabis Laws. Traditionally we focus on bigger localities (which Davis is not) in our Cannabis Countdown series but whenever a new locale enacts a cannabis ordinance we try to highlight them. Historically, Davis took a prohibitionist stance towards cannabis – which was surprising considering UC Davis’ agricultural history (I’m sure living alumni are glad it’s no longer called University Farm). After the California Legislature adopted the Medical Cannabis Regulation and Safety Act (then known as the Medical Marijuana Regulation and Safety Act) the Davis City Council passed Ordinance No. 2467 on January 19, 2016, prohibiting commercial cultivation and personal outdoor cultivation of medical marijuana throughout the city. The Davis City Council then expanded on the prohibition On November 1st, 2016 (7 days prior to passage of the Adult Use of Marijuana Ac) and then expanded on Ordinance 2488 and approved an interim moratorium on the establishment, creation, or expansion of any commercial cannabis uses and outdoor cultivation, with the intent to add commercial recreational cannabis as a prohibited activity. With Sacramento and nearby Sonoma County having favorable and well regulated cannabis ordinances on the books, it wasn’t likely Davis would continue with its ban of commercial cannabis activity, especially medical cannabis.

Proposed Cannabis LawsOn June 6 of this year, the Davis City Council adopted an ordinance permitting commercial cannabis manufacturing research, and distribution in properly zoned districts in Davis. Here are a couple of the ordinance’s highlights:

  • The ordinance allows for manufacturing non-hazardous and hazardous but non-volatile materials. The permitting process for hazardous materials will require additional precautionary measures.
  • The ordinance allows laboratories and research facilities to include limited cultivation on site so long as the cultivation is done strictly for research purposes.
  • A cannabis distribution facility is defined as any facility engaged in the procurement, temporary storage, non-retail sales, and transport of cannabis or cannabis products between State-licensed cannabis businesses, including warehouses and similar structures.

Though Davis’ ordinance isn’t as welcoming to cannabis businesses as those of some of its neighboring jurisdictions it’s better than nothing and history would indicate cities often like to dip their toes in the cannabis pool before diving right in. Just this Tuesday Davis’ City Council asked for feedback and direction for developing an ordinance that would cover dispensaries, delivery services, and commercial cultivators. We’ll be sure to keep you posted as Davis continues on with its road to enlightenment.

California cannabis: think local
California cannabis. Think local.

To the excitement of many, California’s Medical Cannabis Regulation and Safety Act (MCRSA) does not include a residency requirement akin to those we’ve seen in other states, like Washington. Though in theory this could change, such an about face is unlikely given the proposed rules that dropped a few weeks ago. And though Chapter 5, Section 26054(a) of Proposition 64 (dealing with recreational cannabis regulation) does contain a residency requirement, it is likely the medical and recreational cannabis rules will ultimately be synced, eliminating that requirement. For reference, however, that section of Proposition 64 states:

“[n]o licensing authority shall issue or renew a license to any person that cannot demonstrate continuous California residency from or before January 1, 2015. In the case of an applicant or licensee that is an entity, the entity shall not be considered a resident if any person controlling the entity cannot demonstrate continuous California residency from and before January 1, 2015.”

That residency requirement will expire on December 31, 2019 unless the California state legislature renews it. Also important to note is that even if this residency requirement were to go into effect, it would apply only to “controlling persons.” But again, we believe that as the medical and recreational cannabis rules are finalized and synced up, the residency requirements of Proposition 64 will be eliminated.

But this has not stopped local jurisdictions, including cities and counties, from implementing varying levels of residency requirements, or de facto residency requirements, on their own. For example cannabis licenses in the City of Los Angeles will likely be limited to state residents since the City is issuing first round licenses only to Proposition M Priority eligible applicants (i.e., the ~135 Pre-ICO cannabis collectives currently operating in the City under Prop. D immunity from prosecution). In theory, at least, the proprietors of these businesses, who would have been required to possess qualified patient authorizations, would have needed to be California state residents. In other words, the City of Los Angeles is limiting licenses to those who have operated locally since at least 2007, which functions as de facto localism.

Los Angeles’ proposed regulations also require applicants provide a detailed plan for hiring local residents, including making an “ongoing good faith effort to ensure that at least 30 percent of hours of their respective workforce be performed by residents of the City of Los Angeles, of which at least 10 percent of their respective workforce shall be performed by Transitional Workers whose primary place of residence is within a 3-mile radius of the proposed Business.”

The city of Oakland has developed what is perhaps one of the most contentious residency requirements via its Equity Permit Program. This program aims to address inequity in the local cannabis industry by prioritizing permit issuance to those with roots in certain identified Oakland neighborhoods that have been historically impacted by disproportionate drug law enforcement, and to members of the Oakland community who have been arrested and convicted of cannabis crimes in Oakland in the last 20 years. The law moves qualifying Equity Applicants, defined as Oakland residents with an annual income at or less than 80% of the City average and who either lived in certain defined Oakland police beats for 10 of the last 20 years, or who have been convicted of a cannabis crime committed in Oakland within the last 20 years, to the front of the cannabis permitting line, and it also creates access to approximately $3.4 million in earmarked interest-free business loans and other assistance.

When issuing permits for any kind of cannabis business, the City must give half (i.e. maintain a 1-to-1 ratio) of all permits issued in its initial issuance phase to these Equity Applicants.  Oakland local law also requires dispensary staff be at least 50% Oakland residents, with at least half of those residents from areas identified as having high unemployment or low household incomes.

Other local jurisdictions are implementing or considering similar means of enacting residency restrictions, despite the state’s leniency on the issue. It is therefore imperative to review the local laws under which you intend to operate, particularly if you are not a California state resident.

 

 

 

California Cannabis Law Senate Bill 94
California just came out with its Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”)

The California Legislature today passed Senate Bill 94, which effectively repeals the Medical Cannabis Regulation and Safety Act (“MCRSA”) and incorporates certain provisions of the MCRSA in the licensing provisions of the Control, Regulate, and Tax Adult Use of Marijuana Act (“AUMA” aka Proposition 64). As we’ve covered extensively, draft rules for the MCRSA dropped in late April, but speculation has been rampant that the state would integrate the rules for both medicinal cannabis (MCRSA) and adult use cannabis (AUMA). SB 94 does just that by creating the Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”).

Here are 10 of the most important highlights of today’s bill:

  1. The governing bureau will now be the Bureau of Cannabis Control (“the Bureau”).
  2. The types of licenses available for commercial adult-use cannabis activity and commercial medicinal cannabis activity will be the same. The licenses available under both the MCRSA and the AUMA will continue to be available for both kinds of activity, and for specialty cottage cultivation licenses and microbusiness licenses, and, commencing on January 1, 2023, licenses for large outdoor, indoor, and mixed-light cultivation will also be available for both medicinal and adult-use cannabis activity.
  3. Producing dispensary and transporter licenses will not be available.
  4. Quality assurance, inspection, and testing requirements of cannabis and cannabis products prior to retail sale will change. Distributors will be required to store cannabis batches on their premises during testing, testing lab employees will be required to obtain samples for testing and transport those samples to testing labs, and distributors will be required to conduct a quality assurance review to ensure compliance with labeling and packing requirements, among other things.
  5. Though the MCRSA limited the combinations of medicinal cannabis licenses a person may hold until January 1, 2026, the MAUCRSA will not apply these limits (other than that testing laboratory licensees are prohibited from obtaining licenses to engage in any other commercial cannabis activity);
  6. The residency requirements of the AUMA are repealed. In other words, out of staters and even residents of other countries can freely participate.
  7. Additional advertising requirements, including regulation of online advertising and the creation of a universal symbol for edible cannabis products will be implemented.
  8. The cannabis excise tax will be measured by the average market price (as defined) of the retail sale, instead of by the gross receipts of the retail sale.
  9. Applicants for cultivation licenses will need to identify the source of water supply.
  10. The Bureau will no longer have the authority to regulate and control industrial hemp.

The above is only a rough summary of the new legislation. We will be breaking down the details in the coming days so stay tuned.

Oregon Cannabis Grow OperationsSo far in this series on how to open a recreational grow operation in Oregon we have discussed the importance of due diligence when locating your grow op, the process for informing the OLCC about your property and the people behind your company, and meeting your security, power, and water requirements. Now it is time to tell the OLCC how you plan to keep the public, and especially minors, away from your product. Then we will discuss the various site maps you will need to include in your application.

Preventing Public Access. You will need a plan to prevent public access to any indoor areas, all outdoor areas used for cultivation, and also any outdoor areas where cannabis may be stored, even on a temporary basis.

The application packet provides two favored options:

  • Enclose all outdoor areas (and exterior paths between indoor areas and greenhouses) in at least a six-foot tall fence or wall; or
  • Enclose all cultivation areas with at least a six-foot tall fence or wall, and ensure cannabis is only outside the enclosed areas while in the possession of one of your representatives for the limited purpose of transportation between enclosed areas.

In either case, any fences should be constructed of “rigid wooden or metal posts securely anchored to the ground and a woven or welded wire mesh such as ‘chain-link’ fencing or by a solid, rigid barrier, such as wooden fencing planks or similar material.”

You also have the option of creating your own plan, but you will need to specifically detail all the actions and methods you will use to prevent public access. This may subject you to delays as the OLCC can reject your plan or request additional information and clarification.

Minor Control Plan. In addition to your public access plan, you will also need to provide a detailed description of your proposed methods for preventing access to your cannabis by minors, such as identification, perimeter security (physical and personnel), employee screening, and what you will do if you find a minor on your premises. The OLCC conveniently provides an example plan in the application packet:

All doors and gates will be locked at all times. Prior to allowing any person access to the property, age will be verified by checking ID. Employee IDs will be checked prior to hiring and no person will be employed who does not have a valid marijuana worker permit. Signs will be clearly posted at all entry points indicating that minors are not permitted on any portion of the premises. If a minor attempts to gain access to the premises, they will be immediately told to leave and if they do not, law enforcement will be contacted.

Premises Map & Floor Plans. You will need to submit a few maps of your entire cannabis grow property and more detailed floor plans of all structures. The first is sometimes referred to as a Premises Map or Premises Sketch, and the second as the Premises Floor Plan(s).

Premises Map: This map (example here) must include your entire property and must show, at a minimum, the following:

  • The boundaries of your tax lot;
  • The perimeter of the licensed premises (labeled with “Limited Access Area” along the perimeter line);
  • The location of any residences on the property;
  • Dimensions of each structure on the property;
  • Labels showing other activities on the property, such as farming or livestock;
  • Fences and walls;;
  • Labeled compost/waste areas;
  • Labeled canopy areas (cultivation areas); and
  • All entry/exit points for the premises.

You must also include a tax lot map marked to show your premises (which can be obtained from the County Assessor), and an aerial map identifying the area to be licensed (from Google Maps, for example).

Premises Floor Plan(s): You must prepare a separate plan for each structure that includes, at a minimum, the following:

  • A label for the structure;
  • An indication of which floor of the building is shown in the plan (there should be a separate floor plan for each level of each structure);
  • The boundaries of the structure that will be licensed (if you aren’t using the entire structure);
  • All areas where cannabis may be located at any time;
  • All doors, windows, and permanent fixtures;
  • All walls, partitions, counters, and windows;
  • Clear labels for each room, such as “storage area”, “surveillance room”, “trimming”, etc; and
  • All ways in and out of the enclosure.

Make sure your labeling is consistent across your security plan, your premises map, and your floor plans.

At this point you should have everything you need to submit your OLCC application. In part five, we discuss canopy sizes, the new medical bump-up canopy program, and some typical requests for additional information you may receive from the OLCC after you submit your Oregon grow application.

 

California cannabis edibles: just say no to butter
California cannabis edibles: just say no to butter

If you missed our webinar last week on California’s new medical cannabis rules and you just can’t wait for us to publish the recording here on the blog (coming soon!), this post will deal with California’s proposed medical cannabis manufacturing rules for edibles, on which we received a ton of great questions. To get started, a couple of key definitions from the rules:

“Manufacture” means the production, preparation, propagation, or compounding of cannabis products. The term “manufacture” includes the following:

  • Extraction processes;
  • Infusion processes;
  • Packaging or repackaging of manufactured medical cannabis or medical cannabis products.

“Edible Cannabis Product” means manufactured cannabis intended to be used, in whole or in part, for human consumption.

In addition to extensive sanitation, recall, customer complaint and operational requirements for edibles manufacturers, the proposed rules include quite a list of prohibited products and based on our experience in other states with regulated cannabis, we anticipate the list will only grow over time. Here is a sampling of some of the products that will not be allowed under the proposed manufacturing rules:

  1. Cannabis-infused alcoholic beverages;
  2. Cannabis products containing any non-cannabinoid additive that increases potency, toxicity or addictive potential, or that would create an unsafe combination with other psychoactive substances, including nicotine and caffeine;
  3. Cannabis products that must be held below 41 degrees Fahrenheit to be safe for human consumption;
  4. Vacuum packed products;
  5. Canned cannabis products;
  6. Cannabis-infused juice;
  7. Perishable bakery products that must be held at temperatures below 41 degrees Fahrenheit, including cream or custard-filled pies, pies or pastries which consist in whole or in part of milk or milk products, eggs, or synthetic fillings, or meat-filled pies or pastries;
  8. Dairy products of any kind (yes, this appears to include butter);
  9. Meat products;
  10. Seafood products.

For obvious reasons, the issue of whether or not cannabis-infused butter will be allowed is a big one. Though cannabis butter would be prohibited under the current draft rules, we’ve seen other states, like Washington, carve out exceptions for products  made with cannabis butter. However, even Washington prohibits selling cannabis butter as a stand-alone product.

One other glaring omission from the current rules is a prohibition on cannabis products that appeal to children, although this legislation is likely coming down the pipeline. Many states prohibit products like gummy bears and lollipops that mimic candies appealing to children. Though California seems to be taking a less restrictive approach than other states in which my firm’s cannabis lawyers work, it’s highly unlikely it will leave this issue completely unaddressed. In this vein, California’s proposed rules do prohibit licensees from manufacturing cannabis products by applying cannabinoid concentrate or extract to commercially available snack candy or food items. Though the definition of “commercially available” is not entirely clear, at least part of the intent here is to prevent consumer confusion between cannabis-infused and non-cannabis products present in many homes – children are often the ones confused in this manner.

Ultimately, many California cannabis manufacturers will need to rethink the types of products they offer for sale once they begin operating with a state license. Many of the products currently on the market here simply will not comply with the new rules, and a thorough understanding of what products are prohibited will be critical to developing a viable business plan as a cannabis manufacturing licensee.

 

 

Los Angeles Cannabis rulesThe long-awaited proposed regulations under Proposition M for L.A.’s current and future medical (and recreational) marijuana operators are finally out. The 51 pages of initial regulations (that are now in a 60-day public comment period) cover the governance of cultivators, manufacturers, distributors, testing facilities, transporters, retailers, and microbusinesses in significant detail under Proposition M. If you forget what Proposition M is, see here. Though most of these initial regulations identically track initial state regulations under the Medical Cannabis Regulation and Safety Act (“MCRSA“), there are certainly some nuances that will affect medical cannabis businesses differently than in other jurisdictions. Equally important is that L.A. also issued its proposed zoning regulations, so we know where the city expects all operators to locate, which is incredibly important for those looking for eligible real property.

Here are the highlights from the proposed operator rules (we will cover L.A. zoning under Proposition M in a subsequent post):

  1. The City of Los Angeles Cannabis Department (“Department”) is going to issue Commercial Cannabis Activity Certificates of Compliance in four phases as follows: (1) Proposition M Priority eligible applicants (i.e., the ~135 Pre-ICO cannabis collectives currently operating in the City under Prop. D immunity from prosecution), (2) Non-Retail Registry eligible applicants, (3) a restricted phase “in which the number of Certificates of Compliance issued to General Public applicants may not exceed the number of Certificates of Compliance issued to Social Equity Program applicants”, and (4) an unrestricted phase “that commences after the Social Equity Program has been fully funded and implemented as determined by the City Council. City of Los Angeles Cannabis Department.”

This means Prop. D compliant dispensaries will have a lock on L.A.’s retail cannabis market unless and until general public applications are allowed in phase 3, which will only happen after non-retail applicants and social equity program applicants are approved, which could take years. And the number of additional Certificates that may issue in phase 3 is dependent upon and restricted by the number of Certificates that issue to applicants in the social equity program, which hasn’t been created yet.

  1. Prop. M Priority applicants or “Existing Medical Marijuana Dispensaries” (“EMMDs”) will have only 60 days from the date applications become available to get their applications into the Department and then that application window will forever close (if you don’t meet the 60-day deadline, you’ll be treated as a new retail applicant). Further, EMMD applicants will only be allowed to apply for Retailer Commercial Cannabis Activity, which may include Prop. D-compliant on-site cultivation. If one of these applicants also applies for on-site cultivation, it cannot expand its existing grow in any way and the current grow canopy size depends on its size documentation (if any) in the existing lease or in a Certificate of Occupancy issued to the applicant by the City prior to January 1, 2017. All on-site cultivation has to end on or by December 31, 2024 if the EMMD’s premises are not within a zone that allows for Indoor Cultivation Commercial Cannabis Activity. This combination of cultivation may also be problematic for EMMD applicants that don’t also apply for a Producing Dispensary permit from the state (where other combinations of cultivation and retail are not allowed under the MCRSA, though they will be under the Adult Use of Marijuana Act (“AUMA”) and if the Governor’s Budget Trailer Bill passes).
  2. EMMDs that can demonstrate “substantial compliance” with Prop. D will be allowed to continue operating at their one designated location while their application with the Department is pending, but they can’t make any changes at all to their structure or operations during that time. And “any mitigating circumstances due to gaps in operations, ownership change, location change or closure, tax payments, etc. must be described in detail for the Department to consider eligibility” for priority processing. If the City finds you’re not compliant with Prop. D. and, therefore, not eligible for priority processing, its decision is final.
  3. Retailers may possess up to three Certificates of Compliance, and that includes Certificates for Delivery. Though the City did not officially cap the number of dispensaries that may apply for Certificates from the Department in the future, that number will be curtailed by the number of approved Certificates issued to applicants in the social equity program, the rules for which haven’t been established by the City.
  4. All non-retail applicants “that were conducting Indoor Cultivation Commercial Cannabis Activity or Manufacture Commercial Cannabis Activity in the City of Los Angeles prior to January 1, 2016 . . . may continue to operate while their application is pending approval if a completed application is submitted to the [City of Los Angeles Cannabis] Commission within 30 days of the first date [on which applications are] made available to the public, the continuing operations of the applicant are the same activities in which the applicant is seeking a Certificate of Compliance for indoor cultivation or manufacture, the location or premises meets all of the adopted or proposed land use and sensitive use requirements of the City of Los Angeles and other eligibility requirements as listed, and the Department approves eligibility.” The Department will then close the Non-Retail Registry processing window permanently. To prove continuous operation by January 1, 2016, the City will ask for the same documentation as the state for priority licensing approval. Just like with EMMD applications, if the City makes a final determination that you’re not eligible for non-retail application processing, its decision is final. There’s no City cap on the number of Certificates a non-retail applicant can hold.
  5. There will be no volatile (Type 7) manufacturing in Los Angeles. Only non-volatile (Type 6) manufacturing will be allowed. And outdoor and mixed-light cultivation are also not allowed.
  6. There’s a robust list of background and financial information all applicants must supply to the City in their applications for Certificate of Compliance including, all “Owner” information, a list of all non-controlling owner information, your lease or right to occupy your real property for your license type, your hiring plan (which must include a plan for hiring L.A. locals), a premises diagram and security plan, and your business’s organizational structure.
  7. Any person convicted of illegal volatile cannabis manufacturing is banned for 10 years (from the date of conviction) from Commercial Cannabis Activity within L.A., and anyone who’s been convicted for violating any law involving wages or labor laws is banned for 5 years (from the date of conviction) from Commercial Cannabis Activity within L.A.
  8. No foreign companies (i.e., out of state or international) can apply for a Certificate from the City.
  9. As for operational standards, no business can provide physician recommendations to anyone, there can be no on-site consumption, no special parties or events can be held on-site, there are strict records retention requirements (including retention for no less than 7 years for all financial records), all businesses must follow the track and trace system for seed-to-sale, and retailers can be open only from 6 a.m. to 9 p.m.
  10. L.A. is finally going to allow delivery (which has been a long embattled issue in L.A.), and its regulations basically track those of the state (i.e, a brick and mortar dispensary can be the only one to deliver under the MCRSA and no specific distinction was made for delivery under the AUMA — yet). Deliveries cannot take place outside of the City without the City’s express approval.

These initial regulations will certainly change (at least a bit) as a result of stakeholder feedback and debate. But though you can’t take these regulations to the bank yet, they do provide valuable insight into how the City of Los Angeles sees the future of its cannabis market. I still maintain that if the City does not allow significantly more retail dispensaries in the near future, it will not reach its maximum market potential.

We’ll see how things play out over the next two months and we will definitely keep you posted in the meantime.

How to knock down all the pins to get a California cannabis license
How to knock down all the pins for a California cannabis license

Since I moved to our firm’s Los Angeles office, I’ve been getting calls nearly non-stop from existing and potential clients looking to take advantage of California’s soon-to-be highly regulated medical cannabis marketplace under the Medical Cannabis Regulation and Safety Act (“MCRSA“). Nearly all of these callers are already behind when it comes to what they need to know and do to secure a California medical cannabis license in 2018.

Even though California’s rules are still in their initial draft form, they provide great insight into what to expect from the future adopted rules. Surprisingly though, few cannabis stakeholders interested in California’s massive medical cannabis industry have read the rules and this means most have no concept of how important local law compliance is.

The following is the minimum you should know for positioning yourself for a California medical cannabis license:

  1. Priority review. Turns out priority review will actually net you a temporary state license to operate this fall, but you can only get priority review if you were “in operation and in good standing with [your] local jurisdiction by January 1, 2016.” What this really means is that a good number of pre-existing non-profit collectives are going to get first dibs on temporary licenses while all other license applicants will have to wait until January 2018 to begin receiving their licenses. Many of these pre-existing non-profits want to know whether they can go for-profit now and still receive priority review from the state since part of the analysis of priority review is whether your “ownership or premises are currently the same” as they were on or by January 1, 2016. Though existing operators need further clarity from the state on the non-profit to for-profit transition in the context of priority review, new operators can likely forget priority review status altogether.
  2. Prop. 215 is still alive and that’s a problem for for-profit cannabis companies. I am always getting asked whether California allows for-profit cannabis companies now, and the answer is still “no.” Though for-profit entities are allowed to be license applicants under the MCRSA, if you are servicing groups of patients now, the State still encourages you (from a 2008 State Attorney General memo) to form a non-profit collective (if you’re going to form an entity at all) because neither the MCRSA nor the Adult Use of Marijuana Act repealed Prop. 215, which prohibits for-profit sales of medical cannabis. In addition, many local ordinances still require “commercial cannabis activity” to take place within non-profits. The complicating factor is that some California cities and counties are allowing for-profits to apply for local permitting right now. This, combined with the fact that the state is going to allow for-profit applicants, has led some operators to bite the bullet and go for-profit ahead of state licensing in spite of Prop. 215. These operators are betting that the risk of state and local law enforcement interference is lower if local governments are allowing for-profits, and they don’t want to take the chance that the state may not allow for-profit mergers or conversions after state licensing. Since most local ordinances do not allow for transferring cannabis permits after-the-fact, deciding now whether to use a for-profit or non-profit is an immensely important decision.
  3. Local law is king (and always will be in California). The MCRSA requires you show you have local approval to receive a state license. If you don’t have local approval and you try to open despite a local ban or even if you are simply operating under a local government’s tacit approval without any formal recognition, you’re going to suffer in California. California’s cities and counties seemingly constantly change their minds and their laws on what MCRSA businesses and which operators they’re going to allow within their borders (for example, check out our San Fransisco office’s reports here and here on what happened in Marin County). And the local regulation that does exist is rife with zoning limitations, intense deadlines, high fees, property buffers and setbacks, and all kinds of operational standards.
  4. You can’t manufacture just anything. Many do not realize that when California cannabis regulation hits, product choices immediately will get taken away from cannabis manufacturers and consumers because of consumer safety issues and policy choices. Section 40300 of California’s cannabis manufacturing rules sets forth all products that will be outlawed if these rules are adopted. Should this version of the rules be adopted, products that would be barred include cannabis-infused alcoholic beverages, nicotine, or caffeine; any canned cannabis product; any juice; cream or custard-filled pies; pies or pastries which consist in whole or in part of milk or milk products, eggs, or synthetic fillings; meat-filled pies or pastries; dairy products of any kind; meat products of any kind; and seafood products of any kind. Most regulated states have gone further than California when it comes to banning entire product lines — it’s now nearly impossible to find cannabis gummy bears in many cannabis regulated states. All of this means that creative food makers and infusers are likely to be mostly sidelined from California’s cannabis game.
  5. Ownership and investment. California’s medical rules do not contain any hardcore residency or financial minimums or liquidity requirements (yet) for owners and financiers. Under the initial rules, the basic background and corporate information submissions to the state are pretty much identical across license types. Each license applicant will need 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 for a cannabis license, its CEO and all of its directors will be 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.  All owners must be disclosed to the state, along with their stated ownership interest in the applicant. All owners 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 now, only retailers, distributors and transporters will face the highest level of financial scrutiny as California is going to require that these entities submit the following:
    • A list of funds belonging to the commercial cannabis business held in savings, checking, or other accounts maintained by a financial institution;
    • A list of investments made into the commercial cannabis business; and
    • A list of all gifts of any kind given to the applicant for its use in conducting commercial cannabis activity.

    Note though that no California rule prohibits out-of-state companies from applying for California cannabis licenses so long as they are registered to do business in the State of California. In other words, California’s medical cannabis industry is going to be open to out-of-staters and even to companies based outside the United States. Needless to say, many out of state and even out of country companies are in the midst of preparing to do cannabis business in California.

  6. Can I flip my license? No, but there’s likely a catch. California has made clear in its initial rules that its medical cannabis licenses are not transferable — and most local governments are not going to allow for transferring cannabis permits either. What this has meant in other states and what it likely will mean in California as well is that even though you cannot sell your cannabis license as personal property, you can sell the company that holds those licenses as part of a membership unit or a stock purchase and sale. I have little doubt that there will be a large and healthy market for people selling their licensed cannabis businesses right after licensing, and questions of sufficient due diligence, valuation, and the types of purchase and sale agreements that need to be in place will become hot topic issues.
  7. Prohibitions on vertical integration and licensing limitations. People forget that California’s initial rules stem from a statute, and that statute sets the baseline for the rules. In the MCRSA, we have a deliberate prohibition on combining certain types of licenses, and people need to keep those restrictions in mind as they decide the licenses they will seek, especially when local laws come into play. Under the MCRSA, a license applicant can hold up to two licenses in separate categories as follows:
    (1) Type 1, 1A, 1B, 2, 2A, or 2B licensees may also hold either a Type 6 or 7 state license.
    (2) Type 6 or 7 licensees, or a combination thereof, may also hold either a Type 1, 1A, 1B, 2, 2A, or 2B state license.
    (3) Type 6 or 7 licensees, or a combination thereof, may also hold a Type 10A state license.
    (4) Type 10A licensees may also hold either a Type 6 or 7 state license, or a combination thereof.
    (5) Type 1, 1A, 1B, 2, 2A, or 2B licensees, or a combination thereof, may also hold a Type 10A state license.
    (6) Type 10A licensees may apply for Type 1, 1A, 1B, 2, 2A, or 2B state license, or a combination thereof.
    (7) Type 11 licensees shall apply for a Type 12 state license, but shall not apply for any other type of state license.
    (8) Type 12 licensees may apply for a Type 11 state license.

    In addition, the cultivation rules contain strict ownership restrictions on Type 3 (medium cultivation) licenses. Unless a person has a Type 10A Producing Dispensary license, that person shall be limited to one Medium Outdoor, or one Medium Indoor, or one Medium Mixed-Light license. The 10A is limited to no more than three dispensaries and all cultivators are limited to a maximum of 4 acres of plant canopy in total.

  8. Medical and recreational are not the same. Though the MCRSA and the AUMA have a lot in common they also have notable differences, including different models on local approval, residency, vertical integration, and distribution. The differences between the MCRSA and AUMA are highlighted by the fact that though some local governments are embracing medical cannabis, they are rejecting adult use cannabis commercial activity at the same time. Should Governor Brown’s trailer bill pass this summer, those differences will become moot and California medical cannabis will become much more business friendly. Until then though, cannabis stakeholders need to realize the differences between these two laws and plan accordingly. For now, you can still undertake both medical and recreational cannabis operations so long as they are completely separate and not commingled in any way.
  9. Location, location, location. Securing viable real estate for your California cannabis business is going to be one of the toughest pieces of the regulatory puzzle. The initial regulations make clear that you will need to show you have a right to use some piece of real property for your commercial cannabis use and the owner of this property is aware of this. For local law compliance, you will need to have that real estate ready to go anyway and, with some of the deadlines being imposed by local governments, you may be in a serious race to find a viable property that fits all local and state buffer requirements and all applicable zoning laws (and that won’t attract the wrath of any NIMBYs). Given that many landlords are still gun-shy on cannabis leases (in large part because of federal law and asset forfeiture), you better start looking for your viable property now since it could takes months to locate and lock it down.
  10. Cannabis is still federally illegal. All too often investor clients bring us a Private Placement Memorandums or a Confidential Information Memorandum for a cannabis investment in California that nowhere mentions the risk of federal law enforcement or even that cannabis remains federally illegal. Just because most U.S. states have legalized medical cannabis and eight states have fully legalized cannabis, it doesn’t mean a thing under federal law. Yes, we have the appropriations riders that should work to protect state-law compliant MMJ operators from facing shutdown by the Feds, but if Congress ever fails to renew those riders, even that protection will go out the door. And those riders never did nor do they now apply to adult use cannabis operators. With notorious pot-hater Jeff Sessions as our country’s Attorney General, with a Cole Memo that can change or go away at any time, with a lack of access to banking, and with the negative tax impacts of 280e, ignoring federal illegality is a mistake in pretty much any context.

Security Requirements

In part 1 and part 2 of this series we discussed how to find the perfect location for your Oregon recreational grow op, and how to let the OLCC know that your property, your company, and your owners are up to par. You now have a perfect location and the local planning department is working towards approving your Land Use Compatibility Statement. Everyone involved with your company has filled out their Information History forms. Next you need to prove to the OLCC that you have adequate security to prevent your crop from joining the illegal market, rights to enough water to nourish your plants, and enough power to operate your lights and fans (you do have adequate around-the-clock ventilation to prevent mold, right?).

The OLCC wants to know some basic details about your business, such as when you will be open, your cultivation process, and your security setup. Fortunately, the OLCC has recently simplified the producer application, so these requirements are all clearly laid out.

Hours of Operation. As part of the producer application packet you will need to provide your hours of operation for each day of the week, as well as any anticipated variations for seasonal or other reasons. This requirement helps OLCC inspectors know whether they can enter your property on a whim (while you are open) or whether they must first have a reason to believe a violation has occurred (while you are closed).

Cultivation Plan. The application has a short essay question where you will need to describe your grow op in depth. The OLCC wants to know your growing medium, the specialized equipment you will be using, and whether your crop will be indoor or outdoor (or both for mixed producers). You will also need to explain whether you will be using seeds, clones, or a mix and detail how you will be handling your immature cannabis plants. Since you will ultimately need to submit a cultivation plan to the OLCC, you should create one as part of your initial business plan. Savvy investors will likely want to know this information anyway.

Electricity & Water Use. When you initially apply for an Oregon cannabis grow license you will need to provide month-by-month electricity and water usage estimates and you will need to prove you have a legal source of sufficient water. This proof can take the form of 1) a copy of a water use authorization, permit, or certificate from the Oregon Water Resources Department, 2) a statement with the name and contact information of a public or private water provider that will be providing water to your site, or 3) a Marijuana Producer Exempt Water Form from the Oregon Water Resources Department showing that your water does not require a water right. You should contact the Water Resources Department to determine which option will work for your site.

Security. The OLCC is understandably concerned about licensed cannabis flowing into the black market, so all growers must meet strict security requirements. Generally, you will need to do the following:

  • Keep all exterior access points locked with commercial grade locks outside of business hours;
  • Store all usable cannabis, harvested plants, and finished products within a secure, indoor steel-framed room (outside of business hours). This requirement should be on your mind as you search for a location;
  • Have an alarm system that covers all potential entry points, can detect movement within any area housing mature plants or usable product, and automatically notifies authorized personnel in the event of a breach (you can ignore this requirement if you will have at least one person in the premises at all times outside of business hours);
  • Have at least two operational “panic buttons” inside the premises that will immediately notify a security company and law enforcement, or have mobile “panic buttons” carried by all of your employees and representatives, or have a landline telephone present in all limited access areas.

One of your more significant up-front costs will be designing and installing a compliant video surveillance system. Your 24-hour a day system must satisfy the following:

  • Cover all areas where cannabis items or waste will be present or in transit;
  • Cover all areas within 15 feet of all entry points in all directions;
  • Record at a minimum resolution of 1280 x 720 pixels in all lighting conditions;
  • Record at a minimum of 10 frames per second (5 frames per second for exterior non-restricted areas);
  • Be contained in a dedicated room containing a list of all personnel authorized to access the surveillance system;
  • Have a backup battery that can independently power the system for at least an hour;
  • Provide automatic notification in the event of a failure of a security camera or other portion of the system;
  • Include a monitor for viewing video from any camera, a digital archiving system, and a printer; and
  • Maintain recordings for 90 days both on-site and continuously backed up to a secure off-site location.

You will also need to keep a log of all maintenance activity on the system.

Now you have your surveillance and alarm systems set up, you’ve let the OLCC know when and how you will be growing, and you have satisfied the OLCC that you have enough water and power. Check back next week for part 4 where we will discuss your requirements to keep the public, and particularly minors, out of your licensed area as well as the various site diagrams the OLCC will want to see.

 

California Cannabis Law

California 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 the County and City of San Bernardino, 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. Santa Rosa is a city in Sonoma County. With a warmer climate than San Francisco and Oakland to go along with more reasonable home prices there’s no surprise Santa Rosa has seen a steady increase of its population over the last ten years. With its close proximity to the Russian River and all the fine dining and award winning wineries in Sonoma and nearby Napa County, Santa Rosa’s population will likely continue to grow. And who knows what business opportunities will come with the arrival of the SMART train?

History with Cannabis and Current Cannabis Laws. Santa Rosa has been making consistent progress when it comes to cannabis regulations. Perhaps not fast enough for some, but when you see what’s been going on in other parts of California (uh hum, looking straight at you Riverside), Santa Rosa is avant garde. In 2005, Santa Rosa adopted an ordinance allowing medical cannabis dispensaries. In March of 2016, the Santa Rosa City Council adopted an interim ordinance allowing commercial cultivation of medical cannabis. Upon seeing the benefits of properly regulating dispensaries and cultivators, Santa Rosa’s Department of Planning and Economic Development in August of 2016 issued an official zoning code interpretation allowing manufacturing (non-volatile), testing, distributing, and transporting within its boundaries. In order to continue stay on top of the latest developments in the cannabis industry the city of Santa Rosa also created a medical cannabis policy subcommittee that met on the last Thursday of every month. This type of forward thinking will benefit Santa Rosa in the long term (pay attention Riverside).

Proposed Cannabis LawsIn March of this year, the Santa Rosa City Council approved a resolution placing a cannabis business tax measure on the ballot to cover the City’s costs of regulating cannabis – residents will get to vote on June 06, 2017. The tax measure features the following tax structure:

  • For cultivators: for the first two years (if the ballot is approved) 2% of gross receipts or $5.00 per square foot of cannabis cultivation area, at the taxpayer’s election. After two years the tax is scheduled to increase to 8% of gross receipts or $25 per square foot.
  • For manufacturers: the initial two year tax rate will be 1% of gross receipts and will increase to 8% after the two year term.
  • For dispensaries: the initial two year tax rate will be 3% of gross receipts (only applicable to non-medical use) and will increase to 8% after the two year term.
  • For distributors: the initial rate will be 0% but distributors will be subject to the standard city business tax under Santa Rosa City Code Chapter 6-04) – after two years this rate will also be set at 8%.

Santa Rosa believes its tax structure strikes the right balance between encouraging cannabis businesses to enter the regulated market, providing tax certainty to cannabis businesses, and ensuring the city has adequate revenue to regulate its cannabis industry. With nearly 60% of Sonoma residents voting in favor of the Adult Use of Marijuana Act, there’s a strong likelihood Santa Rosa’s tax measure will pass as well. Santa Rosa has the right balance of geography (between the Emerald Triangle and the big cities of San Francisco and Oakland) and forward thinking legislators who understand the benefits of proper regulation and taxation to be an attractive destination for cannabis businesses.

 

 

 

1600px-Flag_of_Washington.svgI previously wrote how “change would be coming” to Washington State’s cannabis law were Governor Inslee to sign SB 5131 into law. Governor Inslee has signed SB 5131 and is now set to go into effect on June 23, 2017.

If you hold a license to produce, process, or sell marijuana in Washington, you need to prepare for the legal changes stemming from SB5131. This post summarizes some key of the key changes you should expect from SB5131.

Requires disclosure of IP licensing deals. We previously wrote how the passage of SB 5131 would impact cannabis branding and intellectual property transactions and rights because it requires licensed cannabis businesses to disclose their IP licensing deals to the Washington State Liquor and Cannabis Board (the LCB).

Restricts advertising by licensees. SB 5131 focuses heavily on advertising. Since passage of Initiative 502, cannabis licensees have been banned from advertising marijuana or marijuana products within 1,000 feet of a school or other sensitive area where children regularly populate. This largely prevented advertising cannabis products by radio, TV, or in publications likely to be heard or distributed in or near schools. This is why you mostly see marijuana advertisements only in publications geared towards adults. SB 5131 extends this cannabis advertising prohibition to include not only cannabis products but cannabis businesses. In other words, cannabis licensees now need to be cautious about advertising their cannabis business in any medium where their ad could end up within 1,000 feet of a sensitive area.

SB 5131 also makes the following changes to advertising:

  • No advertising on cars.  The use of “transit advertisements,” which includes any cannabis advertisement on public or private vehicles, is prohibited.
  • No targeting tourists. Advertisements and marketing practices may not target “persons residing outside of the state of Washington.”
  • 21 plus. All advertising must contain text stating that marijuana products can only be purchased by persons 21 and older.
  • No marketing to kids. Cannabis licensees cannot market to kids and cannot “use objects such as toys or inflatables, movie or cartoon characters, or any other depiction or image likely to be appealing to youth.”
  • No mascots. Cannabis licensees cannot use commercial mascots outside of or near a licensed marijuana business. “Commercial mascots” include humans, animals, or mechanical devices used to draw attention to a business, and specifically includes inflatable tube displays, persons in costumes, and sign spinners.
  • Limited outdoor advertisements. Outdoor advertisements are limited to only text that identifies the “retail outlet by the licensee’s business or trade name, states the location of the business, and identifies the type or nature of the business.”
  • Limited indoor advertisements. Indoor advertisements are only permitted in facilities where minors are not permitted, such as bars. Under SB 5131, cannabis advertising is explicitly prohibited in arenas, stadiums, shopping malls, state fairs, farmers markets, and arcades.
  • No billboard advertising, except by retailers. Retailers will be the only cannabis licensees permitted to use billboards, but like all outdoor advertising, they too may only include text identifying the name, location, and the nature of their business on these billboards.

Allows ownership of five retail stores.  SB 5131 will allow individuals to possess an ownership interest in five retail stores. up from three under current law. Existing retailers may (and no doubt will) be able to purchase other licensed retailers and rebrand them with their own name and open new storefronts under their already established name.

Changes for producers & processors. Though medical marijuana patients in Washington are already permitted to grow cannabis in their homes for personal use and may form a collective to grow medical cannabis together there has been no legal means for medical patients to buy cannabis plants because cannabis producers were prohibited from selling cannabis to individuals who did not hold a license to produce, process, or sell marijuana. SB 5131 changes this by allowing “qualified medical marijuana patients and designated providers to purchase immature plants, clones, or seeds from a licensed producer.” This means cannabis producers can now legally sell immature plants, clones, and seeds to medical marijuana patients. However, “to purchase plants or clones, the patients and providers must hold a recognition card and be entered in the medical marijuana authorization database.” Patients that choose not to enter Washington State’s medical marijuana database cannot obtain a recognition card and may only purchase seeds. Though SB 5131 goes into place June 23, the LCB will likely need time to create rules and implement this program.

SB 5131 requires the LCB to adopt regulations for designating cannabis as organic similar to the federal the “organic” classification granted pursuant to federal regulations. Since cannabis is illegal under federal law, it cannot qualify under federal standards for organic certification. Cannabis producers and processors who choose to comply with Washington State organic standards can market their cannabis products as compliant with the LCB’s organic-style regulations.

SB 5131 also tasks the LCB with studying the viability of allowing processors to process industrial hemp. Under current Washington State law, processors may only process cannabis material grown by a producer. SB 5131 will not change this. However, depending on the results of the LCB’s study, processors could eventually be allowed to process hemp products grown by Washington farmers with permits to grow industrial hemp.

Washington marijuana businesses for years have faced a very robust set of rules and laws. SB 5131 only adds to the Evergreen State’s complex regulatory framework. Though businesses may view these regulations as overly burdensome, compliance is not optional and come June 23, SB 5131 will be the law of the land. Washington marijuana businesses should do all they can now to avoid pitfalls after June 23.