california cannabis licensing raceUnless you’ve been completely out of the loop, you already know that many, many people are in a race to submit their California state temporary cannabis license applications before December 31 of this year, which represents the “drop dead” date for cannabis temporary licenses. Add to that the regulatory curve balls thrown by the California Department of Food and Agriculture (CDFA) and the California Department of Public Health (CDPH) at the end of October (those agencies moved up the their temp licensing submission deadlines to December 1) and you have a stampede of people now trying to get their temporary license applications in by the end of this month. Thankfully, the Bureau of Cannabis Control (BCC) hasn’t yet said that there’s a low chance of successful processing if you submit after December 1, but given the back and forth it takes with the BCC to even get the temp, you may be out of luck.

Why does all of this matter? If you don’t have, or haven’t held, a temporary license for your current cannabis location (which is good for 120 days and gets renewed for additional 90 day periods so long as you’ve applied for your annual cannabis license), you’re ineligible for a provisional license next year, which means you’ll be on ice and non-operational unless and until you get your state annual license. No one really knows how long that will ultimately take.

If you’re finding yourself scrambling to get a temp license in before December 1, you’re not alone. The biggest roadblock of all has been would-be licensees securing local approval from their cities or counties. Certain local governments, though (like Long Beach, the City of Los Angeles, and San Diego) are obliging folks in their local licensing processes by providing them with letters of authorization. These letters of authorization only allow the applicant to go and apply for their state temp license(s)–they do not allow an applicant to actually open their doors until all conditions of official local approval have been met. That’s only half the battle though. Then you have to complete and submit your state temporary license applications, which depending on agency, is no picnic.

All three agencies will ask that you submit proof of local approval from your local government when applying for the temp license. They then contact the local government to verify local approval and the local government has no less than ten days to respond. By far though, CDPH has the simplest and easiest temporary license application. It’s literally one page, and you email or mail it to the agency. And you don’t have to submit even a lease agreement or a premises diagram either. Contrast that though with the BCC and the CDFA, which are a little more intense– especially since the re-adoption of the emergency regulations, which tweaked the temporary license submission requirements for those agencies.

For BCC (for which you must have an online account and then submit online or via hardcopy in Sacramento), you have to submit:

(1) The legal business name of the applicant; (2) The email address of the applicant’s business and the telephone number for the premises; (3) The business’ federal employer identification number; (4) A description of the business organizational structure of the applicant, such as partnership or corporation; (5) The commercial cannabis license that the applicant is applying for, and whether the applicant is requesting that the license be designated as medicinal, adult-use, or both; (6) The contact information for the applicant’s designated primary contact person including the name, title, phone number, and email address of the individual; (7) For each “owner” of the business, the owner’s name, title, percentage of ownership, mailing address, telephone number, and email address if applicable; (8) The physical address of the premises to be licensed; (9) Evidence that the applicant has the legal right to occupy and use the proposed location (that meets all mandatory buffer requirements); (10) A detailed premises diagram; (11) A copy of a valid license, permit, or other authorization issued by a local jurisdiction, that enables the applicant to conduct commercial cannabis activity at the location requested for the temporary license; and (12) a penalty of perjury statement.

For CDFA (for which you must also have an online account and then submit online or via hardcopy in Sacramento), you have to submit:

(1) The license type for which the applicant is applying and whether the application is for an M-license or A-license (note that CDFA still forces people to apply separately for M and A licenses even though those license type designations have since been combined); (2) If the applicant has already submitted an application for annual licensure, the application number; (3) The legal business name of the applicant entity; (4) The full legal name, mailing address, phone number, email address, and affiliation of the “designated responsible party,” who must: (A) Be an owner with legal authority to bind the applicant entity; (B) Serve as agent for service of process; and (C) Serve as primary contact for the application; (5) The physical address of the premises; (6) Copy of local approval; (7) A proposed cultivation plan; (8) Identification of all the following water sources for the cultivation site (as applicable): (A) A retail water supplier; (B) A groundwater well; (C) A rainwater catchment system; (D) A diversion from a waterbody or an underground stream flowing in a known and definite channel; and (9) Evidence of enrollment with the applicable Regional Water Quality Control Board or State Water Resources Control Board for water quality protection programs or written verification from the appropriate board that enrollment is not necessary.

Where are most people going to get screwed up here? Without a doubt, with the BCC it is the premises diagram and the proof of “right to real property” (I.e., your lease agreement). With CDFA, it’s going to be the cultivation plan, identifying water sources, and proof or registration or exemption with the applicable water boards. And many people don’t realize that the cultivation plan, itself, demands the inclusion of a detailed premises diagram, lighting diagram, pest management plan (for which you better have a good amount of knowledge regarding lawful and illegal pesticides and their applications), and waste management plan. All of this is not an insignificant amount of information to compile.

While folks are in the race now to get that initial (and very important) temporary license, there will be another push for these folks prior to the expiration of that 120-day validity period on the temp license where provisional licensing also requires that you have submitted a complete annual license application to the state, which will be another massive information gathering expedition about your cannabis business and how it operates. Undoubtedly, many would-be licensees are going to be out of the game if they don’t get their temps in on time, so stay tuned with updates as the California cannabis regulatory world turns.

cannabis business contractsYou can spend a lot of money on lawyers, accountants and consultants when starting a cannabis business. There is so much ground to cover from concept to execution– especially in a complex and highly regulated industry. Related to this issue, we have written on this blog about finding a team, and we have talked about the importance of things like operating formally, staying away from generic agreements and avoiding the seemingly bottomless pit of industry scams and schemes.

Today’s blog post will cover which documents are really necessary when structuring a cannabis business, and what you may be able to do without— at least in the beginning. Note that these are general guidelines. They are not intended to serve as legal advice and every business should use its best judgment and consult with counsel on these items.

  1. Stuff you cannot do without

Articles of Incorporation or Organization

This is very basic, but you cannot have a company unless the entity has been duly registered with the relevant Secretary of State. These days, most filings in most states can be done online, although there are situations where online filings are a bad idea, like when you want to do anything nonstandard with your Articles of Incorporation (for a corporation) or Articles of Organization (for an LLC). Those situations arise somewhat frequently. For example, you may want specific indemnity provisions for your board of directors beyond what the statutes contemplate. Or you may need to outline the attributes of preferred stock your corporation plans to issue. Many state registration portals do not allow “check the box” options for this type of tailored structuring. Get a solid cannabis business lawyer to help.

Internal Governance Agreements

If you have registered a multi-member LLC, it is a bad idea to proceed without an operating agreement and without an initial set of consent resolutions. The operating agreement in particular is going to define the spectrum of voting and economic rights each member has in the company, as well as crucial operational concepts. These concepts include non-industry specific matters (what happens when the company requires more capital?) to cannabis-specific matters (what happens when a member endangers the company’s state-issued license?).

In a corporation, you are going to have a few more agreements to start. Of these, bylaws and initial consent resolutions cannot be skipped. You will also need a shareholder agreement in most instances, and you will need to issue shares to owners (certificated or uncertificated). Other items, like a voting agreement, proxy agreements, etc., may be less important for some companies and you can often skip these to start.

Lease Agreement

Even if one of the cannabis business owners also owns the real estate at issue, you are going to need an industry-specific lease. A well drafted lease will insulate the property and its owners from liability if the cannabis business fails, or finds itself in litigation. When your business is leasing from a perfect stranger, the lease becomes even more important to outline the basic terms of the landlord-tenant relationship, on everything from your rights to occupy the property, to your rights to make modifications required to obtain a license.

Employee Handbook

If you have even one employee in your new business, get a handbook together. These internal business documents serve as a key communication tool between a business and its employees. A good handbook will set forth guidelines and expectations for workers, and perhaps most importantly, it can give a broad array of legal protections to business owners, as we previously explained here.

Third-Party Agreements

If your brand new cannabis business is doing a business transaction with a third party (some frequent, early examples include loans and services agreements) make sure you have adequately papered those items. Not memorializing a business or financial relationship in writing is asking for trouble.

  1. Stuff you can probably skip (for now)

Employment Agreements

Today, all states recognize at-will employment, with various limitations. This means that a written employment agreement is not needed (or even desirable) for many types of employees. An exception may be where the employee is occupying a highly specialized or highly compensated position, or has rights to vest in ownership. But if all you are worried about is an employee having access to proprietary information, you can generally cover this in an employee handbook, or through a simple non-disclosure agreement.

Stock Purchase Agreement

Lots of cannabis businesses try to raise capital shortly after formation, or as they approach licensure. They do this by selling stock or another form of ownership in the company. In our experience, though, it’s often best to wait until the business understands exactly how much money it needs to raise, and from whom, before drafting a stock purchase agreement. In many cases funds are raised from just one or two targets, and it does not make sense to draft purchase agreements until terms have been negotiated, or even memorialized in a letter of intent or other term sheet with prospective purchasers.

Business Plan

It’s a great idea to have a business plan, but not to pay a lawyer or consultant thousands of dollars to draft this for you. There is enough publicly available information out there for anyone to put together his or her own marijuana business plan these days; and you will know more than anyone you could hire about your goals. Even if you are unsure about some of the concepts at first, doing the research needed to put this document together will go a long way in educating and setting yourself up for success.


It’s easy to get lost when starting a business, and to rack up costs on unnecessary items, or items that are less important in the near term. Focus on the basics to start, and enlist a knowledgeable cannabis business attorney to get you off the ground. The lawyer should be able to provide you estimates for basic services, and allow you to focus mostly on what matters most– running a successful cannabis industry business.

industrial hemp cannabis farm bill

Just two weeks after Speaker of the House Paul Ryan expressed public support for the legalization of industrial hemp, Senate Majority Leader Mitch McConnell is now guaranteeing that the 2018 Farm Bill will include the industrial hemp legalization provision once the House and the Senate solve their difference regarding this issue.

If there’s a Farm Bill, it’ll be in there, I guarantee that,” McConnell told reporters last Friday.

(To watch McConnell’s hemp legalization guarantee, go to 13:15 into this video clip).

As we have discussed at length, the House and the Senate versions of the bill differ in that the House version is silent on the legalization of industrial hemp whereas the Senate version, which was introduced by the Senate Majority Leader himself, would remove the crop from the definition of “marijuana” under the Controlled Substance Act, and instead treat hemp like a standard agricultural crop. Indeed, although industrial hemp and marijuana are the same species, hemp contains a negligible amount of tetrahydrocannabinol (“THC”), the psychoactive compound that gives its users a high.

In justifying his support of the legalization of the crop, McConnell stressed the immense value and versatility of industrial hemp. In addition, McConnell declared that he became aware of the international implications of hemp legalization during his visits of hemp processors this past year and explained that major foreign investors have expressed interest in the hemp business, signaling the crop’s tremendous potential.

I don’t want to overstate this—I don’t know if it’s going to be the next tobacco or not—but I do think it has a lot of potential. And as all of you already know, in terms of food and medicine but also car parts…it’s an extraordinary plant.”

According to the Senate Majority Leader, once legalized, industrial hemp will be “lightly regulated” by the U.S. Department of Agriculture. In addition, there will be no more federal involvement except for the issuance of crop insurances to hemp farmers—which is one of the most significant provisions included in the Senate version of the bill. Instead, industrial hemp would be regulated by local law enforcement, pursuant to the state program under which hemp farmers would be registered.

Although McConnell acknowledged that a provision pertaining to work requirements for food stamp recipients had caused delays in the enactment of the 2018 Farm Bill, he declared that the enactment of the bill will be one of his top priorities when Congress reconvenes for a lame-duck session.

The continuing public support for the legalization of industrial hemp by conservative Congressional leaders strongly suggests that the enactment of the 2018 Farm Bill is imminent, which is fantastic news!

OLCC oregon violation license
Recommended compliance level for Oregon licensees.

A couple of months ago, the Oregon Liquor Control Commission (OLCC), for the first time, rejected a settlement offer from a licensee who had violated OLCC rules. At the time, we speculated the OLCC was done with settling and moving towards stricter compliance requirements. It seems, along with more stringent review of applications, the OLCC is doing exactly what we predicted and either rejecting settlement agreements or negotiating tougher settlements that result in licensees voluntarily giving up their licenses.

On September 21, the OLCC approved an administrative law judge’s (ALJ) order to temporarily suspend the marijuana license of the Corvallis Cannabis Club. Typically, a licensee is allowed to continue to operate as normal after receiving a charging document from the OLCC pending the outcome of a settlement or hearing. However, the Corvallis Cannabis Club was under investigation from the federal DEA and the OLCC agreed with the ALJ that a temporary suspension was necessary.

That same day, the OLCC also cancelled High Cascade Farms license after determining the licensee had violated 13 OLCC rules including transporting marijuana to an off-site location and intentionally misrepresenting to the OLCC what happened to the plants.

On October 26, 2018, the Oregon Bud Works agreed to surrender its license to the OLCC after committing 10 OLCC rule violations including changing the licensed premises without approval from the OLCC, failing to keep required surveillance video, and misrepresenting data in METRC.

I have spoken with several people at the OLCC recently about these developments. They all have the same message: now more than ever, it’s time to ensure compliance with the rules. The OLCC believes there has been sufficient time since legalization and the rules have rolled out for licensees to understand and abide by the rules. They are no longer willing to consider settlements that allow licensees to keep their licenses when there are multiple rule violations or especially egregious rule violations.

It unlikely that the OLCC will ever go back to reduced penalties for egregious violations or multiple violations. The agency seems less interested in teaching compliance at this point, than culling the herd. So what can you, an OLCC licensee do?

First and foremost, get familiar with the rules. Undoubtedly, the rules are expansive and overwhelming. They also change frequently. However, if you want to preserve your license, one of the most important assets you can have is a compliance person whose job it is to know the rules and ensure that your company complies at all times. On this point, make sure all of your employees are familiar with the rules, as well. The fact that an employee has a marijuana worker permit is not enough– your business is on the hook for any violation they may commit.

Second, when you have questions about whether a step or process is correct, specialized cannabis business attorneys are a great resource to assist. If you can have person dedicated to ensuring compliance and an attorney to help with interpretation when necessary, hopefully your licensed business will avoid a charging document from the OLCC. Those documents are looking more and more dangerous, and contesting them can be quite a process.

california cannabis temporary license
Hopefully, more cities are creative with this hard stop.

We recently wrote about an announcement by the California Department of Food and Agriculture (“CDFA”) that temporary license applications need to be submitted by December 1, 2018 in order to be reviewed on time for approval and issuance before December 31, 2018. To date, California Department of Public Health (“CDPH”) followed suit, but the California Bureau of Cannabis Control (“BCC”) has not. It’s safe to say that BCC applications submitted after December 1, 2018 have a low chance of being issued this year.

This is significant because after January 1, 2019, these agencies will have no legal authority to issue temporary licenses, and will not do so. After January 1, 2019, only provisional licenses will be issued, and only then to parties who hold or held temporary licenses. Parties that don’t have temporary licenses and thus cannot get provisional licenses will be stuck in the annual license logjam, which everyone knows moves at a snails’ pace. These deadlines cannot be solved with more regulations. They are from MAUCRSA and only the legislature can modify them. We wouldn’t count on that happening.

This time crunch places would-be licensees whose local applications are under review from California cities in a tough spot. As part of the state-level application process, the above-linked MAUCRSA section requires applicants to fork over “[a] copy of a valid license, permit, or other authorization, issued by a local jurisdiction”, and cities are not going to state that an applicant is approved while an application is under review.

Some cities have come up with creative solutions to this problem. The Los Angeles Department of Cannabis Regulation (“DCR”), for example, issued a release stating that it would issue to applicants from the second phase of applications (which closed a few months ago) who have paid their application fees a local letter of authorization that could be taken to the target state agency. The letter would not authorize commercial cannabis activity in Los Angeles. It would authorize an applicant to simply move into the temporary license phase, in order to eventually secure the provisional license that would eventually get them operational faster. At least one state agency, in turn, has expressed that letters from localities may be sufficient. Earlier this year, the CDPH wrote that local authorization may take the form of a “letter of acknowledgement”.

L.A. is a big city, and is swamped in applications. Our L.A. cannabis business and real estate lawyers have seen some other cities issue letters of authorization, but others that have refused. It’s not clear whether many other cities would write a letter of authorization, or what they would be willing to say. But it’s certainly worth reaching out to a city to see if they will.

cannabis marijuana scams
DON’T BE THE MOOCH.

This morning when I went to the gym before work, I put on an NPR podcast that delved into the story of the FTC’s bust of David Diamond. Diamond is an infamous Angeleno who defrauded hundreds of people via telemarketing scams. In the podcast, the interviewee does a great job of explaining the common scammer term, “mooch.” A mooch is, according to the podcast, “… someone who will essentially buy anything from anybody who calls [them] on the telephone.”

This got me thinking about the ideal marijuana mooch since so much fraud and bad behavior is rampant in the national marijuana marketplace. We’ve covered multiple marijuana scams here, here, and here (and have written about fraud and important red flags (and red herrings) in the industry multiple times in this past).

This time however, I want to dedicate this post to the top 5 red flags of which a marijuana mooch should be aware:

1.  Anyone who tells you to invest in cannabis at all costs because you might “miss the boat.”

News flash–big alcohol, big tobacco, and big pharma are not active in the U.S. cannabis space. Even though they may be thinking about it and may have future plans for it (and even if states may already creating “Big Marijuana” interests), there’s not one single U.S. cannabis company (that actually traffics in cannabis under state licensing laws) that’s tied officially or legitimately back to these big business interests. Normally, the mooch hustle is “You’re going to miss this once in a lifetime opportunity with cannabis since the bigger companies are flooding the space already, so you better invest all you have now, now, now.” Utilize your judgment to understand that this statement is not only overblown, but it’s untrue, and the source of the information is seriously suspect, even today. In any event, before you invest cannabis, which is an extremely volatile prospect, do your homework and determine whether there’s real value at the end of the elevator pitch.

2.  Marijuana penny stocks. 

Stay away from most marijuana penny stocks. As both we and the SEC keep pointing out, many (but not all) publicly traded cannabis companies are vehicles for investor fraud. As we have written before:

It almost seems that publicly traded stock companies are more focused on selling their stocks than on competing in the market. The herd mentality of investors seems to encourage this. Here’s how that basic logic works: Marijuana is booming. Therefore, marijuana businesses must be booming. In turn, all marijuana businesses must be booming. Therefore, I need to invest in a marijuana business. The only way I can easily invest in a marijuana business is to buy the stock in a publicly traded marijuana business. And so the stocks just keep booming.

All of which leads to pump and dump scams where “the group behind the scam increases the demand and trading volume in the stock and this new inflow of investors leads to a sharp rise in its price. Once the price rise has formulated, the group will sell its position to make a large short-term gain.” Pump and dump scams with publicly traded marijuana companies are still quite popular, especially as more and more states have legalized and “medicalized.”

3.  Marijuana franchises. 

Most marijuana franchise “offers” are just plain garbage because they fail to account for all of the reporting, registration, and disclosure requirements required by federal and state franchise laws and regulations. Franchising is governed by FTC and various state agency rules. Because of the state and federal law conflict with cannabis, franchising a cannabis business is a very risky proposition, and we are finding that most cannabis “franchisors” are not providing their potential “franchisees” with nearly enough risk disclosures to really inform franchisees and their investors what they’re getting themselves into at the end of the day.

4.  Marijuana reverse mergers (ESPECIALLY CANADIAN ONES).

Seems like everyone and their mother is trying to accomplish a Canadian reverse merger in the U.S. cannabis industry. Reverse mergers are a relatively fast, cheap and easy way for a private company to “go public” without having to go through all of the SEC reporting, disclosure, and registration requirements required by a standard initial public offering. Just like penny stock fraud though, reverse merger stock fraud is nothing new. In the typical reverse merger transaction, a privately operating company seeks to acquire controlling shares in an already publicly traded company with the goal of acquiring the public company’s listing. In the reverse merger scam, the underlying publicly traded company is usually just a shell company with little or no assets or positive business history. Because the underlying publicly traded shell has no assets, no real management base, and oftentimes no business at all, the whole point of these scams is to acquire investors and raise capital based on pumped-up stock statistics, prices, and claims before everything eventually goes bust. These scams tend to involve the same subset of marginal accounting and law firms that assist by securing IRS and SEC reporting delays. Like anything else, if you’re looking at acquiring stock in a reverse merger company, do your due diligence and know the red flags.

5.  Marijuana crowdfunding.

Back in May of 2015, the SEC released new crowdfunding rules designed to let the small fry swim with the sharks. As of May 16, 2016, companies were able to solicit $2,000 from anyone (and more in many cases) in exchange for an equity stake in their business. Companies can now raise up to $1 million annually through these offerings, which fall under Title III of the 2012 JOBS Act. As we have written before, the SEC does not care whether your business is a pot business, so long as you follow its offerings rules. Though the SEC’s rules for crowdfunding advertising are incredibly strict, we know there are a wind of crowdfunding cannabis companies seeking to skirt these new rules to the detriment of investors and mooches.

Don’t be the marijuana mooch! For more on cannabis scams, check out the following:

california real estate development agreement
You get what you negotiate in development agreements.

This is the third post in our three-part series on development agreements in California. In our first post we provide an overview of the use (and misuse) of development agreements in the cannabis industry. The second post breaks down the basics of development agreement laws. Here, we will discuss the key terms to include and what to watch out for when negotiating a development agreement with a public agency.

Term

As we’ve explained, California’s development agreement laws were enacted to provide assurances to developers faced with uncertainty in government approval processes for complex and long-term development projects. A development agreement should provide developers with assurances that the developer will see a return on investment by providing vested rights to engage in a particular use on a property. The rights are locked in so that if local laws change in the future (e.g., the voters or legislative body prohibit a particular use), the uses permitted in the agreement can continue for the remaining term of the agreement.

Accordingly, one of the fundamental terms of a development agreement is its duration. Commonly, development agreements in the non-cannabis context provide vested rights for a period of ten to twenty years. Properly building out a facility tailored for commercial cannabis uses may cost millions to tens of millions of dollars. If the term of a development agreement is only one to five years (as many California public agencies are proposing), a developer will not likely recoup the value of his or her investment. Imagine investing $15 million into a state-of-the-art cultivation and manufacturing facility, only to be prohibited from engaging in commercial cannabis activity one year down the road. Don’t go in for a short-term agreement!

Permitted Uses

Another key term of a development agreement is the description of permitted uses at the property. This clause should be given careful attention, and must be drafted to ensure that all of the contemplated uses of the property are explicitly spelled out. Stating “commercial cannabis activity” without referring to specific categories or license types will lead to confusion and potential problems. If the developer wants to engage in manufacturing, cultivation, and distribution, for example, then all of those uses should be described with as much specificity as possible to ensure that there is no question as to what the public agency authorized.

Many developers want to include uses that the local jurisdiction has not yet authorized. For example, a local jurisdiction may currently allow cultivation and manufacturing, but no retail use. A developer might want to engage in retail use at some point down the road, and therefore want to include retail in the permitted use clause. However, while a developer can commit to uses more restrictive than those set forth in the zoning ordinance, a development agreement may not allow uses or create exceptions to use restrictions beyond those allowed in the zoning code; to do so requires a rezoning or amendment to the zoning ordinance. Neighbors in Support of Appropriate Land Use v County of Tuolumne (2007) 157 Cal. App. 4th 997, 1015. Once the zoning code is amended, the developer can apply to amend the development agreement accordingly.

Vested Rights

Another fundamental aspect of a development agreement is the provision of vested rights to the developer. A “vested right” is a right to proceed with construction or other land use activity despite an intervening change in the law. See Avco Community Developers, Inc. v South Coast Reg’l Comm’n (1976) 17 C3d 785. Obtaining vested rights is essentially the entire point of a development agreement. However, we have seen some cities attempt to expressly prohibit developers from obtaining a vested right to engage in commercial cannabis activity. A development agreement should explicitly grant vested rights to the developer, and the vesting should not be conditioned on unreasonable or unattainable benchmarks.

Notice and Cure Period

Development agreements should provide developers with an adequate notice and cure period to enable the developer to remedy any problems and maintain its rights under the agreement before the public agency has the right to terminate. Vested rights under a development agreement are a valuable asset to the property, and developers (and their lenders, if applicable) need to have an opportunity to cure any potential defect and remain in good standing with the public agency to protect the value of the property.

Non-Mandatory

A development agreement should provide developers with the right, but not the obligation, to develop and use a property. Similarly, a development agreement should not require the developer to pay fees for a use it does not pursue. Many development agreements we have seen purport to require developers to pay fees to the public agency even when the cannabis uses are not actually pursued by the developer.

Construction Schedule

Some public agencies require developers to include a construction schedule in the development agreement. If the public agency insists on such a provision, make sure that the proposed schedule provides maximum discretion and control to the developer, is realistic and attainable, and does not penalize developer for failing to reach certain construction milestones. Construction is riddled with unforeseeable delays, which means there is a strong chance of running afoul of the development agreement terms or having to amend the development agreement if a strict construction schedule is spelled out in the agreement.


This post is not exhaustive, and you should consult with an experienced cannabis real estate attorney before negotiating a development agreement related to this highly dynamic industry in California.

oregon cannabis marijuana sisters sumpter klamath clatskanie ontario
Oregon is getting greener and greener each cycle.

Cannabis not only won big around the country on Election Day 2018, but also on a local level last week within states that had already legalized adult use marijuana, such as Oregon and California. As to Oregon in particular, a handful of cities voted to lift bans on recreational marijuana on November 6. Nearly all of them succeeded.

As we’ve previously explained, Oregon allowed cities and counties to opt out of the legal sale of recreational cannabis. Many cities and counties–particularly rural areas east of the Cascades–chose to go this route. One of the few ways cities and counties can lift the ban is through local initiatives that are presented to the voters. On November 6, some of those previously opted-out Oregon cities were able to life their bans through this process.

Ontario

Back in 2014, when Oregonians as a whole voted on the legalization of recreational cannabis use and sales, Ontario, Oregon was one of the cities that overwhelming voted against legalization. Ontario’s strong stance against the legalization of recreational marijuana allowed the city to ban the sale and production of marijuana. That all changed on November 6, 2018. According to preliminary results, the city lifted the ban with 1904 citizen voting in favor of the sale and taxation of marijuana within the city and 1450 voting against. The ban will officially lift on January 2, 2018. At that time, marijuana business owners can submit applications to the city for conditional use permits to open retail stores in the City. (Full disclosure: We worked on this initiative process.)

Klamath Falls

Similar to Ontario, Klamath Falls banned marijuana after the November 2014 statewide vote. On election night 2018, the Klamath Falls voters passed an initiative allowing recreational sale of marijuana in the city. Klamath Falls ban on recreational sales will be lifted in February 2019.

Klamath Falls faced strong opposition in an anti-pot PAC that raised more than $23,000 against the petition. Not a small measure for a local election. The surrounding county, unfortunately, is still dry.

Clatskanie

Unlike Ontario and Klamath Falls, Clatskanie citizens voted on what is known as a “referendum.” A referendum is an ordinance passed by the City Council that is put to public vote. Here, the city council of Clatskanie proposed a vote on banning marijuana businesses in the City limits. The voters made their intentions clear and struck down the ordinance—meaning the City must allow marijuana businesses within City limits. Another win.

Sumpter

Sumpter may have squeaked out a victory for recreational marijuana businesses on election night. According to the Baker City Herald, 73 persons voted no to banning marijuana businesses whereas 72 voted yes to the ban. Sumpter may be joining Klamath Falls and Ontario in the new year licensing recreational marijuana businesses. This one is incredibly close.

Sisters

Unfortunately, Sisters was unable to generate enough votes to lift the ban. Nearly 57 percent of voters in Sisters voted to keep its current ban on recreational marijuana businesses banned in the city limits. Perhaps city residents were biased after two Sisters residents were arrested on October 11 related to an illegal operation.


All in all, it was a good night for local cities. Many Oregon cities have tried and failed to lift bans in past elections, however, there seems to be a clear movement towards lifting bans in cities to allow the recreational sale of marijuana (and getting access to that growing stream of state-wide tax revenue). We here at Harris Bricken are hopeful the trend will continue, and are excited to be a part of it along the way.

BCC california cannabis marijuana
We’ve got a lot of questions for the BCC right now.

Last month, California’s regulatory agencies charged with writing commercial cannabis rules released new modifications to the final rules proposed in July. The Bureau of Cannabis Control’s (BCC) proposed modifications contained some of the most dramatic changes, including what would effectively be an outright ban on intellectual property licensing for cannabis products—something we are still trying to wrap our heads around due to the seismic effect it would have throughout the industry. The comment period is now closed on the proposed modifications, so now we must wait and see what the BCC decides to do with its final rules in the next few weeks. (To see at our law firm’s comments to BCC on this, go here.)

The proposed rule banning IP licensing agreements is the result of the BCC’s attempt to redefine what constitutes “commercial cannabis activity.” Existing California statutes—which allow the BCC to create and modify cannabis rules—already require that “all commercial cannabis activity shall be conducted between licensees.” So, if you are conducting “commercial cannabis activity” you must have a license to do so. But what truly is “commercial cannabis activity,” and where should the state draw the line?

Current state law defines “commercial cannabis activity” as “includ[ing] the cultivation, possession, manufacture, distribution, processing, storing, laboratory testing, packaging, labeling, transportation, delivery or sale of cannabis and cannabis products.” That much makes sense—activities that touch the plant or its products fall squarely within a common sense understanding of what activities should require a license from the state. But under the BCC’s new proposed rules, the following would now also constitute commercial cannabis activity:

  • Procuring or purchasing cannabis goods from a licensed cultivator or licensed manufacturer on behalf of, at the request of, or pursuant to a contract with a non-licensed person;
  • Manufacturing cannabis goods according to the specifications of a non-licensee;
  • Packaging and labeling cannabis goods under a non-licensee’s brand or according to the specifications of a non-licensee; and
  • Distributing cannabis goods for a non-licensee.

Distributing cannabis goods for an unlicensed operator seems straightforward. But for the other additions, such a broad reading of the statute would undoubtedly sweep many activities within this prohibition that in fact have little or nothing to do with actual cannabis activity. For example:

  • Some types of cannabis licensees are not prohibited from conducting certain types of non-cannabis activity (e.g. manufacturing, distributing, and selling cannabis accessories). To prohibit any of those non-cannabis contracts from having any interaction with cannabis contracts would add an unnecessary restraint on trade. Perhaps a non-licensee makes vape batteries and as part of its distribution agreement wants to require its licensed retailer partner to only purchase cannabis oil from a certain licensed manufacturer to preserve its brand integrity. Under the new rules, that would be prohibited.
  • Imagine that same battery manufacturer wanted to require that same manufacturer by contract to produce vape oil to certain specifications, to ensure the device functions as designed. Under the new rules, that would be prohibited.
  • The third point is perhaps the most concerning, as we have already discussed previously and written directly to the BCC. It means that anyone with a brand, whether they already associate it with cannabis products or not, would now be prohibited from selling licensees the right to use that brand on packaging or labels for cannabis goods. This would mean that if you want to have a brand you also have to have a license, which means you also have to be a cannabis operator of some kind. And the entity that holds the license to operate must also own the rights to the brand – holding the intellectual property in a separate entity for liability purposes would not be allowed. Such an arbitrary barrier to the use of intellectual property is an unnecessary restraint on trade.

It’s not clear exactly why the BCC believes these rule modifications are necessary or justified; it only states in its notice of modifications that it had been made aware “that licensees may be engaging in such conduct” as would now be prohibited by the new rules. It’s also unclear whether the BCC will stick with these changes or discard them based on feedback received during the comment period—only time will tell.

Earlier this year, the Washington Legislature passed House Bill 2334 (the “Bill”) into law. The Bill allows licensed marijuana producers and processors to use cannabidiol (CBD) from a source not licensed by the Washington State Liquor and Cannabis Board (LCB). The Bill defines a “CBD product” as “any product containing or consisting of cannabidiol” and would permit the use of CBD products from unlicensed sources so long as the CBD product has a THC level of 0.3 percent or less on a dry weight basis and has been lab tested. The Bill essentially allows Washington processors to add CBD from industrial hemp derived in other states into Washington marijuana products.

Washington’s regulated cannabis market is a closed loop that works on the principle that no marijuana comes in and none goes out. Everything sold in a licensed retail store is grown by licensed producer and processed into products like oils and edible by a licensed processor.

cannabis washington lcb marijuana
Start ramping up ahead of December 1.

On October 31, the LCB enacted new regulations in light of the Bill. These new rules impose some additional requirements and restrictions with regards to CBD derived from sources outside of Washington’s framework. The LCB will not allow the addition of CBD to useable marijuana flower. That means CBD additives will be limited to edibles, oils, tinctures, and other products that are derived from marijuana. Licensees will have to enter CBD products into the LCB’s traceability system, keep the records up-to-date, and the additives labeled. And licensees must also keep CBD additives quarantined from other marijuana until the CBD additives have gone through lab testing.

The LCB already requires that all marijuana and marijuana products undergo lab testing. WAC 314-55-102. CBD additives will go through additional testing under these new regulations. CBD additives that do not pass testing cannot be added to marijuana products.

In addition to the THC threshold, outside CBD must be tested for contaminants and toxins by the same accredited labs that test other marijuana and marijuana products in Washington. Licensees must submit samples of CBD additives to accredited labs. The samples must be representative of the entire product and must be one percent of the product as packaged by the manufacturer but no less that two grams. The samples must be collected in a sanitary manner, meaning the person collecting the samples must wash her hands, wear gloves, and use sanitary utensils and storage devices. Samples must be labeled with an unique identifier number, the trade name of the lab receiving the sample, the license number and tradename of the licensee, the date the sample was collected and the weight of the sample.

The CBD additives must be tested for THC to ensure that the product contains less than 0.3 percent. The additives are also tested to determine/verify the levels of THC and CBD. CBD additives must be tested for pesticides, heavy metals, residual solvents, microbiological matter, and mycotoxin.

For any questions on these new rules, give us a call. The new rules take effect December 1, 2018.