LCB washington marijuana cannabis
Some LCB policies make hurdles tough to clear.

Regulatory challenges can be substantive or procedural. Substantive challenges include things like Washington’s ban on out of state ownership and its view that licensee royalty payment constitute profit-sharing. These types of rules and interpretations are challenging because, as a policy matter, businesses aren’t allowed to pursue certain strategies that they otherwise would. Procedural challenges, on the other hand, are challenges that arise in dealing with a regulatory agency. The Washington Liquor and Cannabis Board (LCB) requires that it approve of retail packaging for infused products before that packaging can be used, and the LCB also requires that a person submit a signed criminal history statement before that person can be a true party of interest in a licensed marijuana business. These types of procedural hurdles exist for a reason – the LCB requires them to pursue its legitimate goals of enforcing its substantive regulations.

But there is another type of procedural hurdle that arises in dealing with regulatory agencies (specifically the Washington LCB). These procedural hurldes present challenges to regulated businesses, but they have no relationship with the LCB’s enforcement of its regulatory goals. Here’s one example that has been frustrating us to no end recently: the Washington LCB will not process a change of ownership and a change of location for a marijuana license at the same time. Let’s say that an entrepreneur in Tacoma finds a perfect location for a marijuana retail store and leases that space. The entrepreneur can’t apply for a new license because the state isn’t accepting applications, so the entrepreneur has to find a marijuana retail license allotted to Tacoma on the market. Once the entrepreneur finds that business and negotiates a purchase, the entrepreneur has to make some tough choices.

Because the LCB will not process a change in location and a change of ownership request at the same time, buyers have to determine the order of applications. Both orders have drawbacks. If you apply for a location change first, you will have a marijuana retail store at your location within, hopefully, a few months. However, you run the risk that, in the intervening period, the business’s sellers that still own and control the business do something to put the business at risk. They could commit regulatory violations that risk license cancellation. They could take on business debt, putting the businesses assets at risk. The buyer would be powerless to stop these actions, because the LCB does not want to see any party exert control over a licensed business until that party has been approved by the LCB to do so.

If you instead apply for the ownership change first, you are less at risk of the bad acts of the selling party. Instead, you have to deal with getting a lease that would be in place for the time between when the ownership change is approved and the time when the new location is approved. The LCB wants to see landlord consent, and landlords often try to gouge buyers in this situation because they understand how much leverage they have. You also have to go through a sham process with the LCB when you do the ownership change application. The LCB asks for operating plan information, but you aren’t allowed to say that you don’t really plan on operating in the existing space, even if that is your plan. Instead, you are in a situation where you are just saying what you need to in order to get approved so that you can move on to the next step. LCB investigators understand this, but they still require the minimums so that they can check all the boxes off their checklists.

This type of procedural challenge is so frustrating because it isn’t tied to any policy. The LCB allows location changes, and it allows ownership changes. There is no reason that it shouldn’t be able to run both changes at the same time. But somewhere within the LCB archives, someone wrote down a policy that says investigators can’t do two things at once, and so far no one there is willing to do what it takes to change that policy. That policy has wasted enormous amounts of time and money and created enormous amounts of stress for parties on all sides, and it is part of why Washington has a reputation for being a hard state to do business. It invites actual regulatory violations, where people exert control over businesses that they haven’t been approved for, because the alternative can feel ridiculous.

For those of you with regulatory lobbyists out there, we encourage you to push the LCB on issues like this, in addition to substantive lobbying. There can and should be legitimate debate on whether businesses are allowed to sell marijuana-infused gummy bears. But for procedural challenges that have no basis in enforcing substantive rules, it’s important to keep pushing back. We want to see regulatory compliance, and the more logistically challenging the state makes it for businesses to comply with regulations, the more likely that businesses will ignore those regulations.

california cannabis marijuana
Get your comments in by Nov. 5 and help us fix this.

On Friday, the California Bureau of Cannabis Control, California Department of Public Health, and California Department of Food and Agriculture issued 15-day notices of modification to the texts of their respective proposed regulations. The California Cannabis Portal has published links to each notice and the modified texts of the proposed regulations. For each set, the respective Department will accept written comments submitted by November 5, 2018.

And to all parties currently engaging in intellectual property (IP) licensing or manufacturing deals as or with a non-licensee, you should most definitely submit your written comments if you want to be able to keep those deals alive. The modifications to the text of the proposed regulations include the following:

5032. Designated M and A Commercial Cannabis Activity

(a) All commercial cannabis activity shall be conducted between licensees. Retail licensees, licensed retailers and licensed microbusinesses authorized to engage in retail sales may conduct commercial cannabis activity with customers in accordance with Chapter 3 of this division.

(b) Licensees shall not conduct commercial cannabis activities on behalf of, at the request of, or pursuant to a contract with any person that is not licensed under the Act. Such prohibited commercial cannabis activities include, but are not limited to, the following:

(1) Procuring or purchasing cannabis goods from a licensed cultivator or licensed manufacturer.

(2) Manufacturing cannabis goods according to the specifications of a non-licensee.

(3) Packaging and labeling cannabis goods under a non-licensee’s brand or according to the specifications of a non-licensee.

(4) Distributing cannabis goods for a non-licensee.

These regulations would seemingly prohibit most, if not all, IP licensing agreements where the licensor is not licensed by the state, given that such licensing deals call for the licensee’s use of the licensed IP to manufacture particular goods, often utilizing the licensor’s proprietary techniques, recipes or trade secrets. Section (b)(3) above describes exactly what a licensee does under a trademark licensing agreement where the licensor does not possess its own manufacturing license from the state: “packaging and labeling cannabis goods under a non-licensee’s brand or according to the specifications of a non-licensee.”

Until Friday, there was nothing in the proposed regulations prohibiting a non-licensed third-party from engaging in these types of licensing deals, which we have written about extensively. Under those proposed regulations, a non-licensed entity entering into a licensing or manufacturing deal and taking a royalty from a licensed entity would need to be disclosed to the state as a party with a financial interest in a licensee but would not need to obtain a manufacturing license of their own. These kinds of deals are extremely prevalent throughout the industry, and are allowed to varying degrees in the other states in which my law firm’s cannabis business lawyers work (Washington and Oregon). For California to prohibit licensing deals involving non-licensed entities would be a major departure from what we’ve seen in other jurisdictions and would be incredibly disruptive to the cannabis industry as it currently operates.

This change would have far-reaching and unfortunate implications. Here are some examples of deals and structures that would not be allowed if this modification is ultimately adopted:

  • Licensed operators that have set up separate IP-holding companies to hold and license their intellectual property back to the operator;
  • Out-of-state cannabis companies that wish to license their existing cannabis brand to California manufacturers, but do not wish to directly engage in manufacturing in California;
  • Non-licensed third-parties that have developed technology to manufacture a cannabis product or a brand identity and wish to license that technology or brand identity to a licensed manufacturer.

The list goes on. If you have any type of licensing or manufacturing deal in place that involves both a licensed entity and a non-licensed entity, you should talk to your attorney as soon as possible to determine what the implications of this modification would be. And most importantly, you should provide written feedback immediately to the Bureau of Cannabis Control during the very short 15-day comment period expressing opposition to this modification.

If you have purchased marijuana in Washington State, you’ve probably noticed the packaging can be difficult to open and is adorned with warnings, bar codes, and lots of other information that appears in tiny font. This is by design, as the state has created robust regulations intended to protect the public from contaminated cannabis and to limit access by children. Though these regulations are important, one has to ask what impact these packaging requirements have on the environment.

Washington’s packaging and labeling requirements can be found in WAC 314-55-105. Note that this section of the Washington Administrative Code was recently amended meaning that there are two separate packaging standards. Licensees can abide by the old rules until January 1, 2019 when the new version of WAC 314-55-105 go into full effect. Until that date, licensees have the option to comply with the new rules. This post will focus on the newer version of WAC 314-55-105.

All containers that carry marijuana must protect the substance from contamination and harmful substances. Marijuana-infused products, such as edibles, and marijuana concentrates must come in child-resistant packaging. For packages containing more than one serving (a serving is capped at 10 milligrams of THC) of a solid edible product, each serving must come in child resistant packaging. For liquid products, the packaging must include a measuring device such as a cap that you would find accompanying a bottle of NyQuil. Hash marks on the side of a package are not enough.

In addition, Washington imposes substantial labeling requirements. All products must clearly show the following warning:

Warning – May be habit forming. Unlawful outside Washington State. It is illegal to operate a motor vehicle while under the influence of marijuana.

Per the recent rule change, all marijuana products must also include Washington’s marijuana universal symbol (pictured below). In addition, the label must include the business or trade name and UBI number of the licensed producer and processor, the traceability identifying number, the number of servings (if applicable), the net weight, and THC and CBD concentrations.

Washington’s universal marijuana symbol.

The state also requires the following labeling on specific products:

  • Useable marijuana flower must include the additional warning, “smoking is hazardous to your health.”
  • Marijuana concentrates or infused products intended for inhalation must list the solvents used to create product, state the method of extraction, and disclose whether any other chemicals or compounds were used.
  • Marijuana infused products intended for consumption must also list information about extraction methods and solvents, in addition to listing food allergens and the following sentence: “CAUTION: intoxicating effects may be delayed by 2+ hours.” Additionally, edible marijuana products must include the “Not for Kids” logo, shown to the right.
  • Marijuana topical products must contain the statement: “DO NOT EAT” in bold, capitol letters.

All of this means that products come with a significant amount of packaging. Even small,

Required on edibles in Washington State.

single-serving edibles must come with enough packaging to include the two logos, written warning, and information on the licensees and product. In addition, businesses making the product also want to include their branding and marketing material, which also takes up space. That branded packaging is important for producers and processors who are trying to stand-out and earn valuable shelf-space in retail stores. Unfortunately, all of that packaging has to go somewhere and it often ends up on the street or sitting in a dump.

Last month, journalist Kristen Millares Young wrote about the waste generated by Washington’s cannabis market in an article for the Washington Post. Young highlighted that environmental groups are increasingly finding cannabis packaging on the streets, something I can personally attest to living here in Seattle. The article also highlights the problem with “doob” (as in doobie) tubes, the plastic tubes used to package pre-rolled joints. These tubes cannot be recycled, even when made of recyclable plastic, because they fall through the grates of recycling machines.

Washington’s waste problem doesn’t have a simple solution. As Young points out, a potential “fix” would for Washington to require that producers and processors use recyclable material for the purpose of packaging. However, that would add increase costs to producers and processors who are already struggling to operate in a fiercely competitive market where the number of producers and processors far outweighs the number of retailers.

Perhaps it’s time to reconfigure Washington’s labeling requirements. The newest version of WAC 314-55-105 allows producers and processors to provide some information that used to be required on the physical package online. This may allow for more streamlined packaging, putting less of a burden on Washington landfills. After all, a QAR code can provide a vast amount of information without taking up much space.

If you’re a consumer you have some options. First, you can contact the Washington State Liquor and Cannabis Board about its rules, either online or during their monthly board meetings; and you can call your state representative to voice your concerns. Second, you can purchase products that have less packaging, such as marijuana flower rather than pre-rolls packaged in tubes, and you can reward companies that do use recyclable materials by purchasing their products. Third, you can make an increased effort to recycle your discarded packages and reuse non-recyclable packages. For example, maybe save the doob tube and use it to transport your hand-rolled joint in the future.

oregon marijuana cannabis subsidyRecently, there has been some talk here in Oregon that the state is not doing enough to support licensed cannabis businesses economically. These businesses generated more than $70 million in state tax revenue in FY 2017, after all. Although that revenue does not yet approach the combined $373 million in average annual revenue for beer, wine and spirits (combined), it appears to be closing the gap quickly, despite no option for interstate sales.

Comparing marijuana and alcohol receipts in Oregon is an awkward proposition, given the fact that Oregon marijuana revenues are collected through sales tax, whereas beer and wine vendors pay the state an excise tax, and liquor is distributed and sold by the state itself. At the end of the day, though, the economic impact of regulated cannabis will continue to gain on–and eat into–the alcohol economy, both in Oregon and nationwide. That is especially true if we factor in industrial hemp.

So what is the state doing to subsidize cannabis businesses in Oregon? Not much. The state did pass House Bill 4014 a few years back, which allows cannabis establishments to deduct business expenses allowable under the federal tax code when filing state returns; but that modest gesture pales in comparison to the institutional support given to craft beer and wine. Specifically, here are a few of the ways the wine industry is supported and subsidized by the state of Oregon:

  • The state created the Oregon Wine Board (OWB) to promote development of the wine industry within the state, and coordinate both domestic and report marketing efforts for the industry. OWB receives administrative support from the Oregon Department of Consumer and Business Services, and spends around $2.2 million annually on promoting the Oregon industry.
  • The state created the Oregon Wine Research Institute, housed at Oregon State University, to support Oregon grape growing and wine production.
  • Oregon statutes offer a tax exemption for the first 40,000 gallons, or 151,000 liters, of wine sold annually by any producer in Oregon, which effectively exempts 90% of them from paying any state excise tax.
  • The state offers grants for vineyards in an effort to increase tourism, as well as OWB grants related to viticulture and enology.
  • Oregon winery license fees are paltry compared to cannabis license fees. (Both licenses are issued and billed through the Oregon Liquor Control Commission.)

The above list is not exhaustive: It represents about five minutes of Google research. And at first glance, the favoritism shown to alcohol by the state feels unfair: As with the local wine industry, the Oregon cannabis industry has a world-renowned product, crowned with distinctive appellations. So why doesn’t the state do much for cannabis, aside from fulfilling its democratic mandate to roll out the program, and defending that program from the feds?

There are probably several factors at play:

  • “Marijuana” remains a Schedule I controlled substance at the federal level. While states may see a path forward to licensing cannabis businesses under the Tenth Amendment (see here and here), actually using public dollars to support specific businesses may feel like a bridge too far.
  • More people oppose the cannabis industry than the alcohol industry, so subsidies would likely face strong pushback from a vocal segment of the population.
  • Many of the Oregon wine subsidies listed above were enacted in periods of greater budget stability for the state, back when timber revenues and related federal subsidies were a real thing, and the state pension system was not $22 billion in the hole. Today, those alcohol subsidies are entrenched (although recent efforts at further subsidies have failed.)
  • The Oregon cannabis lobbies are smaller than alcohol lobbies.
  • The creation of a cannabis regulatory regime has been a heavy legislative lift over the past few years here in Oregon, crowding out other conversations related to cannabis.

With all of that said, Oregon could probably do more for the cannabis industry, and it could be more creative. California has at least explored the idea of a state-chartered bank. Along those lines, Washington has helped its legal businesses to open bank accounts, and Hawaii has announced a cashless system for buying medical marijuana. None of these actions are subsidies, but they do make business operations easier and they ultimately contribute to economic efficiency.

Other jurisdictions have gone even further. Colorado, for example, has had a research grant program going back to 2014. And certain cities, like Oakland and San Francisco, have offered bona fide, traditional subsidies like free rent and incubator programs for select marijuana entrepreneurs. So it is possible to funnel public funding into cannabis businesses — at least certain types of businesses, in certain cases.

Oregon will kick off another legislative session in early 2019. Most likely, the state will discuss important regulatory issues, like our U.S. Attorney’s concern with oversupply, alongside the usual re-tread items, like social consumption and event permits. Although these new business permissions would be marginally helpful, hopefully there is also room for discussion on how the state can support its regulated cannabis industry more directly, as it does with alcohol. Then, when federal prohibition ends in a couple of years, we will want it looking something like this.

WSLCB cannabis marijuana
The WSLCB approach is not working so well.

The Washington State Liquor and Cannabis Board (WSLCB) may finally be noticing that its current treatment of “true party of interest” violations is neither just nor sustainable. During an extended conversation at its monthly executive management team meeting in June, the WSLCB discussed potentially adopting a hidden ownership amnesty program. Basically, any existing businesses that had mistakenly created a true party of interest relationship would have a limited time to come forward and declare any owners or other true parties of interest in licensed marijuana businesses that had not been disclosed and vetted in the past. The licensee would then be able to get the person vetted, though some penalty other than license cancellation would potentially still be on the table.

The details are not set, and the WSLCB executive team is going to continue meeting and discussing the issue over the coming months. For those licensees in the middle of investigations or regulatory hearings with the WSLCB, there’s not much hope to pull from this. Even if the WSLCB moved with lightning speed to adopt something, the agency was clear that it would not avail anyone currently undergoing a formal investigation or violation hearing.

That the WSLCB is discussing the topic of leniency at all indicates that they are cognizant of problems with current regulations and enforcement, though their idea of an amnesty or leniency program won’t do anything to solve the underlying issues. The foremost issue right now is that the timing of getting financing approved doesn’t work. The WSLCB currently demands that all money contributed to a licensed business be approved prior to it being spent on behalf of the business. The approval process for capital can take months, even if the capital contributors have already been approved as owners or financiers of the business in the past. But the types of emergencies that require short-term capital infusions tend not to wait months for regulators to approve. Businesses are forced to violate a rule by either having current owners contribute new capital or having outsiders provide financing prior to getting WSLCB approval.

There are plenty of solutions to the financier predicament that the WSLCB could adopt. They could allow for after-the-fact vetting of certain types of loans. They could modernize and streamline their financial approval process. They could keep the exact same system and just hire more people so that new funds could get investigated and cleared immediately. Any move to temporarily allow for relaxed penalties for regulatory violators to come forward isn’t necessarily a bad thing, but the same problem will continue again and again. Academically speaking, the WSLCB is applying an over-inclusive rule to business actions that range from willfully criminal to entirely benign. This over-inclusive application of the law “makes regulatory unreasonableness not an occasional weakness but a pervasive problem.”[1]

[1] Quote is from the first full paragraph on page 40 of this linked article — the WSLCB should read it and redesign their enforcement structure.

The WSLCB’s current investigative and enforcement strategy feels targeted at unlucky businesses that have made mistakes. This is part of why their trigger-happy nature regarding license cancellation is so frustrating. Two of the cancellation cases that my law firm is currently working on have come because of voluntary disclosure of information by a licensee. There certainly are bad actors in the marijuana industry that are intentionally defrauding the WSCLB and may well have ties to organized crime, but the WSLCB seems to leave those businesses alone. It is tough, challenging work to investigate illegal activity when the actors are working hard to cover up the illegal activity. It is much easier to go after the low-hanging fruit of licensees that are fully transparent about their activities.

Fundamentally, the WSLCB underestimates the deterrent effect of large monetary fines and underestimates the huge collateral damage that business shutdowns can create. If the WSLCB wants to create real compliance, it is going to need to make some more drastic changes than temporary amnesty/leniency programs.

washington cannabis LCB
More crucial than ever for Washington operators.

We have represented clients in regulatory violation cases inside and outside the cannabis industry for years. Of all the jurisdictions in which we work, the Washington State Liquor and Cannabis Board in 2018 is unique in its eagerness shut down businesses. In case after case against licensed producers and processors, the WSLCB seems determined to seek violations that could lead to license cancellation and is generally refusing to offer alternative penalties. Because so many of these cases are still pending, it is hard to go into too much detail, but the WSLCB’s actions in these cases indicate a desire to cull the number of licensed producer/processors.

For those producer/processors in Washington that aren’t currently being investigated for regulatory violations, the WSLCB’s current policy generates mixed reactions. When licenses were available for application in November and December 2013, thousands of businesses applied for the right to cultivate and process marijuana. As the market as matured, wholesale prices of marijuana have continued to fall, and the ability of licensees to maximize production has continued to increase. There is so much marijuana available on the market right now that it is hard for producer/processors to compete. Just having a license isn’t enough to run a profitable business, and many of the top performing producer/processors in the state are not generating the profits that most outsiders would assume.

At the same time, the types of violations that can cause the WSLCB to cancel a license and shut down a business are surprisingly easy to commit, even for dedicated compliant businesses. For example, let’s say that a licensed producer/processor has an unexpected bad month and doesn’t have enough money in the bank to make payroll. There isn’t any way for a licensee to get expedited approval of a cash infusion from the business’s owners If those owners contribute more of their own money before getting that approval, though, the WSLCB will still cancel the licenses. Or let’s say that a licensee enters into a licensing deal to manufacture branded products developed by another company. If the contract for that deal includes any terms that the WSLCB determines allow the licensor to exert too much control, they will cancel the license.

License cancellation is not innocuous. Marijuana business regulations bar a company from using a licensed location for business other than marijuana operations. Therefore, any type of license cancellation is really a death penalty for the business itself. These businesses employ anywhere between a few individuals and more than fifty people. Many of the employees are not the most employable in other industries either; legal cannabis jobs are the only thing standing between them and poverty.

And this is where it is clear that the WSLCB’s primary goal in cancelling licenses has to be to reduce the number of active licenses overall. Even in cases where the owner that is the “cause” of the regulatory violation has offered to transfer ownership interest in the business to a third party, the WSLCB still seems determined to cancel the licenses. They don’t seem to consider the effect that license cancellation has on innocent employees, landlords, investors, and contracting parties.

If you’re a licensed producer/processor in Washington (retailers seem to get more leeway), there’s not much you can do about this in the short term other than to stay compliant. There are certainly strategic alternatives that could engender better compliance among licensees, but it isn’t clear that compliance is the WSLCB’s current primary goal. Until the WSLCB starts accepting alternative penalties for certain seemingly innocuous violations for which they are authorized to cancel licenses, though, licensees will not receive the benefit of the doubt from the WSLCB. The correct attitude to take is that the regulators do not want you to have a license to engage in marijuana business activities, and they will do everything in their power to take it away.

marijuana cannabis oregon initiative
The goal of your ballot initiative is to get to a vote.

Oregon successfully legalized the use, sale, processing, and production of recreational marijuana in 2014 through the initiative process. The initiative process is a method of direct democracy that allows people to propose laws outside of the normal legislative process. Oregon’s marijuana statute (ORS 475B) allows cities and counties to “opt-out” of commercial recreational marijuana. In other words, cities and counties do not have to allow for the sale, processing, or producing of marijuana within their jurisdictional borders. ORS 475B, as originally written, allowed cities and counties to automatically opt-out if registered voters in the jurisdiction voted at least 55% against the legalization. All other cities or counties could either create reasonable time, place, and manner restrictions for marijuana businesses or could put up an opt-out vote to the public at the next general election.

Many cities and counties chose to opt-out from legalized recreational marijuana. In these jurisdictions, citizens can still use and possess marijuana, but licensed recreational businesses are not allowed to operate in jurisdictions that opted-out. Still, citizens can use the initiative process to change these local laws. The initiative process allows for citizens to propose a city or county ordinance allowing Oregon Liquor Control Commission (OLCC) licensed marijuana businesses within the jurisdiction. We have expertise in navigating this process and we are, in fact, running one initiative in an “opt out” jurisdiction right now.

The initiative process, much like many forms of our government, is overly complicated with a host of rules and technical requirements. It requires a lot of steps, careful planning, patience, and organization. Once an entrepreneur decides he or she wants to change the laws, the initiative process starts by filing a prospective petition with the local elections official. The prospective petition includes the language of the proposed ordinance. The language is an opportunity to develop a local ordinance that fulfills your goals and the citizens goals for licensed marijuana businesses.

After the prospective petition is submitted, the city or county will approve it for circulation. This is when the real work starts. Initiative petitions are not automatically guaranteed a spot on the ballot. Instead, initiative petitions must gather the support of the public to be included on the next election’s ballot. Almost all of us have been accosted by a circulator on the MAX or downtown in Portland asking if we are a registered voter and if we’ll sign the petition sheet to get a measure on the ballot. City initiative petitions require valid signatures from 15% of the registered voters in the city and County initiative petitions require 8% of registered voters.

If the local elections official determines enough valid signatures were received, the initiative will be referred to the local governing body. The local governing body has the option to adopt the petition without sending it to the ballot. They can also choose to allow the petition to be voted on in the next election. If it makes it onto the ballot, the initiative must receive a majority of approval from the voters to pass. If it receives a majority of votes, the initiative will be enacted as law.

Initiative petitions are one way to attempt to change local laws surrounding marijuana businesses. These petitions can be drafted in favor of their drafters, who may attempt to set themselves up for success once an initiative passes. Over the past few years, some citizens in Oregon have attempted and failed, while others have successfully changed local law to allow for recreational marijuana licensees. The process is long and complex, but the upside can be tremendous.

Tomorrow, June 5th, Californians will go to the polls and vote on a number of state and local races, along with tax measures and other proposed laws. Cannabis will play a large role in many of them.

In the gubernatorial primary race the two favorites, Lt. Governor Gavin Newsom and former Los Angeles Mayor Antonio Villaraigosa, are both Democrats and they both support the cannabis industry and social justice reforms to right the drug wars’ wrongs. California Treasurer John Chiang is also running for governor and he has made increasing banking opportunities (which we covered here) for cannabis businesses one of his most pressing goals. Even if Mr. Chiang doesn’t win, we hope he continues making progress on this front as lack of access to banking severely hampers cannabis business owners and needlessly creates a danger to public safety. The Republican candidates for governor, John Cox and Travis Allen, hold the same traditional shortsighted and draconian Republican position: cannabis is bad, lock everyone up. To quote the current eloquent speaker in the White House: SAD! Although both Republican candidates are longshots to make the statewide election in November, one of them could get lucky if the Democratic favorites split a large number of votes. That’s because California has an open primary system with the top two vote getters, regardless of party affiliation, moving on to the November election.

Keep the momentum going, California!

Making sure the top two gubernatorial candidates support the cannabis industry and social justice reforms is extremely important but there also a number of other races and measures to keep an eye on tomorrow:

  • Republican Congressman Dana Rohrabacher faces what looks like a tough race as he’s being challenged by a Republican and a Democrat. Mr. Rohrabacher is one of the biggest Republican supporters of the cannabis industry (If you’ve never heard of the Rohrabacher-Blumenaur amendment, we covered that for you here.) The best-case scenario is that Mr. Rohrabacher and one of the Democratic candidates receive the most votes. Worst-case scenario is that Mr. Rohrabacher and the other Republican candidate, Scott Baugh, move on the November election and Mr. Baugh wins. Mr. Baugh has chastised Mr. Rohrabacher’s support of the cannabis industry, so a Baugh-Blumenaur collaboration is highly unlikely.
  • Residents of the Southern California City of Jurupa Valley will vote on whether to allow commercial cannabis activities in certain commercial zones.
  • Ballot Measure CC in the City of Pasadena would authorize up to six retailers, four cultivators, and four testing laboratories to operate in the City. There will also be a cannabis tax measure on the ballot.
  • The City of San Rafael, which we recently covered in our California Cannabis Countdown series, will also place a tax measure on its ballot. Measure G would authorize the City to tax cannabis business up to 8%.
  • There’s also a tax measure on the County of Santa Barbara’s ballot, however Measure T’s passage carries more than just tax consequences – if Measure T fails then the cannabis ordinance passed by the Board of Supervisors that would allow commercial cannabis activities will not go into effect.
  • The County of San Luis Obispo will also put forth a tax measure on its ballot and just as in Santa Barbary County, if the tax measure doesn’t pass then commercial cannabis businesses will not be able to operate in SLO County.
  • Yolo County is proposing a tax measure that would place an initial four percent (4%) cultivation tax and an initial five percent (5%) tax on all other cannabis businesses.

There are other marijuana related measures that will be on ballots throughout California this Tuesday and it’s extremely important for current cannabis business owners, future entrepreneurs, and cannabis industry supporters to pay close attention to the language of the ballot measures–especially tax measures tied to the enactment of cannabis ordinances–and the cannabis positions on those running for elected office. The cannabis industry has made great strides recently and now is not the time to let up. Get out there on Tuesday and vote!

Last week I wrote about how the United States is close to approaching the tipping point when it comes to ending the federal government’s prohibition on cannabis. Legalization is long overdue. And just this week, U.S. Attorney General Jeff Sessions, while testifying before the U.S. Senate, surprisingly said that cannabis should be researched and that there may be some benefits to medical marijuana. We’ll take a lukewarm comment from the man that said “good people don’t smoke marijuana” and take that to the bank. Which brings me to the topic of today’s post, banking (a transition as smooth as my middle school dance moves).

california cannabis banking
Will California clear a way for banking?

It’s no secret that many cannabis operators have to operate as cash only businesses since many financial institutions still refuse to offer banking services to the cannabis sector (which has led to an increase in interest in cryptocurrencies). In California, many banking institutions that were considering openly banking cannabis businesses decided to remain on the sidelines once A.G. Sessions rescinded the Cole Memo this January. However, like the slow but forceful gravitational pull of the moon, we’re starting to see tide shift towards more banking opportunities on the horizon.

Part of the shift has to do with fact that the cannabis licensing agencies in California (the Bureau of Cannabis Control, the Department of Food and Agriculture, and the Department of Public Health) will start issuing annual licenses in May. To date, all of these agencies have only issued temporary permits, which required little more than a local permit, a location, and a premises diagram. The application for an annual license requires much greater detail. Although some applicants may balk at the amount of information they must provide, the fact intensive nature of the application process will undoubtedly help cannabis operators obtain banking services. A cannabis business owner that has received an annual permit from the state, can use that permit as a stamp of approval when walking into a bank to open an account. Possession of an annual license will signify to banks that you’ve passed a background investigation and proven to the state that you have the procedures in place to run a compliant cannabis business. Don’t lose sight of that fact as you’re cursing all the hoops you’re jumping through.

Another step in the right direction when it comes to opening banking services to the cannabis industry is the progress of Senate Bill 930 in the California state legislature. SB 930 was first introduced by State Sen. Robert Hertzberg (D-Van Nuys) on January 25, 2018, and was approved by the Governance and Finance Committee last Wednesday. SB 930 would provide for the licensure and regulation of cannabis limited charter banks and credit unions whose sole purpose would be to provide banking services to the cannabis industry. SB 930 is more workable and has a stronger likelihood of success than the prospect of a state backed bank, which we last discussed here.

In order for SB 930 to be successful, it is paramount that the FinCEN guidance issued by the Department of Treasury remain in place (see here for the importance of the FinCEN guidance). The bill would also create the Cannabis Limited Charter Advisory Board (“Board”) that would hold public hearings, submit reports of enforcement activities, and provide guidance on specified investment activities. The Board will be comprised of the state Treasurer (you can find our analysis of the Treasurer’s banking report, here), the state Controller, and Chief of the Bureau of Cannabis Control. SB 930 would also authorize charter banks and credit unions to issue special purpose checks for the following:

  • To pay fees or taxes to the state or local jurisdiction;
  • To pay rent on property that is associated with the account holder’s cannabis business; and
  • To pay a vendor that is located in California for expenses related to goods and services associated with the account holder’s cannabis business.

SB 930 will still have to clear some procedural hurdles before it’s in front of the full Senate for a vote, but this is definitely another step in the right direction to ease the logistical burden – and enormous public safety concern – that dealing in all cash poses on cannabis businesses. SB 930 is yet another piece in the fight against the federal government’s unjust war on cannabis. Eventually the final blow will have to come from the federal government, but in the interim California, along with many other states, will continue to lead the way.

sonoma california cannabis
Will Sonoma stay green?

In 1996 Californians voted for the Compassionate Use Act (aka Prop 215), but more than twenty years later Californians are still fighting for their cannabis rights. One of the biggest misconceptions out there is that the entire state of California is open to cannabis businesses. Our San Francisco and Los Angeles offices field calls from new clients every week looking to start a cannabis business but on many occasions, I have to crush their business plans before they can even get started. It’s not that their business plan isn’t sound, it’s that their business is prohibited in the city or county where they wish to operate.

These bans exist because the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA) explicitly authorizes local jurisdictions to regulate (or outright prohibit) as they see fit. This authority granted to local jurisdictions is just one of the reasons why commercial cannabis licensing has gotten off to a rocky start. After I tell the client that they can’t operate in Butte County, for example, the next question I usually get is “where can I operate?” If you’re a reader of our California Cannabis Countdown series, you’ll know that cannabis friendly jurisdictions do exist, but whether these locales will always remain open to cannabis is another question. There’s an unfortunate trend occurring throughout the state where local jurisdictions are passing laws authorizing commercial cannabis activities only to later change their minds. This brings me to Sonoma County.

Sonoma County would fall into the category of a cannabis friendly jurisdiction, as the County authorizes all seed to sale license types (for medical cannabis businesses anyway). However, recent events have put the County’s cannabis friendly tag in serious peril. There have been a number of high profile robberies (one of which was sadly fatal) of alleged cultivation grow houses, and cannabis opponents have been highlighting these robberies to press the County to make restrictive changes to its cannabis ordinance. The fact that the perpetrators were from out of state and came with the specific goal of targeting grow houses is also being used to further stoke fears. What the prohibitionists are not mentioning is that the houses that were targeted were not legally licensed cultivators, but instead were selected because they were suspected of being illegal grow houses. Licensed operators have security plans and security protocols, whereas illegal operators do not. This push to restrict cannabis activities in Sonoma is misguided as it will strengthen the black market and thereby increase crime. This small but vocal group of cannabis opponents have approached the Board of Supervisors and requested that the County:

  • Freeze issuing any cannabis permits until the County’s ordinance is amended;
  • Authorize only indoor cultivation, and ban all outdoor cultivation;
  • Restrict cultivation to only industrial zoned areas;
  • Place a cap on the number of cultivation permits based on the amount of cannabis necessary to supply only County residents;
  • Disband the Cannabis Advisory Group; and
  • Make these changes retroactive to apply to existing permit applicants.

If this vocal group of opponents is able to persuade the County’s Board of Supervisors to change the County’s cannabis ordinance to include these restrictive changes, the effect on operators who have spent extensive time and capital to abide by the law will be disastrous. Only those that have never been interested in complying will have benefited.

We’ve spoken at length about the importance of showing up to your local hearings and public support is needed now in Sonoma County now more than ever. We don’t want Sonoma to end up like Calaveras County. The Board of Supervisors are meeting this Tuesday at 1:30pm and the Sonoma County Growers Alliance is requesting that supporters come dressed in green. I hope to see you there wearing your St. Patrick’s Day best.