Photo of Hilary Bricken

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.

Three years ago, I did a TedX Talk titled “High Dive: Are We Creating Big Marijuana?” The issues I raised in my talk are still relevant today, especially as more states legalize. Basically the new question around state cannabis legalization is who should get to profit from it–big business or those most negatively affected by the war on drugs or some hybrid of the two that can live in harmony?

By way of example, at SXSW this past week, the Equity First Alliance took exception to John Boehner (former U.S. Speaker of the House of Representatives) touting the benefits of cannabis legalization and its bright economic future. In 2018, Boehner joined the board of Acreage Holdings (a cannabis company that’s publicly traded in Canada and getting cannabis licenses and buying cannabis companies in rapid succession across the U.S.) after having been a drug war advocate during his entire political career. To summarize, some in attendance at SXSW found it troubling how Boehner staunchly opposed federal cannabis legalization while a politician and yet now uses his power and influence for his own financial benefit in building a massive cannabis company–according to its website, Acreage Holdings operates in 19 states, and, according to Leafy, it “deployed $202 million in investment in 2018 and lost $217.6 million in the same period.” Needless to say, Acreage embodies most folks’ idea of “Big Marijuana.” While Boehner is no doubt experiencing the upside of the “green rush,” there’s very little recognition of, or easy entree into the industry for, those who paid (and continue to pay) with their civil liberties for cannabis trafficking over the years as part of the drug war that Boehner helped sustain.

Also according to Leafly, Boehner spoke at SXSW about how the benefits of medical cannabis and exciting investment opportunities in the cannabis industry caused him to change his mind about cannabis. Boehner predicts cannabis revenues will eventually outpace tobacco and the STATES Act will end federal prohibition. Acreage Holding’s CEO, Kevin Murphy, was also present and he told the audience and the protestors that Acreage would invest in cannabis social equity projects if the U.S. Congress would relax its stance on things like 280E, which impede financial growth for cannabis businesses.

From my own boots-on-the-ground perspective in Los Angeles, very little has changed since my TedX Talk three years ago, and that’s because states with legal cannabis still follow the 2013 Cole Memo (even though it is dead though new U.S. Attorney General Bill Barr may revive it) on cannabis licensing and regulations. Because the Cole Memo was so strict regarding federal enforcement priorities, states generally adopt incredibly strict (corresponding) regulations with financial and qualified barriers to entry that do not lend themselves to allowing cannabis businesses good or financially realistic opportunities for righting social harms via social equity programs.

To date, only a handful of U.S. cities, the State of California, and the State of Massachusetts have relaxed licensing standards or provided funding to ensure communities disproportionately impacted by the war on drugs get a good piece of the cannabis market. And though I believe these sorts of programs can work, for them to actually work long term, states need to create incentives to encourage wider and deeper participation from the cannabis business crowd.

When I gave my TedX Talk I believed Big Marijuana to be inevitable and my view on that has not changed. I say this because the cannabis businesses still need a lot of capital and business experience to grow fast while at the same time dealing with comprehensive and ever-changing industry regulations. Unless and until state governments better address this balance between corporatized cannabis and disproportionately impacted populations, the actual relief and easier entry for social equity participants and those wrongly affected by the war on drugs may not really come unless and until the federal laws of repeal ensure a carve out for the more disenfranchised.

The bottom line is this: Relying on established cannabis businesses, including those in the evolving Big Marijuana world, to throw themselves into social equity is not likely to lead to meaningful change, which could ultimately harm the industry as a whole. States, and ultimately the federal government, will have to do better.

phase three los angeles marijuana
Here we go…

Big changes are coming for L.A.’s long-awaited Phase 3 licensing regarding storefront retail. The last time I wrote on this topic, the Department of Cannabis Regulation (“DCR”) made several proposals to City Council on how to re-vamp Phase 3 licensing for efficiency and expediency, which at the time the City Council pretty much rejected. However, last week, the Council came around and Phase 3 is going to look a lot different than anyone may have anticipated. Needless to say there are going to be some winners and a lot of losers in the City of Angels.

On March 8,  City Council requested the City Attorney develop an ordinance (based on these instructions) to, among other things, overhaul Phase 3 licensing for type 10 retail storefronts. It’s no secret now that only 200 retail licenses remain in the City when you do the math on undue concentration limits. And all 200 licenses are destined for social equity applicants because of existing City laws. Previously, the DCR was weighing what to do with these 200 licenses–would they be given on a first come, first serve basis? Via lotto? Via merit? As of Friday, here’s how the City plans to proceed in Phase 3 regarding retail storefront licenses, which will now take place in two sub-phases:

Sub-Phase 1:

In a 14-day window, the DCR will first process the initial 100 storefront licenses for folks who have been “pre-verified” as Tier 1 or 2 social equity applicants (there is no mention of Tier 3 applicants getting any kind of priority here). Pre-verification means that the applicants can prove how they meet their social equity tier and that they ink an indemnification agreement with the City. Plus, those Tier 1s and 2s, at the time of application submission to ensure a complete application, also have to meet “basic qualifications,” which are to:

  1. provide a signed lease with proof of payment or deposit, or a property deed;
  2. meet all sensitive use requirements, including undue concentration;
  3. pay of required license fees;
  4. provide ownership organizational structure;
  5. provide financial information;
  6. provide proposed staffing plan;
  7. provide complete and detailed diagram;
  8. provide proposed security plan;
  9. provide the applicable radius map;
  10. provide a labor peace agreement; and
  11. demonstrate compliance with the City’s Equity Share rules (I.e., tier 1s get 51% of the business and tier 2s get 33%).
In addition, “75 percent of the licenses will be reserved for Tier 1 applicants, unless 75 qualified Tier 1 applicants cannot be identified,” only one application per applicant is allowed, and Type 10 EMMDs cannot participate in this sub-Phase 1. Importantly, these folks cannot relocate their businesses while in the licensing process, and the qualifying Tier 1 or 2 individual cannot sell their equity in the business and must maintain their equity share in the business during the licensing process.
Sub-Phase 2:
Unless and until the first batch of licenses is sorted and the City has established/funded compliance assistance programs for Social Equity applicants, no more Phase 3 retail licensing will occur. So, it could be a while before we see what goes down with the second hundred retail storefront licenses.
Once the first 100 licenses are taken care of and we have compliance assistance for Social Equity, DCR will proceed with processing the additional 100 Tier 1 and Tier 2 Social Equity storefront retail applications in a 30-day window, but there won’t be priority for Tier 1s and 2s during this Phase 2. The basic qualifications to apply are less than for Phase 1, but within 90 days of application, the applicants in this phase have to provide proof of right to occupy real estate as well as the other required documentation for eligibility including SOPs and a radius map. And the restrictions on this phase are the same as Phase 1–no moving locations during the licensing process and no selling of equity by the qualifying social equity individual who must maintain their equity throughout the licensing process.
Without a doubt, the City and applicants are going to face issues with the concept of submitting “complete applications” during the open windows. In both phases, applicants have 5 days from submission to correct any application deficiencies and then they’re locked out, so I don’t anticipate the City allowing applicants to amend their applications after-the-fact if it goes to completeness. The other question is what happens if the City receives more than 100 qualifying applicants in Phase 1? Presumably this mechanism of the “complete application” solves that problem though there are bound to be issues regarding timing without any official first come, first serve standard (though your application will be time-stamped and dated at submission). And if someone ahead of you is DQ’ed, do you move up in the line? And, if so, when? For folks who have been sitting on property in Los Angeles for some time now, there’s likely no guarantee of success in Phase 1 if you don’t act quickly to file and all have all of your ducks lined up within that two-week window.
The overall good news is that we now have a clear road map for licensing in Phase 3 in L.A. No one knows still when this window will actually. open, but when it does it’s undoubtedly going to be a serious race to file for those first 100 licenses.

cannabis marijuana federal lawThere’s no question that cannabis remains a rocky, emerging industry even though entire countries and more than 30 U.S. states now have cannabis legalization or “medicalization”. The reasons why though stem from a variety of sources–federal prohibition, the patchwork quilt of regulations from state to state, the array of personalities coming into the industry from black and gray markets, the bad behavior and fraud that abounds with the constant changes in state and local cannabis laws, etc., etc.. While there’s a lot of room for improvement that hinges on studying the market and its consumers, I’m going to identify the type five drags on cannabis as an emerging market. Unfortunately, most of these are here to stay thanks to the Department of Justice (DOJ) and the Controlled Substances Act (CSA).

1. Irresponsible Federal Government.

At least half of the reason cannabis is so unpredictable as an industry is due to our federal government sticking its head in the sand over cannabis legalization. Instead of taking the reigns and listening to the people to create a federal regulatory framework for uniform oversight and control, the Feds have let the horse out of the barn where states are 100% controlling cannabis law and policy reform which, in the end, is probably a positive thing since states are better positioned anyway to know the needs and demands of their constituent citizens and can better navigate specific local health impact issues. Still, the fact that states have to pay attention every time a new U.S. attorney general (this time, William Barr) takes the helm at the DOJ to ensure that their cannabis licensing regimes remain in tact is not only annoying, but also a waste of time and resources in that states continually pivot to ensure that the DOJ is kept at bay in this area. This enforcement friction ultimately trickles down to cannabis businesses and the bottom line is affected accordingly. Further, with agencies like the Food and Drug Administration, the Environmental Protection Agency, and the Federal Trade Commission (FTC) just turning a blind eye to statewide cannabis legalization, consumer protection has undoubtedly taken a hit when it comes to cannabis.

2.  Volatile Access to Banking.

Lack of access to banking in the industry is the current norm, and it ultimately helps keep cannabis in the shadows and out of reach of full legitimacy and transparency. Even though in 2014 FinCEN issued guidelines to financial institutions for banking in the industry (despite open violations of the Bank Secrecy Act and anti-money laundering laws), the participation under those guidelines by banks and credit unions has been slow-going at best. The good news is that these guidelines still exist despite then-acting Attorney General Jeff Sessions rescinding all other DOJ cannabis guidance. Ultimately, the guidelines are a band-aid until we can get in place federal legislation addressing the lack of access to cannabis banking (for more on that, see here).

3.  Oppressive Federal Taxation. 

The third biggest drag on the industry that keeps it in its murky, emerging state is IRS rules, and those aren’t changing anytime soon. IRC Section 280E prevents cannabis businesses from deducting expenses from their income, except for those considered a Cost of Goods Sold (COGS).  As a consequence, cannabis businesses are required to determine what expenses are included in COGS and, therefore, what expenses are deductible.  To date, very little guidance has been made available from the IRS to help taxpayers make this determination. And all court cases on the topic (with the exception of C.H.A.M.P.) have not been helpful to cannabis businesses. It’s also very clear that the IRS isn’t interested in cutting back on 280E assessments and audits unless and until a change is made to the federal CSA regarding the current scheduling of cannabis.

4.  Constant Changes to “Robust Regulations” by States.

Cannabis will forever be a regulated commodity and that means that the rules around it will change indefinitely. The reason why “constant changes” makes the drag list is because these early days of licensing in various states breeds a lot of uncertainty among regulators as industry issues crop up, so the frequency of these changes in the first few years of licensing help to render and keep cannabis an emerging market. Prohibited products lists, as one of the many regulatory issues in play, are a very good example of constant regulatory change as states decide what products they’ll allow in their marketplaces. In addition, many states opt to err on the side of really robust regulation (mainly to satisfy the rescinded 2013 Cole Memo), which tends to spill into over-regulation in certain contexts such as advertising, marketing, quality assurance testing, and packaging and labeling.

5.  Scammers.

Fraudsters also help to keep cannabis in the wild, wild west. And the bad behavior spans a range of areas in cannabis from scamming investors to bank fraud to lying about entitlements from regulators. With the lack of federal oversight and enforcement, and with states paying attention mainly to just licensing and regulation of actual cannabis businesses, no one is really keeping an eye on the myriad of cannabis charlatans. What will it take to remove these people from the chain? More enforcement activity from state attorneys general and, hopefully one day, from the FTC (which remains a sleeping giant, for better or worse). For more on industry red flags in this area, see here.

cannabis marijuana oscars
Now featuring cannabis!

MarketWatch ran an article last week on how this year’s Academy Award swag bags “are packed” with “legal” cannabis. I’m always happy to see an article like this because it means California legalization is working. And yet, these glam-o, cannabis friendly goodie bags are a good reminder to cannabis businesses (and the ancillary businesses that support them) that even if an A-list celebrity is consuming your cannabis or CBD products on or after the red carpet, California’s Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA“) (and federal law) still apply.

According to MarketWatch, this year’s “treasure trove of over-the-top gifts for the acting and directing nominees is packed with cannabis chocolates, CBD beauty products and a year-long VIP membership to L.A.’s first cannabis-friendly social club. Marketing company Distinctive Assets has been gifting the Oscar’s swag for the past 17 years and company founder, Lash Fary, told MarketWatch their 2019 gifts are “directly tied to the broad legalization of cannabis in California last year.”

As much as I hate being a party-pooper – especially for a party as big as the Oscars — as a Los Angeles based cannabis business lawyer, I cannot resist mentioning my own legal concerns about these swag bags. Under MACURSA and Prop. 64, individual adults 21 and up can gift up to an ounce of cannabis (or its infused equivalent) without fear of state or local prosecution so long as there’s no financial compensation. But this gifting rule is far more complicated for cannabis business licensees. MAUCRSA is clear that cannabis licensees “shall not give away any amount of cannabis or cannabis products, or any cannabis accessories, as part of a business promotion or other commercial activity” and cannabis retailers “cannot provide free cannabis goods to any person” other than a medical cannabis patient as defined by Section 11362.71 of the Health & Safety Code.

This means that if the cannabis in the swag bags is given by cannabis businesses as part of “a business promotion or other commercial activity,” those businesses probably will violate MAUCRSA. I say this because this cannabis swag is probably being given to the Academy Award attendees and Hollywood A-listers as a “business promotion,” especially since a marketing company is involved in the gifting, and I assume the entire point is to elevate the profile of the companies involved amongst powerful circles of potential future consumers.

A lot of cannabis “brand” power is also contained in these Oscar bags, which is pretty interesting given the legal challenges posed by Section 5032 of the Bureau of Cannabis Control (“BCC”) regulations. If any of the cannabis products in the bags utilize a third party’s intellectual property (“IP”)–and luxury branding (or really any branding) in cannabis remains huge– there may end up being issues under Section 5032. Still, the BCC will not say whether this rule requires cannabis IP licensors to have their own commercial cannabis license in California. The BCC’s own comments to this rule indicate that it does not apply to manufacturers, but the rule itself clearly encompasses manufacturing activity and manufactured products (as well as flower). Since many (most?) California cannabis companies hold their IP in separate companies and/or license their IP from well-known operators in other states, section 5032 may or may not cause serious legal headaches here.

These swag bas also contain CBD products, which could get people in trouble with the California Department of Public Health Food and Drug Branch. MarketWatch mentions that some of the CBD products are topicals and beauty products, which the infamous California FDB FAQs (see also here) do not address and which the Federal Food and Drug Administration may also deem unlawful because it generally considers hemp derived CBD to be unlawful under the Food, Drug & Cosmetic Act. And if there are foods or beverages in those bags that contain CBD, they also violate both state and federal laws according to the FDB and the FDA.

Finally, seeing as how the City of Los Angeles does not yet allow onsite consumption at MAUCRSA-licensed retail or microbusiness facilities within the City, I also wonder to what the MarketWatch article was referring when it mentioned “L.A.’s first cannabis-friendly social club” offering VIP memberships in the goodie bags.

Though I have my doubts about the legality of this cannabis swag under California state law, and even though the gifting and receipt of the bags is undoubtedly federally illegal drug trafficking, I cannot help but applaud everyone behind these cannabis gifts: it’s brave and it’s bold. When a nationally significant and hugely watched event like the Oscars is willing to take the risk of openly gifting cannabis and CBD on one of the world’s biggest stages, you know there has been a major, positive societal shift regarding cannabis.

Something has gotta give in Phase 3.

The City of Los Angeles has long endured questions surrounding its elusive Phase 3 licensing process for cannabis businesses. The City completed Phase 1 and 2 licensing without too much crazy change, but Phase 3 is very likely going to be a different story, and will affect a lot of stakeholders for better or worse.

On February 8, 2019, the Department of Cannabis Regulation (“DCR“) wrote to the Rules, Elections, and Intergovernmental Relations Committee (“Committee”), proposing total reform for Phase 3 licensing in the face of multiple regulatory issues caused by undue concentration, the promotion of social equity businesses, and the overall economic interests of various stakeholders who are waiting for Phase 3 to open. DCR wrote to the Committee that it wants to make certain strategic amendments to the licensing process in Phase 3 that “would make our licensing process more efficient, transparent, and, most important, equitable.”

DCR’s obvious concern in its letter to Committee is that Phase 3 successfully hoist up social equity applicants and be as efficient as possible at the same time. In particular, the letter states that:

DCR recognizes that the existing licensing process provided in the Cannabis Procedures ordinance and regulations will take significant time to implement and that many Phase 3 storefront retail applicants will have to make significant investments in the application process before knowing for certain whether they might be denied because another applicant within 700 feet of them gets licensed first or the Community Plan in which they are located reaches undue concentration before they obtain a license.

Based on its letter, DCR looks to be seeking to award those stakeholders that are patiently sitting on eligible commercial cannabis properties (bleeding rent and other costs while waiting for Phase 3 to commence) through swift and efficient licensing. The bottom line is that the current proposed licensing process potentially harms everyone, including social equity applicants who have either already made the investment in the unsettled program or that don’t have the resources to invest ahead of time to their detriment (since the City hasn’t yet established the assistance programs necessary to aid social equity applicants, but is finalizing a draft RFP “to identify vendors who can provide a suite of business and licensing support to Tier 1 and Tier 2 social equity applicants”).

Combine the foregoing with the fact the City “expects approximately 200 storefront retail licenses will be available through Phase 3 before undue concentration is reached in most or all of the City’s Community Plans,” and DCR has taken the position that Phase 3 licensing procedures must change, and fast. DCR therefore proposes in its letter that Phase 3 licensing for the remaining estimated 200 retail licenses (probably all of which will go only to social equity applicants per existing laws) take place as follows:

First come, first serve for verified Tier 1 and Tier 2 applicants (that also have locations ready to go) for the first 100 licenses OR a lottery system to issue the first 100 licenses (with various barriers to entry, including having a location on lock). And for the second 100 licenses, the DCR wants a merit-based system with various qualification criteria.

There were other pretty important recommendations made in the letter to Committee regarding other amendments to current LA cannabis licensing laws, but the change-up on the Phase 3 licensing process is, by far, the most impactful.

Even though the DCR has studied the foregoing issues for months, the City Council was not yet ready to act on the DCR’s recommendations. On Friday, February 15, after a hearing with Committee and then a hearing with Council regarding the DCR’s recommendations, Council instructed DCR “to report back at the next Rules, Elections, and Intergovernmental Relations Committee meeting with a further analysis of the recommendations for Phase 3 Storefront Retail processing and Non-storefront Retail processing, including consideration of a social equity applicant registry platform similar to the City of San Francisco” and to “suspend any Phase 3 processing until the enhanced Social Equity analysis for the San Fernando Valley, Boyle Heights, and Downtown Los Angeles is completed.”

What does all of this mean? Basically, we’re back to square 1 in L.A., and original Phase 3 processing remains in place despite the DCR’s attempt at an overhaul. Without question though, Phase 3 licensing should change. The current timing alone on issuance of Phase 3 licenses will bankrupt or scare off the vast majority of people. First come, first serve likely appeals to most people, but it’s just as imperfect and arbitrary as a lottery system. So long as the right barriers to entry and restrictions are implemented, either system can work to effectuate quick and efficient licensing (just ask Washington State whose biggest problem with a lotto system was actually movement of winners after-the-fact).

Lotto likely edges out first come, first serve if we’re talking maximum efficiency, because it eliminates the timing pressure and order of applicants at the outset when they file with DCR. With either proposal though, ambiguities would hinge around what a “complete” application really means and/or the ability of people to game the system by paying off family members (or whomever) to act as straw applicants to increase their chances of success. Merit-based also poses its own challenges regarding what qualities should net you the most points, especially when dealing with social equity applicants who remain the most popular form of licensing capital in L.A. and therefore the most vulnerable when it comes to scams and hawkish investor behavior.

Interestingly enough at Friday’s hearing, Council did instruct the City Attorney to draft an ordinance (with input from DCR) to, among other things:

  • grant temporary approval to phase 3 retailers (which would allow them to instantly open their doors upon securing state licensure),
  • exempt non-storefront retailers from hearing before the Cannabis Regulation Commission prior to full licensure,
  • force Tier 1s or 2s to give a right of first refusal on ownership transfers to their existing partners to purchase their ownership interests at market rate (after expiration of the applicable Social Equity Agreement term),
  • bar from Phase 3 retail or delivery licensure applicants or landowners with “evidence” against them for illegal cannabis activity at any time since January 1, 2018.

So, we know change is coming to Phase 3 licensing albeit at a glacial pace. For now though, it appears that the DCR will really have to persuade Council on adopting its Phase 3 recommendations for the licensing process, or all Phase 3 stakeholders will invariably suffer licensing by a thousand cuts.

william barr federal law
Hopefully, anyway…

Back on January 4, 2018, the industry was in a slight tailspin due to then acting Attorney General Jeff Session’s (renowned marijuana hater) rescinding of all marijuana enforcement guidance from the Department of Justice (“DOJ”). Reactions in the media ranged from treating the Sessions announcement as nothing more than an attempt to frighten the cannabis industry to claiming that it was the first step in an organized crackdown of the marijuana industry that could affect cannabis businesses and users. Both possibilities are arguably realistic. And the drama that followed Sessions’ moves was pretty satisfying, including when Cory Gardner vowed to (and did) block DOJ appointments until the issue was resolved in favor of the states, culminating in a deal with President Trump to back off of state-legal marijuana. However, now that Sessions is out at the helm of the DOJ, industry folks can breathe a little easier where new Attorney General nominee William Barr has gone on record stating that state-law abiding cannabis businesses will not be prosecuted by the DOJ and essentially that the 2013 Cole Memo will be back from the dead.

In rescinding all DOJ guidance on marijuana enforcement, Sessions torpedoed the famous 2013 Cole Memo, which outlined eight specific enforcement priorities of the DOJ in states with legal marijuana and which, between the lines, indicated that “robust” state regulations would keep the DOJ at bay regarding enforcement of the federal Controlled Substances Act. After that memo, entire states built their comprehensive cannabis licensing and taxation systems on those eight enforcement priorities, ensuring that compliance restrictions and barriers to entry were strong enough to support the same. Instead, Sessions put in place the “Sessions Memo,” which was short on specifics. It doesn’t contain an outright directive ordering U.S. Attorneys to go after marijuana businesses. It simply withdraws all of the earlier marijuana-specific guidance memoranda and directed U.S. attorneys to treat marijuana sales like any other federal crime. The withdrawn memos include, the 2013 Cole Memo, the February 2014 Cole Memo that extended low enforcement priority status to apply to banking activities (although the FinCEN guidelines are, importantly, still alive); and the 2014 Wilkinson Memo that was a sort of Cole Memo for tribal lands.

Right now, U.S. attorneys have full discretion to determine to what extent they can/should enforce federal law in the context of marijuana crimes in states with legalization and medicalization–which they always had anyway–but the 2013 Cole Memo helped them prioritize certain marijuana issues across the DOJ. In his memo, Sessions referred to the principles of enforcement in the U.S. Attorneys’ Manual, but that document reinforces the level of discretion and authority that each U.S. attorney has already. The Cole Memo was ultimately useful in providing a consistent nationwide federal policy. Under Sessions Memo, we are back to the days of having potentially 93 different enforcement policies — one for each U.S. Attorney. To date, there haven’t been any reported incidents of the Feds going after state-law compliant cannabis operators in states that have legalized and regulated.

A new sheriff is coming to town though, and that could be a very good thing for the momentum of state-by-state legalization in that states will better know what to expect from Big Brother as will marijuana businesses and their investors. William Barr may end up becoming a very unlikely helper when it comes to state-legal cannabis. He was Bush I’s attorney general from 1991-1993, and he’s a dyed in the wool conservative who, as Attorney General, was “tough on crime” and put many, many people in prison. As reported by Marijuana Moment, Barr in a mid-January hearing with Congress testified that:

My approach to this would be not to upset settled expectations and the reliant interests that have arisen as a result of the Cole memorandum . . . However, I think the current situation is untenable and really has to be addressed. It’s almost like a backdoor nullification of federal law . . .

While Barr also testified that he wouldn’t go “after companies that have relied on [2013] Cole memorandum . . . ,”  he also didn’t completely kowtow to state legal cannabis. He further testified that “we either should have a federal law that prohibits marijuana everywhere, which I would support myself because I think it’s a mistake to back off marijuana. However, if we want a federal approach—if we want states to have their own laws—then let’s get there and get there in the right way.”

In reading the tea leaves, it sounds like, personally, Barr would have no issue with continuing the War on Drugs as it relates to cannabis. As a department under his watch and command, however, the DOJ probably wouldn’t spend time and valuable resources on state-legal operators — even if Barr is concerned that the current dynamic is breeding “disrespect for the federal law.” Reasonable minds can differ, but I’d say that most cannabis operators and states are very mindful of federal law enforcement and it’s really Congress, the DOJ, and the President to blame for creating legal confusion because of varied enforcement over the years.

In the end, Barr’s testimony ultimately serves to show the country that Congress has been woefully impotent and ignorant when it comes to cannabis as a whole and especially as the topic relates to states’ rights. What’s good to know though is that if Barr is confirmed, we’re very likely returning to the 2013 Cole Memo principles, which will at least create a political atmosphere of certainty in that the DOJ has bigger fish to fry than state-legal marijuana. Right now, Barr is pretty much a lock for U.S. Attorney General, so hopefully he’ll make good on his cannabis compromises.

california cannabis licensing rulesThe State of California finally adopted permanent cannabis regulations earlier this month. In a series of posts, we’re going to cover the highlights of each agency’s permanent rules so that you know what big changes to expect during 2019. This post will cover the main changes (in our opinion) regarding the California Department of Public Health Manufactured Cannabis Safety Branch’s (“CDPH-MCSB”) permanent regs. Without further ado:

No more Farm Bill hemp-CBD ingredients or additives. It’s no secret that the California Department of Health Food and Drug Branch (“FDB”) has an issue with hemp-CBD. Specifically, an FAQ that issued from FDB last year made clear that FDB prohibits hemp-CBD in “Food” for humans and pets. Now, CDPH-MCSB is following suit (indirectly). Pursuant to new regulation 40175(c), “a manufacturer licensee shall only use cannabinoid concentrates and extracts that are manufactured or processed from cannabis obtained from a licensed cannabis cultivator.” What this means is that using Farm Bill hemp-CBD as an ingredient or addictive to cannabis manufactured products is not allowed unless it comes from a licensed cannabis cultivator. The protections of the Farm Bill won’t apply.

Owners and financial interest holders. I recently wrote about how it’s unclear as to how far the state will now go in finding and vetting entity owners and entity financial interest holders, especially since the Bureau of Cannabis Control (“BCC”) articulates in its rules that it intends to locate and vet every human possible in pretty much any ownership structure. But what about MCSB? MCSB entity owner regulations now state that “if the owner . . . is an entity, then the chief executive officer and members of the board of directors of the entity shall be considered owners,” and for financial interest holders, MCSB rules mandate only that “financial interest holders shall be disclosed on the application for licensure.” On balance, the BCC’s owner and financial interest holder rules are much more aggressive than MCSB, and the BCC’s comments to its owner and financial interest holder rules was that all agencies would apply the same standards for vetting. However, this clearly isn’t going to be the case if stakeholders go off of a plain reading of the law. Though it will be strange, the MCSB will very likely stick to its minimal vetting requirements while the BCC goes full bore on retailer, distributor, and lab owners and financial interest holders.

Changes in ownership. Again in contrast with the BCC, the MSCB is going to be much easier on changes in ownership of licensees. Under BCC regulations, if there’s a full buy-out of all existing owners, the entity can no longer operate while the change of ownership is being reviewed and processed by the BCC. The MCSB however has no such standard, at least not one that’s codified under the new regs. Specifically, for any changes of ownership or changes to financial interest holders, the MCSB expects the following protocol:

“The licensee shall notify the [MCSB] of the addition or removal of an owner through [the agency’s online system] within 10 calendar days of the change; Any new owner shall submit the information required [by law]; The [MCSB] shall review the qualifications of the new owner in accordance with [state law] and these regulations to determine whether the change would constitute grounds for denial of the license. The [MCSB] may approve the addition of the owner, deny the addition of the owner, or condition the license as appropriate, to be determined on a case-by-case basis; An owner shall notify the [MCSB] through [the state agency’s online system] of any change in their owner information . . . within 10 calendar days of the change; and a licensee shall notify the [MCSB] through [the state’s online system] of any change in the list of financial interest holders . . . within 10 calendar days of the change.”

Labeling. Labeling is still just as intense and comprehensive as it was under the emergency regulations. Now though, manufacturers need to ensure that, if a product container is separable from the outer-most packaging (e.g., a container placed inside of a box), the product container includes the following: (1) For edible cannabis products, topical cannabis products, suppositories, or orally-consumed concentrates, all information required for the primary panel except for cannabinoid content, and (2) for inhaled products (e.g., dab, shatter, and wax), the universal symbol (which is the black triangle with a cannabis leaf and an “!” with “CA” underneath). We also now (finally) have specific labeling requirements for pre-roll and packaged flower that didn’t exist before outside of the statute, itself. Overall, there are additional technical change requirements for labeling, including the weight of the product now needing to be in metric and U.S. customary units, specific labeling for flavoring in line with federal law, and more specific labeling restrictions for cannabinoid content.

Packaging. Until 2020, manufacturers are off the hook for providing child resistant packaging (“CRP”). Until then, retailers will bear the burden of CRP through the continued use of CRP exit packaging. Once CRP for manufacturers kicks in though, they’ll need to adhere to a litany of requirements, including compliance with the Poison Prevention Packaging Act of 1970 Regulations.

New product definitions. Via the permanent regulations, MCSB has introduced a number of newly defined terms, which is ultimately better for licensees so that confusion doesn’t abound as product development continues. For example, we now have as recognized definitions like:

  • “Infused pre-roll,” which means “a pre-roll into which cannabis concentrate (other than kief) or other ingredients have been incorporated”;
  • “Kief,” which means “the resinous trichomes of cannabis that have been separated from the cannabis plant”; and
  • “Orally-consumed concentrate,” which means “a cannabis concentrate that is intended to be consumed by mouth and is not otherwise an edible cannabis product. ‘Orally-consumed concentrate’ includes tinctures, capsules, and tablets . . .”

OSHA training. Given that cannabis remains federally illegal, people often think that violating one federal law somehow gives you a license to violate every federal law, which is entirely untrue. Under the permanent MCSB regulations:

“for an applicant entity with more than one employee, the applicant employs, or will employ within one year of receiving a license, one supervisor and one employee who have successfully completed a Cal/OSHA 30-hour general industry outreach course offered by a training provider that is authorized by an OSHA Training Institute Education Center to provide the course.”

Clearly, safety and federal compliance in the workplace still applies, even to cannabis operators, which is now demoralized under the permanent MCSB rules.

Changes to operations that now require state approval. As the state moves along with licensing and enforcement, it was inevitable that certain licensee actions would first require state approval. What this usually means is that major changes to your business or SOPs can’t go down without the state’s blessing, which can take weeks or months to secure. Specifically, for the MCSB, licensees will now have to report to and clear with the state the following action items before the licensee pulls the trigger on them (all to the tune of a $700 change application fee, which is non-refundable):

  • the addition of any closed-loop extraction method;
  • the addition of any other extraction method that necessitates a substantial or material alteration of the premises;
  • the addition of infusion operations if no infusion activity is listed in the current license application on file with the [MCSB] (you’ll also have to tell the state about “any changes to the product list on file with the [MCSB] and provide a new product list within 10 business days of making any change” to the products you’re making”); or
  • a substantial or material alteration of the licensed premises from the current premises diagram on file with the [MCSB].

Importantly, a “substantial or material alteration” includes: “the removal, creation, or relocation of an entryway, doorway, wall, or interior partition; a change in the type of activity conducted in, or the use of, an area identified in the premises diagram; or remodeling of the premises or portion of the premises in which manufacturing activities are conducted.” Be advised!

california cannabis license merger saleOur California cannabis lawyers are seeing a major spike in mergers and acquisitions (M & A), and it’s time to discuss what’s on the horizon for changes of ownership for some California cannabis businesses. In every cannabis state, M & A is no breeze because the regulators almost always require pre-approval of the transaction or of the new buyer(s). In California, it’s going to be more of the same in the red tape department in the future, as per the proposed permanent rules that will (likely) take effect at the middle of this month.

As you all know, multiple agencies in California run point on licensing. The Bureau of Cannabis Control (“BCC”) is the lead agency though when it comes to the implementation of the Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”). Under the BCC’s proposed permanent rules (which are still under review by the Office of Administrative Law), we now have a revised change of ownership process for distributors, labs, and retailers. (The California Department of Public Health the California Department of Food and Agriculture both have new change of ownership rules that significantly differ from the BCC in certain ways.)

First, and most importantly for all licensees, state licenses are not transferable. What this means then is that buyers have to purchase the companies that hold those licenses. Second, to accomplish a change of ownership under the new rules, would-be sellers of BCC-licensed businesses will need to submit a “Notification and Request Form” (see here) and check the box entitled “Change in Ownership” or “Change in Financial Interest Holder.” Specifically, for changes of “owners,” under the proposed permanent rules at section 5023(c),

If one or more of the owners of a license change, the new owners shall submit the information required for . . . each new owner be submitted to the [BCC] within 14 calendar days of the effective date of the ownership change.”

This timeline is almost the same as what was set forth under the emergency rules–it’s no surprise that the state has a deadline on disclosure for changes in ownership, as it affects licensure. However, this is the new curve ball for the M & A crowd pursuant to section 5023:

The business may continue to operate under the active license while the [BCC] reviews the qualifications of the new owner(s) in accordance with [MAUCRSA] and these regulations to determine whether the change would constitute grounds for denial of the license, if at least one existing owner is not transferring his or her ownership interest and will remain as an owner under the new ownership structure. If all owners will be transferring their ownership interest, the business shall not operate under the new ownership structure until a new license application has been submitted to and approved by the [BCC], and all application and license fees for the new application have been paid . . . In cases where one or more owners leave the business by transferring their ownership interest to the other existing owner(s), the owner or owners that are transferring their interest shall provide a signed statement to the [BCC] confirming that they have transferred their interest.”

In my experience, most business buyers in cannabis are looking for a full buy-out. And your typical cannabis M & A deal will (hopefully) have as a condition to closing that the state and/or local government(s) approve of the transaction/new buyer(s) prior to closing. However, in California, retailers, labs, and distributors will not be able to operate during a complete buy-out while the state is processing not only all of the new owners (including their background checks) but also an entirely new license application, which could take weeks or months to complete. Without a doubt, buyers will want the business to keep operating during the transaction so this is going to be problematic for a complete buy-out, and it’s pretty much unprecedented that the business shuts down during the transition.

What we’re now very likely to see then is that at least one of the original selling owners will always stay on the licensed entity as part of the transaction and only after the state clears the new license application will that person finally be able to transfer all of their equity (once they provide that written statement to the BCC). What this means is that buy-outs of cannabis businesses in California just got that much tougher and risk-laden for buyers as these transactions will now certainly drag out and become even more complicated.

And if you’re not looking at a full buy-out, life is somewhat easier in that “[a] change in ownership does not occur when one or more owners leave the business by transferring their ownership interest to the other existing owner(s),” and changes to financial interest holders (i.e., anyone who holds less than 20% of the business’s equity) don’t constitute a change of ownership that warrants a new application, etc.

You may be thinking that there’s a silver lining here in that these new rules may only apply specifically to annual licenses. However, regulators ensured that the change of ownership standards apply to those who hold a “License,” which is defined statutorily as “a state license issued under this division, and includes both an A-license and an M-license, as well as a testing laboratory license.” In turn, these standards should apply to those companies that hold temporary, provisional, and annual licenses.

California has certainly set itself apart as a very mixed place when it comes to cannabis business friendliness. And these recent BCC-imposed changes of ownership, at least in my opinion, help bring the state closer to more arbitrary barriers to entry than necessary.

california marijuana cannabis licensingIn California, under the Medicinal and Adult-Use Cannabis and Regulation Safety Act (MAUCRSA), temporary licenses began issuing to cannabis businesses on January 1, 2018. Since then, the state agencies in charge of MAUCRSA’s implementation (the Bureau of Cannabis Control (BCC), the California Department of Public Health (CDPH), and the California Department of Food and Agriculture (CDFA)) have worked pretty much round the clock on adopting permanent regulations. In case you forgot, the agencies dropped their initial proposed permanent rules this past summer, tweaked those, and then released another round of revised proposed permanent regulations last month (which are now in the hands of the Office of Administrative Law (OAL) for an overall review). That last round of proposed permanent rules (see herehere, and here) is very likely to become effective (pending OAL’s review) in early January. Right now, all licensees are still operating under the emergency rules that came out in fall of 2017. And pretty much everyone is racing to get their temporary licenses, which will NOT be available after December 31.

Despite the fact that the state has made great progress towards permanent rules, many questions and ambiguities around licensing and operational conduct remain. In fact, some of the grayer areas of the emergency regulations have been expanded by the proposed permanent rules for better or worse. In turn, with 2019 just around the corner, here’s my list of the top 10 unknowns that still remain for California cannabis:

    1.    IP licensing and white labeling restrictions.

In case you’ve been living under a rock, one of the most shocking proposed permanent rules to come from the BCC is section 5032(b) (which, yes, affects all licensees). Essentially, section 5032 (b), as originally written, basically prohibited all IP licensing and white labeling agreements between cannabis licensees and non-licensees. That rule stated that:

(a) Licensees shall not conduct commercial cannabis activities on behalf of, at the request of, or pursuant to a contract with any person that is not licensed under the Act. Such prohibited commercial cannabis activities include, but are not limited to, the following: (1) Procuring or purchasing cannabis goods from a licensed cultivator or licensed manufacturer; (2) Manufacturing cannabis goods according to the specifications of a non-licensee; (3) Packaging and labeling cannabis goods under a non-licensee’s brand or according to the specifications of a non-licensee; (4) Distributing cannabis goods for a non-licensee.

For more detail on that original rule, see our write-up here. During public comment on 5032, there was a good amount of dissent (including our own) in that it’s pretty obvious if such a rule went through a lot of branded product currently on the shelves would have to be tossed. In addition, California would be the only state in the cannabis union to adopt such a strict rule. When the BCC then released the revised proposed rules, 5032(b) was pared down to read as follows:

(b) Licensees shall not conduct commercial cannabis activities on behalf of, at the request of, or pursuant to a contract with any person that is not licensed under the Act.

As you can see, the IP licensing and white labeling examples were deleted, but the rule still makes clear that licensees can’t undertake commercial cannabis activity (i.e., manufacturing, labeling, processing, etc.) “on behalf of, at the request of, or pursuant to a contract” with a non-licensee. Just removing former examples (1)-(4) may have no impact whatsoever here, and it’s certainly confused the situation as a result. And while the BCC’s own comments to 5032 (in its Final Statement of Reasons) indicate that it takes no issue with non-licensee to licensee IP licensing and white labeling relationships, a plain reading of the rule indicates otherwise.

    2.    Ownership issues. 

The BCC struck again in the proposed rules revising “owner” disclosure standards to be much stricter at section 5003. Now, in addition to anyone with 20% or more in equity, the board of directors, the CEO, and anyone or any entity that exercises any direction, control, or management over the licensee, is also an owner. Any individual or entity merely entitled to profit share at or more than 20% is also an owner. This calls into question though how the BCC plans to treat things like cashless options and warrants that have no immediate entitlement to ownership in or profit sharing with the licensee. And what about husbands and wives (which are in community property marriages in California) since there’s no spousal disclosure requirement and they’re technically one person under existing law? The BCC has been silent on all of the foregoing and I have no doubt that these new revised rules may actually incentive people to be even more “creative” in order to avoid owner (and financial interest holder) status.

    3.   Financial Interest Holder woes.

Identifying financial interest holders (FIHs) is more complicated than owners because the FIH definition now encompasses a variety of folks and entities. I recently spoke to the OC Register about how now even lawyers who take a share of the profits of a cannabis business (in exchange for legal services) will now have to be disclosed as FIHs under the new rules. The BCC also made clear that it’s going to sort through more convoluted corporate structures around FIHs to get to the humans providing the capital to or profit sharing with cannabis businesses. At section 5004 of the proposed rules, the BCC now mandates that:

“When an entity has a financial interest in a commercial cannabis business, then all individuals who are owners of that entity shall be considered financial interest holders of the commercial cannabis business. For example, this includes all entities in a multi-layer business structure, as well as the chief executive officer, members of the board of directors, partners, trustees and all persons that have control of a trust, and managing members or non-member managers of the entity. Each entity disclosed as having a financial interest must disclose the identities of persons holding financial interests until only individuals remain.”

Of course, we have no way of really knowing how far the BCC will go here in vetting the individuals behind these structures, though I’m sure more than a few publicly traded companies are suffering severe heartburn at reading this new rule.

    4.    Packaging and labeling compliance in 2019. 

Under CDPH proposed permanent regulations, manufacturers will not have to implement child resistant packaging (CRP) for their cannabis products until 2020. In the interim, retailers will fill the gap by using CRP exit bags. And while CRP is going away for manufacturers, there are a slew of revised and new packaging and labeling standards being implemented upon the rules becoming effective in the new year. The outstanding issue then is that CDPH created no affirmative grace period for manufactured product that’s out there right now and compliant with the emergency regulations, but that doesn’t meet the new packaging and labeling regulations. (A great example is that manufacturers of certain products now have to put the universal symbol not only on outer packaging but also on the product container itself if that outer packaging is “separable” from the product container.) What’s for sure is that retailers cannot possess or sell finished product that doesn’t adhere to the new packaging and labeling rules. So, what exactly will happen to existing, non-compliant product in 2019? That remains a mystery.

    5.    Provisional licensing. 

Provisional licensing is the new temp licensing. (See here for more on the temp license race to secure provisionals for 2019.) Even though a provisional license is the new hot ticket in town, the BCC and CDPH have given no insight into how a licensee actually secures this license. I surmise that the issuance of provisionals will be automatic (similar to how the state was just renewing temp licenses automatically if a temporary licensee was in clear and earnest pursuit of its annual license). CDFA is the only agency that’s produced a fact sheet on the topic, but no agency has publicly announced the exact logistics around provisional licensing yet.

    6.    Social equity programs. 

For every city that’s done a social equity program, it’s been a challenge out of the gate to do it correctly and sustainably. Los Angeles is just getting started with its program while certain other California cities are trying but are producing meager results at best. While the state finally decided to financially back local social equity programs, it’s clear that the state and the cities need to study this particular social experiment for some time before a gold standard will actually emerge. In turn, the success of these programs is definitely a large unknown.

    7.    Banking.

Banking in California is the number question I get on a weekly basis at this point: namely, when the hell is it going to commence? I’m a firm believer that unless and until our permanent regulations are finalized and are proven to work relative to barriers to entry and vetting owners and FIHs, we will not see private sector banking in California. Our licensing and enforcement systems are still too loose/inchoate to satisfy the 2014 FinCEN guidelines, and no public bank is going to materialize here either for various complicated and practical legal reasons (be sure to watch out for banking fraudsters, too). And while California cannabis companies will likely continue to use management companies to help them alleviate some of the inability to access banking, it’s certainly not a long-term solution and it’s downright illegal when that relationship isn’t legitimate or at an arm’s length anyway.

    8.    Fee slotting agreements and anti-competitive tactics. 

On a regular basis now, I’m seeing retailers introduce to my cultivation and manufacturing clients a variety of fee slotting agreements so that my clients can secure known shelf-space in order to remain competitive. This month, I questioned whether such contracts were valid under MAUCRSA where anti-competitive behavior is strictly barred. Only time will tell whether regulators will address these agreements and their impact on the marketplace.

    9.    Tech platforms and delivery. 

The BCC seems to have developed an appetite for wading into increased regulation regarding retailers and delivery tech platforms. Pursuant to section 5415.1 of the proposed permanent BCC regulations, we now have a more robust code of conduct between retailers and tech platforms when it comes to delivery. Now that the BCC has finally opened the door to invading this relationship regarding contractual limitations and restrictions on advertising and marketing for licensees via tech platforms, it begs the question as to whether California is going to go further down the road of trying to essentially regulate tech platforms or not. Given the fact that California is one of the few states that’s embraced delivery, it’s a very important area for development, both legally and for public policy.

    10.    Corporate versus cottage debate rages on. 

Every single state that’s undertaken recreational cannabis has to battle between corporate and cottage interests. And every single state is different in how it’s handled the issue. In the proposed permanent regulations, it’s hard to tell which way California is leaning since those rules still contain some fairly big business friendly propositions (such as still being able to secure countless small cultivation license types, local law permitting, in order to aggregate big acreage) as well as some rules that cut against “Big Marijuana,” like having to disclose shareholders in a publicly traded company as FIHs unless they hold 5% or less of the equity. In 2019, I think we can fully expect the debate between small and large business interests to carry on, but where California lands remains unknown. That’s going to probably continue for quite some time as it works out the kinks spurred by the proposed regulations.

los ángeles cannabis licensingThe ups, downs, and unknowns around L.A. cannabis licensing have abounded from the passage of Measure M back in March 2017. This is not uncommon, especially in large cities, as regulators determine how to handle things on the fly and as issues arise (see, for example, social equity in L.A. and the ability to re-locate for Existing Medical Marijuana Dispensaries (“EMMDs“). L.A., to its credit, has been transparent and pretty consistent in the way it’s treated licensees and stakeholders. To that end, this month, L.A.’s Department of Cannabis Regulation (“DCR”) released a Phase 2 licensing bulletin that’s significantly important for those Phase 2 would-be licensees that seek a temporary license.

Recall, to qualify for Phase II temporary approval/licensing (which triggered priority licensing for existing “non-retailers” like growers and manufacturers) — folks had to meet all of the following criteria:

  1. Engagement prior to January 1, 2016, in the same Non-Retailer Commercial Cannabis Activity for which it sought a license;
  2. Supplier to an Existing Medical Marijuana Dispensary prior to January 1, 2017;
  3. The Business Premises meet all the land use and sensitive use requirements under cannabis laws and the existing City code;
  4. The applicant’s premises have to pass a pre­-license inspection without any fire or life safety violations either;
  5. All outstanding City business tax obligations were paid to the City and the Applicant had to indemnify the City;
  6. Provision to the City of a written agreement with a testing laboratory for testing all Cannabis and Cannabis products and attests to testing all its Cannabis and Cannabis products in accordance with state standards;
  7. Attestation that the Applicant would cease all operations if denied a State license or City License, and the Applicant cannot do any retail activity at its premises;
  8. Qualification under the City’s Social Equity Program (see here for more info); and
  9. Attestation that the Applicant will comply with all operating requirements imposed by DCR and that DCR may immediately suspend or revoke the temporary approval if the Applicant fails to abide by any City operating requirement.
Number 4 above was causing a lot of heartburn amongst Phase II license applicants in that they didn’t really know what to expect. Pre-licensing inspections can be fairly labor intensive depending on the state of the property at issue versus the build out and business plans of a given applicant, and each City has a different standard for a passing grade. In L.A., pre-licensing inspection (which is a pre-requisite to temporary approval) “may include, but is not limited to [an inspection of the business premises by], employees or agents of the following City or county departments: DCR, Building and Safety, Police Department, Fire Department and Los Angeles County Department of Public Health.” And a pre-License inspection consists of, but is not limited to, the following: “approval of the premises diagram; on-site inspection of all applicable building code and fire code requirements; approval of the security plan; fingerprinting; and approval of the fire safety plan (if applicable).”

Plus, applicants must upgrade all applicable electrical and water systems to Building and Fire Code standards before their application will move forward. Again, this is no small task depending on how your building is holding up/what its previous uses and occupancies were.

Temporary approval in L.A. is essential for applicants to also apply for and receive their temporary licenses from the state, which will not be given out or renewed after December 31. This month, L.A. thankfully illuminated for Phase II applicants what to expect for pre-licensing inspections in the City. In its bulletin, the City states:

To be eligible for Phase 2 Priority Processing, among other requirements, an applicant must pass two inspections. One is a DCR inspection to confirm that the applicant’s business premises is built out to substantially match its business premises diagram (i.e., the location and layout of entry points, interior doorways, rooms and walkways match the diagram) and that the business premises is sufficiently secured. The other is a Los Angeles Fire Department Cannabis Unit inspection to confirm that the applicant’s business premises and operations comply with the Los Angeles Fire Code.

The onus here is on the applicant to confirm for the City that it’s ready for pre-licensing inspection. In addition, when DCR confirms a date for an applicant’s inspection, the applicant will be asked to provide its most up-to-date premises diagrams to the DCR (including showing. accurate placement of security cameras). The bottom line of the City’s bulletin is that the physical premises be substantially similar to the premises diagram submitted to the DCR and that the premises be sufficiently secured per City and state law. During the inspection, the DCR will:

  • Walk through each room or area in the premises and assess whether its layout and location is substantially similar to the premises diagram;
  • Determine whether surveillance cameras are recording all areas required to be under surveillance (practically, this is anywhere on the business premises where cannabis goods will be present at any point in time);
  • Determine whether the surveillance system is in a secured area, is functional and can play back recordings upon request; and
  • Determine whether the premises are equipped with a functioning alarm system.

Another big question in L.A. was what the DCR would do with premises that are not 100% built out. The bulletin tells us that:

DCR will inspect the built out area and if all other Phase 2 eligibility requirements are met, grant Temporary Approval for cannabis activities limited to that specific area. Once the remaining areas of the premises are built out, DCR will send out an inspection team again before authorizing cannabis activities in those areas. However, given the large number of Phase 2 eligibility inspections to complete, DCR cannot provide a timeline for when it will be able to schedule a second inspection for an applicant.”

All of this means that it is best to be fully built out (in accordance with your premises diagram and with the fire and safety code) and ready for inspection if you want to get your temporary approval in L.A. anytime soon for your entire facility.

On inspection, also don’t expect to sweet talk the DCR investigator or to learn about the status of your application. Neither will advance your cause with the DCR at this point. Instead, applicants should proceed with business as usual in a professional manner and be as helpful as possible to the DCR investigators and to LAFD.