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.

As we wrote on Tuesday, the midterm elections were monumental for cannabis: Michigan voters approved of a proposal legalizing recreational marijuana for adult use, Utah and Missouri will soon establish medical marijuana regimes, and Texas Representative and marijuana antagonist Pete Sessions lost to a Democrat.

All in all, Tuesday was a good day at the state and national level. But cannabis wasn’t just on the ballot at the state or national level—many cities had measures on that would regulate cannabis in one form or another. This post discusses some of the more impactful ballot measures that won and lost in California.

california elections cannabis marijuana

To start, dozens of cities and counties in California had cannabis taxation measures, which is a good sign for the expanding market. Oakland voters, for example, approved of Measure V, which amends the local code to allow cannabis manufacturers and cultivators to deduct the value of raw materials when calculating gross receipts for tax purposes. Fresno voters approved of Measure A, which adopts a cannabis business license tax. As noted above, numerous cities had tax measures on the ballot—and they are quite literally all over the map.

El Dorado County had a number of cannabis measures on its ballot. Measures P, Q, R, and S each passed, allowing the retail sale, delivery, distribution, and outdoor/indoor cultivation of commercial cannabis for recreational and medicinal purposes. Interestingly, El Dorado County’s Measure N (a tax measure), didn’t pass.

Los Angeles County’s well-publicized Measure B, which would have established a municipal bank, failed. This was a closely watched measure in the cannabis industry, as many had hoped for a local bank in which to bank their earnings. Because the California effort to charter a state bank has cooled, local businesses may have limited options until a federal fix occurs.

Elsewhere, the City of Malibu passed Measure G, which will now allow retail sales of commercial cannabis and deliveries. Before, Malibu only allowed medicinal sales. But wait before delivering into Malibu from other cities; you’ll need a regulatory permit from the City of Malibu to do so. No word yet on what that application process will look like.

As noted above, these are just a few of the measures that were adopted (or not) on Tuesday. California, like many other places nationally, is certainly moving toward a more open marijuana landscape.

california cannabis intellectual property licensing BCC
These proposed BCC regulations would be a mistake.

As we’ve been blogging about for the last couple of weeks, the Bureau of Cannabis Control (BCC) recently released modifications to the proposed regulations for cannabis licensees, one of which effectively prohibits all licensing, white labeling and manufacturing agreements between two parties where one of those parties is not a licensed cannabis business. In our post on this modification, we urged stakeholders to submit written comments to the BCC expressing their opposition to the rule change. We also noted that we would be submitting formal comments as a firm on behalf of our clients and are publishing those comments here. Our hope is that the BCC understands the damaging implications this rule change will have on the industry here in California, and we will be following the rule adoption process closely to see how this shakes out.

Below is the full text of our November 2 letter to BCC, minus the letterhead and signatures. We will continue to dialogue with affected parties and regulators on this crucial issue as opportunities permit. Please continue to join us in making your voices heard!


Lori Ajax, Chief
Bureau of Cannabis Control
P.O. Box 419106
Rancho Cordova, CA 95741

Re:       Comments Regarding Modifications to Text of Proposed Regulations for All Bureau Licensees §5032-Commercial Cannabis Activity

Dear Ms. Ajax,

On behalf of Harris Bricken McVay Sliwoski, LLP and our clients participating in California’s cannabis industry, we submit our comments to the Bureau of Cannabis Control’s Modifications to the Text of the Proposed Regulations for All Bureau Licensees.

Our comments are limited to Section 5032 pertaining to “commercial cannabis activity.” This section proposes to expand the definition of “commercial cannabis activity,” which may be conducted only between licensees, as follows:

  • 5032. Commercial Cannabis Activity

(a) All commercial cannabis activity shall be conducted between licensees. Retail licensees, licensed retailers and licensed microbusinesses authorized to engage in retail sales may conduct commercial cannabis activity with customers in accordance with Chapter 3 of this division.

(b) Licensees shall not conduct commercial cannabis activities on behalf of, at the request of, or pursuant to a contract with any person that is not licensed under the Act. Such prohibited commercial cannabis activities include, but are not limited to, the following:

(1) Procuring or purchasing cannabis goods from a licensed cultivator or licensed manufacturer.

(2) Manufacturing cannabis goods according to the specifications of a non-licensee.

(3) Packaging and labeling cannabis goods under a non-licensee’s brand or according to the specifications of a non-licensee.

(4) Distributing cannabis goods for a non-licensee.

In particular, we take issue with the expansion of the definition of “commercial cannabis activity” to include “Manufacturing cannabis goods according to the specifications of a non-licensee” and “Packaging and labeling cannabis goods under a non-licensee’s brand or according to the specifications of a non-licensee,” as this modification will effectively prohibit all intellectual property licensing agreements between licensees and non-licensees. We have not encountered such a prohibition in any other state in which cannabis is legalized and regulated, and we believe that this modification would stifle the industry and eliminate many, if not most, of the brands currently on dispensary shelves in California.

Intellectual property licensing agreements are utilized widely throughout virtually every industry. We have assisted clients with many licensing deals throughout the state, none of which were intended to circumvent cannabis regulations or hide ownership or financial interests. In fact, our interpretation of the “financial interest holder” rule has been that the licensor in each of these licensing deals including a royalty component where the licensor receives a share of profits or revenue from the licensee must already be disclosed to the appropriate state regulatory agency as a “financial interest holder” in a licensee.

There are many reasons why intellectual property licensing agreements make sense for a licensed operator, and why access to intellectual property beyond that owned by licensed operators benefits consumers:

  • Many licensed operators do not have the resources to develop new technologies, products, or brand identities and intellectual property licensing can provide a mechanism for expanding and improving their product offerings.
  • Many companies and individuals that own intellectual property, such as recipes, techniques, processes, and brand identities do not have the resources to obtain local and state permits or are based in jurisdictions that do not allow commercial cannabis activity. Intellectual property licensing can provide a mechanism for these companies to provide their intellectual property to licensed operators and become fully disclosed financial interest holders in those licensed operators by taking a royalty based on product sales.
  • For entities that own multiple operations, it often also makes legal sense to utilize an IP holding company (that is not a licensed entity) to hold and manage the group’s IP portfolio for the avoidance of IP ownership disputes and liabilities, among other reasons.
  • Licensed intellectual property expands the ability of licensed operators to provide a greater variety of brands and products to consumers.

Eliminating the ability of licensees to enter into intellectual property licensing deals with non-licensees harms both licensees and consumers by restricting the number of brands and products available. It also seems that the Bureau’s goals may not be well-served by this proposed rule modification due to overbreadth of its scope. The intent of Sections 5032(b)(1) and (b)(2) appears to be preventing licensed entities from conducting cannabis business operations at the behest or at the direction of unlicensed entities. The main purpose of intellectual property licensing deals is not to direct an entity how to conduct its business, but to restrict the ways in which the intellectual property may be used, and to ensure compensation to the owner for those limited uses. The proposed modification to Section 5032 casts an unnecessarily wide net that would prohibit all manufacturing, packaging, and labeling operations by a licensed operator that happen to use intellectual property owned by a non-licensed entity—a result that does not serve consumers, licensed entities, or public safety. Just as a landlord should not have to be licensed in order to lease its property to a licensed cannabis operator in exchange for rent, an owner of a brand or a recipe should not have to be licensed in order to license its intellectual property to a licensed operator in exchange for compensation.

Rather than becoming the first state to prohibit IP licensing in its cannabis regulations, we recommend that the Bureau instead amend the following rule pertaining to financial interest holder disclosure requirements to explicitly include intellectual property and manufacturing agreements where the licensor receives a royalty as disclosable to the state (proposed language emphasized):

  • 5004. Financial Interest in a Commercial Cannabis Business

(a) A financial interest means an agreement to receive a portion of the profits of a commercial cannabis business, an investment into a commercial cannabis business, a loan provided to a commercial cannabis business, or any other equity interest in a commercial cannabis business except as provided in subsection (c) (d) of this section. For the purpose of this section, an interest in a diversified mutual fund, blind trust, or similar instrument is not a financial interest. For purposes of this division, an agreement to receive a portion of the profits includes, but is not limited to, the following individuals:

(1) An employee who has entered into a profit share plan with the commercial cannabis business.

(2) A landlord who has entered into a lease agreement with the commercial cannabis business for a share of the profits.

(3) A consultant who is providing services to the commercial cannabis business for a share of the profits.

(4) A person acting as an agent, such as an accountant or attorney, for the commercial cannabis business for a share of the profits.

(5) A broker who is engaging in activities for the commercial cannabis business for a share of the profits.

(6) A salesperson who earns a commission.

(7) A non-licensed entity that has entered into an intellectual property licensing agreement or manufacturing agreement with a commercial cannabis business for a share of the profits.

From an ownership and financial interest holder perspective, intellectual property and manufacturing agreements are no different than any of the arrangements already referenced in Section 5004 where a non-licensee receives a share of profits from a licensed entity. Intellectual property and manufacturing agreements that stipulate that all commercial cannabis activity shall be carried out solely by a licensed operator and that the non-licensee shall have no control over the licensed entity should not be treated any differently than leases, consulting agreements or any other agreement in which a non-licensee receives a royalty.

If the Bureau is instead concerned with the contents of these intellectual property licensing and manufacturing agreements, we recommend requiring disclosure of the agreements to the state, rather than prohibiting them altogether or requiring the licensor to secure onerous local approval and eventual state licensing for a commercial cannabis license they never intend to actually use. Washington State, for example, which has some of the strictest regulations pertaining to ownership and financial interests in cannabis businesses in the country, requires that licensors entitled to a royalty in a licensing agreement be disclosed to and vetted by the Washington State Liquor and Cannabis Board (WSLCB), and that the licensing agreement itself be disclosed to and reviewed by the WSLCB.[1]

We appreciate the opportunity to provide these comments to the Bureau’s proposed modifications to the text of the proposed regulations for all Bureau licensees and would be happy to engage in a dialogue to identify a means for regulating these types of business deals without causing significant harm to the industry and to consumers. If you have any questions, please contact Alison Malsbury at alison@harrisbricken.com or Hilary Bricken at hilary@harrisbricken.com.

[1]RCW 69.50.395.


Let’s hope that the Bureau considers these and other comments thoughtfully and seriously as California continues to build out its cannabis program architecture. We will keep you posted.

Jeff Sessions Hates Cannabis
Finally, Sessions is a goner.

Jeff Sessions, the drug warrior that may or may not have liked the KKK until he found out they smoked pot, is out as U.S. Attorney General. After two years of being relentlessly bullied by President Trump, Sessions has apparently had enough. The Sessions resignation is of special interest to the marijuana industry because of just how much he hates marijuana. So it’s great news that Sessions is out, right?

While it’s certainly not bad news, the real story is that it doesn’t really matter. Looking back at the Sessions era, the only truly significant act that he took regarding marijuana was the withdrawal of prior federal guidance to U.S. Attorneys regarding marijuana enforcement in January 2018. At the time, we couldn’t tell whether this was the first step in an organized crackdown on marijuana or simply a shot across the bow. As a result of the withdrawal of the prior guidance memos, discretion on whether to prosecute marijuana crimes shifted from the Department of Justice to each of the 93 U.S. Attorneys assigned to the various federal judicial districts.

But lo and behold, nothing actually changed in federal enforcement. There were rumblings out of Oregon (whose U.S. Attorney was just picked to chair the Attorney General’s Marijuana Working Group), but those rumblings led to stakeholder meetings and the issuance of detailed enforcement guidance. This is a far cry from the raids, arrests, and seizures that doom and gloom types predicted when Sessions was named Attorney General. To date, since Washington and Colorado legalized in 2012, there has not been a single instance in the United States where law enforcement has acted against a marijuana business unless it has been able to demonstrate significant violations of state law and violation of prior-stated federal enforcement priorities.

The takeaway, then, is that the cake has already been baked. With another round of state liberalization of marijuana rules, the country has continued its unstoppable march toward federal legalization/decriminalization. If the politics and logistics of enforcing federal marijuana laws against state legal businesses proved unworkable for Jeff Sessions, they are unworkable for anyone.

So celebrate – the Sessions era is over and hopefully we don’t have to sit through any more scoldings from the Attorney General trying to tie marijuana to the opioid epidemic. But even though we may be wrong, we think the real story of the Sessions era is that the fear of widespread federal enforcement of drug laws against state-legal actors will never come to fruition.

 2018 marijuana cannabis midterms michigan utah missouri

Today was a stellar day for marijuana advocates around the country. Not only did a handful of states authorize legalization of medical and recreational marijuana at the polls, but the Democratic Party took control of the House of Representatives, and one very problematic Congressman, Pete Sessions, was sent packing down in Texas.

Below is a summary of the big changes nationwide, with many of these results still firming up at the time of writing. Note that this post does not detail some of the “smaller” local developments, such as decriminalization in certain Ohio cities, enthusiasm for cannabis by Wisconsin voters, or many other positive developments ushered in by this evening’s voting.

Michigan

Congratulations to the Wolverine State, which voted to legalize adult use (recreational) marijuana statewide. Individuals who are at least 21 years of age will be permitted to possess and use marijuana and marijuana-infused edibles, and grow up to 12 marijuana plants for personal consumption (that’s quite a bit). Permitted retail sales will be subject to a relatively modest 10% tax. Per state law, ballot initiatives take effect 10 days after results are certified, which can take up to three weeks from yesterday. So, legalization should take effect by the end of the year. Michigan is the tenth most populous state in the nation, and the first Midwestern state to legalize cannabis– which is a big deal. (Yes, Michigan is a part of the Midwest.)

Missouri

Missouri is another Midwestern state to make giant strides on cannabis, legalizing medical marijuana statewide. Missourians reviewed three medical cannabis legalization measures on the ballot: the one that passed is known as Amendment 2. Amendment 2 is an impressive entrée into legalization for a couple of reasons: first, it actually amends the state constitution to allow medical cannabis; and second, it contemplates a licensing program extending far beyond decriminalization, to state licensure for cultivators, manufacturers, testing labs and dispensaries. Under the new regime, qualified patients with physician approval will be allowed to receive cards for any condition the physician sees fit. There will be a 4% tax on retail transactions. Of the three initiatives on Missouri’s ballot, this one was the best.

North Dakota

Alas, North Dakota failed to move beyond the confines of its medical marijuana program. Measure 3 would have allowed people 21 and older to possess, use, grow, buy and sell marijuana for recreational purposes, and it would have expunged previous cannabis convictions from criminal records. Stepping back, Measure 3 was an odd initiative in that it failed to include any language regarding regulation or taxes. Apparently, the idea was to let the legislature figure that part out, but Measure 3 advisers may be kicking themselves for that strategy today.

Utah

Like North Dakota, Utah is a fairly conservative state. In keeping with that ethos, Utah passed a fairly conservative ballot measure last night to legalize medical marijuana – but passed it nonetheless. Proposition 2 allows qualified patients with physician approval to a purchase two ounces of medical marijuana in any two week period, or products containing 10 grams of CBD or THC. Curiously, smoking medical marijuana isn’t allowed. To the good, patients who live more than 100 miles from a dispensary will be able to cultivate 6 plants at home, and there will be a caregiver program. The state will issue licenses for cultivation, processing, testing and dispensaries.

In all, Proposition 2 had a very interesting backstory, such that today’s legalization of medical marijuana in Utah was something of a fait accompli. You can read about that here.

Congress

Democrats took back the House of Representatives last night, which is great news for federal legislation prospects. Although cannabis is not a distinctly partisan issue these days, most progressive cannabis legislation tends to come from the House, and the prospects of moving marijuana legislation are far superior today than yesterday. The fact that the Senate is still solidly Republican is not ideal for federal legalization, but the prospect of compromise legislation on everything from decriminalization to banking to taxes — to say nothing of issues like industrial hemp — is better than ever.

Pete Sessions (“Prohibition Pete”)

This one could probably fall under the “Congress” paragraph above, but it’s a significant enough development to merit special mention. Back in March, I had fun writing about how Pete Sessions was almost single-handedly blocking cannabis reform, including bipartisan proposals, from his perch as Chair of the House Rules Committee. Well, Pete lost yesterday. This means that the undemocratic nonsense of blocking floor votes on issues that both parties want to vote on, is likely over. This development will probably be under-reported given everything else that occurred today, but it’s huge.

All in all, voters across the U.S. once again expressed their desire to do away with prohibition on November 6. This morning, 33 states and the District of Columbia have laws broadly legalizing marijuana in some form. The President may be open to reform, and we expect industrial hemp to be legalized within a couple of months. Interestingly, the U.S. has also found itself in a marijuana sandwich of sorts, between Canada’s recent federal legalization and Mexico’s imminent legalization. But that’s a story for another day.

For now, cannabis reform advocates should rejoice: Voters rejected prohibition in many places, nationwide.

label CBD hemp oregon FDA
Start from scratch with your CBD product labels.

Since the beginning of the year, our firm has received a growing number of inquiries related to the labeling of cannabinoids (“CBD”)-infused foods. This legal issue is particularly confusing given the fact that the U.S. Food and Drug Administration (“FDA”) has yet to provide clear guidance for this category of products. This post aims to shed some light on the matter by addressing some of the requirements with which manufacturers and distributors of CBD-infused foods, specifically those derived from industrial hemp, must comply in Oregon.

Unlike the State of Indiana, which recently adopted the most stringent labeling rules for hemp-derived CBD products, Oregon opted to defer to the labeling rules promulgated by the FDA.

The Fair Packaging and Labeling Act (“FPL”) directs the FDA to issue regulations requiring that all “consumer commodities” be labeled to disclose net contents, identity of commodity, and the name and place of business of the products’ manufacturer, packer or distributor. Specifically, the FDA rules aim to ensure that foods sold in the United States are safe, wholesome and properly labeled.

The FDA rules provide two ways to label packages and containers:

  1. Place all label statements on the front label panel (also known as the “principal display panel” or “PDP”), which is the portion of the package label that is most likely to be seen by the consumer at the time of purchase (i.e., the front of the package or container); or
  2. Place certain statements on the PDP and others on the information panel, which is the label panel immediately to the right of the PDP, as seen by the consumer facing the product.

Although the FDA gives you the option of placing all label statements on the PDP or split them between the PDP and the information panel, you must ensure that the following label statements appear on the PDP:

  • The statement of identity or name the food as commonly known or used (e., chocolate, pasta); and
  • The net quantity statement or amount of product.

Due to the FDA’s ambiguous position on CBD, manufacturers and distributors should refrain from using the term “CBD” in their statement of identity and should favor instead the term “industrial hemp-infused.” (If you have been on Amazon lately, you will notice that everyone has moved over from the “CBD” to “industrial hemp” terminology.) Note also that the FDA rules impose strict font sizes and methods to accurately determine the weight of your product. Make sure you comply!

In addition to the statement of identity and the net quantity statement, labels will have to provide:

  • The Manufacturer/Distributor Information.
  • Ingredients List: Each ingredient must be listed in descending order of predominance (i.e., heaviest to lightest).
  • Nutrition Labeling, unless you qualify for an exemption, such as the “manufactured by small businesses” exemption which applies to companies that refrain from making nutritional claims and generate $50,000 or less in annual sales.
  • Serving Size.

Lastly, manufacturers and distributors should abstain from making any health claims in fear of being investigated by the FDA which treats products with labels containing health claims as drugs, not food (see here and here more information on this issue). Sometimes, “health claims” can be a fine line, so you should assume that the FDA is going to take a restrictive view of what you can and cannot say.

Although the FDA does not impose a pre-approval process of food labels, manufacturers and distributors of CBD-infused foods should have their labels reviewed by an attorney before they enter the market. Relying on attorneys who are well-versed on the issue of CBD law will ensures compliance with the FDA rules, but also help manufactures and distributors avoid wasting money on reprinting labels and marketing materials.