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

California cannabis lawyers
Big changes are coming to California cannabis collectives

Pretty much every state that’s dealt with an unregulated medical cannabis program has had to face the issue of what to do when heavily regulated adult use cannabis is introduced. In pretty much all of the West Coast states, you have had medical cannabis programs for qualified patients that revolve around an opaque “collective” model whereby patients are supposed to come together to pool resources to cultivate and distribute cannabis for medical use (via a physician or health care provider recommendation) among themselves and/or their caregivers. California was the first state to allow for medical cannabis for qualified patients back in 1996 under the Compassionate Use Act, which is part of the state’s health and safety code. Using “creative” legal advice to take advantage of this Act’s multiple loopholes and ambiguities, the “collective model” in California usually involves patients joining  a “closed loop” membership system (sometimes a formal corporate entity and sometimes not) to receive their medicine allegedly from other patients in the collective who grow or make it for them. What now happens to this collective model since California’s new cannabis laws (and forthcoming regulations) do not repeal the Compassionate Use Act?

When other states have faced the issue of what to do with their old and ambiguous medical marijuana laws after having enacted new and hardcore cannabis regulatory systems, they choose to have the new hardcore regulations cover all or nearly all cannabis issues in their state. This is due mostly to a desire to get into full compliance with the 2013 Cole Memo.

Our California cannabis lawyers are often asked whether it will be worth it to abandon the collective model in favor of receiving a state license under MAUCRSA, which will take time, money, and no small amount of effort. Our answer that it will be, especially because eventually you will no choice anyway. Even though the California legislature cannot disturb the Compassionate Use Act, it has already amended and repealed key provisions of the Medical Marijuana Program Act from 2003 that provided immunity to medical cannabis collectives and this will eventually eliminate the current collective model altogether.

Following implementation of MAUCRSA, qualified patients and their caregivers may continue to operate with limited criminal immunity without a state license, so long as: (1) the patients and caregivers operate in full compliance with state law, and (2) the local government does not prohibit the activity.  See, H&S Code sections 11362.5, 11362.765, 11362.77, and 11362.7. Immunities for medical cannabis collectives (i.e., non-profit mutual benefit corporations, non-profit corporations, non-profit cooperatives, etc.), on the other hand, expire one year after the state begins issuing licenses. See, H&S Code section 11362.775(d). 

Though MAUCRSA expressly exempts qualified patients and caregivers from licensure requirements, it does not allow qualified patients, their caregivers, or cannabis businesses to conduct commercial cannabis activity without a license. So, despite the one-year grace period provided to current collectives in H&S Code section 11362.775(d), a collective that is engaging in commercial cannabis activity that exceeds the very strict qualified patient and primary caregiver limits (see below) violates MAUCRSA and is operating illegally. We are hearing far too many stories (more in our Los Angeles office than in our San Fransisco office) of so-called cannabis lawyers and cannabis consultants charging small fortunes to help their collective clients avoid extinction. We urge you not to waste your money on these schemes.

To be immune from prosecution under the Compassionate Use Act and MAUCRSA, a primary caregiver (or a collective) must operate within the following confines when acting without a state license:

  1. Cultivation, possession, storage, manufacture, transportation, donation, or provision of cannabis must be exclusively for the personal medical purposes of no more than five specified qualified patients for whom the caregiver is the primary caregiver. (B&P section 26033(b));
  2. The caregiver cannot receive remuneration for these activities other than for actual expenses, including reasonable compensation incurred for services provided to an eligible qualified patient or person with an identification card to enable that person to use cannabis under this article, or for payment for out-of-pocket expenses incurred in providing those services. (B&P section 26033(b), H&S Code section 11362.765(c));
  3. The caregiver cannot possess more than eight ounces of dried cannabis per qualified patient unless a physician’s recommendation or local guidelines allow amounts in excess of this limit. (H&S Code section 11362.77(a)-(c)); and
  4. The caregiver cannot maintain more than six mature or twelve immature cannabis plants per qualified patient unless a physician’s recommendation or local guidelines allow amounts in excess of this limit. (H&S Code section 11362.77(a)-(c)).

Additionally, collectives and caregivers still must comply with applicable local city and county laws, which are quickly changing with respect to how they deal with commercial cannabis activity so as to embrace MAUCRSA licensing standards (if there’s not a ban).

If you do not believe the above will be enough to bring the current collective model to a halt by January 1 (when California cannabis licenses begin to issue and when temporary licenses are supposed to become effective), there’s more. Commercial cannabis activity is only permitted among licensees and once a business entity or individual receives an active temporary license or a full-blown license from the state, they must immediately stop doing business with non-licensed entities (including unlicensed collectives), or they risk losing their license. See B&P section 26053(a).

Those who think they will be able to milk the current unregulated collective model for the next year or so as the state implements MAUCRSA are likely to be sorely mistaken. Like the other adult use states that came before it, California will very soon essentially wipe out the old collective model in favor of the transparency and regulation its citizens chose. Trying to hold on to the collective model after January 1, 2018, is going to be a dangerous legal mistake.

 

 

 

California’s Bureau of Cannabis Control (along with its Departments of Public Health and Food and Agriculture) dropped their much-anticipated emergency rules this afternoon (see here, here, and here) to fully implement the Medicinal and Adult-Use Cannabis Regulation and Safety Act in California. The agencies kept a lot of what we saw from the withdrawn rules under the Medical Cannabis Regulation and Safety Act (MCRSA). (see herehere, here, and here), but there are also some new, notable additions and some interesting gap-fillers that now give us the foundation for operational standards across cannabis license types.

Though we can’t cover every single change or topic from these rules in one post (and because we’ll be covering the license types and application details in other posts in the coming days and weeks and at our SoCal Cannabis Investment Forum), I will instead focus on the following highlights of the emergency rules:

  1. We now have a revised definition of “canopy,” which is “the designated area(s) at a licensed premise that will contain mature plants at any point in time.” In addition, canopy shall be calculated in square feet and measured using clearly identifiable boundaries of all area(s) that will contain mature plants at any point in time, including all of the space(s) within the boundaries. Canopy may be noncontiguous, but each unique area included in the total canopy calculation shall be separated by an identifiable boundary which includes interior walls, shelves, greenhouse walls, hoop house walls, garden benches, hedgerows, fencing, garden beds, or garden plots; and if mature plants are being cultivated using a shelving system, the surface area of each level shall be included in the total canopy calculation.
  2. “Nonvolatile solvent” has been further defined to mean “any solvent used in the extraction process that is not a volatile solvent,” which “includes carbon dioxide (CO2) used for extraction and ethanol used for extraction or post-extraction processing.”
  3. Temporary licensing has now been fully detailed to include online applications, the personal information for each owner that must be disclosed, contact information for the applicant’s designated point of contact, physical address of the premises, evidence that the applicant has the legal right to occupy the premises for the desired license type, proof of local approval, and the fact that the temporary license (which is good for 120 days) may be renewed and extended by the state for additional 90 day periods so long as a “complete application for an annual license” has been submitted to the state. No temporary license will become effective until January 1, 2018.
  4. For the full blown “annual license,” the application requirements are pretty much the same as under the MCRSA rules except that you must disclose whether you’re applying for an “M License” or an “A License” and you have to list out all of your financing and financiers which include: “A list of funds belonging to the applicant held  in savings, checking, or other accounts maintained by a financial institution, a list of loans (with all attendant loan information and documentation, including the list of security provided for the loan), all investment funds and names of the investors, a list of all gifts, and a list with certain identifying information of anyone with a “financial interest” in the business. “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 exempt “financial interests” are bank or financial institution lenders, individuals whose only financial interest is through an interest in a diversified mutual fund, blind trust, or “similar instrument”, and those shareholders in a publicly traded company who hold less than 5% of the total shares.
  5. As part of your licensing application, you will still need to submit a premises diagram drawn to scale along with all of your security procedures and inventory procedures (and pretty much all corresponding operational SOPs) A $5,000 bond is still required for all licensees (as well as mandatory insurance) and all owners must submit their felony conviction criminal histories as specifically enumerated in the regulations, as well as rehabilitation statements.
  6. Several new licenses have been created (and/or brought back from the dead from MCRSA): the cannabis event organizer license (to enable people to take advantage of the temporary cannabis event license), the distribution transporter only license (which allows this licensee to only move product between licensees, but not to retailers unless what’s being transported are  immature plants or seeds from a Type 4 nursery), the processor license (a cultivation site that conducts only trimming, drying, curing, grading, packaging, or labeling of cannabis and non-manufactured cannabis products), the Type N and P manufacturing licenses are back, and there’s now a Type 9 delivery only Non-Storefront Retailer license.
  7. We also now have the non-refundable licensing fee schedules and though they vary depending on the license type they mostly are nominal, though some increase with increased gross receipts, and small and medium-sized growers will have to pay pretty robust fees.
  8. If you want to make changes after-the-fact to your premises or to your ownership structure, you first must secure state approval to do so.
  9. All growers are again limited to one Type 3 medium cultivation license each, whether it’s an M License or an A License.
  10. A retailer can sell non-cannabis goods on its premises so long as their city or county allows it (this excludes alcohol, tobacco, and tobacco products). Retailers can also sell non-flowering, immature plants (no more than six in a single day to a single customer). M-licensed retailers and micro-businesses can also give cannabis away free of charge to qualified patients or to their caregivers.
  11. Notably, until July 1, 2018, licensees may conduct commercial cannabis activities with any other licensee, regardless of the A or M designation of the license.
  12. The renewable energy requirements for cultivators have been revamped hopefully to the satisfaction of cannabis growers.
  13. Again, the licenses are NOT transferable, so we’re looking at folks only being able to purchase the businesses that hold them.
  14. Distributors will be able to re-package and re-label flower, but not infused cannabis products unless they hold a manufacturing license. Distributors also cannot store any non-cannabis goods at their premises. The state has laid out what must take place during a distributor’s quality assurance review and the chain of custody protocol with third party labs for testing.
  15. We have a detailed list of all permissible extraction types, including that any CO2 extractions must be done within a closed loop system.
  16. The prohibited products list is pretty much the same as it was under the  MCRSA rules (so, no nicotine or caffeine infused cannabis products).
  17. In regards to “premises,” the Bureau’s regulations mandate that a licensee may have up to two licenses at a given premises of the same license type so long as they’re owned by the same company and one is an A-License and  the other is an  M-License.
  18. In addition to other relatively onerous advertising requirements, licensees must “Prior to any advertising or marketing from the licensee involving direct, individualized communication or dialog, . . .  use age affirmation to verify that the recipient is 21 years of age or older.” Direct, individualized communication or dialog, may occur through any form of communication including in person, telephone, physical mail, or electronic. A method of age verification is not necessary for a communication if the licensee can verify that “the licensee has previously had the intended recipient undergo a method of age affirmation and the licensee is reasonably certain that the communication will only be received by the intended recipient.”
  19. Retailers and micro-businesses are now required to hire third party security to protect and watch their premises.
  20. To hold a micro-business license, a licensee must engage in at least three of the following commercial cannabis activities: cultivation, manufacturing, distribution, and retail sale. There are also now a slew of regulations surrounding each activity a micro-business can undertake.
  21. Live entertainment is now allowed at a licensed premises so long as it follows the bevy of regulations regarding content and presentation.

Overall, we have a close-ish copy of the withdrawn MCRSA rules that will lead us into 2018. Be sure to read the rules again and again before pursuing your California cannabis license. Applicants will have their work cut out for them on both the state and local levels.

 

Attorney General Jeff Sessions seems to have made it his personal M.O. to go after and take down state-legal marijuana programs and businesses, medical and recreational alike. He has made no bones about not being a fan of marijuana or its users, but the state-legal marijuana industry can breathe a (slight) sigh of relief on the heels of Sessions finally providing some guidance from the Department of Justice. According to Sessions, this administration will follow the 2013 Cole Memo in the enforcement of marijuana-related crimes in states with marijuana legalization and/or medicalization and corresponding regulatory systems.

During the House Judiciary Committee oversight hearing yesterday, Sessions stated the following on the record:

Our policy is the same, really, fundamentally as the Holder-Lynch policy, which is that the federal law remains in effect and a state can legalize marijuana for its law enforcement purposes but it still remains illegal with regard to federal purposes.

Hopefully then, cannabis businesses in states with “robust regulation” that adhere to the eight enforcement priorities of the 2013 Cole Memo will be the lowest enforcement priorities for the DOJ. However, neither that Memo nor Sessions’ apparent acceptance changes the federal Controlled Substances Act and marijuana remains illegal under federal law. Still, Sessions agreed with Representative Steve Cohen (derived from a line of questioning from Cohen) that marijuana is not as dangerous as heroin (despite the Schedule I classification they share under the federal Controlled Substances Act). Despite all of Sessions’ anti-marijuana rhetoric (and his poking and prodding of states with recreational marijuana licensing systems), it seems he’s finally coming around to facts and science. Do not though expect this Attorney General to make an effort to reschedule marijuana anytime soon as he will no doubt continue taking the Republican Party line on continuing the failed war on drugs.

Another big boon from yesterday’s hearing is that, despite Sessions requesting Congress essentially undo state medical marijuana protections set forth in various Congressional budget riders (which have actually shown major teeth in the Ninth Circuit), he admitted the Department of Justice must respect those laws so long as they’re in place. In other words, he conceded the DOJ must abide by federal law.

So, for now, the 2013 Cole Memo remains the DOJ’s enforcement policy for state-legal marijuana, and we can expect states to continue their democratic experiments with marijuana regulatory systems at a regular clip. We’re glad to see that the DOJ will (hopefully) follow the 2013 Cole Memo, but we’re even happier that Sessions plans to respect the federal budget riders (as he should have done from the get go) and that he recognizes that marijuana is not the same as heroin.

Among the hundreds of California cannabis events and conferences out there, I’ve come to find few offer much insight or even tips for investing in California’s cannabis industry and ancillary sector. Many of our California cannabis clients have been engaging in all kinds sophisticated hybrid equity and debt deals to put dollars into the hands of California cannabis operators and ancillary businesses as we head into licensing in 2018.

On September 28th of this year, our San Francisco office hosted our first California Cannabis Investment Forum, and it was a huge success. Not only did we sell out and have more than 250 people in attendance, those who attended really enjoyed it and many requested we do something similar in Los Angeles. Their reasons for wanting a similar event in Los Angeles ranged from wanting their SoCal people to be able to attend to wanting to hear what is happening in Southern California and to meet and network with cannabis industry operators and investors in our area. So, by popular demand from attendees and clients, we’re hosting another investment forum at the end of this month, but this time it’s in Los Angeles and with new panelists and a new moderator!

We hope you can join us on Thursday, November 30th for a discussion on investing in Southern California’s newly regulated cannabis industry. Hosted by Harris Bricken‘s Los Angeles office, the Southern California Cannabis Investment Forum will bring together top investors and leading companies in Southern California’s cannabis and ancillary industries.

The Forum will begin at 6:30 p.m. with a keynote from me that addresses the many recent changes to California’s medical and adult use cannabis laws under MAUCRSA. From 6:45 to 8 p.m., I will moderate a panel comprised of the following:

Panelists will cover:

Audience questions will be taken throughout the presentation. A cocktail (the food and a drink is included in the ticket price) networking session will follow the panel and last until 9:30 pm.

The Southern California Cannabis Investment Forum will be held at Wanderlust in Hollywood. Hors-d’oeuvres and drinks will be provided. Doors open at 5:30 pm. If you act now, you can get two tickets for $100. Early bird pricing ends at midnight tomorrow, so don’t wait to get your tickets!

We look forward to seeing you there!

Los Angeles Cannabis Investment Forum

Come to find out that among the hundreds of California cannabis events and conferences out there, not many actually offer much valuable insight or even tips for investing in California’s cannabis industry and ancillary sector. Many of our California cannabis clients have been engaging in all kinds of hybrid equity and debt deals to put dollars into the hands of California cannabis operators and ancillary businesses as we head into licensing in 2018.

In turn, on September 28th of this year, our San Francisco office hosted our first California Cannabis Investment Forum, and it was a huge success. Not only did we sell out, with more than 250 people in attendance, those who attended really enjoyed it and many requested we do something similar in Los Angeles. Their reasons for wanting a similar event in Los Angeles ranged from wanting their SoCal people to be able to attend to wanting to hear what is happening in Southern California and to meet and network with cannabis industry operators and investors in our area.

So by popular demand from attendees and clients, we’re hosting another investment forum at the end of this month. But this time it will be in Los Angeles and this time I will be the moderator.

Please join us on Thursday, November 30th, for an educational discussion on investing in Southern California’s newly regulated cannabis industry. Hosted by Harris Bricken‘s Los Angeles office, the Southern California Cannabis Investment Forum will bring together top investors and leading companies in Southern California’s cannabis and ancillary industries.

The Forum will begin at 6:30 p.m. with a keynote from me that addresses the many recent changes to California’s medical and adult use cannabis laws under MAUCRSA. From 6:45 to 8 p.m., I will then moderate a panel comprised of the following:

Our panelists will cover:

Audience questions will be taken throughout the presentation. If you’d like to submit a question to the panel beforehand, please write to firm@harrisbricken.com. A cocktail networking session will follow the panel and will last until 9:30 pm.

The Southern California Cannabis Investment Forum will be held at Wanderlust in Hollywood. Hors-d’oeuvres and drinks will be provided. Doors open at 5:30 pm. Early bird tickets are on sale now at $55, rising to $75 on November 16. Please go here for details and to sign up.

We look forward to seeing you there!

California cannabis lawyers
Cue California cannabis cautions

With temporary licensing on the horizon, California’s cannabis industry is obviously on the cusp of really big things. With this green rush, our California cannabis business attorneys have been brought on to work on all kinds of M&A deals and a bevy of MAUCRSA and local law regulatory compliance issues. These projects have exposed us to many who pitch various and sundry goods and services, claiming to offer “new paradigms” and “value adds,” but actually offering little to nothing.

In this post, I set out the five most common predatory practices we’re seeing in the Golden State cannabis industry so you can spot them when they’re coming at you and avoid them.

  1. Brokers. Whether it’s for M&A, financing, or finding real estate, many brokers are all too willing to sell cannabis companies down the river when it comes to compliance and just plain common sense. Far too many brokers neither know nor care about local or state law and they work only at cramming a deal down the parties’ throats to ensure they get their coveted commissions. Far too often we are getting brought into deals that involve unenforceable contracts or situations that will get one or both parties in trouble for failing to comply with local or state licensing, permitting, or operational laws or regulations.
  2. Lawyers. California cannabis businesses need to be careful in choosing their cannabis regulatory or business counsel. For twenty years there’s been no government oversight over medical cannabis operators and this has allowed some attorneys to unduly profit at the expense of their clients and their own ethical duties. And just because regulation is coming does not mean that some of these attorneys will stop their reckless, unethical, or incompetent ways. I’ve written before about how to avoid “OG legal advice,” but it goes further than that. If your cannabis attorney is willing to take a financial interest in your business but is not providing you with the requisite conflict waiver and opportunity for you to consult with outside legal counsel, that should be a huge red flag. If you know more about state and local regulations than your cannabis lawyer, that’s another red flag. If your cannabis attorney is trying to “lock” you into a long-term fee agreement that you can’t cancel at any time, that’s a massive red flag (yes, I have seen at least one self-proclaimed cannabis attorney with this sort of fee agreement). If your cannabis lawyer is encouraging you not to be transparent or not to get things in writing or is steering you away from basic business and corporate duties to try to hide things and/or assets, this is yet another red flag. These predatory attorneys will eventually be knocked out of California’s cannabis industry one or the other, but until then it’s buyer beware.
  3. Consultants. Out of all groups on this list, this one is generally the worst. Not only is it increasingly difficult to determine the value most cannabis consultants provide, there are way too many cannabis consultants running rackets because they themselves are blocked from pursuing licensure with the state or a given city or county. We also have seen more than our share of consultants trolling for cash by playing off the naiveté of would-be cannabis licensees. I recently reviewed a proposed agreement with a consultant who wanted seven figures per year for getting a company “through the political process” to receive a cannabis license, yet didn’t include any enumerated services nor any end date. Seeing as how California’s Bureau of Cannabis Control has made clear that state licensing procedures will not be a difficult undertaking, the idea of politicking for licenses makes no sense and paying for such politicking makes even less sense. Don’t be fooled.
  4. Accountants. There’s nothing like talking to a would-be client who has no clue what 280E is yet is working with an accountant/CPA who claims to know cannabis taxation issues and charges premium rates for that “specialized advice.” You need to make sure your accountant/CPA truly knows how to navigate 280E, but above all you want your accountant to be a competent tax professional. All too often we run into accountants who claim to be experts for cannabis businesses that do shoddy jobs on standard accounting or are impossible to reach when their clients need them. In other words, choose your accountant/CPA wisely.
  5. Cannabis conferences and trade groups. Every time we turn around, there’s a new cannabis conference or trade group in California (or elsewhere). Folks have figured out that they can make serious money off the “Green Rush” by throwing events in major cities without much knowledge about anything cannabis-related, or that they can better market themselves and their personal agendas through setting up trade organizations. Few of these conferences have any educational value and most choose their speakers based on who pays for “membership” or “sponsorship.” Having paid to play, the speakers use these conferences mostly just to shamelessly pitch themselves or their products. We have heard of many expensive yet wildly disorganized conferences with speakers who were super stoned and conveyed nothing of value or importance. On the trade group front, watch where you put your money since many of these organizations are neither unified or even organized when it comes to any kind of meaningful mission for change. Be especially wary of self-appointed and deceptively misleading “task forces” that are not actually compiled and appointed by a given city or county, but rather set up to showcase the goods or services of the person or people who formed them. In other words, do your due diligence.

California cannabis rules for deliveryLast week, California’s Bureau of Cannabis Control (“BCC“) finally announced the withdrawal of the MCRSA retailer, transporter, and distributor rules in light of the passage of the Medicinal and Adult Use Cannabis Regulation and Safety Act (“MAUCRSA” a/k/a SB 94) this past June. With that announcement also came some insight from the BCC on what we can expect in the emergency MAUCRSA rules that will drop this November. Specifically, the BCC posted on the California Cannabis Portal website that:

The three cannabis licensing authorities are in the process of drafting emergency regulations based on the new law for the commercial medicinal and adult-use cannabis industries. The licensing authorities will consider the public comments received on the draft medical cannabis regulations and use the feedback to inform the draft emergency regulations. The emergency regulations are expected to be published in November 2017.

And with that website post, the BCC also included a “high level” stakeholder-focused summary telling the public what it learned from the public comments to the MCRSA rules and how it will address those comments in the forthcoming retailer, microbusiness and distributor MAUCRSA rules.

Ultimately, it appears that the majority of public comments will be squared away automatically by MAUCRSA. For example, one summarized public comment was that specialty licenses for “delivery only” or “special events” should be created under the MCRSA (Medical Cannabis and Recreation Act). MAUCRSA takes care of both of these by allowing delivery for only retail and by providing “a state temporary event license at a county fair or district agricultural association event in local jurisdictions that authorize such events.”

There were though some summarized public comments where the BCC’s responses tell us what to expect in the future:

  1. One summarized public comment was that “The regulations should specify which party in the supply chain of transactions (manufacturer, transporter, or dispensary) bears the risk of loss and how much liability should attach.” And the BCC’s response was that liability pretty much has to be negotiated between licensees, which is 100% the right answer. We’ve blogged multiple times about the dangers of product liability (and Prop. 65 violations) in the industry and how to prepare for and shift that risk in your goods and services contracts.
  2. There were several comments about changing the definition of “owner,” lowering the 600-foot buffer requirement, and removing the mandatory labor peace agreement if you have 20 or more employees, dropping the minimum bond requirement, and other MAUCRSA-mandated operational standards, but the BCC made clear that its hands are tied because they must follow SB 94 as written.
  3. The public requested the BCC convene a hotline for assistance with applications, and the BCC replied that “The Bureau will have a call center available to help answer applicant’s questions, as well as materials on its website with information to assist applicants, licensees, and the public.”
  4. Another comment was that “The regulations should provide applicants a streamlined process for converting a business from a not-for-profit business to a for-profit business,” and the BCC punted in its response by stating that MAUCRSA doesn’t require any particular business structure for operation (again, the old collective model is not mandatory for compliance with MAUCRSA, so, if your local jurisdiction permits it, you should begin to think about corporate conversion as application time ramps up).
  5. Colocation of multiple licenses at the same “premises” is still up in the air and the BCC will address it in the emergency rules. Helpfully, AB 133 removed the “separate and distinct” requirement for multiple licenses and licenses of different types.
  6. Regarding comments about continued operations to ensure no disruption of services and goods to qualified patients, the BCC’s response is that temporary licensing should serve to prevent that disconnect.
  7. The public commented that licenses should themselves be transferable and the BCC responded that “By law, each owner must meet certain requirements to hold a license, therefore, a new application is needed. The Bureau is evaluating if a notification, rather than a new application, is appropriate when changes in persons with a financial interest in the business do not include a new owner, who is required to submit fingerprints.” Given that the withdrawn MCRSA rules rendered licenses non-transferable, we’re likely to see that again in the MAUCRSA rules, which means business purchases will likely be the only way to get a hold of a license — as long as you notify the BCC beforehand and the BCC approves that ownership change request. In any event, you should be aware of California’s M & A red flags.
  8. Summarized public comment wanted the distributor license eliminated or small businesses be able to self-distribute. The BCC responded it can’t get rid of the distributor license because it’s required under MAUCRSA, but that it is considering creating another distributor license for transportation only. Not to worry folks, you can self-distribute and you don’t need to contract with a distributor anymore to make a sale to a retailer.
  9. The BCC is reviewing whether cannabis licensees will be able to engage in “other [non-cannabis] activities.” This review came from a summarized public comment that distributors should be able to store and distribute non-cannabis related products. In all other states, licensees are restricted to only commercial cannabis activity for their license type so it would be groundbreaking if California were to go against that norm by allowing California cannabis licensees to take on other lines of business.
  10. The BCC isn’t going to allow for delivery or transport of cannabis other than by enclosed motor vehicle with sufficient GPS tracking despite summarized comments that the BCC should relax restrictions to allow for bike couriers and other modes for transporting cannabis product.
  11. On delivery, public comments asked that the BCC allow delivery by third party contractors or couriers. The BCC batted back, citing to MAUCRSA, which only allows delivery by “an employee of a licensed retailer, microbusiness, or non-profit.”
  12. Summarized public comments also leaned towards asking BCC fees for licenses be set according to a sliding scale of total net revenue. In response, the BCC stated that “Business and Professions Code section 26180 requires that fees are set on a scaled basis based on the size of the business. The Bureau is examining what method is most appropriate to determine the scaled fee, including total net revenue.”

All in all, the BCC has its work cut out for it as it goes back to the drawing board on the MAUCRSA regulations. Many issues will be out of the BCC’s control because MAUCRSA requires certain unchangeable operational standards and restrictions. November will fill in many of the outstanding “don’t knows” that still remain for California cannabis rule-making, so stay tuned.

California Cannabis mergers and acquistionsAh, California. The land of tech innovation, wine country, and endless coastline. Also the land of shysters, hucksters, and snake oil salesmen, far too many of whom have migrated to the booming cannabis industry to ply their trade. With the lead up to full implementation of the Medicinal and Adult Use Cannabis Regulation and Safety Act (“MAUCRSA” a/k/a SB 94), mergers and acquisitions of existing cannabis entities and locally approved cannabis operators are happening at a rapid pace. And with this run-up in California cannabis M&A, we are seeing all kinds of bad behavior by sellers of cannabis business looking to generate a quick buck by selling little more than vapor.

Here are my top five red flags for California cannabis business purchases so as to avoid getting lost in the smoke:

  1. Refusal to engage in due diligence. With any other business purchase, a failure by the seller to answer each and every due diligence question is a massive warning sign. Especially in California, where strange and illegal behavior has run rampant under Prop. 215, anyone looking to buy an existing operator “collective” needs to conduct due diligence to make sure they do not purchase an entity that has been suspended by the Franchise Tax Board, that’s facing massive tax penalties or an IRS audit, that doesn’t have rights to the real property on which it seeks to operate, or that doesn’t even have the authority to sell you the entity because of corporate governance issues. See also The Great Eight California Marijuana Industry Pitfalls. All too often, existing California cannabis operators claim they have no business history in writing to review and you should just “trust them.” Don’t.
  2. Paranoia about talking to regulators. The cannabis business lawyers in my firm represented a buyer in a California cannabis business purchase where the sellers became visibly angry and scared upon learning that our buyer client had reached out to local government regulators to ensure the sellers had actually secured local approval for medical cannabis commercial activity and to confirm the local government was on track to permit adult use cannabis activity sometime in 2018. Potential buyers bear the bulk of the risk in the purchase and sale of a business and they are entitled to verify that local entitlements are on track and if a seller trying to prevent that is a red flag.
  3. Bogus assets with a great pitch. Way too often, California cannabis business sellers try to pitch buyers with business assets that either do not exist or are legally impossible. Countless times, I’ve had existing operators tell my buyer clients they have a state license to operate under MAUCRSA. This cannot be true because no state license has yet to issue for cannabis activity in California; the regulatory agencies in charge of implementing MAUCRSA haven’t even issued the initial rules yet. I’ve had other existing operators claim to have access to countless contracts with future retailers (which are really just Prop. 215 collectives) for future sales or to have contracts to sell massive quantities of cannabis products to researchers or major hospitals These claims and contracts are all likely unenforceable or nonexistent, but they can sound great to a seller who doesn’t know California’s cannabis laws or marketplace. I’ve also had sellers claim they can sell their cannabis businesses without local approval issues which is also untrue almost all of the time. The name of the game in California cannabis mergers and acquisitions should be buyer beware and then some.
  4. Overvaluation. The majority of California cannabis operators seem to believe their California cannabis businesses are worth millions of dollars even though they’ve never faced regulated competition, their non-profit structures don’t grant equity to their members, or they are in a city or county that only allows for medical cannabis (which reduces the ability to maximize sales and therefore profit). We’ve blogged before about how difficult it is to truly value a cannabis business for a variety of reasons, but California is on another level with the wild numbers being pumped out without any verifiable data to support them.
  5. “Exclusive Opportunities” on the hustle. Many existing California operators try to sell potential buyers by claiming theirs is “the only opportunity” to undertake certain commercial cannabis activity in a given local jurisdiction. Rarely is this claim true. Sometimes this claim is based on the seller having a lease or sublease with proper zoning. That lease interest is indeed valuable, but it is not a once in a lifetime shot. And with this “exclusive opportunity” comes an absurdly short closing date where the seller needs the money now, now, now. If you’re a seasoned businessperson, you know that good deals take time to vet and close.
Los Angeles cannabis regulations
Los Angeles just came out with new cannabis regulations

California has lately been on its game with progressive changes to tis cannabis laws. Last week, AB 133 passed, making needed technical fixes to the Medicinal and Adult Use Cannabis Regulation and Safety Act (“MAUCRSA” a/k/a SB 94). And then last Thursday, California’s Bureau of Cannabis Control publicly revealed details behind its temporary licensing program (see here for the Bureau’s brochure on that process). And now the City of Los Angeles just released its 42-page revised draft regulations under Proposition M and they contain some interesting, comprehensive, and important changes from the original draft (if anyone forgets what Prop. M is, go here).

Here are some of the highlights from the revised ordinance if you’re looking to have a cannabis business in Los Angeles:

  1. Remember the controversial certificates of approval? Those have been eliminated in favor of a straight licensing program that includes provisional and permanent City licenses. This new licensing program will give applicants greater and better-protected rights to operate within the City’s borders. Upon initial approval, you will receive a provisional license and once you get your state license to operate, the City will issue you a permanent City of Los Angeles license.
  2. Under the original Prop. M draft regulations, certificates of approval were set to issue in four waves in this particular order: Prop. D-compliant existing medical marijuana dispensaries (EMMDs), non-retail registrants (i.e., growers and manufacturers), the social equity program, and then the general public. Formerly, non-retail registrants were only eligible for a certificate of approval in that second wave if they could show they were operating in the City before January 1, 2016. That’s all changed as there is no longer any non-retail registry priority.
  3. The City of Los Angeles Department of Cannabis Regulation will still give first priority in processing EMMD applications that “demonstrate to the Department the EMMD has operated in compliance with the provisions of the limited immunity and tax provisions of Proposition D.” Note that in the previous draft rules, the City required “substantial compliance” with Prop. D. Once applications become available, these EMMD applicants will have only 60 days to get their applications in and, after that, that application window closes indefinitely. And, just like in the original rules for EMMDs, “any mitigating circumstances due to gaps in operations, location change or involuntary closure, ownership, tax payments, etc. must be described in detail for the Department to consider eligibility.”
  4. EMMDs will only be allowed to apply for Retailer Commercial Cannabis Activity (including delivery), which may include on-site cultivation as allowable under Prop. D. On-site cultivation in this scenario may not exceed the size of the EMMD’s existing canopy or square footage of building space as documented by a lease or Certificate of Occupancy prior to January 1, 2017. A maximum of three Licenses per EMMD with a valid Business Tax Registration Certificate will be allowed–the example the City gives is: One Type 10 (retailer), One Type 10 (retailer with delivery) AND one Type 2A OR Type 3A (on-site cultivation if applicable).
  5. One of the biggest boons for EMMDs (and for any cannabis applicant in the city of L.A.) is that “changes in ownership status from non-profit status to for-profit status are allowable.” Now is the time for all LA operators to think about getting away from their precarious non-profit mutual benefit corporations and other bizarre corporate setups and to prepare to convert to a legal, for-profit business entity in order to apply for a license with the City in line with the California Corporations Code.
  6. The City of Los Angeles is still working on its social equity program. It is expected that will be finalized and made part of the Prop. M rules sometime in October.
  7. The general public will be allowed to apply for licenses at the same time as the social equity program opens up. The most positive change for the general public is that they are no longer limited to the number of licenses that will issue in the social equity program. Without a doubt, the general public now has a much better chance to participate in L.A.’s cannabis scene.
  8. Here’s the deal on license caps in the City: all retailers and microbusinesses in the City will be limited to three licenses at the most. There are no license caps for cultivators so long as a given business does not have more than 1.5 acres of plant canopy within the City. Type 7 volatile manufacturing is now allowed (previously it wasn’t), and there are no set caps on manufacturing licenses within the City. There also is no licensing cap for distributors.
  9. As part of the application process, applicants must provide a site diagram to the City. The premises must be a contiguous area and may only be occupied by one business. However, multiple businesses may be located on the same property (as established by an assessor’s parcel number) if each premises has “a unique entrance and immovable physical barriers between unique premises.” Our cannabis lawyers have dealt with these sorts of restrictions in other states and they are usually not a problem and should be dealt with in your lease.
  10.  Applicants must provide a detailed description and plan for hiring “local residents, including making an ongoing good-faith effort to ensure that at least 30 percent of hours of their respective workforce be performed by residents of the City of Los Angeles, of which at least 10 percent of their respective workforce shall be performed by Transitional Workers whose primary place of residence is within a 3-mile radius of the proposed Business.”
  11. An applicant with ten or more full-time equivalent employees must enter into a labor peace agreement.
  12. On the M & A front, neither the City licenses nor the businesses are transferable once a provisional or permanent license issues, but you can still apply to the City to change the business structure, which does allow for you to sell the business so long as the City of Los Angeles approves the sale. See here for more on buying cannabis businesses in Los Angeles.
  13. No licensed retailer of alcoholic beverages or tobacco products can apply for a City of Los Angeles cannabis license.
  14. Foreign companies from outside the U.S. are not allowed in the City, but the City specifically states that this prohibition “does not preclude out-of-state investment in a Business proposing to conduct Commercial Cannabis Activity.” If you are thinking about investing in a California cannabis businesses, you should be sure to join us at our September 28th California Cannabis Investment Forum in San Francisco. But do NOT wait because we must limit the number attendees to 250 and we are getting dangerously close to that already.
  15. The City is still discussing what to do about zoning for cannabis businesses and changes to that proposed ordinance are sure to affect your ability to secure an eligible property.

All in all, Los Angeles is finally starting to embrace comprehensive cannabis control and oversight with a regulatory system that should catapult it into its rightful place as a cannabis powerhouse with serious operators.

California cannabis Having begun my cannabis legal career in Washington State, which is a cannabis marketplace that started with a loose collective model and then morphed into the heavily regulated medicinal and adult use marketplace it is today, I know firsthand that it will be no small task to get right on cannabis regulation here in California now. As we all know by now, cannabis regulations are constantly changing and in California such changes seem already to be hitting us nearly every month. California seems hellbent on getting revising (and re-revising) its regulations so as to get a strong regulatory grip over what will soon be the most profitable and dynamic legal cannabis market in the world (by far).

Cue AB 133, which is the most significant and realistic technical fix bill to California’s cannabis marketplace since passage of SB 94 this summer. SB 94 represents a regulatory union between medical and adult use cannabis from the get-go. Most other states that have legalized recreational cannabis already had a robust (though unregulated) medical cannabis market that they let remain for a while to the detriment of regulated operators, but California has decided from the outset that the two cannabis industries (medical and recreational) would be combined under one regulatory regime. However, there are flaws in SB 94 and a lot of gaps and ostensible impossibilities when it comes to logistics and operational standards. Though regulating agencies (like California’s Bureau of Cannabis Control) might normally be expected to interpret and fill in the blanks on legislation via rule-making, California isn’t leaving anything to chance with its proposal of AB 133.

If passed, AB 133 would make SB 94 even more business-friendly for operators and consumers. AB 133 would do the following:

  • Cannabis deliveries would allowed by a retailer using any technology platform owned, leased, or controlled by the retailer. Currently, retailers can only use technology platforms they own and control to undertake deliveries.
  • Holders of multiple cannabis licenses would no longer be required to keep their licenses “separate and distinct.” This likely will mean you can combine your multiple licenses or your adult use and medical operations on a single “premises.”
  • AB 133 would repeal the requirement that licensed medicinal cannabis manufacturers only manufacture cannabis products for sale by a medicinal cannabis retailer.
  • Verification of local approval would change for applicants that voluntarily provide proof of such approval to the state during the licensing process. Essentially, if you provide this proof to the State of California, it will presume you’re in compliance with local laws unless otherwise notified by the city or the county.
  • If you’re a cultivator and your water source stems from diversion, you will have until October 31, 2017 to get that use authorized and to disclose that diversion to the state (rather than the July 31, 2017 deadline that’s already come and gone).
  • If you’re under 21, you can be on the premises of an A-licensee so long as the A-licensee also holds an M-license at the same location. And if you’re over 21, you can be on the premises of an M-licensee so long as that licensee also holds an A-license at the same location.
  • Caregivers would be allowed on premises to purchase medical cannabis for verifiable qualified patients, but the Bureau of Cannabis Control would set forth the specific rules around these purchases.
  • Cannabis cooperatives would be barred from undertaking contracts, etc. with other cooperatives in other states.
  • The unlawful possession of concentrated cannabis amounts would be increased from 4 grams to 8 grams.
  • The cannabis cultivation tax would apply only to harvested cannabis that “enters the commercial market” and cannabis that “enters the commercial market” would re redefined to be cannabis or cannabis product that completes and complies with a quality assurance review and testing, except immature cannabis plants and seeds,
  • You won’t pay your cannabis excise taxes directly to the Board of Equalization anymore; you will instead pay them to the California Department of Tax and Fee Administration.

Though passage of AB 133 is not a cure-all for all that ails us in SB 94, it is a good start toward ensuring that some of the wider gaps in California’s existing cannabis legislation are headed off at the pass of rule-making. Most importantly, California is still on track to be one of the most business-friendly regulatory states, but we’ll see what future rule-making (and local restrictions) do to that status as fall approaches.