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

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

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

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

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

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

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

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

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

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

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

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

  • Carl Shuller

    Where are the provisions that “protect” small business that were promised. We were supposed to have 5 years before “big business” could enter the market. Not stating any residency requirements is going to create a disadvantage to those who have built this industry in California.

  • Alice McGovern

    “If an owner is married, the spouse does not have to go through the intense background checking process or get fingerprinted so long as he or she is not an owner in or controlling the applicant.” This is not true. There is a loophole, and even if you are an “owner,” if your interest is held in community property, you don’t have to list yourself as an owner. Re-read it, and you’ll see.

    • Canna Law Blog

      Thank you for your comment. No loophole exists for spouses where all community property interest holders must be disclosed to the state at the time of application, at minimum, but they do not have to be background checked or vetted by the state in the same way as an “owner,” unless that community property interest holder is an “owner” as defined by the rules or if they exercise control or authority over the business, also as defined by the rules. At minimum, all community property interest holders of license applicants have to be disclosed and if the community property interest holder is an “owner” or in control over the business, they will have to go through the more intense vetting process.

  • Alice McGovern

    “If an owner is married, the spouse does not have to go through the intense background checking process or get fingerprinted so long as he or she is not an owner in or controlling the applicant.” This is not true. If you read closely you’ll see that even if you are an “owner,” you don’t need to apply to be a licensee if your interest is held in community property. Big loophole.

  • Thomas Cloud

    There should be more dispensaries allowed because of the supply and demand is going to be decreased and create monopolies which would be an unfair business practice that would eventually raise the cost for consumers and make it difficult for small businesses to thrive.
    My Company Cloud 9 Collective, was registered with the state and city of Los Angeles in 2011 before proposition D was passed. However, the Land Lord received a cease and desist order from the FEDS and My company had to look for another location and was not able to find one until 2017. Accordingly, under proposition D all dispensaries would be given a reasonable time to relocate , and must give notice of their intent to continue operate.
    The rule allowing only those dispensaries registered before or in 2007 would be only ones given limited immunity, which is creating a monopoly and is unfair for those who were in business before proposition “D”