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Since joining Harris Bricken in 2010, Hilary has earned a reputation as a fearless advocate for local businesses. Hilary’s clients—start-ups, entrepreneurs, and companies in all stages of development—value her bold approach to business strategy.

California cannabis attorneyLast Friday, July 12, 2018, all three agencies overseeing California’s implementation of MAUCRSA dropped proposed permanent regulations that will eventually replace the readopted emergency regulations that are active now. For the text of those proposed regulations go here, here, and here. Importantly, these regulations are just proposed; they are not in effect and they won’t be in effect until after the 45-day public comment period so long as the agencies move to adopt them without changes.

The proposed rules don’t make massive changes to the existing regime. In fact, many of these rule additions and clarifications should have already been in the mix as fundamental, common sense standards for operation in line with former federal enforcement priorities. More than anything else, these proposed rules represent technical fixes to pretty large gaps in the existing emergency rules.

All three California agencies tasked with regulating cannabis are now finally on the same page about the disclosure and vetting of “owners” versus “financial interest holders” and, importantly, if an “owner” is an entity only “the chief executive officer and members of the board of directors of the entity shall be considered owners.” In addition, the agencies clarified that none of them will issue temporary licenses after December 31, 2018. This was already in MAUCRSA, but the agencies clarified that temporary licenses with an expiration date after January 1, 2019 will be valid only through that date with no additional 90 day extensions. This is significant since a temporary license is the only way licensees can operate post-local approval but before receiving their annual license. Further, all three agencies are addressing issues regarding CEQA compliance prior to licensure and responses to disaster relief, and M and A licensees can still do business with each other to get product to market. Each agency has also upped the required details on annual licensing submissions relative to standard operating procedures (SOPs) and plans.

The highlights of the more specific significant changes/additions/clarifications from the three agencies are:

  1. Department of Food and Agriculture, CalCannabis Cultivation Licensing (oversees cultivators and processors):
    1. Individuals and entities will still only be allowed to have one Type 3 medium license, and there’s still no limit on the number of Type 1 or 2 cultivation licenses anyone can have (other than those limitations set forth by cities and counties, if any).
    2. Outdoor licensees won’t be able to use use any light deprivation techniques.
    3. Licensees are prohibited from accepting returns of cannabis plants or nonmanufactured cannabis products after transferring possession of cannabis plants or nonmanufactured cannabis to another licensee after testing is performed.
    4. Nurseries can now develop and maintain dedicated R&D areas in their facilities.
  2. Department of Public Health, Manufactured Cannabis Safety Branch (oversees manufacturers): 
    1. CDPH-MCSB implemented some notable changes to their definitions of certain cannabis terms. For example, the term “concentrate” would now include inhaled products (such as shatter, dab, or wax) and “edible cannabis product” and would include “a cannabis product that resembles traditional foods or beverages and cannabis products that dissolve or disintegrate in the mouth.” They’ve also proposed the terms “infused pre-roll,” which would mean “a pre-roll into which cannabis concentrate or other ingredients have been incorporated” and “orally-consumed concentrate” to mean “cannabis concentrates that are consumed by mouth and are not otherwise considered edibles.”
    2. You can’t manufacture, prepare, package or label any products other than cannabis products at a licensed premises.  “Cannabis products” also includes packaged cannabis, pre-rolls, and products that do not contain cannabis, but are otherwise identical to the cannabis-containing product, and are intended for use as samples.
    3. You can’t manufacture, prepare, package, or label cannabis products in a location operating as a retail food establishment or as a processed food registrant, and you can’t do the same in any location licensed by the Department of Alcoholic Beverage Control.
    4. Edible potency limitations are staying the same (no more than 10 mg of THC per serving and no more than 100 mg per package), but “orally-dissolving” edibles can have up to 500 milligrams THC per package, if: (1) The cannabis product consists of discrete servings of no more than 10 milligrams THC per piece; (2) The cannabis product is labeled “FOR MEDICAL USE ONLY;” and (3) The cannabis product is only available for sale to a medicinal-use customer.
    5. There are now increased packaging and labeling requirements for pre rolls and dried flower, and the labeling requirements generally for all products have increased.
    6. Use of the word organic (or any variation of that word) on any product label is now going to be false or misleading unless the National Organic Program (the federal regulatory program governing organic food) “authorizes organic designation and certification for cannabis and the cannabis or cannabis product meets the requirements for such designation and certification.”
    7. Child-resistant packaging would be eliminated, but tamper-evident packaging would still be required for cannabis products.
  3. Bureau of Cannabis Control (oversees retailers, delivery only retail, microbusinesses, distributors, and labs):
    1. Making up your own SOPs would no longer be a requirement for the annual license. Instead, the state would have you input all of your SOP information into pre-established forms.
    2. You won’t be able to pump in the smell of cannabis to your licensed premises via a vaporizer device or diffuser.
    3. The state is cracking down on cannabis giveaways and generally getting stricter on licensee advertising attractive to children.
    4. “Limited access area” security now applies to all licensees, not to just retailers.
    5. On rejections and returns, licensees now have to reject whole shipments and they can’t just pick and choose inventory they want to keep from those shipments.
    6. Distributors are receiving more clarity in their rules such that they can now package prerolls but can’t store live plants, they can transport tested product to more than one retailer, distributor, or microbusiness, and they can perform just quality assurance reviews of product if another distributor has already had that product tested.
    7. Retail exit packaging has to be resealable, child-resistant, and opaque.
    8. Statewide delivery would be permitted regardless of jurisdiction. The specific rule states that “A delivery employee may deliver to any jurisdiction within the State of California.” Given the hostility of some cities and counties to any form of commercial cannabis activity, or those cities that require you to have local approval to deliver (like Los Angeles), this is bound to cause conflict between the state and the locals.
The 45-day comment period has begun, so get your comments in now or forever hold your peace in California as the regulatory landscape continues to shift slowly but surely.

Happy Fourth of July!

For those in California, the rollout of the state’s Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA“) has been no picnic. The emergency rules released by the State of California last November (and recently re-adopted) still contain gaps and gray areas and the  “transition period” that allowed for ended on July 1. In addition, the majority of California’s 482 cities and 58 counties have rejected cannabis legalization by banning commercial cannabis activity or by enacting rolling moratoria to give themselves time to see how other cities and counties handle things. Just like any other state that’s navigated adult use and medical cannabis commercial activity, California is going to need more time before its cannabis market stabilizes, and it’s going to take a while before its cities and counties routinely sign on to local regulations. There is though some good news as Los Angeles County finally seems ready to open its doors to local cannabis regulations.

Under MAUCRSA, before you can secure even a temporary license to operate, you must first obtain “local approval.” Local approval is basically affirmative authorization from the city or county in which you plan to operate that it approves your commercial cannabis activity and location. Local approval can take the form of a city or county license, permit, or some other form of authorization. Having the nation’s most populous county on board to regulate and allow for cannabis businesses is a huge step forward for MAUCRSA.

LA County has long banned commercial cannabis activity of any kind. However, back in February 2017, the County decided it would flirt with cannabis regulations. The Interim Director of the Department of Consumer and Business Affairs then released its report on options for regulation (or continued prohibition) of cannabis:

  1. Allow and regulate all medical and adult-use commercial cannabis activity in unincorporated areas.
  2. Allow and regulate commercial cannabis but limit the types of businesses that can locate in unincorporated areas (e.g.,allow commercial medical cannabis activities only and limit business types to retail only).
  3. Continue to prohibit commercial cannabis in unincorporated areas.

For option number 1, the County came up with 8 components that would make up a comprehensive regulatory framework for all license types “that promotes health equity, ensures the health and safety of consumers and people living and working nearby, prevents cannabis businesses from causing blight or becoming nuisances in their communities, takes residents’ concerns into account, and does not promote commercial cannabis activities at the expense of other considerations.” Those components are to:

  1. Establish a cannabis commission to oversee the licensing and regulatory enforcement program in conjunction with the existing Office of Cannabis Management.
  2. Complete a health impact assessment on the health equity impacts of permitting cannabis businesses in unincorporated areas. This assessment would inform the county regarding the communal impact stemming from regulation and the establishment of cannabis businesses within certain communities.
  3. Create permits to allow cannabis stores, delivery services, indoor cultivation, manufacturing, distribution, and testing laboratories in unincorporated areas. Outdoor cultivation would be a no-go.
  4. Institute permit caps. In the first two years of the program, there would be no more than 25 cannabis store permits, with no more than 5 store permits per supervisorial district and no more than 2 cannabis store permits in any one unincorporated community. There would also be 25 cannabis delivery-only permits, with no more than 5 delivery-only permits per supervisorial district, 10 cultivation permits, 10 manufacturing permits, 10 distribution permits, and 10 testing laboratory permits.
  5. Institute zoning limitations and buffers. Cannabis stores, delivery, and testing laboratories would only be allowed in heavy commercial and manufacturing zones and all other commercial cannabis businesses could only go into manufacturing zones. Stores would be required to locate not less than 1,000 feet from schools (K-12), 600 feet from day cares (including preschools), public parks, public libraries, licensed drug and alcohol treatment centers, and other cannabis stores, and 300 feet from off-site alcohol sales, such as liquor stores. All other commercial cannabis businesses would need to locate not less than 1,000 feet from schools (K-12) and 600 feet from day cares (including preschools), public parks, and public libraries. Maps of where operators could potentially go can be found here.
  6. Come up with a social equity program to reduce barriers to entry for those who were disproportionately impacted by the War on Drugs.
  7. Create a 15-member stakeholder advisory board to assist the cannabis commission and the board of supervisors.
  8. Create a business license category for commercial cannabis businesses (in addition to the required permits). The County is also discussing tax proposals for commercial cannabis activity if it opts to institute comprehensive regulation.

Permit caps in a county that boasts over 10 million residents may are not likely to go over well with those looking for meaningful access to cannabis, especially since most LA County cities have banned cannabis or (like the City of Los Angeles) been slow to write cannabis regulations.

Proposed County Option 2 would limit the types of businesses that could engage in a cannabis business in the County. It might do this by, for example, allowing only medical cannabis but no adult use cannabis, or just by allowing retail and delivery in an effort to curb the gray and black market shops that continue popping up.

County Option 3 would continue the ban on commercial cannabis activity in all portions of unincorporated LA County. Without exception, all of my firm’s California cannabis lawyers see this as unlikely to happen given the time and money the County has already spent analyzing its options and givn how many tax dollars it will lose by not going forward. LA county need only look at its inability to shut down illegal operators to know that its implementing comprehensive (or even limited) regulation will likely help with identifying good versus bad actors. If Los Angeles County wants to succeed with its cannabis regulations it will go with Option 1 and that is exactly what I see it doing.

Editor’s Note: A version of this post originally appeared in an Above the Law column, also by Hilary Bricken.

marijuana states actIt seems like every year, the old pot guard in Congress tries its hand at some form of marijuana legalization. Although these sorts of actions attract headlines (and votes?), they never seem to go anywhere. But for the first time ever, a real and legitimate bipartisan “respect states’ rights” effort is being pushed by some powerful members of Congress. Specifically, Republican Senator Cory Gardner is picking up the mantle for Congressional cannabis reform and it may actually pass this time (if the MFOA doesn’t get there first).

On June 7th, Senators Gardner and Elizabeth Warren released a bipartisan marijuana bill that would explicitly allow states to determine the fate of marijuana in their own jurisdictions. Here’s a copy of the bill, entitled the “Strengthening the Tenth Amendment Through Entrusting States Act” (“STATES Act”). Most importantly (and wisely, if anyone wants this bill to go anywhere), it doesn’t change the Controlled Substances Act (CSA) on cannabis scheduling and so even if it passes, cannabis will remain a Schedule I controlled substance. But it will mean the CSA will be amended to give each state the freedom to determine how best to address commercial cannabis activity within its own borders, state-approved commercial cannabis activity will cease to be considered drug trafficking, and proceeds from and assets used in legal cannabis operations would not be subject to forfeiture by the Department of Justice (DOJ).

If the bill passes, the CSA would not apply to:

[A]ny person acting in compliance with State law relating to the manufacture, production, possession, distribution, dispensation, administration, or delivery of marihuana . . . any person acting in compliance with the law of a Federally recognized Indian tribe within its jurisdiction in Indian Country . . . related to the manufacture, production, possession, distribution, dispensation, administration, or delivery of marihuana so long as such jurisdiction is located within a state that permits, respectively, manufacture, production, possession, distribution, dispensation, administration, or delivery of marihuana.

State-legal marijuana businesses would still be in trouble under the CSA for employing anyone “under 18 years of age to manufacture, produce, distribute, dispense, administer, or deliver marihuana.’’ This bill will also remove industrial hemp from the CSA, which would finally square away its precarious legal status regarding its derivative products, like CBD.

Though the Rohrabacher-Blumenauer Amendment prevents the DOJ from interfering with a state’s right to implement medical cannabis laws and regulations, the STATES Act would make it illegal for the Department of Justice to enforce the CSA against state-legal marijuana users or medical or recreational marijuana businesses. Passage of this bill would obviously be a huge, huge step forward for marijuana legalization. This bill would lead to improvements in the banking situation for cannabis businesses and realizing this, some bank are lobbying for cannabis reform to be able to better serve the cannabis industry. Passage will also mean state-legal cannabis businesses can finally secure federally protected trademarks and avail themselves of other federal protections and benefits currently denied to them, including nondiscriminatory tax treatment.

Ironically, the one person we may deserve the most thanks for this big move is Attorney General Jeff Sessions who — as we all know — loathes cannabis. His blitzkrieg to undo state progress on cannabis law reform is backfiring. I previously wrote how Senator Gardner was so irritated by Sessions’s rescinding the 2013 Cole Memo that he took it upon himself to block numerous DOJ appointments. This got President Trump’s attention and led Gardner to receive, according to The Washington Post, “a commitment from the President that the Department of Justice’s rescission of the Cole memo will not impact Colorado’s legal marijuana industry . . . Furthermore, President Trump . . . assured [Gardner] that he will support a federalism-based legislative solution to fix this states’ rights issue once and for all.”  And Trump echoed on June 8th that he’d “probably” support the STATES Act.

The STATES Act is a bipartisan bill that does not outright legalize marijuana or even re-schedule or decriminalize it. Couple this with President Trump’s strong dislike of Sessions anyway and it does very much look as though the political stars may finally be aligned to see meaningful marijuana law reform at the Congressional level.

Editor’s Note: A version of this post originally appeared in an Above the Law column, also by Hilary Bricken.

It’s no secret that the City of Los Angeles has struggled with implementing its commercial cannabis program under the Medicinal and Adult-Use Cannabis Act (“MAUCRSA“). The licensing of existing medical marijuana dispensaries (“EMMDs”) under Measure M has been a slow and opaque process, but Los Angeles is committed to the success of its cannabis program long-term and isn’t in any rush to act hastily when it comes to continued licensing by the Department of Cannabis Regulation (“DCR“) and Cannabis Regulation Commission. Indeed, just last week, the Los Angeles City Council adopted a handful of ordinances and made several recommendations to the City Attorney (and other City departments) to tighten, clarify, and technically fix its current commercial cannabis legislation. The amended regulations take effect on July 23, 2018.

Here are the major highlights:

  • Off-site Advertising. Ordinance No. 185607 addresses commercial cannabis advertising in the City. We now have a 700-foot distance buffer for any off premises advertising for “Cannabis, Cannabis Products, or Cannabis Activity” in any “Publicly Visible Location” from “any School, Public Park, Public Library, Alcoholism or Drug Abuse Recovery or Treatment Facility, Day Care Center, and Permanent Supportive Housing,” except for those advertising signs that are located inside the licensed premises (unless it’s a window sign), or if the advertising sign is on any “commercial vehicle used exclusively for transporting or delivering cannabis or cannabis products.” The distance buffer also doesn’t apply to “the display of public service messages or similar announcements cautioning against the use of Cannabis or Cannabis Products or that are designed to encourage minors to refrain from using or purchasing Cannabis or Cannabis Products.” However, this exemption won’t be used “. . .to permit an advertisement that purports to caution against the use of Cannabis or Cannabis Products when that message is conveyed in conjunction with the display of a logo, trademark or name used by any person or entity engaged in any Cannabis Activity for marketing or promotion of Cannabis or Cannabis Products.” Lastly, the 700-foot buffer is measured as the crow flies from the property line of the prohibited facility to the “closest visible edge of the advertising sign face of the off-site sign.”
  • On-site Advertising. Ordinance No. 185607 also tackles on-premises advertising. Only one on-site sign per street frontage is allowed. And that signage is included in the “maximum sign area” allowed for the property (this is in addition to any mandatory state signage under MAUCRSA). On-site signage is now going to be content controlled–you can only have the following information on the sign: “name of business; ‘logogram’ of business; and business’ address, hours of operation and contact information. Other than the foregoing information, no advertising for Cannabis or Cannabis Products shall be displayed on any sign in a Publicly Visible Location.” And here’s the list of all the fun signage you CAN’T utilize: Portable signs or sandwich signs located in the public right-of-way; Digital signs; Spinner signs; Monument signs; Illuminated architectural canopy signs; Pole signs; Marquee signs; Roof signs; Temporary signs; Moving signs and signs with moving parts; and Supergraphic signs.
  • Testing. Ordinance No. 185609 addresses quality assurance testing in that licensees won’t have to have their products fully tested “until 120 days after City licensure, or until required under State of California Code of Regulations Title 16, Division 42, Chapter 5, Section 5715, whichever is sooner, after which all cannabis goods shall be labeled and tested.”
  • Technical fix legislation. Ordinance No. 185608 is the first technical fix legislation for existing commercial cannabis regulations in L.A. Here are the need-to-knows:
    1. EMMDs that entered into a payment plan with the Office of Finance to become current on outstanding taxes owed will be considered fully paid up for priority licensure (which closed back in March).
    2. The Type 10 Delivery Retailer License has been deleted–Type 10’s under state law outright allow delivery anyway.
    3. Crimes that will bar you from applying from a license have been further amended to include: “A Person with a felony conviction for violating any State or local law involving violent crimes, sex trafficking, rape, crimes against children, gun crimes or hate crimes for a period of 20 years from the date of conviction or completion of a term of imprisonment, supervised release or probation imposed as a sentence for the conviction, whichever is later.”
    4. EMMDs can now be approved for the full type 11 distribution license (not just “self-distribution transport only”).
    5. Since the April 1, 2018 deadline for accepting “Non-Retail” priority applications has come and gone, the DCR’s new standard is that it will accept those applications for no more than 30 days after it opens that particular application window. There’s City-wide speculation that this window will open on July 1, but the City hasn’t made anything official yet.
    6. If a testing lab obtains and maintains an ISO/IEC 17025 accreditation, the DCR may issue temporary approval to the testing lab before completion of a pre-licensing inspection.

What is probably even more interesting than the foregoing is that the City Council also asked (based on a June 5th motion) that the City Attorney, in conjunction with the DCR and other City offices, prepare and present an ordinance to make the following additional changes to existing cannabis regulations:

  • Address and control cannabis management companies. The City proposed that “management company” be defined as “any person who participates in the management, direction or control of the operations of a business licensed to conduct commercial cannabis activity, or any person who participates in the management, direction or control of another person who participates in the management, direction or control of the operations of a business licensed to conduct commercial cannabis activity.” The City Council has also proposed that “a management company shall not hold equity ownership in the applicant licensee or have the authority to make major decisions impacting the corporate structure of the applicant or licensee or the license held by the applicant or licensee.” However, a management company would be able to “receive revenue or profit-based compensation, subject to limitations established by the DCR.” Of course, this would still make the management company a financial interest holder under MAUCRSA.

Social Equity Program applicants (“SEPs”) and regular licensees would also have to get written approval from the DCR before engaging with a management company. All SEPs and licensees would also have to disclose to the DCR all written agreements or contracts with a management company and all other documents the DCR requires to identify all persons who will act as the management company for the business premises. And if you can’t qualify for licensure from the DCR, the DCR may also stop you from acting as a management company. Or if you’ve violated any local or state cannabis laws, the DCR may also knock you out from acting as a management company to a SEP or licensee. SEPs and licensee will be responsible for all acts or omissions of its management company in connection with compliance with state and city laws. All management companies engaged in commercial cannabis activity within the City of Los Angeles would have to register and maintain appropriate records with the DCR. Finally, management companies would be limited to entering into management agreements for no more than 3% of commercial cannabis businesses within the City of Los Angeles, by license type. That percentage will increase 1% on July 1st of every year beginning in 2019 until a total of 7% is reached. Tier 1 and Tier 2 SEPs would be exempt from these management company license limits.

  • More clarity on the social equity program and allowing more flexibility for Social Equity-licensed businesses. Among other tweaks and additions, Tier 1 and Tier 2 SEPs would be able to apply for retail licenses under the 2:1 ratio already set by the City, and Tier 3 applicants won’t be able to apply for retail licenses. Tiers 1 through 3 applicants would though be able to apply for non-retail licenses under the 1:1 ratio set by the City. The City also wants to allow the DCR to license incubator projects with multiple licenses for the education, training, etc. for SEPs. The City also asked that SEPs be allowed to apply for licensure even if they do not have local land use authorization, but local land use authorization must be obtained prior to completing the licensing process. The City would also increase term of Social Equity Program agreements to five years, and would allow Social Equity-licensed businesses to terminate their agreement with the actual SEP after five years, all with the approval of the DCR. Interestingly, the City added that the Social Equity-licensed business would have the right of first refusal to buy out the SEP applicant (presumably at any time). The City is also planning to allow the Social Equity-licensed business to replace the SEP under certain criteria and conditions.
  • Taxes and Cannabis Reinvestment Act. The City Council also asked the City Attorney to draft an election “Ordinance and Resolutions” to place a ballot measure before the voters at the November 6, 2018 State General Election entitled the “Cannabis Reinvestment Act,” and that the ballot measure would, among other revenue captures, implement a one percent gross receipts tax on all commercial cannabis activity to be “reinvested in the community with all funds going to a newly created Cannabis Reinvestment Trust Fund” earmarked for various City items and groups.

Without a doubt in the coming weeks we’re going to see even more legislation from L.A. regarding amending its current cannabis regulations (with specific regard to its much-anticipated Social Equity program), and these forthcoming changes will also directly affect would-be licensees’ ability to pursue licensure in the long run in what may end up being California’s largest cannabis marketplace. So, stay tuned!

bank marijuana cannabis
Banking is within reach for many cannabis businesses.

In my previous post, I wrote about avoiding the scammers that abound when it comes to cannabis banking. Because cannabis is federally illegal, getting a bank account has been very difficult for cannabis businesses even though the 2014 FinCEN guidelines (see here) allow financial institutions to provide banking services to cannabis businesses under certain circumstances — which guidelines are still alive despite Attorney General Jeff Sessions rescinding the Cole Memo. Ultimately, FinCEN makes clear in its guidelines that they “should enhance the availability of financial services for, and the financial transparency of, marijuana-related businesses.”

But what exactly should a cannabis business do to get a legitimate bank account with a real financial institution? Plain and simple, you make it as easy as possible for the bank or credit union to abide by the FinCEN guidelines. This means you do not lie about or omit anything regarding your cannabis business.

To even get to this point though, your cannabis business must be in a state with “robust regulations” that give its regulators the authority to tightly control and govern its cannabis industry. And not all states are created equal when it comes to this.

In states like Washington, Oregon, and Colorado, banking is made a little easier because those states have hardcore regulations ranging from financial and criminal background checking on all cannabis business owners to knowing every single dollar that comes into a given cannabis operation and its source. In medical cannabis states like New Mexico and Arizona, which are basically unregulated medical cannabis states, banking is non-existent.  And in California (where I am based), which still has relatively weak cannabis licensing rules (for example, there are no spousal vetting requirements for owners of cannabis businesses), it is still nearly impossible for a cannabis business to get a bank account and this is not likely to change until California tightens up on its licensing regime.

But if you’re in a state with robust cannabis regulation, here’s what you need to do and expect when pursuing a bank account under the FinCEN guidelines:

  1. Banks that follow the FinCEN guidelines do so in open violation of the Bank Secrecy Act (BSA). This is the case because they are directly engaging in money laundering because cannabis remains federally illegal and this is why virtually none of the really big banks (like Bank of America and Wells Fargo) will knowingly take on cannabis accounts. But for those banks that are willing to take on cannabis bank accounts, you need to be prepared to basically do whatever the bank tells you to do to secure that account because the bank will be the one to be held accountable to the federal government for violating the BSA.
  2. You should expect your bank or credit union to conduct comprehensive due diligence on your cannabis business – nearly always at your expense. This due diligence usually will include the following:

(i) verifying with the appropriate state authorities whether your cannabis business is duly licensed and registered;

(ii) reviewing your cannabis license application and other documents your cannabis business submitted to obtain its state license to operate;

(iii) requesting information about your business and its related parties from state licensing and enforcement authorities;

(iv) developing an understanding of the normal and expected activity of your business, including the products to be sold and the type of customers to be served (e.g., medical versus recreational customers);

(v) ongoing monitoring of publicly available sources for adverse information about your business and its related parties;

(vi) ongoing monitoring for suspicious activity, including for any of the red flags described in the FinCen guidance; and

(vii) constantly updating the above information.

  1. Don’t get frustrated with the bank or credit union over this mandatory due diligence. Your job is to fork over as much documentation as you can to demonstrate that you are licensed and in full compliance with state and local laws.
  2. The Cole Memo, though rescinded, still matters to FinCEN. Specifically, the FinCen guidelines state that “[a]s part of its customer due diligence, a financial institution should consider whether a marijuana-related business implicates one of the Cole Memo priorities or violates state law. This is a particularly important factor for a financial institution to consider when assessing the risk of providing financial services to a marijuana-related business. Considering this factor also enables the financial institution to provide information in BSA reports pertinent to law enforcement’s priorities. A financial institution that decides to provide financial services to a marijuana-related business would be required to file suspicious activity reports (“SARs”).” This means you should review the eight Cole Memo priorities and implement them in your business practices.
  3. Your bank will regularly file SARs on your business. A financial institution is required to file a SAR if it knows, suspects, or has reason to suspect that a transaction conducted or attempted by, at, or through the financial institution: (i) involves funds derived from illegal activity or is an attempt to disguise funds derived from illegal activity; (ii) is designed to evade regulations promulgated under the BSA; or (iii) lacks a business or apparent lawful purpose. Because commercial cannabis activity is federally illegal, SARs are a must in the cannabis banking world.
  4. The following SARs will likely apply to your cannabis business: (i) Marijuana limited SARs, which mean you are not violating state law or violating a Cole Memo priority; (ii) Marijuana priority SARs, which mean the bank believes you are violating state law or a Cole Memo priority; and (iii) Marijuana termination SARs, which mean the bank thinks you are a threat to its anti-money laundering systems under the BSA so it must end its relationship with you. All these SARs get sent to the federal government for possible investigation.
  5. Your bank will constantly monitor the financial activity of your cannabis business because it must do so under the FinCEN guidelines. Your bank will monitor everything from your deposits to your social media accounts to your ability to keep your license in good standing to ensure that you are complying with state laws and rules. Again, if you want to keep your bank account, you need to assist your bank with this continued due diligence.
  6. The FinCEN guidelines list various red flags banks must watch for. One of those red flags is using management companies or middlemen to secure your bank accounts. The FinCEN guidelines are clear that Cole Memo priorities may be violated if a “customer seeks to conceal or disguise involvement in marijuana-related business activity. For example, the customer may be using a business with a non-descript name (e.g., a “consulting,” “holding,” or “management” company) that purports to engage in commercial activity unrelated to marijuana, but is depositing cash that smells like marijuana.” Cash structuring, commingling of funds with an unrelated business, and “deposits by third parties with no apparent connection to the accountholder” are additional red flags. Pay attention to the FinCEN guidelines’ red flags list and strive to avoid them.

Securing a bank account will not be easy but it is possible if you are in the right state and you prepare and act accordingly. Though state public banking and cryptocurrency have been floated as ways to provide wider access to banking, the FinCEN guidelines are still the key for both cannabis operators and financial institutions. And that’s not likely going to change anytime soon.

Editor’s Note: This post originally appeared in an Above the Law column, also by Hilary Bricken.

marijuana banking fraud california
“Offshore cannabis bank.”

Of the many issues that prevent cannabis businesses from acting like regular businesses, lack of access to banking is probably the most hindering. Since commercial cannabis activity remains a federal crime, the federal Bank Secrecy Act prohibits financial institutions from accepting cannabis-generated dollars. Most cannabis businesses therefore must operate on an all-cash basis. This makes them targets for actual criminals and helps further the need for access to a bank account.

This lack of bank access in turn creates desperation, which hucksters and fraudsters then prey upon. This post is dedicated to helping cannabis stakeholders avoid those who blow smoke about “marijuana banking.”

Because marijuana is still a Schedule I controlled substance, proceeds from cannabis sales trigger anti-money laundering laws for banks. The Bank Secrecy Act requires banks combat fraud and money laundering and protect against criminal and terrorist activity. Certain banking laws require that national banks and credit unions file Suspicious Activity Reports (“SARs”) with the Financial Crimes Enforcement Network (“FinCEN”), when the financial institution knows or suspects an account holder is engaged in or trying to cover up illegal activity. Consequently, banks routinely deny or shut down cannabis business bank accounts (and cannabis-based financing) even in cannabis-friendly states.

In 2014, new FinCEN guidelines for cannabis banking provided that financial institutions could provide services to state-legal marijuana businesses without running afoul of federal regulations so long as they do the following:

  • Verify with state authorities that the business is duly licensed and registered.
  • Review the state license application and related documentation the cannabis business used to obtain its state license to operate its marijuana-related business.
  • Request from the state licensing and enforcement authorities available information about the cannabis business and related parties.
  • Develop an understanding of the normal and expected activity for the cannabis business, including the types of products to be sold and the types of customers to be served.
  • Monitor publicly available sources for adverse information about the cannabis business and related parties.
  • Periodically refresh information obtained as part of customer due diligence using methods and timetables commensurate with the risk.

These guidelines are still in place, despite Attorney General Jeff Sessions’s rescinding of the 2013 Cole Memo, and the Department of Justice’s Guidance Regarding Marijuana Related Financial Crimes. Banks acting under the FinCEN guidelines must file SARs for all their marijuana businesses customers. There are no direct consequences arising from these SAR filings, but this means that the federal government knows exactly who is involved in the marijuana indusry and with whom they’re banking.

The FinCEN guidelines demand transparency and strict due diligence of cannabis customers. Because of this, in states like California that are just coming online with a regulated cannabis regime, there are a host of fraudsters who claim to have access to “marijuana banking,” when all they are really doing is opening bank accounts with shell companies and/or obscure offshore entities and then running cannabis operators’ money through those accounts. This clearly violates the FinCEN guidelines and it puts both the financial institution and the cannabis company at great risk. My firm’s California cannabis lawyers are seeing a lot of this in California, to the point that many cannabis companies are convinced that what they are doing is legal.

What are the specific red flags to look for if you’re being pitched on a “solution to the marijuana banking problem”?

  1. A refusal or inability to disclose the actual financial institution is the biggest red flag. There’s no reason why the financial institution that will hold your cannabis funds cannot be disclosed to you by the person pitching you. And any third party that’s telling you otherwise is probably illegitimate and not planning to operate in line with the FinCEN guidelines.
  2. If the third party does not discuss the FinCEN guidelines or the level of reporting you will need to do with your financial institution or the level of due diligence with which the financial institution will put you through, you are almost certainly dealing with a hack.
  3. Huge fees to third parties that are unrelated to opening a legitimate bank account. The third party will tell you that you need to pay them a large premium for them to get you a coveted bank account, but there is rarely any reason why this should be the case.
  4. Running money through various accounts and third parties that are supposed to be acting as wardens of your cannabis money without direct verification of a vendor relationship with the ultimate financial institution. The FinCEN guidelines don’t bar a bank or credit union from using third parties to provide account marketing or due diligence support, but full transparency between banks and cannabis customers is mandatory.
  5. Out-of-state bank accounts require significant caution. For banks and credit unions to comply with Fin-CEN, they need to have a due diligence system that is tailored to each specific state. Cannabis businesses need to verify not only that a bank is willing to take cannabis customers but also that the bank has the due diligence and cash handling resources to take customers in the specific state.

At least twice a week, one of my firm’s cannabis business lawyers will get contacted by an ancillary company trying to pitch us on referring our clients to them for “marijuana banking services,” claiming they’ve cracked the code on marijuana banking. We routinely ignore these solicitations and all cannabis stakeholders should do the same.

What then should you do to properly secure a legitimate cannabis bank account? I’ll cover that in my next post.

Editor’s Note:  A version of this post originally appeared in an Above the Law column, also by Hilary Bricken.

california marijuana cannabis invest own

Passage of California’s Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA“) has opened the doors to institutional investing in California cannabis companies. California’s lack of a residency requirement for investors and its relatively limited investor disclosure and background requirements have made it popular for institutional investors looking to invest in cannabis. In that sense, California is building out its program to mirror wide-open states like Oregon, and not protective states like Washington.

There are two main types of California cannabis applicants: owners and financial interest holders. To be legally considered an “owner” under California’s cannabis regulations, one does not actually need equity in the applicant’s cannabis business. “Owner” means any of the following:

  1. A person with an aggregate ownership interest of 20 percent or more in the person applying for a license or a licensee, unless the interest is solely a security, lien, encumbrance;
  2. the chief executive officer of a nonprofit or other entity;
  3. a member of the board of directors of a nonprofit; and
  4. and any individual who will be participating in the direction, control, or management of the person applying for a license.

An individual who directs, controls, or manages the business includes any of the following: a partner of a commercial cannabis business that is organized as a partnership; a member of a limited liability company of a commercial cannabis business that is organized as a limited liability company; and an officer or director of a commercial cannabis business that is organized as a corporation. These are all fairly standard definitions, as far as cannabis regulation goes.

Even if someone is not an “owner,” however, that person or company may still be deemed a financial interest holder (“FIH”). “Financial interest” is broadly defined to mean “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.” California cannabis regulators consider the term “equity interest” to include less than a 20% ownership in the cannabis applicant and pretty much any profit-sharing arrangement or entitlement to profits from cannabis licensee, including IP licensing royalties and percentage rent arrangements. The following are not considered FIHs: banks and financial institutions; diversified mutual funds, blind trusts or similar instruments; holders of security interests, liens, or encumbrances on property that will be used by the commercial cannabis business; and individuals holding less than 5 percent of the total shares in a publicly traded company.

California requires FIHs be disclosed to and vetted by the state upon application for annual cannabis licenses. The license applicant must provide a complete list of all financing it receives. Specifically, the license application mandates that applicants include the name, birthdate, and government-issued identification type and number (i.e., driver’s license) for any individual with a financial interest in a commercial cannabis business. FIHs are not required to submit to criminal background checks but they will still undergo some vetting by state regulators.

Even with these new rules, most institutional investment in the cannabis space is still concentrated in “ancillary services“, i.e. services that support cannabis businesses but do not “touch the plant.” Examples include turnkey real estateequipment and materials leasing and salesintellectual property licensing, consulting services, and tech platforms. Many institutional investors still want to stay one or two steps removed from touch-the-plant cannabis businesses and do not like the idea of being listed in a state database as being an owner or FIH. However, given California’s wide-reaching definition of owner and FIH, even these companies and their investors can be deemed by the state to have a direct cannabis business interest. To avoid being considered owners or FIHs in California, ancillary service providers will need to avoid directly providing financing, using profit-sharing or similar performance-based payment schemes with cannabis businesses. They will also need to avoid managing, directing, or controlling the licensed entity.

Editor’s Note: A version of this post originally appeared in an Above the Law column, also by Hilary Bricken.

california cannabis labeling
It’s not optional for California packaging and labeling.

California is just starting to get its cannabis packaging and labeling regulations right under MAUCRSA.  As part of this multi-part series on these regulations, I covered transition period product packaging and labeling in a previous post, and I analyzed the packaging and labeling for “New Products” in another post. Today’s post will cover Proposition 65 labeling issues for California’s cannabis businesses. Note that MAUCRSA makes no specific mention of Prop. 65 compliance, so marijuana business owners are on their own in identifying whether or not they must adhere to that law.

The Safe Drinking Water and Toxic Enforcement Act of 1986 (a/k/a Prop. 65), requires theOffice of Environmental Health Hazard Assessment (OEHHA) to publish a list of chemicals known to cause cancer, birth defects or other types of reproductive harm. The list now includes more than 850 chemicals. Given this fact, there is hardly a manufacturing business in California that won’t find itself subject to Prop 65 warning requirements at some point.

Prop. 65 requires businesses to provide their customers with notice of these chemicals when present in the products they purchase, in their homes or workplaces, or that are released into the environment. The ultimate intent is to allow consumers to make informed decisions with respect to chemical exposure (though there have been allegations of abusive lawsuits against businesses by “bounty hunters” almost from the outset of the passage of Prop. 65).

Effective June 19, 2009, marijuana smoke was added to the Prop. 65 list of chemicals known to cause cancer. The Carcinogen Identification Committee of the Office of Environmental Health Hazard Assessment  “determined that marijuana smoke was clearly shown, through scientifically valid testing according to generally accepted principles, to cause cancer.” And back in 2015, a “citizen enforcer” served the first five 60-day notices on medical cannabis dispensaries around the state.

As MAUCRSA licensing and regulation steadily comes online, you can bet that we will see a smattering of Prop. 65 attacks on cannabis business owners who fail to properly label their products. So, what do you need to look out for as a cannabis business? The first thing is to realize that, yes, Prop. 65 likely applies to you where any of the products you’re selling may contain Prop. 65 chemicals above safe harbor levels that warrant the mandated labeling warnings: Prop. 65 applies to everyone in the chain of distribution, not just retailers. Also, just because your products do not contain “marijuana smoke” doesn’t mean you don’t have to adjust your label: If your products contain any of the other ~849 chemicals, you have to disclose accordingly under Prop. 65. For example, any carcinogens or toxins that go into any oil inserted into a vapor pen cartridge are likely going to warrant a Prop. 65 warning.

There have also been updates to Prop. 65, the latest of which passed in 2016 and will be fully effective on August 30, 2018 of this year. These updates to the law affect how you must label your products to secure the safe harbor. The typical warning that’s out there right now in the cannabis community is some iteration of:

WARNING: This product contains a chemical known to the State of California to cause cancer.

With the new laws coming into play on August 30, the foregoing will no longer be good enough. Instead, unless you meet one of the few exceptions (one of which is that your product was manufactured prior to August 30, 2018 and contains the September 2008 safe harbor warnings), you’ll need to follow the new regulations. One of the most important changes with the new regulations is that you now need to actually identify at least one triggering chemical depending on the type of harm caused by that chemical. Specifically, OEHHA mandates that:

If, for example, there are five possible chemical exposures from a given product, and all five chemicals are listed only as carcinogens, then the business would only be required to name one of those five chemicals in the warning. . . If there are exposures to both carcinogens and reproductive toxicants, a business would be required to name one of the chemicals that is a carcinogen and one of the chemicals that is a reproductive toxicant, but the business could choose to identify more chemicals in the warning.

In turn, your new Prop. 65 warning labels will look like one of the following:

For carcinogens: “This product can expose you to chemicals including [name of one or more chemicals], which is [are] known to the State of California to cause cancer. For more information go to www.P65Warnings.ca.gov.”

For  reproductive toxicants: “This product can expose you to chemicals including [name of one or more chemicals], which is [are] known to the State of California to cause birth defects or other reproductive harm. For more information go to www.P65Warnings.ca.gov.”

For exposures to both listed carcinogens and reproductive toxicants: “This product can expose you to chemicals including [name of one or more chemicals], which is [are] known to the State of California to cause cancer, and [name of one or more chemicals], which is [are] known to the State of California to cause birth defects or other reproductive harm. For more information go to www.P65Warnings.ca.gov.”
For exposures to a chemical that is listed as both a carcinogen and a reproductive toxicant: “This product can expose you to chemicals including [name of one or more chemicals], which is [are] known to the State of California to cause cancer and birth defects or other reproductive harm. For more information go to www.P65Warnings.ca.gov.”
If you’re starting to worry, you can also use a short-form label under certain circumstances. Finally, the look of the label has also changed with the new regulations:

“A symbol consisting of a black exclamation point in a yellow equilateral triangle with a bold black outline. Where the sign, label or shelf tag for the product is not printed using the color yellow, the symbol may be printed in black and white. The symbol shall be placed to the left of the text of the warning, in a size no smaller than the height of the word ‘WARNING'”.

You can download the symbol here.

There are a slew of other mandates under Prop. 65, but the bottom line is that if you fail to comply with this law, you’re going to be facing costly legal challenges and/or settlements, none of which will have to do with your MAUCRSA compliance. So double check your labels now to ensure that you’re prepared and in compliance for August 30, 2018.

medical marijuana cannabis
Medical cannabis businesses are shielded, for now.

State medical marijuana laws and their implementation are safe until September 30th of this year. In a highly anticipated move, Congress extended the protections of the well-known “Rohrabacher-Blumenauer Amendment” (the “Amendment”) last week. This extension is an important political and legal action after Attorney General Jeff Sessions threw the state-legal cannabis industry into a fit from his rescinding of the Obama era Cole Memo in January (he has provided further, largely unhelpful guidance since then). But what impact does the Amendment really have? It could be significant over the coming months, though I am confident that Sessions and other U.S. Attorneys may seek to undermine the spirit of that law as time goes on.

The Amendment first passed back in 2014 and has been consistently renewed and extended by Congress in the form of budget riders since then (and this last one is around 2,200 pages). The Amendment has been construed as stopping the federal government from prosecuting state-legal medical cannabis operators, but outside of the Ninth Circuit it has not been tested. The Amendment provides that:

“None of the funds made available under this Act to the Department of Justice may be used, with respect to any of the States of Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, and Wyoming, or with respect to the District of Columbia, Guam, or Puerto Rico, to prevent any of them from implementing their own laws that authorize the use, distribution, possession, or cultivation of medical marijuana.”

On its face, the law only precludes the Department of Justice (DOJ) from spending funds to “prevent” any of the foregoing states “from implementing” their medical cannabis laws. However, in the Ninth Circuit, as a result of the McIntosh case, the Amendment has some serious teeth. In that case, the Court ruled in favor of medical cannabis providers who disputed the DOJ’s enforcement of the federal Controlled Substances Act against them in their respective states (all of which have legalized medical cannabis) due to the Amendment. In doing so, the Court reaffirmed Congress’s intent to halt federal enforcement measures against medical marijuana providers in states that have legalized and regulated it.

To date, the McIntosh ruling represents the highest judicial approval of that legislation as an effective means of curbing federal crackdowns on state-legal medical marijuana programs. Nonetheless, the Court made clear that its ruling only applies to medical cannabis operators. And the Court remanded the cases back the lower courts to investigate whether the appellants were, in fact, in full compliance with their states’ laws regarding medical cannabis. Notably, the DOJ didn’t appeal this ruling to SCOTUS, and it also dropped another major case—the Harborside Health Center forfeiture case that had raged on for years–after the McIntosh ruling.

Clearly, to avail yourself of the protections of the Amendment in the Ninth Circuit, you must be on the medical cannabis side and you must be in completely compliance with your state’s medical cannabis laws and regulations. While the McIntosh and Harborside cases show us that the Amendment can be used as an effective shield, those cases resolved before Jeff Sessions took the helm at the DOJ (and, in case you missed it, Sessions is a major marijuana hater).

Whether the Amendment will be interpreted as strongly in other U.S. District and/or Circuit Courts (or even by SCOTUS) in the future remains to be seen. At the same time, Sessions has already asked Congress in the past not to renew the Amendment (which Congress has continually ignored) and, back in 2015, the DOJ already instructed its personnel (prior to McIntosh) on how to soundly defeat in court any defense raised by a cannabis operator under the Amendment. Given that Sessions recently called for U.S. Attorneys to seek the death penalty for drug dealers of all kinds (which, under current federal law, includes cannabis business operators), I am confident that the DOJ is not going to lay down for use of the Amendment in Court so long as Sessions has any kind of influence.

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.