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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 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.

It seems like most days I receive a call or an email from a client or potential client that wants to examine a marijuana joint venture (JV). Whether it’s a business arrangement between companies that already has been negotiated, or stage one of the deal process, marijuana JVs are all the rage, even though many people don’t understand what they are getting into. This post covers some the main dos and don’ts of the marijuana JV.

Marijuana joint venture business

What is a JV and why are so many companies looking to get into them? Counter to how they are often discussed, a JV isn’t an entity in the same way that a corporation or LLC or limited partnership is. A JV can take many forms but generally involves a contract between multiple business entities that involves some level of profit sharing for joint activities. As it turns out, financiers looking to capitalize off of the green rush often know nothing about producing or manufacturing cannabis. Conversely, a lot of our country’s best cannabis talent lacks both cash and know-how necessary to run a complex, highly-regulated cannabis business or ancillary company in a hugely competitive environment. Each side wants and needs a partner to cover some gaps, but the parties often are unwilling to share direct ownership in their businesses. So, we see some hasty marriages between multiple companies structured as JVs. This sharing of expertise and resources, along with strategic alliances for specific business purposes are the primary reason that most JVs exist. However, many companies wading into or already in the cannabis industry think a JV is the answer to pretty much every relationship. In reality, JVs require some specific circumstances to work.

JVs attract would-be dealmakers specifically because no ownership purchase, sale, or assignment has to take place between the interested companies. There is a lot that goes into an agreement where parties agree to an equity transfer. Securities filings, updates to company operating documents and cap tables, filings with state regulators, and other tedious projects await a company (and its attorney) anytime ownership is transferred. A JV avoids much of that and provides significant flexibility.

It is also worth noting that because of the new tax law, many cannabis businesses are choosing to form or be taxed as C-corporations. A JV between an operating company and a financier can provide some of the agreement flexibility that an LLC provides while allowing different parties to the JV to make different tax elections. With the fluid nature of cannabis laws and the creation of individual and insulated state markets, JVs appeal to many as a result.

The two (or more) companies coming together for a joint venture purpose are usually acting in their own best interests in the JV and not necessarily in the best interest of a single, unified entity. The individuals involved in negotiating a JV owe fiduciary duties to their own shareholders and members — not to the shareholders or members of their co-venturers. This dynamic has ramifications for the day-to-day performance of the parties, and it drives home the importance of negotiating the precise duties and obligations of the parties, using the JV agreement to efficiently allocate risk. If the parties do not make this allocation correctly, it is important to note that there is no statuary regime that delineates the standard relationship among the parties, as with corporations and LLCs. Negotiable provisions include governance of the joint venture itself, working capital, labor issues, and who bears the brunt of production or work product turn out.

As a result, finding your ideal JV partner can be a monumental task in cannabis where a lot of cannabis operators have never conducted business in a JV setting, let alone in a highly regulated environment. In turn, when looking for that JV partner in cannabis, whether you’re on the investor side or the operator side (or whatever side), your JV partner should be cognizant of and capable of compliance with the multitude of state regulation that now surrounds marijuana businesses (including residency, criminal record, and capital start-up mandates). The joint venturer should also understand marijuana federal enforcement priorities (or the lack thereof), be aware of the capital it will take support and sustain the JV, and be able to fully articulate their short and long-term goals for the JV.

With respect to state licensing, states will not issue a cannabis license to a JV: one or more of the co-venturers must hold the license, and the other entities will be engaged in some activity supporting that of the licensee(s). A JV just for cannabis licensure only really makes sense for parties that absolutely need market access and/or resources that they cannot otherwise get themselves or through their own investors. On the other hand, when it comes to the development of marijuana or marijuana ancillary intellectual property (IP), including for white labeling or brand houses, or to the development of certain marijuana based or related products that we wouldn’t otherwise see in the marketplace from a single company with limited resources, a joint ventures may be a good option. In such cases, the joint venture agreement should clearly spell out who has ultimate ownership and control of any IP developed by the venturers.

Lastly, for those cannabis operators contemplating a merger or acquisition down the line, a JV can make a future exit for the owners of any co-venturer difficult and clunky, unless the parties to the JV have not negotiated what to do if one of them wants to exit. Standard M & A deals include contract review by the acquiring party, and most JV contracts include clauses that allow termination of the deal if one side changes its ownership or sells off its assets. For the selling side, this can be extremely stressful if participation in the JV, and the resultant profits, are the primary reasons that buyers are looking at their businesses. If the JV isn’t clear about which party owns assets, additional challenges arise. Disputes around marijuana JVs are increasing where the parties have failed to identify, record, and enforce who will own and/or sell what JV assets, even in a partner-to-partner sale.

Marijuana JVs can work well in specific instances where the parties know what they are getting into and understand the risks that come with participating in a JV. If the only goal is to get a cannabis license, there are generally other types of deals that make more sense. When a JV is the right answer–e.g. for a specific projects, co-branded products, or other temporary business relationships–all parties are advised to carefully think through all of the possible ramifications before signing on the dotted line.

Editor’s Note: A version of this post previously ran in the author’s Above the Law column.

California marijuana packaging and labeling
What are the packaging and labeling requirements for new marijuana products?

California is just starting to get its cannabis packaging and labeling regulations right under MAUCRSA. The state has a mandated transition period from January 1 to July 1, 2018, during which time adult use and medical marijuana licensees can do business with each other, and temporary and annual state licensees can transport and sell cannabis products already in their possession in the newly regulated market. This means there are two packaging and labeling standards during this transition period: one for products that licensees bring into the marketplace from before January 1, 2018 and another for products cultivated or made on or after January 1, 2018. I covered transition period product packaging and labeling in a previous post. This post will cover the packaging and labeling requirements for those products made or cultivated on or after January 1, 2018 (collectively, “New Products”).

Retailers

For New Products, retailers won’t package or label anything. Instead, all New Products will come to retailers already packaged and labeled by either cultivators, processors, manufacturers, or distributors. The only packaging requirement retailers have for New Products is exit packaging. Specifically, per section 5413 of the Bureau of Cannabis Control Emergency MAUCRSA rules, “[c]annabis goods purchased by a customer shall not leave the retailer’s premises unless the goods are placed in an opaque exit package.”

Distributors

While distributors have lost a lot of power via MAUCRSA, they may still package, label, re-package, and re-label flower for retail sale (in line with cultivation packaging and labeling rules). That said, they cannot package, label, re-package, and re-label manufactured products unless they also own a manufacturing license and they’re dealing with their own manufactured products. The lone exception for manufactured products is if lab testing shows that the tetrahydrocannabinol (THC) content, per package or serving, was labeled incorrectly but is still within allowable THC limits. In that case, the distributor may then re-label the package with the correct amount of THC. Lastly, “transport only” distributors can’t package, label, re-package, or re-label any cannabis goods at all.

Manufacturers

For manufactured New Products, manufacturers (and Type Ps that label, package, re-label, and re-package cannabis products) must ensure that the label is in English and that all required labeling is “unobstructed and conspicuous” so that it can be “read by the consumer”. Moreover, all required labeling must go on the outside of the package or container (supplemental product information and “side effects” information can go on the inside of the packaging through inserts). There are two mandatory panel labeling requirements for manufactured New Products: the primary label and the informational label.

The primary label must contain the following items, in no less than 6-point font and in relation to the size of the primary panel and container/package:

  1. the identity of the product in a text size reasonably related to the most prominent printed matter on the panel;
  2. the net weight or volume of the contents of the package; and
  3. the THC content and cannabidiol (CBD) content for the package in its entirety (even if the CBD content is zero), expressed in milligrams per package.

If the manufactured New Product is an edible, the following requirements also apply:

  1. the words “cannabis-infused” must go immediately above the identity of the product in bold type and a text size larger than the text size used for the identity of the product; and
  2. the THC content and CBD content per serving, expressed in milligrams per serving; and
  3. this crazy symbol must be included:

You can include additional product information on the primary panel, but the foregoing MUST be on the outside label as relevant.

The informational label must also contain (in no less than a 6-point font in relation to the size of the primary panel and container/package, with limited exceptions depending on how much room you have with the label):

  1. the licensed manufacturer and its contact number or website address;
  2. the date of the cannabis product’s manufacture;
  3. the following statement: “GOVERNMENT WARNING: THIS PRODUCT CONTAINS CANNABIS, A SCHEDULE I CONTROLLED SUBSTANCE. KEEP OUT OF REACH OF CHILDREN AND ANIMALS. CANNABIS PRODUCTS MAY ONLY BE POSSESSED OR CONSUMED BY PERSONS 21 YEARS OF AGE OR OLDER UNLESS THE PERSON IS A QUALIFIED PATIENT. THE INTOXICATING EFFECTS OF CANNABIS PRODUCTS MAY BE DELAYED UP TO TWO HOURS. CANNABIS USE WHILE PREGNANT OR BREASTFEEDING MAY BE HARMFUL. CONSUMPTION OF CANNABIS PRODUCTS IMPAIRS YOUR ABILITY TO DRIVE AND OPERATE MACHINERY. PLEASE USE EXTREME CAUTION;
  4. if the product is intended for the medical market, the statement “For Medicinal Use Only”;
  5. a list of all product ingredients in descending order of predominance by weight or volume;
  6. if an edible product that contains an ingredient, flavoring, coloring, or an incidental additive that bears or contains a major food allergen, the word “contains,” followed by a list of the applicable major food allergens;
  7. if an edible product, the names of any artificial food colorings contained in the product and the amount, in grams, of sodium, sugar, carbohydrates, and total fat per serving; Instructions for use, such as the method of consumption or application, and any preparation necessary prior to use (which is completely up to the manufacturer); and
  8. the product expiration date, “use by” date, or “best by” date, if any; and, when available from the state, the UID and, if used, the batch number.

For the required packaging of all manufactured New Products, manufacturers must have packaging that is:

  1. capable of protecting the product from contamination and that shall not expose the product to any toxic or harmful substance;
  2. tamper-evident, which means that the product shall be packaged in packaging that is sealed so that the contents cannot be opened without obvious destruction of the seal;
  3. child-resistant, which means the package shall be designed or constructed to be significantly difficult for children under five years of age to open or otherwise obtain access to the product contained therein within a reasonable time, and shall not be difficult for normal adults to open or obtain access to the product contained therein;
  4. not imitating any package used for products typically marketed to children;
  5. if an edible New Product, opaque; and
  6. if the package contains more than one serving of cannabis product, re-sealable so that child-resistance is maintained throughout the life of the package.

Cultivators and Processors

Cultivators can grow and process their own flower. Processors only trim, dry, cure, grade, package, and/or label flower or non-manufactured cannabis: they don’t grow anything. Both are charged with the following packaging and labeling requirements for cultivated New Products headed for retail sale (including the same font, conspicuous placement, and English language requirements as manufacturers):

  1. all cannabis has to be labeled and placed in a resealable, tamper-evident, child-resistant package and must include, once available, a unique identifier for the purposes of identifying and tracking cannabis and cannabis products;
  2. the following statement in bold print:  “GOVERNMENT WARNING: THIS PACKAGE CONTAINS CANNABIS, A SCHEDULE I CONTROLLED SUBSTANCE. KEEP OUT OF REACH OF CHILDREN AND ANIMALS. CANNABIS MAY ONLY BE POSSESSED OR CONSUMED BY PERSONS 21 YEARS OF AGE OR OLDER UNLESS THE PERSON IS A QUALIFIED PATIENT. CANNABIS USE WHILE PREGNANT OR BREASTFEEDING MAY BE HARMFUL. CONSUMPTION OF CANNABIS IMPAIRS YOUR ABILITY TO DRIVE AND OPERATE MACHINERY. PLEASE USE EXTREME CAUTION.”;
  3. the net weight of cannabis in the package;
  4. identification of the source and date of cultivation, the type of cannabis, and the date of packaging;
  5. the appellation of origin, if any;
  6. list of pharmacologically active ingredients, including, but not limited to THC, CBD, and other cannabinoid content, the THC and other cannabinoid amount in milligrams per serving, servings per package, and the THC and other cannabinoid amount in milligrams for the package total; and
  7. information associated with the unique identifier issued by the state Department of Food and Agriculture.

Additionally, a flower label may specify the county of origin only if 100% of the cannabis or nonmanufactured cannabis product contained in the package was produced within the designated county, as defined by finite political boundaries. For more on cannabis appellations in California, see here.

In all, the packaging and labeling requirements for California cannabis products are extremely detailed and must be followed to a T by any business that wishes to maintain its medical or adult use license. All prospective licensees should begin preparations today.
Stay tuned for Part 3 of this series on California cannabis packaging and labeling, where I’ll cover the warnings and disclaimers that should go on your products (not covered under or mandated by MAUCRSA), including how to handle new Prop. 65 rules.
California marijuana banking
A public marijuana bank is a red herring.

It seems like every state in its own way has tried to grapple with a state-legislated solution to the notorious banking issue across the cannabis industry. And now California is going to study its own banking solution that, in all reality, probably isn’t going to go anywhere.

California is predicted to take in $7 billion by 2020 because of adult-use legalization. Its licensed operators have nowhere reliable to put all of that cash, and you can be sure that the California Department of Tax and Fee Administration doesn’t want those operators trucking hundreds of thousands of tax dollars to Sacramento. Additionally, the cash epidemic was complicated by the fact that Attorney General Sessions’s rescission of the 2014 Department of Justice (DOJ) Financial Crimes memo, which allowed financial institutions to bank marijuana businesses in states with “robust regulation”, in concert with the 2014 FinCEN guidelines. Thankfully, those guidelines still exist, but the Department of Treasury is currently looking at them in the wake of Sessions’s decision.

Back to California.

This month, Treasurer John Chiang announced that his office (along with the California State Attorney General’s office) would undertake a two-part feasibility study around forming a state-backed bank to serve California cannabis businesses. In his office’s November 2017 report, Chiang admitted that creating and supporting a state cannabis bank would be a “formidable” task and that the “definitive solution” is for the federal government to either legalize cannabis or for Congress to create some kind of legal safe harbor for financial institutions that bank the industry. Nonetheless, Chiang’s report proposed two options for a state cannabis bank:

  • “A public institution that would either (1) finance public infrastructure and expand banking for underserved groups, including the cannabis industry; or (2) take deposits, make loans, and provide other services primarily to cannabis producers, distributors, retailers, and related businesses.” Or,
  • “A privately owned bankers’ bank, supported by the state, which would not take retail or small business deposits, but instead provide financial services, compliance services, and technical assistance to financial institutions serving the cannabis industry.”

Chiang’s report goes into great detail about the pros and cons of choosing either a public financial institution or the banker’s bank model. The report runs the gamut of concerns over federal asset forfeiture risks, industry volatility, special problems with closed loop banking and the Federal Reserve, public costs, profitability, capitalization, federal and state regulatory issues, the inability to secure federal depository insurance, and various and complicated ownership structures over either model. Overall though, both models sound nearly impossible to create, capitalize, and sustain due to exiting federal regulations that are insurmountable in every way, because “marijuana” is still a Schedule I controlled substance.

While we appreciate the state’s desire to find a banking solution for cannabis operators, a state-owned, operated, and financially backed bank would have a gargantuan task just to get started–just ask Massachusetts and Colorado. Federal deposit insurers want nothing to do with a bank that is focused on marijuana businesses, regardless of whether it is state-owned. The Federal Reserve also seems unlikely to grant a master account to any newly chartered financial institution whose reason for being is to serve marijuana businesses. Without that master account, the bank wouldn’t have access to the federal money transfer system, a key aspect of banking.

California would be wise to examine state-legal marijuana banking in the Northwest. Washington and Oregon boast a small but stable number of banks and credit unions that provide services to state-licensed marijuana businesses. Private banking in those jurisdictions grew slowly as those states developed their regulations, and the vast majority of rules are promulgated by state government.

California has only just started, and banks that would serve marijuana businesses there would only now be in a position to start working with California cannabis operators. Additionally, with the level of control that California regulators allow local authorities, marijuana businesses in different, local jurisdictions still face significantly different hurdles from one another. It is more challenging for institutions in California to keep up with the myriad of state and local rules that have been promulgated, most of which are still untested and with new ambiguities being found daily.

Now that the 2014 DOJ Financial Crimes enforcement memo is gone, it’s anyone’s guess as to what Treasury will do going forward and whether increased MAUCRSA regulation will matter to banks and credit unions in California. If banks are going to participate, regulations need to be significant enough that banks believe that they are as “robust” as the Treasury guidance requires, but simple enough that a bank can feel confident about its ability to judge whether or not one of its account holders is complying with state law.

Ultimately, a public bank of any kind is a red herring for the cannabis industry. Instead, existing financial institutions need to be sufficiently supported by the states so that they feel comfortable taking on the risk of servicing cannabis accounts.

Editor’s Note: A version of this post previously ran in the author’s Above the Law column.

marijuana cannabis labeling california
There’s a lot going on with packaging and labeling requirements for California transition products.

California is just starting to get its cannabis packaging and labeling regulations right under MAUCRSA. California has a mandated transition period from January 1 to July 1, 2018, during which time adult use and medical marijuana licensees can do business with each other and temporary and annual state licensees can transport and sell cannabis products already in their possession in the newly regulated market. This means there are two packaging and labeling standards during this transition period: one for products that licensees bring into the marketplace from before January 1, 2018 and another for products cultivated or made on or after January 1, 2018.

For transition period products only, the following packaging and labeling rules apply:

Retailers and Distributors: 

If at the time it is licensed by the state (i.e., receiving the temporary or annual license), a retailer already has cannabis goods not in child-resistant packaging, those products can still be sold by the retailer if the retailer places them “into child-resistant packaging . . . at the time of sale.” Cannabis goods that do not meet the full-blown packaging and labeling requirements for new products can still be transported and sold if “a sticker with the applicable warning statement under Business and Professions Code section 26120, subdivisions (c)(1)(A) and (c)(1)(B) is affixed to the cannabis goods prior to sale by the retailer.” Retailers can still sell, and distributors can still transport, cannabis goods that have not undergone laboratory testing “if a label stating that the cannabis goods have not been tested as required under Business and Professions Code section 26070(l) is affixed to each package containing the cannabis goods prior to sale by the retailer.” In addition, dried flower held in inventory by a retailer at the time of licensure that is not packaged may (not must) be packaged by the retailer into individual packages for sale. Cannabis products held in inventory by a retailer that don’t meet the appearance or ingredient requirements pursuant to Business and Professions Code section 26130 and 26131 can still be sold by a retailer.

Manufacturers:

In the transition period, manufacturers can sell cannabis products already in their possession at the time of licensure so long as those products are: 1) packaged in child-resistant packaging; 2) labeled with the government warning set forth at Section 40408(a)(3) of the manufacturing rules; 3) within the THC limits under Sections 40305 or 40306 of the manufacturing rules; and 4) labeled with the amount of THC and, if applicable, CBD per serving and per package.

Under the manufacturing rules, “child-resistant packaging” means:

“the package shall be designed or constructed to be significantly difficult for children under five years of age to open or otherwise obtain access to the product contained therein within a reasonable time, and shall not be difficult for normal adults to open or obtain access to the product contained therein.’ A package shall be deemed child-resistant if it satisfies the standard for “special packaging” as set forth in the Poison Prevention Packaging Act of 1970 Regulations (16 C.F.R. §1700.1(b)(4)”).

A secondary package that is child-resistant is okay with the state for this requirement.

Cultivators: 

Other than having to label cannabis with the disclaimer that “This product has not been tested as required by the Medicinal and Adult-Use Cannabis Regulation and Safety Act” and having to include the government warning from Business and Professions Code section 26120, subdivisions (c)(1)(A), there are no other specific packaging or labeling requirements in the MAUCRSA emergency rules for transition period product in the possession of cultivators at the time of licensure (i.e., raw flower and unmanufactured cannabis products).

Once licensees run out of transition period product or start making or cultivating new products, the more robust packaging and labeling requirements apply to manufacturers, cultivators, and distributors. (Retailers will NOT be allowed to package and label any of the new products). However, it’s never to early to start running your mock-up labels and packaging to ensure that you comply with these very important regulations. Indeed, a proper label can make or break you in a products liability lawsuit and if you haven’t heard of Prop. 65 in the cannabis context, you’re behind (yes, transition period product should have the requisite Prop. 65 warnings).

In Part 2 of this series on California cannabis packaging and labeling, I’ll cover the packaging and labeling regulations for products cultivated or made on or after January 1, 2018.

With the beginning of California cannabis licensing under the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA), there has been a lot of confusion regarding how the new system will operate. The below are the top ten pieces of hearsay our California attorneys are hearing most regarding California’s newly legalized cannabis industry:

  1. The current collective model gets to rage on for the next year. Not entirely true, as we have covered elsewhere on this blog. The collective model created by a 2008 state attorney general memo and eventually addressed by SB 420 gets to live on until January 9, 2019 (if you didn’t get it, the Bureau of Cannabis Control (“BCC”) notified stakeholders by email that it posted to its website its notice to repeal Health and Safety Code section 11362.775 one year after regulators begin issuing licenses). However, if existing collectives undertake any sales of cannabis for profit or operate outside of the caregiver model set up by the Medicinal and Adult-Use Cannabis Act, or if they operate outside of local law mandates, they’re going to be in trouble with state and/or local authorities. Essentially, there’s been a legal narrowing of the collective model that pretty much no one is following because we haven’t seen the state or locals start to police accordingly yet, but that’s bound to change.
  2. During the “transition period,” licensees can buy product from unlicensed collectives. False. Once you have your state temporary license, you’re stuck in the temporary licensee system–you can only buy and sell product from and to other temporary licensees. The transition period is set up under the MAUCRSA emergency regulations to allow medicinal (M) and adult use (A) licensees to do business with each other from January 1 until July 7, 2018. That period also allows temporary and annual licensees to sell “transition period product,” i.e., products they already had in their possession when they received their temporary license, under certain circumstances.
  3. Transition period product doesn’t have any packaging, labeling, or testing standards. Mostly false. While transition period product doesn’t have to undergo testing, it absolutely has to meet certain packaging, labeling, and content standards depending on the licensee holding it. For manufactures, for example, the products brought into the temporary licensed market must adhere to the following standards: 1) the product has to be packaged in child-resistant packaging (CRP) that complies with the emergency MAUCRSA manufacturer rules (though a secondary package that’s CRP is fine); 2) it has to have the specific government warning set forth at Section 40408(3)(a) of the emergency MAUCRSA manufacturer rules; 3) is has to meet the THC limits for edible and non-edible products; and 4) it has to contain and show the amount of THC and, if applicable, CBD per serving and per package as required by the emergency MAUCRSA manufacturer rules.
  4. During the transition period, retailers can sell to qualified patients and M retailers can sell to adults 21 and up. False. Even though the transition period allows M and A licensees to do business with each other, the transition period rules do not allow A retailers to sell to qualified patients or M retailers to sell to adults 21 and up.
  5. As a temporary licensee, I’m not responsible for tracking and tracing commercial cannabis activity. Unfortunately, this is false. Under the emergency MAUCRSA rules, temporary licensees aren’t obligated to record commercial cannabis activity in the state’s formal track and trace system (though, after they receive their annual license, they have a set amount of time to get set up and into that system). However, under the BCC emergency regulations, temporary licensees “shall track and record all cannabis commercial activities and information required . . .  at a minimum, on paper receipts, invoices, or manifests.” The amount of track and trace activities for distributors, microbusinesses, and retailers is fairly significant, so temporary licensees should prepare themselves accordingly. For manufacturer temporary licensees, they have to record: name, address, and license number of the seller; name, address, and license number of the purchaser; date of sale or transfer; description or type of cannabis or cannabis product; weight or quantity of cannabis or cannabis product sold or transferred; and cost to the purchaser of the cannabis or cannabis product. And cultivators temporary licensees have to record that commercial cannabis activity set forth at section 8401 of the emergency MAUCRSA cultivation rules.
  6. Local approval isn’t necessary. False. Local approval is pretty much everything when you’re talking about getting a state license. In turn, you need to check the local jurisdiction in which you plan to operate to ensure two things: 1) they allow and regulate the license type you want; and 2) you can locate and secure real property that complies with local and state laws.
  7. Profit sharing, IP royalties, and sales as rent are disclosable financial interests. True. The emergency MAUCRSA regulations make clear that financial interests in a licensee are disclosable to regulators. A financial interest means “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.” The only exceptions are: 1) A bank or financial institution whose interest constitutes a loan; 2) individuals whose only financial interest in the commercial cannabis business is through an interest in a diversified mutual fund, blind trust, or similar instrument; 3) individuals whose only financial interest is a security interest, lien, or encumbrance on property that will be used by the commercial cannabis business; and 4) individuals who hold a share of stock that is less than 5 percent of the total shares in a publicly traded company. Of course, in other states, any right to receive any net or gross profit often triggers this kind of disclosure rule. As to California state regulators, they have relayed to us that profit sharing, intellectual property royalties, and sales as rent also constitute disclosable financial interests under MAUCRSA.
  8. Consultants will not be considered “owners”. Maybe, but it depends on what the consultant is doing and what your consulting agreement says. The emergency MAUCRSA regulations define “owner” as “[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; the chief executive officer of a nonprofit or other entity; a member of the board of directors of a nonprofit; an individual who will be participating in the direction, control, or management of the person applying for a license; an owner who is an individual participating in the direction, control, or management of the commercial cannabis 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; an officer or director of a commercial cannabis business that is organized as a corporation.” A consultant can easily be construed as an “owner” in the license applicant if that consultant is controlling entire product lines, acting as a “master” anything with complete authority over the process, hiring and firing people without going through the actual owners, brokering and engaging in sales of product, and generally directing, controlling, and/or managing the business. In turn, unless you make some carve outs in your consulting agreements, be sure your consultants can meet all of the owner eligibility roles.
  9. Transition period product is taxable. True. The California Department of Tax and Fee Administration (“CDTFA”) back in December adopted Emergency Regulation 3701, Collection and Remittance of the Cannabis Excise Tax, clarifying that California’s Cannabis Excise Tax applies to sales of cannabis acquired before January 1, 2018, but sold to customers on or after January 1, 2018. Emergency Regulation 3701 was issued to close a perceived loophole in California’s Cannabis Excise Tax. For more on Emergency Regulation 3701, see here.
  10. I can throw a “cannabis cup” wherever and whenever I want where cannabis is bought, sold, and consumed. False. As I’ve written time and again, legalization pretty much kills a lot of innovation and, with that, there are less and less sanctioned cannabis cups as we know them (i.e., people buying, selling, and ultimately consuming a ton of cannabis and judging it accordingly). Most California cannabis cups at this point are going to require a temporary event license under MAUCRSA, which will only be given if the “event” is thrown at a county fair or district agricultural association event. Any cannabis sales or consumption, would have to comply with MAUCRSA as well as local government approval standards for consumption. The other kicker is that to acquire one of these temporary event licenses, you would have to first receive a cannabis event organizer license, which entails all of the vetting and disclosure requirements for any other license type. In addition, customers and consumers at the event must be 21 and up, cannabis consumption cannot be visible from any public place or non-age-restricted area, no alcohol or tobacco can be consumed on the “cannabis event premises”, and sales of cannabis can only be conducted by existing microbusinesses or retailers.
Jeff Sessions Hates Cannabis
Jeff Sessions Hates Cannabis

It’s finally happening — Attorney General Jeff Sessions will, today, rescind the 2013 Cole Memo regarding federal enforcement in states that legalized cannabis. The Cole Memo, which came on the heels of marijuana legalization in Colorado and Washington back in 2012, set forth the Obama administration’s enforcement policies regarding state-legal marijuana. It set out eight main enforcement directives that essentially allowed states to move forward with legalization so long as they had “robust” regulations to control undesirable side effects. In turn, cannabis operators who consistently complied with hardcore state marijuana regulations basically saw themselves as off-limits to the Feds because of the Cole Memo. Nonetheless, the Cole Memo did not legalize or decriminalize marijuana and marijuana remains federally illegal today.

With this imminent shift in enforcement policies from the Department of Justice (DOJ), the question now becomes what will future DOJ enforcement look like?

Where the Cole Memo basically relinquished marijuana enforcement to the states under certain conditions, rescission of the Cole Memo likely will mean that federal prosecutors in cannabis legal states will now be free to decide how aggressively they wish to enforce federal marijuana laws. This means that a U.S. Attorney’s views on cannabis in a state where cannabis is legal will be critically important. It, therefore, behooves you — now more than ever — to familiarize yourself with the stances your particular U.S. Attorney has regarding cannabis. Though we do not foresee a return to high-level and consistent federal enforcement against cannabis — the DOJ lacks money and manpower to prosecute everyone — individual prosecutors will likely soon have sufficient means to target certain operators that get on their radar. Most U.S. Attorneys though (especially in the leading cannabis legal states) will see going after cannabis as political suicide and view themselves as having bigger fish to fry.

There will, however, likely be a ripple effect from this news. Namely, current access to banking, any tax reform progress, and investment are going to feel the chill of uncertainty and the threat of federal enforcement. Banks are only banking the cannabis industry because of a set of FinCEN guidelines from 2014 (and another DOJ memo on marijuana banking) that hinged on the Cole Memo. Banks are incredibly conservative and taking down the Cole Memo will almost certainly lead some banks to stop providing banking services to cannabis businesses. Institutional investors do not like this kind of uncertainty and we fear this will lead to a slowdown in cannabis investments, at least until we see how U.S. prosecutors handle the new enforcement protocol.

And what about the Rohrabacher-Blumenauer amendment (“Amendment”)? It’s still in play as valid federal law until January 19th, when it comes up for renewal. Be mindful though that the Amendment applies only to states with medical cannabis; it does not provide any protection to adult use marijuana operators. Plus, that Amendment has only served to protect medical cannabis operators in the 9th circuit based only on the McIntosh case.

Sessions’ move will increase confusion for both U.S. Attorneys and states, but I have been representing cannabis businesses in California and Washington for eight years now and I am confident that Western States like California, Colorado, Oregon, and Washington are not going to back down in the face of Jeff Sessions’ overzealous pursuit of his personal war on marijuana. Indeed, these (and other) states’ positions may ultimately speed up bonafide legal challenges that finally call into question in a real way the constitutionality of marijuana’s current scheduling and states’ rights to legalize and be left alone.

Stay tuned.