Something has gotta give in Phase 3.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

On Wednesday, January 16, 2019, the California Bureau of Cannabis Control (“BCC”)—the agency that licenses distributors, retailers, testing labs, and event organizers—dropped its final regulations. Until then, BCC licensed commercial cannabis operators or applicants for BCC licenses had been in no man’s land, complying with emergency regulations while trying to divine what the final regulations would look like, what they would need to change, and when they would need to change it. While the final regulations are by no means perfect, they are at least here (alongside the CDPH permanent regulations, which we covered on Monday). While these final regulations from BCC appear to mirror the proposed regulations submitted back in early December, they depart from the emergency regulations in some pretty significant ways. Below are a few of the more key areas.

BCC marijuana final regulationsOwner Changes. One of the more significant final regulatory expansions comes in the disclosures that must be made to the BCC when a licensed entity is owned by another entity. The BCC previously required that some of the people who own or run entity owners of licensees be disclosed in BCC applications, but the new regulation greatly expands those requirements. For example, in the readopted emergency regulations, entity owners needed to disclose their CEOs and/or board members if those entities were considered owners based on 20 percent or more equity in the licensee.

Now, entity ownership requirements kick in in any situation in which a company owns a licensee—not only where the ownership is based in equity (remember that ownership can also be based on direction, management, or control of a licensee or other grounds). If an entity is considered an owner, then anyone with a financial interest in that entity must be disclosed to the BCC and may be considered an owner.

This is a tremendously significant requirement and means that virtually everyone in the corporate chain must be disclosed (and probably must provide all of the many significant and burdensome disclosures). For example, if John Smith directly owns 1% of the BCC licensee ABC Retailer and does not exercise any control over ABC Retailer, he will be considered a financial interest holder as opposed to an owner.  But if he owns 1% of XYX Holdings, which has a 20% stake in ABC Retailer, he will need to be disclosed to the BCC and may be considered an owner.

What is less clear is how the BCC will evaluate whether persons like John Smith in the above example are owners. The rule isn’t very clear on this point, but does give examples such as “all entities in a multilayer business structure, as well as the chief executive officer, members of the board of directors, partners, trustees and all persons who have control of a trust, and managing members or nonmember managers of the entity.” Persons like John Smith, who really have no say over the company and have just a small monetary interest, probably won’t be considered owners even under these new rules. But again, they probably will need to make full ownership disclosures before the BCC makes that determination.

One other significant point in the final regulations is that the BCC now expressly considers persons who expect 20% or more of the profits of a licensee to be owners. This means that various kinds of contracts (subject to the discussion below) between a licensee and third party could turn the third party into an owner depending on the compensation—even if that third party otherwise would not be an owner.

Interest Holder Changes: Similar to the owner regulations, the financial interest holder rules (regulation 5004) were also enlarged. Unlike in the readopted emergency regulations, the interest holder regulations provide a non-exhaustive list of persons or entities who must be disclosed as interest holders:

  • An employee who has entered into a profit share plan with the commercial cannabis business.
  • A landlord who has entered into a lease agreement with the commercial cannabis business for a share of the profits.
  • A consultant who is providing services to the commercial cannabis business for a share of the profits.
  • A person acting as an agent, such as an accountant or attorney, for the commercial cannabis business for a share of the profits.
  • A broker who is engaging in activities for the commercial cannabis business for a share of the profits.
  • A salesperson who earns a commission.

The ownership changes discussed above may seem at first glance to be one of the more onerous changes in the regulations. And to some extent—especially for licensees in corporate families or which are owned by other companies—this is true. But these interest holder disclosure requirements are equally, if not more complex because they require disclosure of virtually anyone with any sort of stake in a cannabis company—small or large. This will require companies to take stock of all third-party agreements to which they are a party and spend serious effort analyzing whether the disclosure obligations apply.

Not only are there likely to be larger disclosures of financial interest holders than of owners, but licensees are also now obligated to make similar disclosures where their financial interest holders are entities. Now, anyone who is an “owner” of a financial interest holder will need to be disclosed to the BCC. This rule is admittedly narrower than the ownership disclosure requirement in that it is limited to just owners of the financial interest holder and that the categories of information that must be submitted are much narrower, but it is significant nonetheless and will require a lot of work and evaluation.

IP Licenses and Other Third-Party Agreements: Back in October, we wrote about how changes to BCC regulation 5032(b) could prohibit IP licenses and other transactions with non-licensed entities. This is obviously significant as there are many such transactions in this industry (and any). The October version of rule 5032(b) was subsequently scaled back to remove examples of unlawful third-party agreements, but now we are left with a regulation which is ambiguous as to its scope: “Licensees shall not conduct commercial cannabis activities on behalf of, at the request of, or pursuant to a contract with any person who is not licensed under the Act.” In the final statement of rules that accompanied the December 2018 proposed final regulations (which have been removed from the BCC’s website), the BCC suggested in response to comments that third-party license agreements could be permissible if an unlicensed entity were disclosed as an owner or interest holder. But whether the BCC maintains this position remains to be seen.

Packaging and Labeling: A few weeks ago, I wrote about the packaging and labeling mess that was likely to ensue if the December proposed regulations became the final regulations. It looks like that’s happened, so I won’t repeat that article verbatim. But what bears repeating is that, except for child-resistant packaging, there doesn’t appear to be any sort of grace period for compliance with the new labeling regulations. To compound matters, while distributors can re-label cannabis and pre-rolls, they apparently can no longer re-label manufactured goods—and retailers can’t do any sort of labeling. We therefore expect that there will be a good deal of chaos over packaging that was compliant but now suddenly is not, and confusion over what to do about it.

Delivery Expansion (or Not?): As I highlighted back in the October when the BCC’s modified proposed regulations were issued, one of the bigger changes to the regulations was to section 5416(d), which allows deliveries into any jurisdiction in the state so long as they comply with the BCC regulations. This change stuck in the final regulations. While it would seem that licensed cannabis retailers can deliver anywhere in the state, there are a number of jurisdictions that still forbid it. This thus creates a conflict between local laws and statewide regulations that is not so clear as one may think.

For example, Malibu recently passed a measure that permits adult use cannabis sales and deliveries, but forbids deliveries into Malibu for entities that don’t have Malibu permits. Pasadena, which is currently undergoing a massive licensing competition, prohibits its permittees from delivering into cities or counties that prohibit deliveries. And of course there are numerous other California cities which are even more restrictive and prohibit all commercial cannabis sales or deliveries.

While not very clear, the Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”) provides: “A local jurisdiction shall not prevent delivery of cannabis or cannabis products on public roads by a licensee acting in compliance with [MAUCRSA] . . . .” Arguments could therefore be made on either side of the spectrum about whether MAUCRSA permits cities to preclude deliveries: cities could argue that MAUCRSA permits them to ban deliveries off of public roads (i.e., on private property); others could argue that deliveries made using public roads and to residences or other private properties adjacent to public roads cannot be prohibited. We expect that there may be future litigation here.

These are just some of the significant changes in the regulations. Compliance with the regulations is critical, and it’s always recommended to consult with experienced regulatory cannabis counsel in doing so. Stay tuned to the Canna Law Blog to see how the BCC regulations shake out and for other California cannabis developments.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

HR 420 marijuana blumenauer

On Wednesday, January 9, 2018, Representative Earl Blumenauer (D-Or) introduced the aptly designated H.R. 420, or the Regulate Marijuana like Alcohol Act. The bill is still so new that it’s not yet up on Congress’ site, but the apparent text for the bill can be found online.

H.R. 420, if passed in its current form, would remove marijuana from the Controlled Substances Act’s scheduling. The law wouldn’t allow complete legalization without regulation. It still makes clear that bringing cannabis into a jurisdiction would be unlawful where it would violate the laws of that jurisdiction. Instead of full-scale legalization, the bill would require the Secretary of the Treasury to establish a permitting scheme which could, like state law, involve different permits for each different kind of cannabis activity. It’s not yet totally clear how this would play out for permit holders in states with current regimes, i.e., whether they would have to get federal permits and/or what criteria they’d be held to.

Interestingly, these federal permits appear to last indefinitely until suspended and can be transferred if the transferee makes a timely request. There are of course disqualifying convictions, but those appear to be relatively narrow and exclude federal or state offenses if the underlying conduct was lawful in the state where the conviction was rendered. The bill also makes clear that applicants couldn’t get permits that would violate state law (this is an interesting flip where federal law bows to state law) or if an applicant wasn’t likely to commence operations within a reasonable period or maintain them in accordance with federal law.

One other interesting component of the bill is that it would transfer jurisdiction from the Attorney General over marijuana to the re-named Bureau of Alcohol, Tobacco, Marijuana, Firearms, and Explosives. The bill would also give the Food and Drug Administration the same authority over marijuana that it has over alcohol. The bill would also give the Treasury Secretary the authority to regulate certain elements of marijuana advertising to ensure that it was not false or misleading.

Ultimately, the bill leaves more unsaid than said, and if it is ever passes, it will be up to the regulators to figure out the mechanics. It’s not certain that this bill will go anywhere, especially in such a tumultuous and chaotic time. However, the approach of regulating marijuana more or less like alcohol, similar to what many states are already doing and with an element of federal oversight, is a compelling idea. Stay tuned to the Canna Law Blog for more details and updates.

oregon marijuana OLCC violation
Make it happen!

I’ve been suspicious the last few months that the Oregon Liquor Control Commission (OLCC) is starting to set a zero tolerance policy for marijuana rule violations. Unfortunately, the extrinsic evidence seems to be proving my suspicions.

As I’ve previously written, the OLCC settlement policies seemed to shift last September. In a first for the commission, they rejected a settlement proposal that would have allowed a licensee to keep its license and pay a fine. That particular licensee, Black Market Distribution, LLC, either needs to fight for its license at a hearing or surrender its license. The OLCC has not issued a final order related to Black Market Distribution yet and the company still have its license according to the approved license list. Only time will tell if Black Market Distribution is able to keep their license in light of the alleged violations.

As I wrote in November, if the OLCCs continued actions are any indication, Black Market Distribution may have little chance of keeping their license. In December, the OLCC seemed to continue down a path of refusing to settle cases unless the Licensee agrees to sell the business or surrender the license.

  • The OLCC alleged licensee Positive Vibrations committed four Category IV violations relating to advertising rules. The OLCC proposed a 34-day suspension or a civil penalty of $5,610. However, the OLCC and Positive Vibrations were able to reach a settlement agreement requiring Positive Vibrations to accept responsibility for the Category IV violations and either serve a 26 day suspension or pay a civil penalty of $4,290.00.
  • In the only other settlement agreement from December, the OLCC alleged licensee Greenway Ventures committed 10 violations, including two Category I violations. Even a single Category I violation is sufficient to revoke a license. Based on the violations, the OLCC proposed license cancellation. Greenway and the OLCC entered a settlement agreement that required Greenway to sell the business or surrender its license by March 30, 2019. Greenway must also accept a Letter of Reprimand for the violations that will become a permanent part of its file and may be considered in future applications. Further, the Greenway  had to forfeit 21 totes of marijuana to the OLCC for destruction.

Not only have we seen the OLCC entering into stricter and more stringent settlement agreements, but our office has seen a significant influx of charging documents issued by the OLCC. These usually come about after anonymous complaints are made to the OLCC regarding potential rule violations of the licensee. After an anonymous complaint is received by the OLCC, the OLCC assigns the complaint an investigator. The investigator then conducts inquiries and visits the licensed premises. The investigator will not only investigate the allegations of the complaint, but will also look into other practices of the licensee. This can often result in multiple rule violations.

So, what’s the takeaway? As we’ve said in the past (and will continue to say), the only way to avoid OLCC charging document exposure is to ensure compliance with the rules. How do you do that? The best way is to create a compliance position for your license, and designate or hire a compliance person. This might not be cheap but it will probably save you in the long run. That person’s job will be to keep up to date on OLCC rules (which are still being updated frequently), and to ensure that every aspect of the license is in compliance with those rules. Alternatively, split up the job among several experts. If you have someone running your Instagram account, for example, make it their job to ensure that every Instagram post and every marketing item that stems from the license complies with the rules. Have someone become an expert in CTS, tagging, and manifest. Etc. The bottom line is, make sure you have someone or a team of someones that know the rules inside and out, and isn’t shy about speaking up when practices are lax. If you and the compliance expert cannot figure something out, hire an attorney to review your practices. At the end of the day, it’s better to pay up front to ensure rule compliance rather than to pay the OLCC in penalty fees or lose your license altogether.

california cannabis final regulations

Yesterday afternoon, on January 16, 2019, the California Office of Administrative Law (“OAL) finally approved the sets of final regulations under it had been reviewing after submissions from the California Department of Public Health (“CDPH”) which regulates cannabis manufacturers, the California Department of Food and Agriculture (“CDFA”) which regulates cultivators, and the Bureau of Cannabis Control (“BCC”) which regulates distributors, retailers, event organizers, and testing laboratories. You can find the final regulations here.

The three sets of regulations follow on the heels of final proposed regulations that the CDPH, CDFA, and BCC submitted to the OAL for its review in December. We will be providing some overview of the key components of the final regulations shortly, but it looks upon initial review like these regulations adopted most or all of what was submitted for review in December.

These regulations are “final”, meaning cannabis operators and applicants no longer need to worry about discrepancies between emergency regulations (which as of now are no longer effective per the OAL’s statement) and whatever version of proposed regulations were then out in the ether. But though these regulations are “final”, we’re pretty positive that there will be changes and modifications—probably on a more incremental level—in the future.

Stay tuned to the Canna Law Blog for further insight and analysis into these final regulations and any final regulations that will come.

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

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

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

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

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

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

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

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

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

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

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

On January 1, 2019, the City of Pasadena in Northeastern Los Angeles County will open up its 30-day window to apply for one of six retail, four cultivation, or four testing facility permits. These 14 licenses will be highly coveted and sought after, and the winners will not be derived from a lottery system, but selected instead on scored applications. For anyone looking to get licensed in Pasadena, it’s going to be a busy month and an uphill battle.

Licensing in Pasadena is based on the June 2018 approval of local ballot measures CC and DD, which allow these limited permits and establish local taxing regimes. These ballot measures set hard caps on the license types as noted above. Unless Pasadena elects to allow more license types or licenses at later dates, this one-month window will be the only time to apply for commercial cannabis licenses in this city. And where the majority of California cities and counties still ban commercial cannabis activity, having Pasadena come online is a big win for overall legalization.

Notably, section 17.50.66 of the Pasadena Municipal Code precludes businesses from being licensed within the same building or even within 500–1,000 feet of one another, depending on the license type. In other words, Pasadena won’t be allowing combined license types in the same building or even anywhere near one another (which is much stricter than applicable state laws). Nor will it allow manufacturing or distribution, so there won’t be complete vertical integration for businesses in the near future in Pasadena.

Pasadena’s official screening information can be found here. To summarize, Pasadena will require information about owners of the business and about the proposed business generally. This includes detailed operations and security plans, statements of the owners’ previous experience, and statements of how the proposed business would be compatible with the surrounding community. The paper applications will have a hard cap of 100 pages. If you tried for a license in West Hollywood earlier this year, this should all sound very familiar.

Every aspect of these written plans will be reviewed based on scored criteria (found here). This scoring, in combination with the detailed plan requirements and page limitations mean that applications will need to be both comprehensive and polished. Pasadena will be evaluating these applications for owner experience, and if the applications are not well done or formatted properly, they may be dead on arrival.

Applicants may be tempted to approach this like a lottery as there are relatively few spots open. But this process will be very different from a lottery, where putting together a quick application or using a lot of the same boilerplate materials from other applications may be in the applicant’s best interest. Here, Pasadena has made pretty clear that it wants to see top-shape applications from folks with business acumen and industry experience. It’s even more important to ensure that applications are as perfectly formatted and complete as they can be, as the fee is a whopping $13,654 per permit.

Our L.A. cannabis business attorneys expect many Pasadena applicants, as there were with other popular L.A. cities with very limited license openings, and which awarded on a merit basis. For anyone who is applying in Pasadena, sharpen your pencils. January’s going to be a busy month.

2018 has been a roller coaster for California cannabis businesses. The cannabis laws and regulations in California have made life difficult, to say the least, for anyone wishing to obtain licensure. This isn’t necessarily the fault of any single legislature, municipality, or agency, but instead was the result of a perfect storm of legal and non-legal issues.

The beginning of the year saw the opening of adult use licensing under the Medicinal and Adult Use Cannabis Regulatory and Safety Act (or “MAUCRSA”). Businesses that sought licensure could apply as of January 1, 2018 for an annual application. In theory, this could have been simple, but it turned out to be far more complex than anyone probably intended.

One provision in MAUCRSA that has been the bane of any applicant’s existence is the requirement to have local approval when applying for an annual (or temporary) license. What this means is that applicants couldn’t apply for state and local licenses concurrently; instead, they had to apply for and obtain full local approval first, and then move onto the statewide licensing. Localities have been all over the map in terms of how they process applications, which means that it could take months between finding an eligible parcel of land and even starting the process of applying for state licensing.

Many cities (for example, Los Angeles) have created complex, phased licensing schemes that meant that certain applicants couldn’t even apply until late in the year. (For Los Angeles, the final, third phase won’t even open until some undisclosed time in 2019.) It’s understandable why larger cities would want to phase their application processes—but for operators, this posed a pretty big problem in terms of delays to apply for annuals and the temporary license deadline.

And regarding temporary licenses, MAUCRSA set up a scheme to allow for temporary licenses that last for 120 days and could be renewed for 90 days. The intent appears to have been to allow operators with local approval to start engaging in business while applying for annual licenses. For reasons that in hindsight appear to not make too much sense, these temporary licenses could only be issued during 2018.

This end-of-2018 cutoff meant that applicants needed local approval prior to the cutoff date so that they could obtain temporary licenses while awaiting the very, very slow annual license application process. But the problem was that cities were so backlogged—or in some cases hadn’t opened all phases until too late in 2018. To solve this issue, many localities started providing applicants with local approval letters late in 2018, and there was a bottleneck in applications in November and December.

Additionally, over the summer, the California legislature, recognizing the delay in processing local approvals (some of which was caused by environmental disasters and other forces that nobody drafting MAUCRSA probably anticipated), created a new kind of “provisional license” to be issued through 2020, which is similar to the temporary license but will last longer. This could have been a saving grace for applicants who were delayed by phasing or other local issues into late 2018. However, the legislature expressly required that an applicant for a provisional license had to have obtained a temporary license at some point in 2018. In other words, the provisional license scheme really only benefits those who were already first in line in 2018.

Separate from these licensing issues, the regulations have undergone numerous and drastic changes many times in 2018. For example, in October 2018, the Bureau of Cannabis Control (“BCC”)—which regulates distributors and retailers, among other things—issued modified proposed regulations that seemed to ban many IP licensing agreements and vastly broaden the ownership definitions in requirements in a manner unlike the other California cannabis regulators. It appears that some of these expansions may have been drawn back in subsequent proposed final regulations. But these many rounds of proposed or emergency regulations have imposed a lot of stress on applicants already under the stress of the foregoing application process.

This is only a short post and we can certainly point out many more areas in which the cannabis industry in California undergone growing pains this year.  We intend to write soon about what 2019 will look like for applicants, but suffice it to say, for those who don’t have temporary licenses, there will be more delay.

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

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

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

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

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

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

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

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

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

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

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

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