oakland cannabis marijuana

Oakland’s City Council recently passed what is, to our knowledge, a first-of-its-kind ordinance intended to protect residential tenants in the city’s “Green Zone” from being evicted by cannabis businesses (as a resident of Oakland’s “Green Zone,” this is an issue of both personal and professional importance to me). The ordinance passed on its first reading last week, and the second reading will happen today.

The issue of cannabis-fueled residential displacement in Oakland seems to have come to everyone’s attention a few months ago, when a Denver-based cannabis company called Green Sage bought The Oakland Cannery, a community of live-work lofts that house more than 30 artists and makers. The tenants learned from representatives of the company that their intention was to convert the building to commercial use space, and to use it as a cannabis cultivation facility. Residents were told they would not be allowed to stay.

While many within the industry are quick to tout the economic benefits brought about by cannabis legalization (which are undeniable), Oakland is one of the first cities to grapple with the potential negative downstream effects on communities that are suddenly flooded with cannabis business dollars. The City recognizes the Bay Area’s affordability crisis in terms of housing, as well as the importance of “affordable housing and space for artistic and creative enterprises and small economic enterprises and businesses.” The City of Oakland Planning Code allows for a variety of live/work uses in its industrial and commercial zones, which provides important affordable housing and space for these creative and small economic enterprises.

The live/work spaces that the City is seeking to protect are located within the City’s “Green Zone,” which was established in May 2016. Since Spring of 2017, when the City began receiving applications for cannabis businesses, they have received more than eight hundred such applications. In its report, the City identified at least twenty-five permitted live/work properties in the “Green Zone” where cannabis businesses are allowed to situate. The City recognized that these properties, which are located in traditionally industrial areas, tend to be “both more affordable for residents and more conducive to businesses that support artists, makers, and other workers in creative sectors than in other areas of the City that allow more traditional housing and commercial uses.”

As anyone with any experience in vying for a properly-zoned space for their cannabis business in California knows, these spaces are hard to come by, and competition is fierce. The fact that an out-of-state cannabis company purchased The Oakland Cannery does not surprise us, and without intervention by the City, it’s likely that other owners of these live/work buildings would be tempted by the soaring purchase prices commanded by buildings that are zoned for commercial cannabis uses. Buildings in areas of Oakland that were for many years completely undesirable are now quite valuable, if those buildings can be put to use for cannabis cultivation or manufacturing.

In passing this ordinance, the stated purpose of the City Council is to “restrict and prohibit the issuance of cannabis approvals and permits in properties utilized for Work/Live or residential purposes [that existed as of March 6, 2018] to preserve the public peace, health, safety, and general welfare of the citizens and residents of the City of Oakland.” As we stated above, this is the first ordinance we’ve seen that intentionally carves out a cannabis zoning exception for live/work spaces, and given the character of the communities in Oakland that are encompassed by the “Green Zone,” I think this ordinance makes sense. It certainly shows that the City of Oakland continues to regulate cannabis in a way that is both progressive and beneficial to its communities and residents.

california marijuana c-corpIt’s a good time to revisit the very basics of cannabis company structuring, particularly in light of two new developments in 2018: tax reform and California state-wide legalization. Thus, this three part series “Reviewing Corporate Law Basics” will address:

  • Part 1: Cannabis Entity Selection: Corporation, LLC or Something Else?
  • Part 2: Equity Incentives for Your Startup: Restricted Stock, Stock Options, or Something Else?
  • Part 3: Canna Exits in 2018: Sale, Merger, or Something Else?

Cannabis Entity Selection: Corporation, LLC or Something Else?

Prior to California’s Prop 64 taking effect on January 2018, entity selection for “direct operator” marijuana companies was relatively straightforward. State law required companies to operate on a not-for-profit basis, and non-profit mutual benefit corporations became pervasive, with a smattering of other non-profit entity types. In 2018, these not-for-profit entities are converting en masse to for-profit entities.

Transitioning companies, as well as new operators (both direct operators and ancillary companies), are asking the ever-popular early-stage question: should we be a corporation, an LLC, or an *insert creative choice*? Luckily, for most companies the decision becomes clear based on a few key factors. And for the remaining companies, the founders can make a decision based on their assumptions. Changing corporate forms is an option if necessary.

The tax analysis also should be considered, in conjunction with an expert in cannabis company taxation. A detailed analysis of your business’ goals and growth path are needed to do this analysis fully–and you should always consult your trusted corporate attorney–but this article may help you to consider the advantages and disadvantages of your options.

Note that we assume all companies will incorporate in California, which is the default recommendation for businesses in the cannabis space operating in California. However, even for an ancillary company that may choose to incorporate in Delaware, or the newest favorite – Nevada – the state-to-state analysis is not fundamentally different.

C Corporation

General Background.

Are you planning to raise funds through successive equity financings? Are you planning to raise funds from Institutional investors? If the answer to either of these questions is yes, then there’s a 90% chance that a C Corporation is right for you. If both answers are yes, then you’re certainly going to go with a C Corporation.

Simply put, a C Corporation is the overwhelming choice for companies that will raise funds, because of its ability to issue stock to investors, and create classes of preferred stock for equity investment rounds. Further, corporations have better options when it comes to issuing equity incentives to employees. While it’s true that an LLC can mimic a corporation in many respects, and can issue classes of “units” similar to stock – this non-standard structure offers no advantages for financing through equity investments, and it will severely limit the types of investors the business can approach. For a business seeking to get the best terms for an equity financing, immediately cutting out the majority of potentially interested investors makes little sense.

Further, even though an LLC can mimic a corporation in many respects, the differences in tax treatment of a C Corporation versus an LLC must be considered carefully.

Tax Considerations.

Previously we wrote about the tax consequences of entity selection. We also covered the fact that you can make a “tax election” to have your business be taxed as a C Corporation.

Before the Tax Cuts and Jobs Act (“TCJA”) the C corporation was not the first choice of closely-held businesses. The first drawback was that C corporations had a relatively high tax rate of 35%. Under the TCJA, that corporate rate was reduced to a flat 21%.

The second drawback, was the issue of “double taxation”. A corporation is subject to income tax at the entity level. In addition, dividend distributions are taxable to shareholders. Because of the historically high corporate tax rate, this double taxation generally discouraged companies from operating as C corporations.

Under the TCJA, a corporation and its shareholders are still subject to double taxation; however, the corporate tax rate has been lowered such that double taxation may still result in the most favorable tax outcome.

For example, a C corporation that earns $100,000 will pay tax of $21,000 ($100,000 *21%). If that same corporation dividends 100% of its earnings to shareholders, the maximum tax at the individual level is $23,800 ($100,000*23.8%). So the combined amount of tax is $44,800 ($21,000 + $23,800).  In comparison, a partnership (or S corporation) results in less overall tax to the owners $37,000 ($100,000 *37%).

However, a C corporation is the preferred structure if the plan is to limit the amount of dividends paid to shareholders. For example the total tax hit to a C corporation and its shareholders that paid out dividends of $50,000 is: $32,900 [$21,000+ $11,900($50,000 * 23.8%)]. In this case, a C Corporation saves $4,100 of taxes compared to operating as a partnership. The C Corporation has the additional benefit of insulating shareholders/owners from personal liability for federal income tax.

These parameters are why we recommend that our clients use their current business plan and think about how much cash they wish to distribute each year. From there they can use some real data to make a much better decision regarding entity formation,  We have run numbers for other clients to determine what entity structure best fits within their goals.  At the end of the day, a client that manages its cash distributions can operate as a C corporation and usually achieve a better tax result than being structured as a flow-through entity.


General Background

If you answered “no” to the questions posed up top, and you can answer “yes” to any of the questions posed below, then an LLC may be right for your business.

Are you planning to keep the number of owners small? Do you anticipate the business will not require significant funding, or do you intend for the principals of the business to self-fund the company’s growth? Will you have a small number of capital partners, that you know are already comfortable with an LLC?

If so, an LLC could suit your business. The primary LLC advantages are:

  • Ease of establishment and maintenance
  • Ease of amendment
  • Highly customizable

LLCs are set up by and managed through an Operating Agreement, which is essentially a contract between the LLC Members governing the management and structure of the business. As such, the Operating Agreement can be modified a myriad of ways, allowing the business to have fewer moving parts that require meetings and maintenance (such as shareholders and directors). LLCs are pass-through entities, meaning profits and losses pass through directly to the members. For a business with a few principals, this may keep it simple and straightforward. But for outside investors, the LLC may generate “unrelated business taxable income.”

Tax Considerations

Even if the company’s future fundraising plans are not determinative, sending you down the C Corporation path, founders should also undertake a detailed tax analysis before making their choice. Our firm has developed a model for determining whether a cannabis LLC should be treated as a partnership/flow-through entity or as a C Corporation for federal income tax purposes. Generally, taxation as a partnership/flow-through entity will be more favorable under the following circumstances:

  • The individual tax brackets of the LLC members are below 37%;
  • The individual member/partners qualify for the favorable 20% deduction for flow-through income under IRC section 199A;
  • The business plan emphasizes distributing cash to investors over reinvesting cash into the business (growth).

Anecdotally, roughly ninety percent of our clients that go through the exercise of comparing LLCs and C Corps, end up choosing a C Corp. That said, a fair number are more comfortable with LLCs through their experience in real estate investing, private equity, or other business experience, and go with the LLC without much additional thought. By and large, these are businesses where the principals anticipate contributing their own capital to fund the company’s growth, or possibly reaching out to a small pool of capital partners or other financing.

Something Else

Cannabis investors and operators should also consider whether a hybrid structure would be advantageous. Real estate investors, for example, should consider the application of the Real Estate Investment Trust (“REIT”). The REIT is a legal entity not subject to federal income tax. Instead, a REIT may deduct dividends it distributes to investors, essentially acting as a conduit. REITs must have at least 100 shareholders and are suitable only for large scale investments.

Likewise, certain corporations may be treated as cooperatives under federal income tax law. Cooperatives may or may not be taxable entities under the federal income tax law. An organization that is considered a cooperative under state law does not mean that the organization is a cooperative (or tax-exempt) under federal income tax law. One possible advantage to operating as a federal cooperative is that certain patronage dividends are deductible by the co-op and taxable to the recipient. Cooperatives may avoid double taxation; however, the operating requirements are highly technical and strictly enforced.

There are a few other “hybrid” corporate forms that we regularly see proposed—the California Benefit Corporation and the Social Purpose Corporation. In essence, these entities require that corporate leadership consider factors in all business decisions: a Benefit Corporation must advance “general public benefit” and consider not only profit, but also how its business decisions affect its community, society, and the environment.

While these are commendable goals, B-corps can be problematic: any shareholder can bring a derivative lawsuit against the corporation alleging that its leadership, in any business decision, did not consider all of the required factors. Growth stage startups need to be able to make decisions quickly and confidently—and not under the constant threat of a suit. Also, from an investor point of view, B-Corps and Social Purpose Corporations often carry too many unknowns. Therefore, founders moving from a C-Corp to B-Corp may find their investors moving from a “Y” to “N.”

Stay tuned for parts 2 and 3 of this series, on equity incentives and company exits.

marijuana ireland cannabis
The Irish will celebrate with beer, not cannabis, on St. Paddy’s.

Happy St. Patrick’s Day!

Given the origin of the holiday, we write to update you on the regulation of cannabis in Ireland. Historically, Ireland has had a conservative cannabis policy due to the nation’s heroin epidemic, among other factors. In 1977, the government enacted the Misuse of Drugs Act (the “Act”) making it unlawful to produce, possess, and supply controlled substances, including cannabis. That remains the law today.

Violations of the Act distinguish between personal use and possession for sale or supply. Possession of cannabis for personal use is punishable by a fine for the first or second conviction, and then punishable by up to one year in prison for the third or subsequent offenses. Penalties for possession to sell or supply controlled substances are imprisonment based on the conviction. There are larger penalties in place for drug trafficking.

Interestingly, the Act grants the Minister for Health the authority to issue licenses to manufacture, distribute, and sell controlled substances. In 2002 and 2003, GW Pharmaceuticals were granted a license to perform medical trials for Sativex, a cannabis extract spray common in European countries. There have been other instances where individuals were granted a license for personal use for medical issues.

In 2017, a bill was introduced that would legalize cannabis for medical conditions. The bill would allow cannabis to be prescribed by registered doctors and remove cannabis from the Act. The government allowed the bill to progress through the legislature despite it having some flaws. The bill is still pending approval from the committee, but there does not seem to have been much movement since November.

Although Ireland lags behind some of its neighboring European countries in regards to cannabis legalization, in recent years, the country has seen some welcome progress. As an international law firm with offices in nearby Spain, we are always keeping tabs on new cannabis markets that arise in around the world.


washington employment marijuana

The Washington Legislature concluded its 2018 Session last week, and joined Oregon and California in “banning the box” when it comes to employment applications. Specifically, Washington’s new law, dubbed the “Fair Chance Act” (the “Act”),  prohibits employers from looking into any criminal history of potential employees at the point an applicant first applies for a job. The Act is less stringent than California’s legislation and tends to mirror Oregon’s legislation.

The Act passed through both houses of the Washington legislature on March 3, and Governor Jay Inslee wasted no time signing it into law. At this point, the only thing that would prevent the Act from taking effect is a provision which states that funding must be appropriated “by June 30, 2018, through the omnibus appropriations act.” The likelihood of that not happening is very slim. For this reason, we are advising all of our cannabis businesses clients to treat HB 2198 as the law of the land in Washington, starting now.

It is important to note that the Act does not bar employers from inquiring as to criminal history at all points in the application process. Once an employer has determined the applicant is “otherwise qualified” for the position, the inquiry may begin. “Otherwise qualified” means that the applicant meets the basic criteria for the position as set out in the job advertisement or job description. In most cases, whether the applicant is otherwise qualified can be determined from the application materials. Thus, employers in Washington may be able to ask about criminal history during interviews, but not before.

In addition to the initial screening rules, it is important to note that the Act also prohibits employers from advertising open positions in any way that excludes people with a criminal record from applying. Job advertisements that state “felons need not apply” or “no criminal background”, or that convey similar messages are prohibited. Finally, employers that are required by either federal or state law to perform criminal background checks are exempt from the law. This exemption does not apply to Washington cannabis businesses.

Ban the box legislation is trending nationwide: today, 31 states and more than 150 cities and counties have adopted a ban-the-box law regulating either public or private employers. These laws are especially important for cannabis businesses, which may, anecdotally, have a higher incidence of applicants with colorful backgrounds. Some states seem to care more about this than others: Oregon, for example, runs a background check while individually permitting cannabis employees; Washington does not.

The big take-aways here are: 1) do not ask about past criminal history on applications; and 2) consider seriously whether asking this question is necessary at all during interviews. By turning over too many rocks, you may find that an applicant has a past conviction for something like marijuana possession or distribution, and you may unintentionally violate one of Washington’s newest laws. Above all, and when in doubt, have an experienced employment attorney review your hiring techniques.

california immigration marijuana
The Feds and California are not getting along so well.

If you’ve been following the news lately you’ve probably noticed that that the Trump administration, along with the U.S. Department of Justice (DOJ), have not exactly been getting along with the state of California. Just last week the Department of Justice filed a lawsuit against the Golden State, claiming that three of its laws interfere with the federal government’s authority to regulate the country’s immigration system. The California laws in question are Senate Bill 54 (“SB 54), Assembly Bill 450 (“AB 450”), and Assembly Bill 103 (“AB 103”). This is not the proper venue for an in-depth breakdown of every provision in these laws, but a brief description of each will help frame this discussion:

  • SB 54: Also known as the “California Values Act” was signed by California Governor Jerry Brown on October 05, 2017. SB 54 places limitations on when California law enforcement authorities can cooperate with federal immigration officials.
  • AB 450: Signed by Gov. Brown on October 05, 2017, AB 450 prohibits employers from cooperating with immigration enforcement officers unless the employer has been served with a subpoena or judicial warrant.
  • AB 103: Approved by Gov. Brown on June 27, 2017, AB 103 is a public safety omnibus bill (meaning it is a law that covers a number of measures). The DOJ takes issue with the provisions regarding state inspection of immigration detention facilities and granting the California Attorney General the authority to review the conditions of confinement and the standards of due process at these facilities (Section 12532).

In its lawsuit, the DOJ asserts that all three laws violate the Supremacy Clause of the United States Constitution by “constituting an obstacle to the United States’ enforcement of the immigration laws and discriminating against federal immigration enforcement.” I’ll save you from having to attend a semester of Con Law 101 by giving you a succint explanation on the Supremacy Clause: the Supremacy Clause is the constitutional provision that federal law takes precedence over conflicting state laws (assuming, of course, that the law is constitutional) . California has not yet filed an answer to the DOJ’s lawsuit but any response will be sure to include a Tenth Amendment argument.

Tenth Amendment jurisprudence states that the federal government can enact laws but it can’t force (or “commandeer”) state officials to administer them. In Printz v. U.S., 521 US 898 (1997), Justice Scalia, writing the majority opinion in a close decision (the case was a 5-4 traditional conservative-liberal split) held that “Congress cannot compel the States to enact or enforce a federal regulatory program.” California can make the plausible argument (and likely winning one) that under the Printz ruling the federal government cannot force local law enforcement to assist in federal immigration enforcement. However, the Printz decision will likely only apply to SB 54. Whether AB 103 or AB 450 can survive federal judicial scrutiny is far from certain.

The concern for states that have legalized medical and adult-use cannabis activities, along with state-legal cannabis businesses, is that the DOJ’s Supremacy Clause argument can be made against a state’s lawfully regulated cannabis industry. Under the federal Controlled Substances Act marijuana is still a federally illegal Schedule I drug and that is the supreme law of the land. The conflict between federal law’s cannabis prohibition and the states in the U.S. that now regulate cannabis activities is not an issue that the U.S. Supreme Court has yet to rule on directly but it has been bubbling around the surface for some time now and that day will arrive soon enough — leave it to California to lead the way! Assuming it does, we explained in detail how a state might defend its cannabis programs here.

With respect to California state laws, we should also note that in February of 2017, California state Assemblyman Reginald Jones-Sawyer introduced AB 1578. Just like with SB 54, AB 1578 would prohibit state or local agencies from assisting the federal government in taking certain actions, except in this instance it’s cannabis activities instead of immigration enforcement. AB 1578 ended up stalled in the state legislature but ever since the rescission of the Cole Memo by U.S. Attorney General Jeff Sessions there’s been a push to reintroduce AB 1578.

Hopefully AB 1578 is revived, but if the federal DOJ is eager for a fight before that happens it doesn’t have to wait: the city of Berkeley has already fired the first shot. Last month, the Berkeley city council voted to prohibit city agencies from using resources in enforcing federal cannabis laws or providing information on cannabis activities. Because the underlying theme between SB 54 and the Berkeley resolution are the same–prohibiting local officials from assisting federal authorities in enforcing federal law–one would assume that the DOJ will let their immigration lawsuit make its way through the courts before going after Berkeley (or AB 1578, if it’s ever enacted). All of that said, the Trump administration continues to pursue a path that continuously defies logic, so why would it show restraint now?

The DOJ immigration lawsuit will likely find its way to the Supreme Court and although I highly doubt a majority of conservative justices would overturn Justice Scalia (a conservative icon to many) there’s no guarantee that the Supreme Court won’t find a way to somehow differentiate Printz from the DOJ lawsuit. This is definitely a case to follow and we’ll be sure to keep you updated on all developments.

Oregon Josephine County marijuana
Josephine County skipped a step.

In the past six months, we have closely followed the efforts of Josephine County, Oregon, to ban cannabis farming in its rural residential 5 (RR-5) zone (see our coverage here and here). Just last week we mentioned that a coalition of local growers (“Petitioners”) challenging the local ordinance finally had their day in court, presenting their case to Oregon’s Land Use Board of Appeals (“LUBA”). In brief, the challenged ordinance, adopted in December, banned marijuana production on RR-5 lots smaller than five acres, and seriously curtailed production on larger lots. The Petitioners challenged the ordinance on three grounds, alleging:

  1. The ordinance violated ORS 215.130(5) because it does not allow farms operating at the time the ordinance was adopted to continue operating. (ORS 215.130(5) essentially prohibits a county from adopting an ordinance that retroactively bans existing lawful uses.)
  2. The county failed to give mandatory notices to the owners of any properties that would be limited or prohibited from any previously allowed uses.
  3. Local jurisdictions are only allowed to place “reasonable regulations” on commercial cannabis production, and this ordinance did not qualify.

Yesterday, LUBA issued its opinion in favor of the Petitioners, and sent the County back to square one on the ordinance. The Petitioners deserve a hearty congratulations, but the fight is far from over. This is because LUBA kicked the case back to the County after determining that the County failed to provide the mandatory pre-hearing notices required for any proposed zoning change. As a result, LUBA did not reach the merits of whether 1) the ordinance violated ORS 215.130(5) because of its retroactive application or 2) whether the ordinance went beyond the County’s right to impose “reasonable regulations” on cannabis production. LUBA simply found that the County acted without the required public input.

By kicking the case for a procedural error, LUBA left the door open for the County to continue to pursue this or a similar ordinance. That isn’t to say that the County is going to have an easy time of it. LUBA’s Opinion requires the County to comply with the notice requirements and hold at least one more public hearing. This is no easy feat, as the County will need to issue individual written notice, by mail, to the owners of all 16,000 RR-5 lots.

Although public scrutiny will no doubt increase, we expect the County to continue to push forward in its misguided attempt to regulate away its fledging cannabis industry, as well as all the taxes and jobs that will go with it. In a County that has struggled to provide even basic services following the timber revenue dive, that seems like a shame.

industrial hemp california

On Thursday, SB 1409, which proposes changes to California’s industrial hemp laws, was referred to committee. This piece of legislation proposes some much-needed updates to California’s industrial hemp laws. In our experience, states with adult use marijuana regulations, like California, tend to move more slowly building out their industrial hemp programs, which often come in as an afterthought. In that respect, SB 1409 is a welcome effort.

Currently, California law regulates the cultivation of industrial hemp, and specifies certain procedures and requirements on cultivators, not including an established agricultural research institution. Existing law defines “industrial hemp,” via the California Uniform Controlled Substances Act, as a fiber or oilseed crop, or both, that is limited to the non-psychoactive types of the plant Cannabis sativa L. and the seed produced from that plant.

Existing California law also requires that industrial hemp only be grown by those on the list of approved hemp seed cultivars. That list includes only hemp seed cultivars certified on or before January 1, 2013. Industrial hemp may only be grown as a densely planted fiber or oilseed crop, or both, in minimum acreages. Growers of industrial hemp and seed breeders must register with the county agricultural commissioner and pay a registration and/or renewal fee.

SB 1409 proposes to delete the exclusionary requirement that industrial hemp seed cultivars be certified on or before January 1, 2013. Additionally, “industrial hemp” would no longer be defined restrictively in the California Uniform Controlled Substances Act as a fiber or oilseed crop, and the bill would delete the requirement that industrial hemp be grown as a fiber or oilseed crop, or both. Presumably, this will allow cultivators to harvest hemp for CBD derivation, and related use.

SB 1409 would also authorize the state Department of Food and Agriculture to carry out, pursuant to the federal Agricultural Act of 2014, an agricultural pilot program for industrial hemp. Twinning a state-sanctioned pilot program with licensed, private cultivation is a model that has worked well in other states, like Colorado and Oregon. SB 1409 seems to have been well-researched in that sense.

To read more about the current state of industrial hemp under federal law, as well as what other states have done to regulate it, take a look at these posts:

We look forward to seeing whether California will take the lead, or at least take serious steps, toward regulating industrial hemp in a progressive way. SB 1409 was introduced only last month and seems to be moving along nicely. We will keep an eye on this bill, and keep you updated on any developments.

Our Barcelona office continues to keep tabs on Spain’s vibrant cannabis industry, which is different than anything going on in the United States, or anywhere else in the world for that matter. Last week, the 15th annual Spannabis conference showed that the country’s enthusiasm for marijuana has not diminished in the least, and that Spaniards continue to adapt and push forward within a unique state environment.

Spain’s lack of regulations for cannabis use, its criminal laws against cannabis, and the country’s failure to enforce those criminal laws, presents a unique view of use, possession, and cultivation of cannabis. Unlike the United States, Spain’s laws do not distinguish between medical and recreational cannabis use and/or possession. The Spanish Justice refers to substances listed in the 1961 Single Convention on Narcotic Drugs (the “Narcotics List”) as either banned or controlled. The Narcotics List contains most illegal drugs, including cannabis. According to the Spanish Criminal Code, it is considered a criminal offense to develop, produce, or sell any of the substances on the Narcotics List, or engage in any activity designed to encourage their consumption. A distinction is made between substances that cause serious damage to health and other substances that the law considers less harmful.

In Spain, it is illegal to sell cannabis; however, the government does not prosecute the personal and private consumption of cannabis. Case law has developed several factors to determine what quantity of cannabis amounts to personal use and therefore is not a crime. These factors include the quantity of the drug, whether the person is a regular consumer, the amount of cannabis the person has been consuming, previous criminal records of trafficking, etc. The consumption of cannabis in public places or public buildings is always considered illegal and those activities can elicit fines from 100 € to 600,000 € depending on the specific case.

The “public place” embargo has resulted in the creation of private cannabis social clubs, which are non-commercial entities that provide “members” with cannabis to meet their personal needs. Membership to these social clubs is gained either: (1) through invitation by two or more members or (2) by showing a medical report that states the person has an illness for which cannabis is recommended. Consumption in these social clubs is tolerated because this is considered consumption in a private setting.

At present, social clubs will not see interference from police or other government enforcement bodies as long as consumption remains in the private, closed setting, there is restricted access, and consumption is not visible for the general public. Social clubs have been raided in the past, but largely because they did not strictly follow those previously stated consumption guidelines. In that sense, compliance is not difficult.

Cannabis social clubs are allowed to possess cannabis because they are possessing what is considered necessary for personal consumption of their members. Social clubs are permitted to hold the amount of cannabis to supply their members’ demand and consumption. The social clubs must keep meticulous records, which are accessible and able to be produced upon government inspection. Clubs are subject to criminal penalties for failing to provide the necessary records.

Making things even more interesting, Spain is comprised of autonomous regions that may create separate regulations to govern their individual region. Recently, the region of Catalonia (in which the city of Barcelona is located) has been at the center of the cannabis market in Spain. In July 2017, the Catalonian government enacted a statute regulating cannabis social clubs, including: their form of entity, membership rights and obligations, self-sustainability, production and transport, publicity, zoning and building requirements, and special treatment of medical users. The statute was a large step towards legalizing and regulating the cultivation, consumption, and distribution of cannabis; however, the Spanish central government suspended the passage of the statue, claiming it was unconstitutional and the Catalonian Parliament lacked the authority to enact it.

It is an interesting time for cannabis in Spain, to say the least. We will continue to update periodically as things unfold.

california CUA collective MAUCRSA
Is the tide finally coming in for gray market California cannabis?

For state-by-state legalization to succeed in the long run, state and local governments often need to take significant enforcement measures against existing “gray” cannabis markets to ensure that there’s an even playing field for licensed operators who face the financial pinch and responsibility of comprehensive licensing regulations and robust taxation. To date, each state with an existing, unregulated medical cannabis industry has taken action to make sure that unlicensed, unregulated medical cannabis operators don’t undermine or disenfranchise their otherwise licensed counterparts (see Washington State as a prime example, or the continuing legislative efforts in Oregon).

It appears that California is finally taking certain steps to stop the unlicensed and illegal sale of cannabis within its borders. To regulators’ credit, they don’t have a choice but to tolerate the Compassionate Use Act (“CUA”) collective model through early 2019: the MAUCRSA preserves the criminal immunity of CUA collectives and cooperatives up to one year after the first MAUCRSA licenses begin to issue. The drop dead date on those collectives and cooperatives is now January 9, 2019.

Although these CUA collectives and cooperatives can continue to serve qualified patients and their caregivers without the administrative annoyance or cost of having to comply with MAUCRSA, they can’t engage in the for-profit sale of cannabis or any level of “commercial cannabis activity” without a license. However, many of these collectives and cooperatives continue to engage in illegal commercial cannabis activity: such activity is hard to monitor and police where the CUA has pretty much no government oversight. In addition, many CUA collectives and cooperatives believe that they can do business with MAUCRSA temporary and/or annual licensees (and vice versa), but this is just another piece of unreliable industry hearsay that violates the law.

In turn, California has started sending cease and desist letters to unlicensed operators they believe to be engaged in commercial cannabis activity in violation of MAUCRSA. And regulators have also started to crackdown on ancillary advertisers, like Weedmaps, for promoting unlicensed operators and their products in violation of MAUCRSA marketing and advertising restrictions. Certainly, these won’t be the last efforts we see regarding the takedown of illegal cannabis operators in California. Here’s what else we can expect:

  1. Industry self-policing. It’s highly unlikely that licensed operators are going to allow CUA collectives and cooperatives to take away their market share and/or to conduct sales of cannabis without facing the same onerous state and local taxes as licensees. As a result, we’re likely to see a spike in industry reporting on CUA collectives and cooperatives that don’t have a MAUCRSA license.
  2. Increased scrutiny of ancillary businesses. Going after Weedmaps represents the state’s willingness to chase third parties that are directly or indirectly assisting illegal operators. We can expect then that consultants, landlords, equipment sellers/lessors, etc., who assist or continue to assist unlicensed operators violating MAUCRSA will feel the same heat as Weedmaps.
  3. Policing of attorneys. Yes, there are still attorneys forming CUA collectives and cooperatives with the sole purpose of helping their clients evade MAUCRSA licensing to make one last stream of profit before 2019. At this point, if a potential client wants to engage in the commercial cultivation, manufacture, distribution, and/or sale of cannabis, helping them start a CUA collective or cooperative is unethical and constitutes malpractice.
  4. Getting local governments involved. Half the problem with current CUA collectives and cooperatives violating MAUCRSA is that local laws still allow them to operate in a completely gray area. Sometimes, local governments haven’t even regulated under MAUCRSA but they have and maintain existing laws that only allow for CUA collectives and cooperatives. State regulators would be wise to dialogue with local governments about CUA collectives and cooperatives acting in violation of MAUCRSA. Otherwise, those collectives and cooperatives will have free reign under local law to continue to violate MAUCRSA through January of next year.
  5. Federal intervention. If CUA operators ignore state mandates to cease commercial cannabis activity, there’s a solid chance that state regulators (and local governments) will call upon U.S. prosecutors to assist in sweeps. Given Sessions’ rescinding of the Cole Memo in January, U.S. Attorneys are going to act in accordance with the resources and priorities of their districts. And if local and state governments demand action in regards to violations of MAUCRSA, we can expect more arrests and prosecutions from the Feds.

Let us know what you are seeing out there, and what you expect to see in the coming year for California enforcement against gray market cannabis.

oregon marijuana hempThe Oregon legislature concluded its 2018 session last weekend. As we wrote last month, because 2018 is an even-numbered year, this was a short session lasting just 35 days. We predicted that not all four proposed cannabis bills would pass and that is exactly what happened: the proposed legislation on “special events” for marijuana licensees quickly fell by the wayside. You can be sure someone will push that one again in 2019.

Still, three bills made it through, two of which will impact the Oregon marijuana and hemp industries considerably. These “enrolled” bills have been approved by both legislative houses, and will become law as soon as Governor Brown signs– or within 30 days of passage if she does not. Because these bills passed through two Democrat-controlled chambers, and because Governor Brown is also a Democrat who has never vetoed a cannabis bill, you can be 99.99% sure these bills will soon become law.

Each bill is linked to and summarized below. If you click through to view the bills themselves, remember that text in bold typeface is proposed new language, and text in [italicized and bracketed] typeface is language that will be removed from existing statutes.

Senate Bill 1544  (Marijuana)

This was the gut-and-stuff bill we discussed last month, which ended up covering a range of issues related to medical and non-medical marijuana, and industrial hemp. Below are the highlights. Note that references to the Oregon Liquor Control Commission (OLCC) concern the adult use program, which allows recreational operators to serve the medical market nowadays. The Oregon Health Authority (OHA) references relate strictly to the medical marijuana program.

Unlike most cannabis legislation passed in Oregon over the past few years, SB 1544 does not carry an “emergency” designation. This means that its provisions are not effective on passage. Instead, the effective date of this bill is June 1, 2018, with some of its provisions operative at designated intervals thereafter.

Below, we have emphasized the big moves in bold and added brief commentary to those items.

  • Allows OLCC producer licensees who are registered to grow medical canopies to provide immature plants to OHA program participants.
  • Exempts OLCC processors from labeling and packaging requirements and standard when those processors are dealing direct with medical marijuana patients and their caregivers.
  • Requires OHA grow sites to include a U.S. Postal Service address in their application, if they have one. If not, the grow site has to cough up an assessor’s map showing the exact location of the grow site, or a tax lot number.
  • Caps the amount of immature plants that a person responsible for an OHA grow site (PRMG) can grow, at 12 immature plants that are 24 or more inches high. Requires also that OHA cap the number of immature plants that are less than 24 inches high. This is an effort to curb black market activity.
  • Reduces the amount of both mature and immature plants that can exist at an OHA site if a PMRG’s authority is revoked or suspended by OHA.
  • Exempts small OHA grow sites with two or fewer cardholders, from tracking and reporting requirements. This is to give the little guy a break.
  • Re-jiggers the Department of Revenue distribution protocol for taxes collected from marijuana.
  • Clarifies that although OHA grow sites may be subject to certain tracking requirements, they are not “commercial operations” for the purposes of state law.
  • Pushes out dates for Oregon Cannabis Commission reporting obligations.
  • Grandfathers OLCC and OHA retailers from the school proximity standard, if they were established prior to August 1, 2017 under a city or county ordinance.
  • Establishes a tough-sounding “Illegal Marijuana Market Enforcement Grant Program” administered by the Oregon Criminal Justice Commission, and earmarks about $1.25 million in grants to “address and prosecute unlawful marijuana cultivation or distribution operations.” This may be more symbolic than anything: $1.25 million is not a lot of money as far as the state budget goes.
  • Requires industrial hemp products sold by OLCC retailers to contain labels that clearly identify whether the products are derived from hemp or marijuana. Think, hemp-derived CBD products.

Senate Bill 1555  (Marijuana)

This simple bill temporarily enables the Oregon Department of Revenue to distribute a portion of marijuana tax revenues to community mental health. This is an emergency bill, effective on passage. It also sunsets on July 1, 2019, at which point things revert to the current scheme.

House Bill 4089  (Industrial Hemp)

House Bill 4089 is a multifaceted law brought by the Oregon Hemp Farmers Association. When we first saw this bill last month, we observed that although it was comprehensive in scope, it did not include a provision limiting the ability of hemp growers to sell high THC products, and it did not contain tracking provisions related to the movement of hemp into OLCC channels. Maybe Salem was listening, because the legislature fixed both issues.

Below is everything of note in HB 4089, with comments on the big moves in bold.

  • Names the hemp research program operated by the Oregon Department of Agriculture (ODA) the Oregon Industrial Hemp Agricultural Pilot Program.
  • Clarifies ODA’s authority to administer the program. Specifies that agricultural hemp seed is agricultural or flower seed for the purposes of statutes regulating labeling, testing, or certifying seeds.
  • Directs the Director of Agriculture and Dean of College of Agricultural Sciences of Oregon State University to establish a program for labeling and certifying agricultural hemp seed.
  • Provides that an accredited independent testing laboratory that has been approved by OHA or ODA may test industrial hemp and industrial hemp commodities and products produced or processed by a grower, handler, or agricultural hemp seed producer.
  • Transfers responsibility from the testing laboratory to the registered grower, handler, or processor, for entering hemp, commodity, or product into the tracking system before the hemp, commodity, or product is transferred to a laboratory for testing.
  • Requires the OLCC to track the hemp, commodity, or product when it is transferred, sold, or transported to a licensed premises, or area under the control of the premises licensee. This is an expansion of OLCC’s current obligation to track all cannabis in the state, with the exception of home grow and limited medical grow.
  • Specifies that industrial hemp products that contain more than 0.3 percent tetrahydrocannabinol may not be sold to a consumer by a person other than a retailer, and requires that the OLCC adopt rules to ensure compliance. This shores up a huge gap: until now, ODA growers could theoretically sell these products without oversight.
  • Authorizes OLCC actions regarding industrial hemp to enforce and ensure compliance with marijuana laws and provisions of industrial hemp laws that incorporate requirements, restrictions, or other provisions of marijuana laws. More oversight for OLCC.
  • Specifies that a person may not produce, process, or store homemade industrial hemp extracts. This further curtails ODA growers’ options, which were nearly limitless under existing state law.
  • Changes the description of the limit on production and storage of homegrown cannabis plants.
  • Allows ODA to adopt rules establishing a higher average tetrahydrocannabinol concentration limit for industrial hemp if a higher average concentration limit is established by federal law.
  • Revises language regarding grower retention of agricultural hemp seed for producing industrial hemp.
  • Establishes the Industrial Hemp Fund and appropriates moneys to ODA to implement, administer, and enforce industrial hemp statutes.

Like SB 1555, the hemp bill is “emergency” legislation that is effective on passage. When coupled with the new OLCC rules around industrial hemp passed a few months back, it’s safe to say that the Oregon hemp program is fully formed at last. Like the marijuana programs, Oregon hemp has come a long way.