Recreational Marijuana

California cannabis rulesAt a Sacramento conference I attended last week, a panel of California’s cannabis regulators discussed the status of the state’s new cannabis laws under the Medicinal and Adult Use Cannabis Regulation and Safety Act (“MAUCRSA” a/k/a SB 94) that aim to reconcile California’s 2015 Medical Cannabis Regulation and Safety Act (MCRSA) and the 2016 Adult Use of Marijuana Act. MAUCRSA comes on the heels of a comprehensive set of proposed MCRSA regulations (see here, here, herehere, and here) and a slew of pubic hearings and commentary on those proposed rules. According to regulators, they are now incorporating public comments as well as MAUCRSA into their efforts to finalize the licensing rules before licenses begin to issue in January 2018.

Here are some of the potential changes to the MAUCRSA regulations discussed at Monday’s panel:

  1. The MCRSA proposed rules will be withdrawn in full, and new MAUCRSA rules will likely come in the fall that cover both medicinal and adult use. Some regulations likely will change from their current MCRSA form, but what likely won’t change is the license application requirements, and the state expects to begin issuing temporary licenses in early December for applicants with prior local approval. The temporary licenses will be good for only four months, though, and these licensees will still have to go through the full application process.
  2. Based on public feedback received to date, the regulators expect some cultivation rules to change, including the definitions for “mixed light,” “indoor,” “outdoor,” and “owner.” Also, the requirement for 42% renewable source energy for indoor grows will likely be revised to define exactly what qualifies as a renewable source and to potentially alter the percentage mandated, though it is unclear whether that would increase or decrease.
  3. MAUCRSA allows individuals to hold both medicinal and adult use licenses but only if there are located at “separate and distinct” premises. The MAUCRSA regulations will aim to clarify what “separate and distinct” means, and regulators on the panel didn’t seem to want a strict interpretation of that term so as to require entirely separate parcels, but instead discussed the possibility of allowing “physical barriers” of some sort between separately licensed medicinal and recreational activities.
  4. Under California’s existing Compassionate Use Act, medical cannabis operators have utilized mostly non-profit mutual benefit corporations as the preferred corporate form for compliance. What MAUCRSA doesn’t do is explicitly clarify how these non-profits might transition to for-profit companies without jeopardizing their licenses or prior local approval or triggering regulator scrutiny. The regulators acknowledged that this omission in MAUCRSA may foreclose specific regulation on the subject until further “cleanup” legislation is handed down from the legislature.

Though the public comment period on the MCRSA proposed rules has already passed, regulators stressed that they welcome further feedback from cannabis industry stakeholders ahead of their releasing proposed MAUCRSA regulations in the fall. They made clear that public input is an essential element of making sure California “gets it right” on developing and regulating a successful and safe recreational and medical cannabis industry.

To help you better understand what MAUCRSA means for your cannabis business, three of our California attorneys will be hosting a free webinar on August 8, 2017 from 12 pm to 1 pm PT. Los Angeles-based Hilary Bricken will moderate two of our San Francisco-based attorneys (Alison Malsbury and Habib Bentaleb) in a discussion on the major changes between the MCRSA and MAUCRSA, including touching on vertical integration and ownership of multiple licenses, revised distributorship standards, and what California cannabis license applicants can expect more generally from California’s Bureau of Cannabis Control as rule-making continues through the remainder of the year. They will also address questions from the audience both during and at the end of the webinar.

To register for this free webinar, please click here. We look forward to your joining us!

Oregon Cannabis laws
Oregon’s Cannabis Laws

Last week, the 2017 Oregon legislative session came to an end and it wound up basically how we thought it would. During the five-month term, the Oregon legislature passed a raft of cannabis bills related to medical marijuana, adult use pot, and industrial hemp. In addition to the new laws (which I’ll get to in a minute), this session was notable for the dissolution of the aptly named Joint Committee on Marijuana Regulation. The Joint Committee was created over two years ago for the express purpose of implementing Oregon’s Measure 91. Now that the Joint Committee has dissolved, you can expect to see fewer bills on cannabis going forward: most of the work to shape legislation and public policy is done in committee.

With no more Joint Committee and only a short legislative session to look forward to in 2018, industry players can only prepare for what probably feels like water torture at this point: the seemingly never-ending treacle of administrative rule-making by the Oregon Liquor Control Commission (adult use / recreational, and now medical marijuana); Oregon Health Authority (strictly medical marijuana) and Oregon Department of Agriculture (industrial hemp). Each of these agencies will make rules to implement and interpret Oregon’s revised cannabis statutes, as summarized below.

Senate Bill 1057. This was the big one, which, among other things: (1) requires medical growers use the METRC tracking system; (2) establishes immature plant limits for medical growers; (3) allows OLCC licensees to declare themselves as exclusively medical cannabis growers; and (4) assigns all cannabis labeling operations to OLCC. For a full list of the SB 1057 provisions and our take on their impact go here.

Senate Bill 56. Because the immature plant limitation in Senate Bill 1057 had many people freaked out, especially medical growers in transition to OLCC, the legislature quickly scrambled to pass SB 56, which suspends the immature plant limitation for a premises at which an OLCC application was pending as of June 23, 2017. This one seemed to make sense to everyone. The new law also allows for limited cannabis processing by small, licensed OLCC producers (<5,000 square feet of canopy; water or mechanical extraction only) and provides for the immediate suspension of any marijuana license for diversion of product to the illegal market.

Senate Bill 302. This bill removes provisions related to marijuana offenses from the state Uniform Controlled Substances Act. It also removes and/or reduces various criminal penalties related to marijuana crimes by unlicensed operators. The thrust of this bill was to treat marijuana crimes more like alcohol crimes, and it achieves that purpose. Because penalties for marijuana offenses were scattered throughout the Oregon statutes, this one has an enormous amount of tedious, conforming amendments, to something like 125 statutes.

Senate Bill 303. This law is similar in nature to SB 302. It amends, clarifies, and reconciles statutes related to minors possessing and purchasing both cannabis and alcohol. Generally speaking, it should have little effect on the cannabis industry.

Senate Bill 863. This one concerns consumer privacy, and it serves as a further attempt by Oregon to shield its citizens’ information from the federal government. The new law prohibits marijuana retailers from recording, retaining and transferring “information that may be used to identify a consumer.” This bill was short, sweet and non-controversial.

Senate Bill 1015. This new law provides that industrial hemp growers may transfer hemp to OLCC licensed processors. Similarly, industrial hemp handlers may transfer both hemp concentrates and extracts to processors. Expect a fee and some forms.

House Bill 2197. This is a neat bill that passed toward the end of the session. It allows the Oregon Department of Revenue to enter into agreements with the governing body of federally recognized Indian tribes (read: The Confederated Tribes of Warm Springs). Under those agreements, the State of Oregon would make rebate payments to the tribes for the estimated tax on marijuana items sold by tribes. Let’s wish the Warm Springs tribe luck.

House Bill 2198. HB 2198 is the only bill on this list that is not yet a law. It currently sits on Governor Brown’s desk for review, and we expect she will sign it. If she does, the bill would establish an Oregon Cannabis Commission, to report back to the legislature on the status and condition of the Oregon Medical Marijuana Program (which the legislature keeps curtailing). The idea here is to find a way to help medical marijuana patients who might otherwise be left behind. Among other things, this bill contains the controversial “20 pound amendment” which would allow designated Oregon medical marijuana growers to sell up to 20 pounds of excess flower annually into the OLCC market. It also makes changes to miscellaneous items, like the buffer rule related to schools and cannabis dispensaries.

Dear Californian cannabis entrepreneurs,

As you prepare to open your cannabis businesses under the MAUCRSA, perhaps with a few lifelong friends, you may be tempted to think “we’re friends, we don’t need to get the lawyers involved.” We don’t mean to be blunt, but you need to get it in writing regardless of the current camaraderie.

Cannabis contracts
Cannabis contracts. Because they make sense.

Failing to properly paper your company or your company’s transactions is a recipe for trouble in any cannabis state. In the rush to license, many Oregon and Washington State entrepreneurs skipped these vital steps. The result is that a few years after Oregon and Washington legalized recreational cannabis, we are seeing a rise in litigation among formerly friendly service contractors and marijuana businesses and especially between partners of marijuana businesses fighting over percentages, control, and responsibilities.

With the classic marijuana business ownership dispute, you have a case that makes attorneys, judges, and litigants pull their hair out. Two people start a business with the basic understanding that they are 50/50 partners. A third partner is introduced and they agree to give that person a stake but they never specify the amount of that stake nor whether the original partner shares will be equally diluted. The parties do not even know if they have entered into a binding contract. Nothing specific is in writing, but various emails and phone calls reference slightly different versions and iterations of the same deal. There is no right answer in a case like this, but everyone knows that if they do not settle, litigation will be expensive and contentious and risky.

Compare this to when a licensed marijuana business orally agrees on the basic terms for a future cannabis product transaction. We have written before about the Uniform Commercial Code (the “UCC”), which applies to transactions for the sale of goods. Though the lack of a written document in the business ownership matter (as discussed above) leads to all sorts of difficulties, in a sale of goods situation, the lack of a written contract can (but does not always) work out just fine. The default provisions in the UCC exist to protect parties with reasonable contract terms where they fail to bargain on those terms, even if there is nothing in writing. In other words, the UCC will fill in with clear-cut default provisions whatever the parties failed to agree upon. Nonetheless, having clearly worded and detailed contracts avoids any need to rely on the default provisions of the UCC, which may not be to your benefit if left ignored.

Without written agreements, these fights devolve into often intractable (and nearly always expensive) court battles over who said what and when. In many cases, these disputes would never occur if the parties could had a clearly worded set of bylaws, an operating agreement or services agreement. And if the dispute must go to litigation, it is often cheaper to argue over the meaning of a written contract, than to argue over what the parties orally agreed to in the first place.

Cannabis businesses need to take the same ordinary business steps as other business do to properly memorialize their business relationships. Please, take it from our lawyers who have operated in other highly regulated cannabis states–just get it in writing. You won’t regret it.

Sincerely,

Our Oregon and Washington cannabis lawyers

 

Buying a Los Angeles Cannabis dispensary
Buying a Los Angeles cannabis Dispensary? Due diligence is key.

With California’s recent passage of the Medicinal and Adult Use Cannabis Regulation and Safety Act (“MAUCRSA“), we finally know California will be combining its regulatory oversight of medical and adult use cannabis. We also know potential licensees no longer need to prove prior compliance with local laws to receive a state cannabis — which was the case under MCRSA, which has been repealed. This does not mean state licensees get to violate local laws. Instead, MAUCRSA lays out a sort of local vigilance program where the state notifies local governments of incoming licensees and the local governments then have to let the state know whether those licensees are complying with local cannabis laws. Local law is still king in California.

If you’ve been following the situation in Los Angeles, you know LA has an embattled history with its medical marijuana dispensaries. In addition to other enforcement measures, one of the City’s biggest battles has been enforcing Proposition D (a mere immunity-from-prosecution ordinance), which was essentially replaced this past March with ballot initiative Measure M that will finally regulate cannabis businesses within the City’s borders. Among other directives, Measure M ensured that Proposition D-compliant dispensary collectives would receive “priority” status for whatever local approval mechanism the City would design under Measure M. Despite the passage of Measure M, the question remained as to whether the City would increase the number of dispensaries and how exactly the City would regulate its cannabis operators.

Last month, Los Angeles released proposed Measure M regulations. Under those regulations (which are in a 60-day comment period), dispensaries that can prove “substantial” compliance with Proposition D will receive priority processing in the first round of the City’s issuance of “certificates of approval.” Though there has already been a fair amount of stakeholder dissent surrounding the use of certificates of approval and backlash against the proposal of a non-retail registry for cultivators and manufacturers, what has not been discussed as much is whether Proposition D-compliant dispensaries can essentially “flip,” or partner with third parties on, one or more of their certificates of approval (which include delivery and cultivation).

Even before institution of Measure M, folks were looking to “buy” Proposition D-compliant dispensaries, but ever more so now that owning such a dispensary gets priority processing from the City and because L.A. may not actually increase its number of dispensaries based on some restrictions in the proposed Measure M regulations.

If you are looking to get in on a Los Angeles cannabis dispensary you need to be thinking about due diligence. Due diligence on Los Angeles dispensaries is difficult because California’s existing MMJ laws under Prop. 215 do not require much operational or corporate accountability or tracking on either the state or local level. Also, because most of these entities are non-profits, there’s no equity to buy or sell. So you need to check the entity’s bylaws to make sure you can either take over the entity by paying a membership fee or that you can do some kind of director swap with an attendant asset purchase and that the entity will not need to give notice to thousands of patient members for you to do so. Given the unregulated nature of existing operators on a state level, you also need to make sure that the dispensary has been paying its taxes to the IRS (under 280e) and that it has been paying the Board of Equalization. Lastly, many Los Angeles dispensaries are not compliant with Proposition D and this too could cause you all sorts of problems. What makes for a compliant Proposition D dispensary? This is not entirely clear. Some believe that being on the 2013 City-issued list (which shows 134 dispensaries) proves compliance. Others believe the June 2017 map of dispensaries issued by the City Controller (which shows 139 dispensaries) is the proof you need. Proposition D says that to prove compliance, a Los Angeles dispensary must show the following:

1. Was operating as a medical marijuana dispensary in the City by or before September 14, 2007;
2. Had a business tax registration certificate (“BTCR”) or tax exemption from the City by or before September 13, 2007;
3. Was registered as a medical marijuana dispensary with the City Clerk by November 13, 2007. pursuant to the then existing pre-interim control ordinance number 179027;
4. Notified the City Clerk by February 18, 2011 of its intention to register under the city’s Medical Marijuana Ordinance 181068, as amended by temporary urgency ordinance 181530;
5. Has not ceased operations at its identified location for any of the following reasons: (1) court or government enforcement order to shut down or (2) lack of a lease or utilities (in the name of the dispensary or one of the managers/directors of the dispensary for the benefit of the dispensary) to the property. There are exceptions to this requirement if the dispensary ever relocated (which they were allowed to do) or if it temporarily closed down because of a shutdown letter from the Feds or the City prior to the temporary urgency ordinance 181530 but then re-opened;
6. Obtained its BTRCs for 2011 and 2012 (and has continued to renew those BTRCs with the City);
7. Has no outstanding or unpaid tax liability with or to the City (including any fines, penalties, etc.). There are some exceptions here on payments during the 2011 and 2012 tax years, and settlement agreements with the City are also exempt;
7. Has continuously complied with the various operational requirements in Proposition D;
8. Has had all dispensary managers over the years submit to the City livescan checks; and
9. From property line to property line, is at least 1,000 feet away from any schools and at least 600 feet away from any parks, churches, child care facilities, public libraries, youth centers, rehab facilities, and other dispensaries.
Under Measure M proposed regulations, the City will allow the dispensaries to explain any mitigating factors for non-compliance with Proposition D, but that’s definitely not a guarantee the dispensary will receive a certificate of approval.
If you are contemplating buying into or joining as an owner in any Los Angeles dispensary business, due diligence will be key. Proposition D compliant-dispensaries are valuable as they may end up being the only dispensaries in Los Angeles for a number of years. But don’t get sucked into investing in a Los Angeles dispensary that will not be able to prove its immunity under Proposition D–avoid this problem by doing proper due diligence.

Oregon cannabis due diligenceWelcome to the latest installment in our series on Oregon cannabis company acquisitions. In Part I of this series, we wrote about the general deal structures these acquisitions tend to take. In Part II, we wrote about how those structures are outlined at a high level, through term sheets. Today, we offer additional details on a topic we have covered before, for purchasers: due diligence on the target company.

If you are the type of person who enjoys sifting through large stacks of files and correspondence, or more likely, wandering around online in a virtual data room, you will love due diligence. If you are not that type of person, well, you get to do it anyway. The good news is that a corporate cannabis lawyer skilled in acquisitions can start things off with a comprehensive due diligence checklist, and begin looking under rocks on your behalf. Note that the form of checklist provided will vary, depending on whether the acquisition of the cannabis company is an asset purchase agreement, stock sale, merger, or other form of agreement.

Because due diligence occurs after a term sheet is executed, but before an acquisition is final, the due diligence period is the parties’ last big chance to walk away from a deal. On several occasions over the past few years, we have spotted show-stopping issues during the due diligence period, on either side of a transaction. If the issues cannot be fixed, these deals tend to die. Other times, the due diligence period will turn up nothing remarkable at all. And that is what you want, because in the world of due diligence, turning over rocks and finding nothing is progress.

When we covered this topic in March, we wrote that too often cannabis deals involve two sides rushing to complete a transaction without having done adequate due diligence on the potential cannabis company purchase. We offered a top five of due diligence items for purchasers, including some of the big ones: state and local law compliance, state law procedures for ownership changes, corporate authority, real property, and financial liabilities. We recommend you revisit that post, and today offer five more crucial items to look for during the diligence period.

Funky financial statements. Oregon cannabis companies tend to be new companies, and businesses with three or four years worth of financial statements, or even tax returns, are almost unheard of. Many cannabis companies stuff their skinny financial statements with unreasonable assumptions, under-estimates of working capital requirements, misleading margins, etc. If you are not comfortable auditing this type of information, enlist someone who is, and do not be afraid to ask lots of questions as you attempt to read the tea leaves.

Intellectual property. In an ordinary business transaction, a purchaser will be very interested in the target’s intellectual property. In the Oregon cannabis trade, brand power is important, but formally registered IP is less common than in other businesses, given the nature of federal law. That said, do not overlook: trade secrets (particularly for cultivators and processors), state trademark filings, and licensing agreements, to start.

Sales and Clients. Before investing in or purchasing a marijuana producer, processor or wholesale business, a buyer should understand who its top 5 or 10 clients are, whether these clients (who are usually other Oregon cannabis businesses) are loyal to the company, whether their operations will cause fluctuations in company revenues (common with producer clients, for example), and other factors. This means that in addition to doing diligence on the target company, it’s worth looking into the target company’s clients, at least in a cursory way.

Contracts. Like most businesses, a cannabis business will be party to numerous material contracts; and if the target business has no contracts for review, RUN. Types of contracts worth a close look include: customer and supplier contracts, equipment leases, real estate leases and purchase agreements, employment agreements, loans and credit agreements, and non-competes. Internal company contracts are also key, beginning with charter documents like shareholder and operating agreements.

Disclosure Schedules. As a part of any large or mid-sized acquisition, the target company will prepare a disclosure schedule addressing due diligence items, and identifying any exceptions to the representations and warranties requested by the buyer. If you are a target company, this will be the most important and laborious portion of the sale: so, it’s wise to start early, involve key employees and work with an attorney. If you are the buyer, this is the document you will cross-check against everything requested in your due diligence checklist.

If you make it through this vetting period, and are satisfied with what you have seen, congrats! It’s time to close the sale.

California CannabisThere have been countless reports of how California’s medical and adult use cannabis markets under the Medical Cannabis Regulation and Safety Act and the Adult Use of Marijuana Act (now, combined under the Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA“)) will generate billions of dollars in revenue. Unless more California cities and counties allow commercial cannabis activity within their borders, these numbers will prove far too high.

Our California cannabis clients are constantly asking us questions like, “where in California should I set up my cannabis business? Which California cities and counties are the friendliest towards cannabis? Who is regulating now for what I want to do?” And though the list of “welcoming” cities and counties continues to change, it seems the worst cities and counties for cannabis continue to remain the same, despite the will of the voters and the actions of the California legislature.

When it comes to cannabis the below is my list of the five worst California cities and counties for commercial cannabis activity — not shockingly, most on this list are in Southern California:

  1. Los Angeles County. The most populous county in the United States has for a long time had a complicated relationship with cannabis. Though at one point Los Angeles County passed comprehensive regulations for medical marijuana dispensaries, (which remain in the County Code to this day) it has since instituted a ban on dispensaries and, as of 2016, it has also banned all commercial marijuana activities within unincorporated areas of the County. In March of last year, the County voted to shut down all illegal dispensaries and it has vigorously pursued those shutdowns. It also adopted an ordinance that makes it explicitly illegal for landlords to rent to any marijuana operators. And just this month, the County again voted to extend the ban for an entire year on all marijuana-related business activity, though with this vote the County for the first time also outlined “reasonable regulations” for personal use of marijuana for medical purposes by individual patients. There is though some light at the end of the tunnel since the County expects eventually to pass comprehensive regulation for marijuana businesses. Though the MAUCRSA does not require local government approval of your cannabis business before you receive a California state license, eventual compliance with local laws is still required in the state licensing process. What this means is that unless and until L.A. County sets up its regulatory scheme, we shouldn’t expect a lot (or any) state-licensed or locally permitted commercial marijuana activity in the County.
  2. City of Riverside. In 2013, the City of Riverside won a landmark case before the California Supreme Court upholding its right to ban medical marijuana collectives within its borders under Proposition 215. And since the MAUCRSA does not prohibit cities and counties from banning marijuana businesses, Riverside is keeping with its prohibitions against cannabis businesses within city limits. City of Riverside voters rejected a 2015 ballot measure that would have allowed and regulated a small number of dispensaries in the City and since 2007, Riverside has shuttered 118 dispensaries — giving it the supposed distinction of being the only California city with a 100% closure rate. Riverside is keeping its ban on medical marijuana businesses in place for now, and though it has yet to make a decision about adult-use marijuana businesses, we can fairly safely predict that too will be a no-go.
  3. Orange County (and most of its cities). Though beloved cannabis reformer (and author of the Rohrabacher-Farr Amendment) Congressman Dana Rohrabacher hails from the OC, his home county and most of its cities are pretty bad when it comes to allowing for/regulating commercial cannabis activity. Orange County banned dispensaries (and all other medical marijuana activity) in 2010 after the Sheriff’s Department submitted a report to County supervisors stating that “dispensaries [were] responsible for an uptick in robberies, burglaries, weapons violations and money laundering.” Though some OC cities allow for small home grows for qualified patients and their primary caregivers, most OC cities (including its largest city, Anaheim)do not allow any commercial cannabis activity or they charge an arm and a leg for it (see Costa Mesa‘s approximately $94,000.00 price tag for cannabis permitting). And let’s not forget that botched dispensary raid in Santa Ana in 2015. Back in January of this year, the County did begin talking about regulation of marijuana businesses after passage of Proposition 64 but so far nothing has come of that discussion and OC cities mostly continue to opt for prohibition.
  4. Marin County. When it comes to cannabis business regulation and Marin County, two words come to mind: drama and disappointment. In December 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. The County Administrator, Matthew Hymel, rejected all ten of the applications pretty much over substantive concerns with each application and because residents were concerned about having an over concentration of brick and mortar dispensaries within the county. Eight of the ten applicants appealed that decision and Hymel rejected all of those appeals. To date, the County hasn’t picked up the torch again on a revised approach to regulating marijuana dispensaries or other commercial cannabis activity.
  5. City of Pasadena. If you can’t beat ’em, take away their resources. This is what Pasadena has done in a concerted effort to choke out and shut down illegally operating cannabis businesses within its city limits. It was reported that, as of May of this year, “. . . there are 12 shops in Pasadena that sell marijuana . . . None of them have permits to operate. One of two dealers with numerous citations for illegal distribution said through it attorney that it will not stop selling pot until ordered to do so by a court. Even after sending cease and desist letters and suing half of the operators, these shops still are not closing their doors. In response, Pasadena decided through an ordinance to shut off utilities to illegal operators to force them to close (not surprisingly, Anaheim and L.A. have also used this tactic). Pasadena makes my list not because it is trying to enforce its own laws but because it has not given immediate or emergency regulation a shot. Instead, it’s choosing to waste additional time and tax payer dollars shuttering operators it could have re-located, regulated and taxed.

Today closes out our five part series on “How to Open an Oregon Recreational Grow Operation” (see parts 1, 2, 3, and 4) with a discussion on canopy sizes and the medical bump-up canopy program. I also touch on Oregon’s marijuana worker permit program and discuss what you can expect after you submit your OLCC (Oregon Liquor Control Commission) license application. Remember that the law in this area has been changing rapidly, so much of what we have discussed so far is potentially subject to change.

Canopy Sizes. Your “canopy” is the part of your licensed premises that can be used to cultivate cannabis plants. In your cannabis license application you must tell the OLCC how much square footage you intend to use for cannabis cultivation, and you must clearly designate canopy areas on your site plan (see here for an example). The larger the total area, the greater your annual license fee:

  • Micro Tier I – $1,000
    • Indoor: Up to 625 sq. ft.
    • Outdoor: Up to 2,500 sq. ft.
  • Micro Tier II – $2,000
    • Indoor: 626 to 1,250 sq. ft.
    • Outdoor: 2,501 to 5,000 sq. ft.
  • Tier I – $3,759
    • Indoor: 1,251 to 5,000 sq. ft.
    • Outdoor: 5,001 to 10,000 sq. ft.
  • Tier II – $5,750
    • Indoor: 5,001 to 10,000 sq. ft.
    • Outdoor: 20,001 to 40,000 sq. ft.

It gets a bit more complicated if you have a mixed use site, but generally one foot of indoor area is equivalent to four feet of outdoor area. So, for example, a mixed-use Tier II producer could have all 10,000 indoor, a mix of 5,000 indoor/20,000 outdoor, or all 40,000 outdoor.

Oregon cannabis grow licenses
Your canopy areas do not have a height restriction, so feel free to expand vertically.

When you are deciding on your cannabis canopy limits, keep in mind that the limits apply only to mature plants, not to immature plants. You can grow as many mature plants as you can fit in your canopy areas. As there are no height restrictions, you should be thinking vertically.

Medical Bump-Up Canopy. Oregon’s legislature recently approved the “medical bump-up canopy” program, which allows recreational cannabis producers to set aside a small portion of their premises to cultivate medical cannabis. If you are interested in growing medical cannabis alongside your recreational cannabis, you can enter into a Producer-Patient Medical Canopy Agreement with up to 24 OMMP (Oregon Medical Marijuana Program) cardholding patients. These patients can reimburse you for your reasonable expenses, but you must give these patients their marijuana medicine free of charge.

Nevertheless, a medical canopy is still potentially profitable. Though you can grow up to six plants per patient, you can transfer no more than 3 pounds to a single patient in a year. This means you will likely have a surplus for each patient. The bump-up program allows you to generate some income from your medical marijuana crop by transferring up to 25% of that crop to registered producers and dispensaries.

Marijuana Worker Permit. Each of your employees must have a marijuana worker permit, including seasonal employees. Each permit costs $100 and each applicant must pass an online test and a background check. The OLCC has set up a simple website explaining the process, which includes a link to the study book.

What to Expect when the OLCC Follows Up. Once you submit your cannabis grow license application, the OLCC will conduct a preliminary review. You will likely receive a follow up letter from the OLCC identifying any deficiencies in your application you must resolve before you can obtain your grow license. To minimize delays, make sure your initial application is thorough and correct. The following are examples of issues that have come up:

  • Failing to properly identify the portion of a tax lot that will be leased to your company.
  • Including a residence within your licensed premises boundary.
  • Failing to properly label your site and floor plans, including the location of your cameras.
  • Failing to be consistent in your labels across site and floor plans.
  • Failing to provide dimensions for each structure on your property.
  • Failing to identify the materials that make up your fences/walls.
  • Failing to label each camera with a number on your security plan.

Once you are confident you have met all of your Oregon cannabis grow application requirements and you have the required documents in order, you will be ready to request an inspection. If all goes well, and you have complied with all local requirements, you will soon be a licensed recreational grow operation. Congratulations!

business-1320058_960_720Last week, I wrote on Oregon cannabis company acquisitions, and the types of deal structures these transactions tend to follow. I mentioned that before a transaction is consummated, but after discussions have commenced, the purchasing entity will typically discuss its plans with counsel. The lawyer will then draft a letter of intent or a term sheet to present to the target company. If the target company accepts outright, the transaction will proceed. If the target company does not accept outright (more common), it will submit proposed revisions.

Term sheets take many forms, but in a basic sense a term sheet describes the terms of the acquisition at hand. Because each transaction is a snowflake, each term sheet is also unique and must be carefully considered and prepared. Sometimes, the parties will skip the term sheet and simply proceed to the transaction in an attempt at “efficiency.” We strongly advise against this: it invites a substantial risk of misunderstanding as to which documents will follow, and when, and may even cause confusion as to deal points themselves.

Here is a basic list of items for inclusion in any term sheet for an Oregon cannabis company acquisition:

Binding vs. non-binding provisions. As a general concept, a well written term sheet will be organized by binding and non-binding provisions. The binding provisions will include items like non-disclosure, exclusivity, jurisdiction, and choice of law. The non-binding provisions will include the unique deal point items, such as purchase price, payment terms and collateral agreements (e.g. consulting agreement, non-compete, lease or land sale contract, etc.). When a non-binding provision is misplaced into the “binding” category, or vice versa, both buyer and seller can expose themselves to serious legal risk.

Nature of acquisition. The term sheet should clearly lay out whether the transaction is an asset sale, stock sale or merger, and whether the purchase price will be paid via cash, debt, equity swap, or other method. This portion of the document should also detail whether the buyer will proceed in its own name, or through a newly created entity.

Liabilities. In nearly all acquisitions, the purchaser will assume certain liabilities of the seller. These liabilities may include everything under the sun related to seller, or liabilities may be limited to select items, like assignable contracts. If specific liabilities are known at term sheet preparation, they should be listed, perhaps on a separate schedule.

Indemnification. Limitations on both seller and buyer liability can be a heavily negotiated portion of any term sheet. The term sheet should deal with any potential claim that may arise out of the parties’ pending agreements. It should also address claims existing prior to the transaction, the possibility of breaches of representations and warranties, issues of title to assets, tax obligations, employee benefits, claims arising out of marijuana’s status as a controlled substance, etc.

Employment agreements. Every term sheet should deal with the seller’s employees. Will they stay, or will the seller be required to fire them? What happens with regular employees versus executives? When can employees be apprised of the transaction? Failure to address employment can cause serious headaches for both parties.

Conditions to closing (contingencies). This list may be long and varied, and include items from the acquisition of third-party financing, to approvals by the shareholders and/or directors of the purchasing and selling entity. The satisfactory completion of due diligence by the parties is always a crucial item, and in the cannabis context, licensing (see below) is a critical issue.

Marijuana licensing. Like other adult use states, Oregon requires its cannabis companies to maintain state licensure. In certain areas, a local license may also be required. The administrative protocol for changes in license ownership can be complex and time-consuming, and may take on a unique character, depending on the type of acquisition. The licensing update or transfer protocol must be carefully thought through and delineated in the term sheet.

If you made it this far, congratulations; but please note that the above list is not at all exhaustive. There are many nuances to a letter of intent or term sheet beyond the deal points highlighted here. Once a term sheet is negotiated and signed, the parties can move into the formal due diligence phase mentioned above, and ultimately, to closing.

Oregon cannabis In the past six months or so, we have begun to see an increase in consolidation throughout the Oregon marijuana industry. Large companies from other states are moving in, and Oregon companies are buying each other’s assets or stock and integrating to form verticals. In business parlance, we have entered the scaling portion of the inevitable consolidation curve. This development should make for a lively second half of 2017.

Generally speaking, there are three primary structures that acquisitions follow: (1) stock purchase; (2) asset purchase; and (3) merger. Each comes with a raft of legal and tax implications, and each is discussed very briefly below:

  1. Stock purchase. Stock purchases tend to be favored by sellers. In these transactions, the buyer purchases some or all of the seller’s shares (or, in the case of an LLC, its units or membership interests). Sometimes, a buyer will purchase only a majority of the shares, and later force a sale of the remaining shares by statutory short-form merger, or simply as permitted under internal company documents. Unlike a buyer in an asset sale, a buyer of stock is purchasing the target company’s assets and liabilities.
  1. Asset purchase. Asset purchase agreements tend to be favored by buyers. Under an asset purchase agreement, the buyer purchases the seller’s assets and assumes no liabilities, unless the parties agree otherwise. Assets can be both tangible (e.g., inventory and equipment) and intangible (e.g., intellectual property and goodwill), but generally do not include cash. Unlike with a stock purchase, an asset purchase allows the buyer to “step up” the company’s depreciable basis in its assets, within IRS guidelines. From a taxation perspective, that can be crucial.
  1. Merger. In a merger, two entities combine to form one upon the issuance of a “certificate of merger” by the State of Oregon. The surviving company (purchaser) assumes all liabilities and receives all assets of the disappearing company (seller). We have seen fewer mergers in the cannabis space than stock purchases or asset purchases; the exception would be “downstream” mergers where the holding company absorbs its wholly owned subsidiary.

Before a transaction can be consummated, but after discussions have commenced, the purchasing entity will typically discuss its plans with counsel. The attorney will then draft a term sheet or a letter of intent, to present to the target company. Once the parties have negotiated and executed that foundational document, the purchaser will be ready to undertake the time and expense of performing due diligence on the seller and any related parties.

If the due diligence checks out, the purchaser may form a wholly owned subsidiary to purchase the target business, and to further insulate itself from liabilities of the purchased entity. In Oregon cannabis, there are also critical state licensing strictures related to consolidation. Those conversations are important to facilitate early on: in this way, the purchaser will not find itself sitting on unproductive assets after putting a bow on the transaction.

Acquisitions can be an intense process, and the blizzard of documents and disclosures can feel dizzying at times. Ultimately, though, these transactions tend to be memorable experiences for clients and attorneys alike. And in certain instances, an acquisition is crucial for a company to achieve its ultimate goals.

Stay tuned for Part II of this series, where we will discuss the cannabis acquisition term sheet, a critical document in these transactions.

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.