Recreational Marijuana

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

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

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

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

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

 

California cannabis lawyerLast week, California lawmakers introduced a new bill to increase protections for California cannabis businesses from federal persecution. The timing couldn’t be better as a new president and incoming federal administration have many in the cannabis industry concerned about the future of legal marijuana in the United States.

California Assembly Bill 1578 would prohibit California state and local agencies from taking certain actions and assisting federal agencies in enforcing federal law against marijuana businesses for medical or recreational cannabis activities authorized under California law.

The prohibited activities would include:

  1. Using agency money, facilities, property, equipment, or personnel to assist a federal agency to investigate, detain, detect, report, or arrest a person for commercial or noncommercial marijuana or medical cannabis activity authorized by law in the State of California.
  2. Responding to a request made by a federal agency for personal information about an individual who is authorized to possess, cultivate, transport, manufacture, sell, or possess for sale marijuana or marijuana products or medical cannabis or medical cannabis products, if that request is made for the purpose of investigating or enforcing federal marijuana law.
  3. Providing information about a person who has applied for or received a license to engage in commercial marijuana or commercial medical cannabis activity pursuant to MCRSA or AUMA.
  4. Transferring an individual to federal law enforcement authorities for purposes of marijuana enforcement or detain an individual at the request of federal law enforcement for conduct legal under state law.

State and local agencies would only be allowed to take these actions if they receive a court order signed by a judge. Thus, AB 1578 would protect California cannabis businesses that are operating legally in the state from being handed over to federal law enforcement unless a judicial exception is made.

The bill is similar to other legislation proposed by California lawmakers and signed into law by California Governor Jerry Brown in September of last year. In Assembly Bill 2679, California lawmakers provided guidance for cannabis manufacturers currently operating in the state to increase their protection against misguided raids by local law enforcement. Then, under Senate Bill 443, California lawmakers revised the state’s asset forfeiture laws to reduce the risk of unfair property seizure by state and local law enforcement. SB 443 prohibits state and local law enforcement from transferring property seized under state law to a federal agency and also requires state agencies obtain a criminal conviction to receive a share of federally seized property or to recover their expenses.

If approved and signed into law, AB 1578 would be a good step to ensuring California cannabis businesses and consumers that the state of California is behind them and that it will not allow the federal government to interfere with their licensed and compliant cannabis businesses, at least not by providing the help of any state or local agencies.

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

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

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

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

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

Subject to [member voting restrictions in the bylaws]:

(a) Unless the articles or bylaws otherwise provide:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Stay tuned.

California cannabis marijuanaLast Friday, the California Bureau of Medical Cannabis Regulation (BMCR) announced in a press release that it has begun seeking applicants to participate in a Cannabis Advisory Committee. The role of the Committee will be to help the Bureau and other state agencies – the Department of Food and Agriculture (DFA) and the Department of Public Health (DPH) – develop cannabis “regulations that protect public health and safety while ensuring a regulated market that helps reduce the illicit market for cannabis.”

The Committee is required under Proposition 64 and is one of several steps needed if California is to keep its promise to begin issuing cannabis business licenses by Prop 64’s January 1, 2018 deadline. The agencies still have their work cut out for them, including the challenge of reconciling the conflicting provisions under the Medical Cannabis Regulation and Safety Act (MCRSA) and Proposition 64.

The Bureau and other state agencies have been holding pre-regulatory meetings throughout California over the past year to gather information from cannabis stakeholders, which it is now using to draft initial state regulations for the various cannabis license types. According to the Bureau’s communications director, Alex Traverso, the Cannabis Advisory Committee will meet several times during the next year to review drafts of regulations and share their opinions to ensure that California rule makers are on the “right path.”

They are specifically seeking input from representatives of the cannabis industry, labor organizations, local or state law enforcement, state or local agencies, and from communities disproportionately affected by past federal and state drug policy, as well as cannabis cultivators, environmental experts, patient advocates, physicians, public health experts, social justice advocates, individuals with expertise in regulating intoxicating substances for adult use, and individuals with expertise in the medicinal properties of marijuana.

The application to join the Cannabis Advisory Committee includes requests for any relevant work history in the cannabis industry, and past or present affiliation with a cannabis company, relevant qualifications to serve on the Committee, an explanation of why you wish to serve on the committee, and any potential conflicts of interests. Applicants will also need to provide four references and submit a resume and letters of recommendation. In addition, selected committee members may be required to complete a Fair Political Practices Commission (FPPC) Form 700, Statement of Economic Interest disclosing their personal assets and income.

Committee members will be appointed by the Director of the Department of Consumer Affairs (DCA), Awet Kidane. The DCA is not looking to fill a specific amount of committee seats, but instead the committee’s size will be determined by the number of qualified applicants. Also, the positions on the Cannabis Advisory Committee are voluntary, which means you will not be paid for serving on the Committee, but members are entitled to receive reimbursement of their travel expenses to approved meetings, which will be held in the state’s capitol in Sacramento.

If you’re interested in applying, the bureau says it will keep the application process open for at least a month. For those currently involved in or hoping to join the California cannabis industry, this is an important opportunity to help shape the laws that will impact your/our future. The best way to affect marijuana law and policy is to get involved, whether it’s at the local, state, or federal level.

Cannabis lawyersIt is easy to burn through money when starting a business. Expenses like market research and professional fees can kick in almost immediately, and capital expenditures like inventory, property and tools are unavoidable beyond the early stage. In addition to these traditional start-up costs, the state-legal cannabis industry brings regulatory add-ons, like licensing and permit fees, and, in some jurisdictions, requirements for plans by architects and engineers. Like any business, starting a pot business can be expensive. Only more.

In our Washington, Oregon and California offices, our cannabis business lawyers speak daily with entrepreneurs in the early stages of cannabis business planning. Given the recent advent of state-legal marijuana, even our most “seasoned” industry clients and those with industry cachet have operated above board for only a couple of years. Because the regulated cannabis industry is a start-up industry, everyone needs to monitor costs closely. Those costs include professional fees.

At the onset of business planning, it is tempting to engage a range of professionals to handle any foreseeable matter. Like any industry, the cannabis industry has its experts: lawyers, accountants, realtors, vendors and any variety of “consultants.” Many of these individuals can be helpful along the way, if used correctly. The key is knowing when, whether and how to engage each provider in the life cycle of your cannabis business.

Lawyer. Potential clients are surprised when we sometimes send them away. In Oregon, for example, licenses are tied to locations, and unless there is an urgent need for legal services (i.e., the business is being capitalized), we often suggest that would-be clients return after they have sourced a target property. At that point, we can hone in on zoning issues as well as the lease or sale transaction, while structuring the business to boot. Otherwise, with no location in mind, there is a tendency to run up fees unnecessarily, and before the point where a lawyer is truly required.

Accountant. In the cannabis industry, it is critical to have an accountant (as well as a lawyer) who understands the quagmire of IRC 280E. An accountant versed in the cannabis industry will be able to assess the pros and cons of various tax elections in the context of a tax code tilted against pot businesses, and offer ongoing planning advice. Like cannabis business law, cannabis accounting is highly specialized, but the right CPA can make all the difference.

Realtor. Many aspiring pot businesses attempt to find a realtor. Unlike lawyers or accountants, realtors generally do not work for an hourly fee; they typically get paid when a deal closes. In the marijuana industry, realtors are not enthusiastic about pounding the pavement for smaller placements, like a dispensary lease. The commission simply isn’t there. But, if you are looking at a larger transaction—and specifically to buy a building or a piece of property—a good realtor can be a real asset.

Vendors. Most cannabis businesses enlist a couple vendors at the onset of operations. The two most commonly retained vendors are insurance providers and security operators. Regarding insurance, cannabis businesses need the same products as other small businesses. This tends to include property insurance and workers’ compensation, in a highly specialized field. As to security, the cannabis industry is unfortunately still a cash game for the most part. Not only are security providers required for property set up and installation, but they are often hired to transport cash during business operations.

Consultants. There are innumerable cannabis consulting firms nationwide, but many of them do not add value. For this reason, we have cautioned (on more than one occasion) to be wary of expensive consultants, particularly at the outset of business operations. Most of what a consultant can provide can also be obtained for free, from other industry sources. Anything worth paying for can almost always be got somewhere else.

California marijuana license
California marijuana licenses: start now, but stay flexible

California lawmakers have been tasked with the difficult challenge of reconciling the Medical Cannabis Regulation and Safety Act (MCRSA), which legalized commercial medical marijuana activities, with Proposition 64, which legalized recreational marijuana use for all adults and is set to begin licensing commercial recreational businesses by January 1, 2018. We’ve previously blogged about this challenge and the state’s efforts to meet the 2018 deadline here, here and here.

The many conflicts between the MCRSA and Prop 64 include different timelines, license categories, rules on ownership, residency requirements, and tracking systems. Another key difference is that the MCRSA places limits on vertical integration, generally allowing cannabis licensees to hold state licenses in up to two separate categories and only in certain combinations. The MCRSA also does not allow licensed cannabis cultivators and manufacturers to hold a marijuana distribution license. Licensed cannabis cultivators and manufacturers in the State of California instead must work with an independent distributor to transport cannabis products to labs for testing and quality assurance before they enter the consumer market.

The California cannabis industry is divided on both vertical integration and distribution issues, and the side you take most likely depends on your views on allowing big business to operate under the new regulated cannabis regime. Growers and dispensaries in California are also divided on the issues. California dispensaries generally believe that the use of independent distributors is unnecessary and will ultimately increase costs for the consumers, small mom-and-pop operations worry that without limits on vertical integration they will be squeezed out by bigger, well-funded investments groups.

In contrast, Prop 64 places no limits on vertical integration, except that all testing labs must be independent and large Type 5 grows will not be able act as their own distributors (but these licenses won’t even kick in until 2023). For those hoping to create a vertically integrated cannabis business in California in 2018, Prop 64 offers a nice alternative to avoid the MCRSA’s limits and independent distribution requirements altogether.

However, this option could be gone by the time state licenses are issued. As California legislators work to develop regulations for both the MCRSA and Prop 64 that can operate simultaneously and in congruence, special interests are sending their lobbyists to the Capitol to try and influence the upcoming laws. Labor unions, investors, and entrepreneurs are all seeking to shape the laws that will most favor their members and bottom lines for when the California cannabis gold rush starts in earnest.

The coalition of Teamsters, local government, police chiefs, a Sacramento distribution company called RVR, and the California Growers Association (CGA) that helped draft the MCRSA bills wants to see the same limits on vertical integration and independent distribution requirements extended to recreational businesses under Prop 64. On the other side, cannabis manufacturers, the United Food and Commercial Workers (UFCW), and the California Cannabis Industry Association (CCIA) want to see a more free-market approach under the current Prop 64 model. They argue this is the model California voters supported when they passed Prop 64 last November.

To make changes to Prop 64, California legislators will need to pass any amendments by a two thirds vote. We advise cannabis license hopefuls to start NOW to prepare for California cannabis licensing, but remain ever mindful that much can change between now and January 1.

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

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

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

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

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

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

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

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

 

Producer_of_marihuanaIndividuals and companies looking to join the Oregon cannabis market often ask us lawyers whether we know of any licenses for sale. Some of these requests come from states like Washington, where licenses are no longer being issued and are frequently bought and sold. Others come from outside the regulated marijuana space altogether, from people who believe it advantageous to “purchase” a license, rather than start from scratch. Typically, however, Oregon licenses are not bought and sold.

As a preliminary matter, it is important to note that Oregon is a wide-open recreational cannabis market. State licensing fees are relatively cheap, and neither residency requirements nor other challenging barriers to entry exist. Most importantly, there is no cap on the number of licenses issued by the Oregon Liquor Control Commission (OLCC) — a fact that should drive the resale value of licenses down to zero as a basic economic proposition. So, Oregon is an open market where everyone is allowed to compete, and where entrepreneurs, not the state, will determine who succeeds.

During the Oregon cannabis license application process, everyone with a “financial interest” in a cannabis enterprise must be disclosed to OLCC. Having pushed through licenses for a while now, and lots of them, it is our experience that OLCC is flexible with ownership changes mid-stream (before a license is actually issued). After a license is out there in the world, however, the analysis is different: for a proposed change in ownership or business structure, OLCC requires submission of a form for its review, and payment of up to $1,000. If the proposed change of ownership is 51% or greater, a new application must be filed. OAR 845-025-1160(4)(d).

Because of the “new application” rule, licenses are never truly sold in Oregon. Instead, when Party A purchases the going concern of Party B, OLCC attempts to coordinate with both buyer and seller so that the old license is surrendered on the day the new license is issued. Note that Party A cannot take its license to a new locale; licenses are fixed to locations. The surrender/issue protocol is a theoretically simple process, although review is never expedited per se. This is because OLCC will want to vet Party B to ensure that nothing has changed regarding the physical space before it issues a new cannabis business license.

Often, it is attractive for new players to enter the Oregon market via acquisition, and our Portland office has vetted and handled pot business sales on behalf of everyone from publicly traded companies to single-member LLCs. The reason for the acquisition approach is because for certain lines of business, namely retail, locations that work with OLCC distance requirements and local zoning rules are scarcer than before. Thus, anyone interested in entering the Oregon pot market as a retailer may be better served to buy an existing operation, than to try to find an unclaimed space.

Altogether, the Oregon pot licensing system means that what is bought and sold in the state is almost always the cannabis business itself (whether that’s an asset sale or a stock sale) and never the license. Sometimes a premium is paid for a desirable location or other intangible item, but not for OLCC paper. So, if you are vetting a pot deal in Oregon and thinking of paying for the license, think again. Licenses are different here.

California marijuanaWe previously wrote about possible delays to California’s cannabis state licensing program due to conflicts between the state’s new medical and recreational laws under the Medical Cannabis Regulation and Safety Act (MCRSA) and the Adult Use of Marijuana Act (AUMA), respectively. The AUMA, aka Proposition 64, was passed by California voters last November and required state agencies begin issuing licenses by January 1, 2018 (hereinafter “the 2018 deadline”).

Last week, we provided an update on the work California legislators have been doing to get the state ready to issue licenses. Lori Ajax, the Chief of the Bureau of Medical Cannabis Regulation (soon to be the Bureau of Marijuana Control), promised audiences at a recent cannabis event that licenses would be issued by the 2018 deadline set under Prop 64.

However, California lawmakers are not so sure. On Monday, January 30, 2017, state Senate committees held an oversight hearing to discuss whether California agencies are on track to meet the 2018 deadline. During the hearing, Sen. Jerry Hill voiced “a considerable amount of skepticism” that the state would meet the deadline. Though lawmakers believe some agencies will be able to start processing applications by 2018, they doubt they will be able to issue all of the “tens of thousands” of licenses applied for by that time. Once the cannabis license applications are received, they could take months to process and complete the necessary background checks.

As Sen. Mike McGuire so aptly put it, the state is “building the airplane while it’s being flown,” and thus “it’s not realistic that all of the Proposition 64 rules and regulations will be in place by the new year.” The state’s process for rule-making includes the potential for further delays as public feedback could require a major reworking of regulations (followed by further feedback and more reworking) while new legislation could rewrite rules or change the process entirely (we covered proposed pot legislation here, here, and here).

Ajax admitted not everyone will receive their California cannabis license on January 1, 2018, but instead some could receive temporary licenses while the rest of the applications are being processed. She also stated that California’s state marijuana regulations will be in place by the 2018 deadline through a streamlined, “emergency regulation” process.

Ajax and her 11-person staff (six positions remain unfilled) are working hard to meet the deadline, but there is still a lot left to do. They have yet to convene the advisory committee required under Prop 64 to advise the Bureau and state agencies on drafting standards and regulations for marijuana businesses. Prop 64 also requires implementing a marijuana track and trace system the state has yet to develop. Besides creating the computer program behind the system, the government process will also involve long timelines for drafting proposals, selecting vendors, and completing a statewide rollout. Ajax has stated that applicants may not be included in the track and trace system by the 2018 deadline.

It’s currently unclear what would happen if California is unable to meet the January 1, 2018 deadline. Some argue it is better to have a well-crafted system later, than risk an ineffective system and a thriving illegal market. Since medical cannabis businesses can continue operating until state licenses are issued, the effect of any delay will fall mostly on prospective recreational cannabis businesses.