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.

california cannabis licensing rulesThis past Friday, California’s three agencies charged with writing and enforcing cannabis regulations—the Bureau of Cannabis Control (BCC), the Department of Public Health (DPH), and the Department of Food and Agriculture (DFA)—made public their respective proposed final regulations, which are currently pending a 30-day review by the Office of Administrative Law before becoming law. Some of the most significant and controversial changes appear in the BCC’s proposed final regulations, which govern a variety of licensees such as retailers, distributors, testing laboratories, and microbusinesses, and which we will be writing about in the coming days.

As for the DFA, which issues and enforces rules for cannabis cultivators, the proposed final rules are substantially the same as the modifications the agency proposed back in October. While “substantially the same” might sound innocuous, it amounts to acceptance of the October modifications, many of which were significant. Below are some initial takeaways.

Cultivation license “stacking.” It looks like the “stacking” work-around for the acreage cap is going to be permanent. Remember the controversy surrounding the state’s decision not to limit accumulation of small cultivation licenses by a single licensee so as to essentially create a loophole to the 1-acre cap, to the benefit of big farms. However…

Shared facilities limitations. It also looks like the DFA’s proposed modifications regarding shared spaces between licenses are also going to be permanent, creating a challenge for license “stackers”. As we explained here, what the DFA was proposing (and which now appears likely to become final) was restricting the ability of a single licensee holding multiple licenses from being able to use shared facilities for its various licenses. And whereas the areas excluded from shared use under the October modifications included immature plant-growing areas, processing or packaging areas, and administrative holding areas, it looks like we can now add to that list areas used for storage of harvested cannabis, which is an item that was removed from the allowable list of shared usage areas this time around (although there is some ambiguity in how that particular regulation could be interpreted).

What this means overall is that things are going to be more difficult for licensees holding more than one license (especially of the same type), as they will now have to arbitrarily create various dedicated areas on the cultivation premises to serve each specific license, even if they’re the same kind of license with the same kind of operation in every respect.

Structures on site.  There is an interesting difference in the BCC proposed final rules compared to the DFA rules when it comes to the permanency of structures on the licensed premises. The BCC is aiming to require that all structures included as part of a BCC-licensed premises would have to be permanently affixed to the land, and this would specifically exclude things like shipping containers, mobile trailers, and non-affixed modular structured. We had suspected that the DFA might follow suit in its final proposed rules, especially because such structures are popular for cannabis farms, but it has not—no such explicit restriction appears in the DFA’s proposed final regulations.

Ownership, Financial Interests and Disclosure. There is also an interesting difference between ownership and financial interest holder disclosure requirements between the BCC and DFA proposed final rules. We previously wrote about how the BCC’s proposed final rules could sweep some landlords into the definition of “owner” or “financial interest holder” depending on the landlord’s relationship with the tenant. But another important difference between the BCC and DFA rules that we thought would be reconciled in the final rules but apparently will not be is the extent to which entities (as opposed to persons) that qualify as “owners” or “financial interest holders” of BCC licensee must undergo vetting and disclosure all the way up the chain of entity ownership, whereas there is no such explicit requirement for DPH or DFA licensees. We will be writing more on this specific difference in the coming days. Stay tuned.

california cannabis litigation
We see litigation in the California industry’s future.

Because California’s cannabis regulatory scheme is still in relative infancy, 2018 has looked the same for most operators: applying for annual licenses and waiting (and then continuing to wait) for them to issue or fighting to get temporary license applications submitted before they can no longer be issued. But what happens in two or three years after hundreds or thousands of commercial cannabis licenses have been issued? A host of administrative and civil litigation, probably.

California’s cannabis regulators have immense power that’s not just going to disappear after they issue licenses. The Bureau of Cannabis Control, which regulates a number of different license types, arguably has more police power than the actual police. Section 5800 of the BCC’s readopted emergency regulations, for example, gives the BCC “full and immediate access”, without prior notice, to enter premises, inspect cannabis or vehicles, and copy books and records, and failure of a party to comply with a BCC investigation can be subject to discipline.

Not only do the agencies have broad investigative power, but the subject matter of what they can investigate—all the various regulations that companies have to comply with—is immense. The regulators are not going to sit around and assume that licensees are following the law, the regulations, or even their own operational plans submitted with their applications—they are almost certainly going to use their investigative power to root out non-compliant operators. This should come as no surprise as the BCC, for example, has already taken some action against allegedly unlicensed cannabis operators. Our cannabis lawyers in other states with older licensing schemes have already seen targeted agency investigations and enforcement actions.

There are really endless ways that the agencies may choose to investigate or enforce their regulations, but it’s safe to say that they will prioritize enforcement against unlicensed operators. They may also go after some other easy targets—selling to underage persons, violations of advertising or delivery regulations, track-and-trace non-compliance, and so on. Rest assured, too, that administrative rules will continue to evolve, and licensed businesses that do not keep up on compliance will also be vulnerable.

Not only are the next few years likely to see an increase in administrative actions, but they are also likely to see a swath of civil litigation between licensees and internally. With the development of so much new technology and other intellectual property, we expect to see a good deal of trade secret and other IP litigation. Prop 65 and other forms of false advertising litigation are likely to continue as well. And internally, members of cannabis companies may start to bring lawsuits against each other or their companies for a number of reasons—from simple things like alleged mismanagement of company assets to fraud in soliciting investors.

The future of the California cannabis industry isn’t entirely certain, but it’s likely going to involve a lot of time before arbitrators, judges and other dispute resolution officiants.

california cannabis lease
May be required of certain California cannabis landlords.

We’ve previously written about some of the pitfalls for landlords to avoid when leasing to commercial cannabis tenants in California. We’ve also written about how the state’s recently proposed modifications to its final cannabis regulations could affect licensees and the industry writ large (see here, here, and here). The comment period for those rule changes is now over and we expect to see final rules from the state agencies within the next couple of weeks. This post focuses on a few examples of how those proposed modifications would affect cannabis landlords specifically.

One of the biggest proposed changes in the new rules has to do with who qualifies as an “owner” or a “financial interest holder” of a cannabis licensee that must be disclosed and vetted as part of the cannabis operator’s license application. Under the current proposed final rules and existing statutes, all “owners” of a cannabis business licensee must be listed in a licensee’s annual license application, including each owner’s contact information, social security number and tax identification number, employment information, disclosure and description of all past convictions, and a live scan fingerprint analysis for a background check with the Department of Justice. All “financial interest holders” in a licensee business must also be disclosed, though disclosure requirements are lesser than for owners and vary slightly across agencies, ranging from a simple list of financial interest holders to the name, and type and number of government identification for individuals; business name and tax ID for entities.

Under the most recently proposed rule modifications, a “financial interest holder” in a cannabis licensee such as a retailer, distributor, testing laboratory, or microbusiness would now include “[a] landlord who has entered into a lease agreement with the commercial cannabis business for a share of the profits.” And if that agreed share is 20 percent or more of the tenant’s profits, then the landlord would qualify as an “owner” of the cannabis licensee. (Landlords already qualify as “owners” under prior versions of the rules if they own 20 percent or more of the cannabis tenant business).

While we have previously written about the problems associated with landlords entering into anything other than an arms-length relationship with cannabis tenants for payment of rent in exchange for leased space, you can now add to that list the regulatory burden of disclosure and vetting of the landlord. However, if the landlord is an entity such as a holding company or an investment fund, the disclosure burden is amplified exponentially: if an entity landlord is an “owner” or a “financial interest holder” in certain kinds of cannabis licensees, then the same disclosure requirements apply for various layers of ownership to all individuals and entities that are owners or financial interest holders in that landlord entity, along with board members, CEOs, etc., all the way up the chain until only individuals remain.

What this means is that if cannabis landlords agree to accept a share of the tenant’s profits in lieu of rent—and this is not an uncommon arrangement especially for smaller or undercapitalized cannabis tenants—the landlord and its owners and investors could unknowingly be exposing themselves to unexpectedly high burdens of regulatory disclosure and vetting that would not normally apply if the tenant was anything other than a cannabis licensee.

It remains to be seen what the state agencies’ final rules will look like, especially in light of the widespread effect such disclosure requirements would have on investment in the cannabis industry in California, but in the meantime landlords considering profit-sharing arrangement with their cannabis tenants would be wise to consider the full regulatory implications of doing so, even if on an anticipated basis during pendency of the rulemaking process.

For more on California cannabis leasing, check out the following:

oregon marijuana OLCC report
Pretty good report for licensed Oregon producers.

On Monday, the Oregon Liquor Control Commission (“OLCC”) released results of enforcement inspections of recreational marijuana producers, which indicate that the majority of inspected licensees are in compliance with Oregon laws and the OLCC rules.

“Operation Good Harvest” was a saturation compliance effort that focused on Oregon’s fall 2018 legal outdoor cannabis harvest. OLCC inspectors were in the field for the past two months and conducted 354 inspections across the state, with an emphasis on southern Oregon, a hotbed of marijuana production, accounting for more than a third of the recreational marijuana licenses in the state.

The OLCC inspected a total of 354 outdoor producer licensees and found that 259, or 73 percent of them did not have any “deficiencies” nor were they likely to commit potential violations. Of the 95 licensees with deficiencies, 41 have potential violations that could lead to the cancellations of their license, which roughly represents 12 percent of the outdoor producer facilities inspected. A more comprehensive overview of the inspection results is as follows:

Region

Inspections Licensees with Deficiencies Compliance Rate

Possible License Cancellations

Statewide

354

95

73%

41

Bend

11

5

55%

2

Eugene

44

9 44%

5

Medford

167

43 74%

22

Portland Metro

102

33 68%

11

Salem

30

5

83%

1

The inspections reflect our agency’s effort to prevent diversion from Oregon’s legal cannabis market, and we’ll continue compliance activity across all license categories to maintain the well-regulated market that Oregonians expect”, declared Steve Marks, OLCC Executive Director.

The results of Operation Good Harvest demonstrate that the OLCC continues to take steps to corral Oregon’s overproduction of marijuana by taking a tougher stance on rule violations by licensees. (For some background on this administrative policy progression, we have recently written about OLCC’s recent “tightening up”, from application scrutiny through dealing with non-compliance.)

The result of Operation Good Harvest also seems to reinforce the fact that the surplus of marijuana in our state does not generally emanate from cannabis grown and produced by OLCC licensees, despite earlier reports to the contrary. Instead, illegal export tends to stem from unlicensed grows and from poorly regulated, quasi-commercial systems like the Oregon Medical Marijuana Program.

As far as the violations actually turned up by OLCC inspections in Operation Good Harvest, the most common deficiencies pertained to issues with cameras and surveillance coverage. Other common violations included:

  • Data in the Cannabis Tracking System (METRC) not matching plants or product found on the licensed premises;
  • Marijuana plants not tagged and entered into METRC;
  • Failure to provide the OLCC with harvest notification information;
  • Making unapproved alterations to the licensed premises; and
  • Using scales not approved by the Oregon Department of Agriculture.

The agency is currently investigating licensees for alleged violations and will decide how to charge these license holders once its investigations are complete. Any licensees whose license will be revoked will be entitled to challenge the OLCC charges through the State of Oregon’s Administrative Hearings process However, the final decision on any charges will be made by the OLCC Commission.

Operation Good Harvest produced promising results, showing that Oregon continues to be a leader in regulating cannabis, and that this nascent industry is slowly but surely finding its equilibrium.

california cannabis licensing raceUnless you’ve been completely out of the loop, you already know that many, many people are in a race to submit their California state temporary cannabis license applications before December 31 of this year, which represents the “drop dead” date for cannabis temporary licenses. Add to that the regulatory curve balls thrown by the California Department of Food and Agriculture (CDFA) and the California Department of Public Health (CDPH) at the end of October (those agencies moved up the their temp licensing submission deadlines to December 1) and you have a stampede of people now trying to get their temporary license applications in by the end of this month. Thankfully, the Bureau of Cannabis Control (BCC) hasn’t yet said that there’s a low chance of successful processing if you submit after December 1, but given the back and forth it takes with the BCC to even get the temp, you may be out of luck.

Why does all of this matter? If you don’t have, or haven’t held, a temporary license for your current cannabis location (which is good for 120 days and gets renewed for additional 90 day periods so long as you’ve applied for your annual cannabis license), you’re ineligible for a provisional license next year, which means you’ll be on ice and non-operational unless and until you get your state annual license. No one really knows how long that will ultimately take.

If you’re finding yourself scrambling to get a temp license in before December 1, you’re not alone. The biggest roadblock of all has been would-be licensees securing local approval from their cities or counties. Certain local governments, though (like Long Beach, the City of Los Angeles, and San Diego) are obliging folks in their local licensing processes by providing them with letters of authorization. These letters of authorization only allow the applicant to go and apply for their state temp license(s)–they do not allow an applicant to actually open their doors until all conditions of official local approval have been met. That’s only half the battle though. Then you have to complete and submit your state temporary license applications, which depending on agency, is no picnic.

All three agencies will ask that you submit proof of local approval from your local government when applying for the temp license. They then contact the local government to verify local approval and the local government has no less than ten days to respond. By far though, CDPH has the simplest and easiest temporary license application. It’s literally one page, and you email or mail it to the agency. And you don’t have to submit even a lease agreement or a premises diagram either. Contrast that though with the BCC and the CDFA, which are a little more intense– especially since the re-adoption of the emergency regulations, which tweaked the temporary license submission requirements for those agencies.

For BCC (for which you must have an online account and then submit online or via hardcopy in Sacramento), you have to submit:

(1) The legal business name of the applicant; (2) The email address of the applicant’s business and the telephone number for the premises; (3) The business’ federal employer identification number; (4) A description of the business organizational structure of the applicant, such as partnership or corporation; (5) The commercial cannabis license that the applicant is applying for, and whether the applicant is requesting that the license be designated as medicinal, adult-use, or both; (6) The contact information for the applicant’s designated primary contact person including the name, title, phone number, and email address of the individual; (7) For each “owner” of the business, the owner’s name, title, percentage of ownership, mailing address, telephone number, and email address if applicable; (8) The physical address of the premises to be licensed; (9) Evidence that the applicant has the legal right to occupy and use the proposed location (that meets all mandatory buffer requirements); (10) A detailed premises diagram; (11) A copy of a valid license, permit, or other authorization issued by a local jurisdiction, that enables the applicant to conduct commercial cannabis activity at the location requested for the temporary license; and (12) a penalty of perjury statement.

For CDFA (for which you must also have an online account and then submit online or via hardcopy in Sacramento), you have to submit:

(1) The license type for which the applicant is applying and whether the application is for an M-license or A-license (note that CDFA still forces people to apply separately for M and A licenses even though those license type designations have since been combined); (2) If the applicant has already submitted an application for annual licensure, the application number; (3) The legal business name of the applicant entity; (4) The full legal name, mailing address, phone number, email address, and affiliation of the “designated responsible party,” who must: (A) Be an owner with legal authority to bind the applicant entity; (B) Serve as agent for service of process; and (C) Serve as primary contact for the application; (5) The physical address of the premises; (6) Copy of local approval; (7) A proposed cultivation plan; (8) Identification of all the following water sources for the cultivation site (as applicable): (A) A retail water supplier; (B) A groundwater well; (C) A rainwater catchment system; (D) A diversion from a waterbody or an underground stream flowing in a known and definite channel; and (9) Evidence of enrollment with the applicable Regional Water Quality Control Board or State Water Resources Control Board for water quality protection programs or written verification from the appropriate board that enrollment is not necessary.

Where are most people going to get screwed up here? Without a doubt, with the BCC it is the premises diagram and the proof of “right to real property” (I.e., your lease agreement). With CDFA, it’s going to be the cultivation plan, identifying water sources, and proof or registration or exemption with the applicable water boards. And many people don’t realize that the cultivation plan, itself, demands the inclusion of a detailed premises diagram, lighting diagram, pest management plan (for which you better have a good amount of knowledge regarding lawful and illegal pesticides and their applications), and waste management plan. All of this is not an insignificant amount of information to compile.

While folks are in the race now to get that initial (and very important) temporary license, there will be another push for these folks prior to the expiration of that 120-day validity period on the temp license where provisional licensing also requires that you have submitted a complete annual license application to the state, which will be another massive information gathering expedition about your cannabis business and how it operates. Undoubtedly, many would-be licensees are going to be out of the game if they don’t get their temps in on time, so stay tuned with updates as the California cannabis regulatory world turns.

OLCC oregon violation license
Recommended compliance level for Oregon licensees.

A couple of months ago, the Oregon Liquor Control Commission (OLCC), for the first time, rejected a settlement offer from a licensee who had violated OLCC rules. At the time, we speculated the OLCC was done with settling and moving towards stricter compliance requirements. It seems, along with more stringent review of applications, the OLCC is doing exactly what we predicted and either rejecting settlement agreements or negotiating tougher settlements that result in licensees voluntarily giving up their licenses.

On September 21, the OLCC approved an administrative law judge’s (ALJ) order to temporarily suspend the marijuana license of the Corvallis Cannabis Club. Typically, a licensee is allowed to continue to operate as normal after receiving a charging document from the OLCC pending the outcome of a settlement or hearing. However, the Corvallis Cannabis Club was under investigation from the federal DEA and the OLCC agreed with the ALJ that a temporary suspension was necessary.

That same day, the OLCC also cancelled High Cascade Farms license after determining the licensee had violated 13 OLCC rules including transporting marijuana to an off-site location and intentionally misrepresenting to the OLCC what happened to the plants.

On October 26, 2018, the Oregon Bud Works agreed to surrender its license to the OLCC after committing 10 OLCC rule violations including changing the licensed premises without approval from the OLCC, failing to keep required surveillance video, and misrepresenting data in METRC.

I have spoken with several people at the OLCC recently about these developments. They all have the same message: now more than ever, it’s time to ensure compliance with the rules. The OLCC believes there has been sufficient time since legalization and the rules have rolled out for licensees to understand and abide by the rules. They are no longer willing to consider settlements that allow licensees to keep their licenses when there are multiple rule violations or especially egregious rule violations.

It unlikely that the OLCC will ever go back to reduced penalties for egregious violations or multiple violations. The agency seems less interested in teaching compliance at this point, than culling the herd. So what can you, an OLCC licensee do?

First and foremost, get familiar with the rules. Undoubtedly, the rules are expansive and overwhelming. They also change frequently. However, if you want to preserve your license, one of the most important assets you can have is a compliance person whose job it is to know the rules and ensure that your company complies at all times. On this point, make sure all of your employees are familiar with the rules, as well. The fact that an employee has a marijuana worker permit is not enough– your business is on the hook for any violation they may commit.

Second, when you have questions about whether a step or process is correct, specialized cannabis business attorneys are a great resource to assist. If you can have person dedicated to ensuring compliance and an attorney to help with interpretation when necessary, hopefully your licensed business will avoid a charging document from the OLCC. Those documents are looking more and more dangerous, and contesting them can be quite a process.