Photo of Hilary Bricken

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

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.

The California cannabis model is unique.

Even though the Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA“) stripped distributors of massive amounts of power, they are still relevant and 100% necessary if cultivators and manufacturers want to get their products to retailers. Why? There are three primary reasons:

  1. Distributors are the only license type that can transport marijuana products and they’re also the only licensees that can coordinate the required third-party testing of licensees’ products.
  2. Prior to any retail sale, licensees must ensure that a distributor undertakes quality assurance packaging and labeling reviews of their products.
  3. Perhaps most importantly, distributors are almost exclusively in charge of collection and remittance of the cultivation and excise taxes to the California Department of Tax and Fee Administration (“CDTFA”).

Given the responsibilities placed on distributors by the MAUCRSA and the corresponding Bureau of Cannabis Control (“BCC”) emergency regulations, multiple distributors, as well as cultivators and manufacturers working with distributors, have asked us to draft their distribution service contracts. Gone are the days where cannabis goods and services are traded amongst wholesalers and retailers based on handshakes–at this point, it would be a huge mistake not to have your distribution contracts in writing to ensure enforceability and good behavior in the marketplace.

So what should go into your cannabis distribution contract? Excluding all of the normal and necessary contract concerns like performance deadlines, term, termination standards, material breaches, waiver, assignment, disputes, etc., here’s a list of considerations that should be specific to the average California distribution agreement:

  1. Don’t think of it like alcohol.  This is not an alcohol distribution contract, so forget googling some boilerplate alcohol or beer distribution agreement. Unlike California alcohol distributors, marijuana distributors don’t have to push brands or make any representation or warranties that they have the authority or power to do that for the benefit of the manufacturer or cultivator in any kind of exclusive way or setting. Distributors don’t have to sweat product promotion, marketing, or even sales: in California, they don’t have to take title to the products they distribute (taking title is strictly optional).  Even if a distributor were going to take on such a role, the alcohol distribution contract model still likely wouldn’t fit given the BCC rules in play regarding “ownership” and “financial interests,” and because of the MAUCRSA’s anti-competitive behavior standards.
  2. The white label option. Consider white labeling for flower. Distributors may re-label, re-package, label, and/or package cannabis flower for retail sale under the BCC rules. Notably, distributors are not allowed to white label any manufactured products unless they also hold a manufacturing license and are re-labeling/re-packaging their own manufactured products. If you’re going to white-label flower as a distributor, you need to consider a whole host of issues ranging from the creation of intellectual property, to product specifications, product warranties, applications of branding, risk and retention of title over the product, quality control, and liabilities and/or product recalls due to faulty packaging and labeling.
  3. Core services.  Determine what lines of business you want to be in as a distributor, as you can charge licensees for performance of these services. Your options are: 1) storage only services, 2) transportation or transportation-only, 3) coordination of third party testing, and 4) quality assurance reviews of packaging and labeling. If you coordinate testing, you must also do the final quality assurance review.
    • Storage only. Note that distributors can’t store (or distribute) non-cannabis goods on their premises. There are also significant regulatory obligations that should be recorded in any distribution service contract to ensure that distributors meet these mandatory performance standards (like separate and distinct storing of various batches and that the informational content of batch labels lines up with BCC rules). If dealing with storage-only services, distributors and other licensees will want to analyze in their service contracts who bears the risk of loss of any product and what the consequences under the contract will be for any storage rule violations by the distributor.
    • Transportation or transportation-only. Movement of the product across the marketplace is going to be a critical revenue driver. There are all kinds of BCC rules governing transportation of product which, again, should be recorded in any service contract between a distributor and any other licensee including, but not limited to, performance standards for the generation of correct and accurate shipping manifests as well as ensuring that the distributor follows the rules for the state’s designated transportation routes. In addition, if you’re dealing with a transportation-only distributor, that distributor can’t transport any product to retailers except for transporting immature plants and seeds from a nursery licensee, and these kinds of distributors can’t take title to any product unless they hold some other type of commercial cannabis license. Again, who bears the risk of loss of product and performance regarding transportation schedules is going to be paramount when dealing with transportation services.
    • Coordinating third party testing. Essentially, the distributor is responsible for lining up third party lab testing of all products made or manufactured after January 1, 2018, and distributors must video record the lab’s retrieval of any given batch sample for testing as well as ensure that the lab takes a representative sample of the batch for testing (both the lab and the distributor are obligated to execute a chain of custody form to substantiate their interactions over the batch). The labs used by distributors for this service should be subject to negotiation between the cultivator/manufacturer and the distributor, and we anticipate that to be a large point of contention between the parties based on cost of the tests and reputation of the labs. The question has also arisen regarding with whom the lab should contract, with the distributor or with the licensee whose product is being tested (or both). Again, this is likely subject to negotiation between the parties.
    • Quality assurance review. Once the distributor receives a passing certificate of analysis from the lab for a test batch, the distributor cannot just transport the products to a retailer. Instead, the distributor has to do a quality assurance review of the product’s labeling and packaging to make sure that it meets the BCC rules. Basically, the distributor is the last stop to ensuring that all product packaging and labeling meet the rules in play. Such a role will of course play into the distributor’s liability for any bad, defective, or faulty packaging/labeling that hits the marketplace and those scenarios need to be handled through solid indemnification clauses in the distribution service agreements.
  4. Testing contingencies.  Make sure you sort out who is responsible for what and when in the event a batch doesn’t pass testing since the state has a mandatory protocol in place for this.  If the distributor is in possession of a failed batch that can be “remediated,” the distributor may “transport the batch to a cultivator or manufacturer for remediation.” Notably, the distributor doesn’t have to return the batch to the licensee who sourced it, which is another point of negotiation for the distribution services contract. Finally, a distributor can’t destroy a batch that failed laboratory testing and that can’t be remediated, so don’t include that in your agreements for products that fail testing: it won’t be an enforceable performance standard.
  5. Inventory Tracking. Account for any discrepancies in inventory in the contract. Distributors are obligated to audit their inventory every 14 days. If there’s any difference between actual inventory and the state’s track and trace system, the distributor must immediately undertake an audit. In turn, this inventory accounting should be a distributor performance standard in any service contract, especially if you’re looking at storage or transportation-only services, to ensure that there’s no confusion about which party is responsible for maintaining track and trace standards on the products while they’re in storage or while they await transportation or testing.
  6. State tax reporting.  Be sure to address the distributor’s collection and remittance of taxes to CDTFA. This is going to be a big issue between licensees as CDTFA continues to change its MAUCRSA tax policies and standards. For cultivators and manufacturers, distributors will likely want to collect the cultivation tax upon transfer of the product or upon the issuance by the lab of a passing certificate of analysis. In addition, the timing of remittance of the tax should also be addressed in the contract and abide by CDTFA regulations. Ultimately tough, CDTFA may ignore tax agreements between parties, and will first look to the distributor for any unpaid tax.  A distributor should therefore address in the contract the parties’ responsibility for bad math on the tax owed, falsified financial data and other failures to comply with CDTFA regulations or policy.
  7. Licensing issues.  Don’t forget to negotiate what happens to the agreement in the event a party loses their state license or local approval to operate. It’s highly unlikely that the parties will want to keep doing business together if one of them loses their ability to conduct commercial cannabis activity under state or local law, so be sure to include that worst case scenario in the distribution agreement.
  8. Regulatory changes.  The rules will continue to change indefinitely and they may (and likely will) affect your distribution agreement as a result. After enough time goes by and the market stabilizes, regulatory will often begin to make rules around licensees’ abilities to contract with each other to ensure that there’s no anti-competitive behavior or practices taking place. As a result, make sure that you reserve the right to amend the contract to comply with the rules in the event they affect material terms in the agreement.
The Top 10: What We Still Don't Know About L.A.'s Cannabis Business Laws
What’s in Los Angeles’ Cannabis Business Laws? What You Don’t Know Might Hurt You.

It was a massive step forward for L.A. to pass its suite of ordinances that now make up Measure M, which regulates, licenses, and taxes cannabis businesses within the City’s borders. However, since the passage of those ordinances, we’ve gotten non-stop questions about the details of certain provisions therein and what they actually mean and what effect they’ll have during the application process and operationally. To help stakeholders better understand some of the gaps and/or ambiguities posed by these ordinances, we wanted to provide the following FAQ list:

  1. Does the City have a website for the Department of Cannabis Regulation (DCR) or Cannabis Regulation Commission? Unfortunately, the answer is still no. The County of L.A. has one, but don’t get confused–L.A. County’s cannabis laws have no bearing on City of L.A. cannabis businesses. Having a website for the DCR is going to be incredibly important though since all licensees should have to file for their local licenses online with the City (though other portions of the Rules and Regulations ordinance do mandate that each applicant receive a time and date stamp upon DCR’s receipt of their application or “the electronic equivalent,” so hardcopy submissions may or may not be in play).
  2. What are the licensing fees? In all of the reporting on L.A. dropping these regulations, coverage on actual licensing fees was, on the whole, left out (probably because the licensing fee schedule was just adopted by council on December 13th), but here they are. EMMDs seeking retail licenses or microbusiness licenses with retail have to pay $9,360; pre-existing non-retailers have to pay $11,806 for each license they pursue; and everyone else (including EMMDs that want other license types outside of retail and retail microbusiness) have to pay $8,059 per license application.
  3. Where is a copy of the license application? As of the writing of this post, the “master license application” doesn’t yet exist (at least, not that I could find anywhere) and the City presumably still needs to create it. Even though the ordinances outline what you’ll have to provide to the City in the master license application, it doesn’t say in what format (other than online or potentially in physical hard copy) or concerning what exact details or demonstrative exhibits have to go into your licensing submissions regarding specific operational plans per license type.
  4. If I have local approval for my cannabis business in another California city or county, can I do business with L.A. operators? The short answer is yes for almost all license types. However, in specific regard to retail delivery, L.A. mandates that “[n]o person shall conduct any deliveries within the boundaries of the City of Los Angeles without first obtaining the required license from the DCR. Furthermore, no Licensee is authorized to provide delivery services outside of the City of Los Angeles under a license issued by the DCR, unless authorized by the jurisdiction where the delivery is to be made.” Additionally, “[a] Licensee may only deliver cannabis goods to a physical address within the boundaries of the City of Los Angeles [and a] Licensee may only deliver outside of the City of Los Angeles with the approval of DCR and the affected jurisdiction.”
  5. Can I sublease my licensed premises? L.A. says no, you can’t, unless you get written approval from DCR first. However, licensee subletting is prohibited by current MAUCRSA regulations, so it’s a moot point.
  6. Selling untested product–what’s the deal? Under L.A. law, “[u]p to 120 days after the date of City licensure or April 1, 2018, whichever is sooner, a Licensee may sell its inventory of untested cannabis goods if the Licensee places a label on each package it sells with the date of purchase and the following statement: ‘This product has not been tested under the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA).'” However, under current MAUCRSA regulations, if a licensee possesses cannabis products made or manufactured from before 1/1/2018, those untested products can enter and be sold in the regulated marketplace untested (so long as they’re packaged and labeled accordingly) until July 1, 2018. However, in L.A., it appears there’s going to be an earlier cut off date regarding the sale of untested products, so prepare accordingly.
  7. If I’m an existing cultivator or manufacturer in the City, do I have to qualify for the social equity program in order to keep operating while my license application is pending? The short answer is yes. In addition to a slew of other qualifications (including proof of engagement in non-retail cannabis activities (i.e., growing or manufacturing) prior to January 1, 2016), you have to be able to qualify for the social equity program in order to continue operating while your license application is pending. What does that mean? It means you have to fall into Tier 1, 2, or 3 of the social equity program set forth at section 104.20 of the Cannabis Procedures ordinance.
  8. How will non-profit transitions for EMMDs work? Since L.A. allows for-profit operation and because both the city and state licenses are not transferable, new license applicants will very likely apply for city licenses as for-profit entities. However, almost all EMMDs are organized as some form of non-profit because of California’s Compassionate Use Act and a 2008 State Attorney General memo regarding “collectives”. Still, L.A.’s new cannabis laws state that:

A change from non-profit status to for-profit status by an EMMD is exempt from [having to get the City’s approval of the change] if no other ownership change is made in accordance with Proposition D’s ownership rules and notice is provided to DCR within five business days. This exemption is not available after a license is issued.”

Does this mean that EMMDs can have a for-profit waiting in the wings when they apply for licensure or can they just apply with a for-profit so long as they can show they were running a compliant EMMD? Or do they have to apply as non-profits first and then transition that entity to a for-profit company after licensure? It seems like the latter is the case if you want Priority M processing, which is likely going to pose significant problems for EMMDs whose bylaws, on the whole, likely don’t exactly allow for conversion or merger into a for-profit (see here fore more on that particular issue).

  1. When does the license application window open? No opening deadline for applications was set in the ordinances other than that:
    1. Pre-ICO/Prop. D dispensaries (now known under the new laws as “existing medical marijuana dispensaries” or “EMMDs”), including their delivery and on-site cultivation operations consistent with Proposition D, “shall be accepted and processed by DCR for the first 60 days after DCR starts accepting applications”; and
    2. Existing non-retail operators (who meet all qualifying conditions under section 104.08 of the Cannabis Procedures ordinance) can have their applications processed by DCR until April 1, 2018.

Regarding other license types, it’s anyone’s guess as to when applications will become available and be accepted by the City.

  1. What is undue concentration and how does it work? L.A. doesn’t have a formal license cap on licensees, but it does have a de facto cap based on “undue concentration” for pretty much everyone who’s not a distributor or a Pre-ICO/Prop. D compliant dispensary. Undue Concentration means:. . . the Applicant’s Business Premises is located within a higher cannabis license/population ratio within the community plan based on the 2016 American Community Survey, updated by each decennial census, than the following: ratio of one license per 10,000 residents for Retailer (Type 10); ratio of one license per 7,500 residents for Microbusiness (Type 12); ratio of 1 square foot of cultivated area for every 350 square feet of land zoned M1, M2, M3, MR1, and MR2 with a maximum aggregate of 100,000 square feet of cultivated area and a maximum aggregate number of 15 Licenses at a ratio of one License for every 2,500 square feet of allowable cultivated area for Cultivation (Types 1A, 1C, 2A, 3A, 4 and 5A); and ratio of one license per 7,500 residents for Manufacture (Type 7).

Here are the City’s calculations for the undue concentration limitations by license type. To understand how undue concentration works, let’s analyze Chatsworth. The Chatsworth region has 101,427 residents. On the numbers, 101,427/10,000 equals around 10 dispensary licenses for Chatsworth (note that each microbusiness with a retail license counts against the retail limit). Growing is a little more complicated. The City has calculated that between the M1, M2, M3, MR1, and MR2 zones located in Chatsworth there exists 59,207,864 eligible square feet for cultivation. Note that the City’s calculation does NOT say what the eligible square feet for cultivation is per zone, it’s just the total across all zones. If you have an 80,000 square foot building, 80,000/350 equals one 114 square foot cultivation site. However, that calculation is misleading unless you know the eligible square footage within your exact zone as it may expand or lower that number. In addition, who’s to say that all eligible square footage will actually be used or even leased? As a result, it’s going to be extremely tough to determine and plan for how large of a grow you can have at a given property.

Los Angeles Cannabis Lawyers
The City of Los Angeles Passes Revised Cannabis Licensing and Zoning Ordinances

Today, the L.A. City Council finally adopted three ordinances (totaling over 70 pages) to regulate and zone the city of Los Angeles’s cannabis businesses pursuant to the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA). The ordinances are: Cannabis Procedures (adding Article 4 to Chapter X of the municipal code), Rules and Regulations for Cannabis Procedures (supplementing Article 4), and zoning for Commercial Cannabis Activity (adding Article 5 to Chapter X of the municipal code). Though these ordinances went through a huge number of tweaks and changes (see here and here), we finally know what L.A.’s regulated cannabis businesses will look like in 2018. This post focuses mainly on the licensing process and operational requirements for would-be licensees in L.A.

Proposition D-compliant dispensaries still get first dibs on the licensing process in L.A. under Prop. M, but the definition of an “existing medical marijuana dispensary” (“EMMD”) has changed somewhat under the revised ordinances. EMMD now means:

. . . an existing medical marijuana dispensary that is in compliance with all restrictions of Proposition D, notwithstanding those restrictions are or would have been repealed, including, but not limited to, either possessing a 2017 L050 BTRC and current with all City-owed business taxes, or received a BTRC in 2007, registered with the City Clerk by November 13, 2007 (in accordance with the requirements under Interim Control Ordinance 179027), received a L050 BTRC in 2015 or 2016 and submits payment for all City-owed business taxes before the License application is deemed complete.

L.A. will still have a local licensing system made up of the following licenses for both medical and adult use cannabis commercial activity: Type 10 (brick and mortar retail); Type 9 (delivery only, non-storefront retailer); Type 12 (microbusiness); Type 1A, 2A, 3A, 4, 5A, and 1C (indoor only cultivation licenses (Type 5s aren’t available from the state right now)); Processor license; Type 6 (non-volatile manufacturing license); Type 7 (volatile manufacturing license); Type P (infusion license); Type N (packaging license); Type 8 (testing); and Type 11 (distributor license). All license applicants in L.A. now need to pay attention to “Undue Concentration”. Undue Concentration means:

. . . the Applicant’s Business Premises is located within a higher cannabis license/population ratio within the community plan based on the 2016 American Community Survey, updated by each decennial census, than the following: ratio of one license per 10,000 residents for Retailer (Type 10); ratio of one license per 7,500 residents for Microbusiness (Type 12); ratio of 1 square foot of cultivated area for every 350 square feet of land zoned M1, M2, M3, MR1, and MR2 with a maximum aggregate of 100,000 square feet of cultivated area and a maximum aggregate number of 15 Licenses at a ratio of one License for every 2,500 square feet of allowable cultivated area for Cultivation (Types 1A, 1C, 2A, 3A, 4 and 5A); and ratio of one license per 7,500 residents for Manufacture (Type 7).

Importantly, an EMMD won’t be subject to the Undue Concentration analysis. A microbusiness involved in on­ site retail counts towards the Undue Concentration License limits applied to Type 10 Retailer licenses, and a microbusiness involved in cultivation counts towards the undue concentration limits applied to the cultivation licenses types. If you’re in a geographical area of Undue Concentration, you have to file with the City Clerk, on a form provided by DCR, “a request that the City Council find that approval of the License application would serve public convenience or necessity, supported by evidence in the record.” If the City Council does not act on your request within 90 days, it will be deemed to support “public convenience”. See here for the City’s calculations around Undue Concentration.

Outside of priority licensing processing for EMMDs, the basic gist of the general licensing process is as follows.

The City of L.A. Department of Cannabis Regulation (“DCR”) is your first stop for submitting your license application once the application window opens (we don’t know when that will be outside of EMMDs). Whether or not you ultimately get your license though is decided by the City of L.A. Cannabis Regulation Commission (“Commission”). Within 10 days of determining that your license application is complete, the DCR will instruct you to provide mailed notice of your application to the owner or owners of business premises, and to the owners and occupants of all property, within 500 feet of your proposed premises property line. Written notice must also be given to the closest neighborhood council, the closest business improvement district and the City Council office within which your proposed business is situated. And for any public hearings regarding your license application, you have to provide written notice of that hearing to all of the foregoing no less than 45 days prior to the date of the hearings.

For retail commercial cannabis activity (which is defined to include sales and distribution of cannabis to the public) and for non-retail commercial cannabis activity taking place in a space that’s more than 30,000 square feet, once your license application is complete and you undergo a mandatory pre-license inspection, the DCR must tell you within 60 days whether they will deny your license application or recommend you to the Commission for a license. DCR can deny your license application with no hearing and based only on written findings for several grounds as laid out in the Cannabis Procedures ordinance, including for being non-responsive, because of Undue Concentration (unless the public convenience exception is met), or because you made material misrepresentations in your application. If DCR recommends the Commission grant you a license, a public hearing must then be held “within the geographic area of the Area Planning Commission”. At this point, the Commission basically has all authority to consider the entire record, Undue Concentration, all public testimony, any public safety issues, and the recommendation of the DCR in deciding whether to issue a license.

For non-retail commercial cannabis activity taking place in a space that’s less than 30,000 square feet, the licensing process is simpler where the DCR can just deny or issue the license without a hearing within 60 days of receiving a complete application and completing a pre-license inspection.

Even though Prop. D. is repealed as of January 1, 2018, for Prop. M priority processing, an EMMD that, as of January 1, 2018, meets all Proposition D requirements will receive limited immunity up until the time it gets Temporary Approval (i.e., DCR-issued temporary approval of your license). This limited immunity terminates if the EMMD fails to seek or obtain a Temporary Approval. Once DCR deems a Proposition M priority processing application is complete and eligible for priority processing, DCR has to issue a Temporary Approval to the EMMD, which then allows the EMMD to maintain its Prop. D immunity (even after that immunity is repealed until it receives a license from the City). Before getting a Temporary Approval (or a license), EMMDs have to submit to a financial audit by the City’s Office of Finance and clear all City tax obligations.

An EMMD issued a license pursuant to Proposition M priority processing is not required to adhere to the zoning, distance and sensitive use restrictions posed by the new zoning laws on the condition that the EMMD operates and continues to operate in compliance with the distance and sensitive use restrictions of Proposition D and so long as it limits on ­site cultivation, if any, not to exceed the size of its existing square footage of building space as of March 7, 2017, “as documented by dated photographs, building lease entered into on or before March 7, 2017, or other comparable evidence”. This limited grandfathering stops on December 31, 2022, after which all EMMDs must comply with applicable zoning laws.

Of course, there’s way more detail to the licensing process than the foregoing. If you haven’t had a chance to read the ordinances in full, don’t worry–here are the highlights:

  1. EMMDs can only apply for priority processing during the first 60 days after DCR opens license applications.
  2. Limitations on licenses are as follows: an applicant can only have up to THREE Type 10 or Type 9 retailer licenses, and cultivators aren’t limited in the number of cultivation licenses they can have but they will have a plant canopy cap citywide of no more than 1.5 acres per applicant (recall, the state no longer has any statewide plant canopy cap limitations). In addition, EMMDs may apply for a maximum of ONE Type 12 microbusiness OR a maximum combination of ONE Type 10 retail license, ONE “Delivery for Retailer License”, ONE Distributor License (Type 11 for self-distribution transport only), ONE manufacturer license (Type 6 only) and ONE cultivation license (Type 1A, 1C, 2A or 3A) identified in its original or amended Business Tax Registration Certificate (“BTRC”) and as “demonstrated in previous Commercial Cannabis Activity as of March 7, 2017.”
  3. There’s a list of folks who will be ineligible for certain periods of time (or completely ineligible) to receive a local license in L.A. which includes (but is not limited to) persons convicted of “illegal volatile cannabis manufacturing” in violation of the Health and Safety Code, anyone who’s violated state or local hour or labor laws, companies formed outside the U.S., and anyone convicted of violating any law involving distribution of cannabis to minors. And any non-cannabis drug felonies may also be grounds to reject a license application.
  4. A License is not transferable–there can only be a change of ownership for the licensee. And that change has to be submitted to and approved by DCR.
  5. A change from non-profit to for-profit status is allowed by an EMMD and it’s exempt from clearance by DCR if “no other ownership change is made in accordance with Proposition D’s ownership rules and notice is provided to DCR within five business days.” This exemption isn’t available after the license issues.
  6. Temporary approval is also available for those existing non-retail operators who qualify presumably to ensure that L.A. has a smooth transition period from gray market to fully regulated.  An applicant who applies for a license for non-retail commercial cannabis activity and who meets the following criteria as determined by DCR will receive Temporary Approval, which gives the applicant limited immunity to operate pending the review of its license application (through essentially April 1, 2018):
    1. the Business Premises meets all of the land use and sensitive use requirements of the zoning laws;
    2. there are no fire or life safety violations on the Business Premises; and
    3. the Applicant:
      1. was engaged prior to January 1,2016, in the same non-retailer commercial cannabis activity for which it now seeks a license;
      2. provides evidence and attests under penalty of perjury that it was a supplier to an EMMD prior to January 1, 2017;
      3. passes a pre-license inspection;
      4. paid all outstanding City business tax obligations;
      5. indemnifies the City from any potential liability on a form approved by DCR;
      6. provides a written agreement with a testing laboratory for testing of all cannabis and cannabis products and attests to testing all of its cannabis and cannabis products in accordance with state standards;
      7.  is not engaged in retailer commercial cannabis activity at the business premises;
      8. attests that it will cease all operations if denied a state license or city license;
      9. qualifies under the social equity program;
      10. attests that it will comply with all operating requirements imposed by DCR and that DCR may immediately suspend or revoke the Temporary Approval if the Aaplicant fails to abide by any City operating requirement.
  7. We finally have the social equity program codified in law. There are three tiers of social equity applicants based on an applicants’ low-income, previous California cannabis convictions, and cumulative residency in a “Disproportionately Impacted Area.” Tier 1 social equity applicants get priority processing for Type 9 and 10 and for Type 12 (that includes retail) licenses on a 2 to 1 ratio with all non-social equity applicants, and for all non-retail license types, Tier 1-3 social equity applicants get priority processing on a 1 to 1 ratio with all non-social equity applicants. There are multiple ownership and financier restrictions for social equity applicants so that the City can safeguard these applicants from hawkish and predatory business behavior and activities.
  8. The operational requirements for licensees in L.A. (found in the Rules and Regulations for Cannabis Procedures ordinance) pretty much track the emergency MAUCRSA rules, with a few notable exceptions (and this is not an exhaustive list) — no on-site consumption will be allowed in L.A., and no parties or special events (or even entertainment) of any kind may be held at any licensed cannabis business. And if any company wants to deliver within the City of L.A., it must also get a license from the DCR and/or Commission.

With this kind of comprehensive regulation, it’s not going to be easy to get through the gauntlet of DCR and/or the Commission to receive a local license, so license applicants should prepare themselves accordingly ahead of January 1.

 

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.