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.

marijuana montana employmentMedical marijuana is legal in Montana. Unfortunately, that does not prevent local employers from terminating workers for legal, off-work use of marijuana in the state.

In 2010, while already employed by Charter Communications, LLC, Lance Carlson was issued a medical marijuana card under Montana Medical Marijuana Act to treat chronic low back and stomach pain. The medical marijuana card allowed Mr. Carlson to legally use marijuana to treat the conditions. In 2016, Mr. Carlson was involved in a work-related motor-vehicle accident. A urinalysis that followed the accident tested positive for THC. Mr. Carlson was promptly terminated as a result of the drug test.

Mr. Carlson initially brought suit against his former employer in Montana state court, alleging the former employer had wrongfully terminated him in violation of the Discrimination Under the Montana Human Rights Act— specifically, that his employer had discriminated against him because of a disability. The case was removed to Federal District Court. Charter Communications quickly moved for a motion to dismiss arguing that the Montana Marijuana Act allowed them to terminate Mr. Carlson for his medical marijuana use. Mr. Carlson appealed the decision to the Ninth Circuit.

The Ninth Circuit, in an unpublished opinion, upheld the district court’s dismissal. The Ninth Circuit specifically relied on the carve-out of Montana’s medical marijuana act that states employers are allowed to prohibit employees from using marijuana. Mr. Carlson challenged that exact regulation as unconstitutional. However, the Ninth Circuit determined it was constitutional because it was “rationally related to Montana’s legitimate state interest in providing careful regulation of access to an otherwise illegal substance for the limited use by persons for whom there is little or no other effective alternative…”

Given the general trend for acceptance of marijuana, the Ninth Circuit decision is disappointing, even though it is unpublished and therefore sets no legal precedent. However, the problem does not generally lie with the Ninth Circuit, but instead with Montana’s state law. Now is the time to lobby Montana officials to have the Montana Medical Marijuana Act revised to protect employee’s off-work medical marijuana use.

Montana is not alone in allowing employers to terminate employee for their legal off-work use of marijuana. Oregon, similarly, has a statute that does not require employers to accommodate employees’ off-work use of medical marijuana. Way back in 2010, the Oregon Supreme Court ruled that the statute prohibiting disability discrimination in employment does not protect medical marijuana users. Washington’s laws do not require employers to accommodate employee’s medical marijuana use either. Colorado, another state on the forefront of adult use legalization, still allows employers to terminate employees for medical marijuana use, too.

While Oregon and California have struggled to pass legislation protecting employee’s off-work medical marijuana use, other states have managed. These laws typically create a carve-out for employers who contract with the federal government and therefore are required to have a drug-free workplace. Federal legislators also have recently introduced legislation  to protect off-work marijuana use. Currently the bipartisan bill is stalled in the Oversight and Government Reform Committee.

I suspect eventually the states discussed in this blog post will catch up with the changing of the times, but until then, be aware that many states allow employers to terminate employees for their legal use of marijuana—medical or otherwise.

Editor’s Note: This blog post first ran on December 6. We are re-publishing it here because a platform glitch erased the initial publication.

california cannabis BCC

Today, the Bureau of Cannabis Control (BCC) published its Proposed Text of Regulations Submitted to Office of Administrative Law for review here. We are still in the process of reviewing everything, but there are enough ambiguities to cause us a good deal of concern, particularly with respect to IP licensing and contract manufacturing agreements.

We are also reviewing the BCC’s responses to comments submitted on the proposed regulations back in early November, of which there are about a thousand pages. We’ll be analyzing the regulations section by section and writing about all of the changes over the course of the next week.

Stay tuned.

marijuana bank fincen
Slowly but surely, it’s happening for canna businesses.

According to a recent report from the U.S. Treasury Department’s Financial Crime Enforcement Network (“FinCEN”), a growing number of financial institutions are willing to work with cannabis businesses. As of September 30, 375 banks and 111 credit unions were managing marijuana business accounts.

These numbers reveal a steady growth in the number of financial providers willing to engage with the cannabis industry, despite its federal illegality. The report confirms what our cannabis business lawyers have observed over the past few years in Washington and Oregon: namely, most of our licensed cannabis business clients in those states are banked, and it isn’t as hard as it used to be to acquire a basic merchant account. (California is a different story.)

Nationwide, though, most financial services providers have been reluctant to serve the marijuana industry for years, fearing the federal cannabis prohibition would trigger liability under money laundering laws. Earlier this year, many concluded that banks would refuse to associate with cannabis businesses following the decision by then-U.S. Attorney General Jeff Sessions to retract policy protections for licensed marijuana businesses from federal interference. However, the latest FinCEN report reveals that those fears were mostly speculative.

The American Bankers Association, which recently conducted a survey on the issues faced by banks that are serving cannabis businesses, is advocating for greater legal clarity to banks operating in states where recreational and medical cannabis has been legalized. Indeed, the guidelines currently used by the financial services industry are those published in 2014 by the FinCEN and could use an update given the continued ascendance of marijuana reform.

Several key officials of the Trump administration have also expressed the need to clarify cannabis banking issues. For instance, Treasury Secretary Steven Mnuchin stated in congressional testimony that he wants businesses operating in states where marijuana is legal to be able to store their profits in banks.

I assure you that we don’t want bags of cash … We do want to find a solution to make sure that businesses that have large access to cash have a way to get them into a depository institution for it to be safe.”

In June, Federal Deposit Insurance Corporation Chariwoman Jelena McWilliams explained that she instructed her staff to consider ways to address the banking issues, but that the agency’s hands were “somewhat tied” until federal law legalizes cannabis.

Support for clarification and for fixing marijuana banking problems also comes from the states. A few months ago, a coalition of the top financial regulators located in thirteen states asked Congress to take action to protect banks working with the cannabis industry.

In their letter, the regulators wrote:

It is incumbent on Congress to resolve the conflict between state cannabis programs and federal statutes that effectively create unnecessary risk for banks seeking to operate in this space without the looming threat of civil actions, forfeiture of assets, reputational risk, and criminal penalties.”

Finally, back in June, a bipartisan group of twelve governors urged lawmakers to pass the Strengthening the Tenth Amendment Entrusting States (“STATES”) Act, which proposed to amend the Controlled Substance Act to exempt state-legal marijuana activities.

This growing support for permanent protections of banks that serve cannabis businesses is a promising sign that legal reform is on its way. The newly formed Democratic House has expressed a strong desire to move cannabis legislation, including banking issues, in the new year. Only time will tell whether the Republican-controlled Senate will allow it.

shelf space california cannabis contract
Shelf space is a big deal right now in California cannabis.

With the roll out of the Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA“), our California cannabis attorneys see all kinds of agreements between and among licensees. From IP licensing to white labeling to distribution contracts, we’re beginning to see people emerge from the shadows and enter into written agreements with each other, which is undoubtedly for the best given the amount of litigation that already exists in the industry and given the amount of fighting that’s sure to come regarding commercial disputes. Lately though, what we’ve seen a lot of are “pay-to-stay” and slotting fee agreements between cannabis cultivators, manufacturers, distributors, and retailers. In these agreements, cultivators, manufacturers and distributors are locking retailers into contracts for dedicated, prime-time shelf space. The question, though, is whether such agreements are kosher in California and what you need to know to have a reliable, enforceable, pay-to-stay contract.

California is still pretty dynamic when it comes to contracts between licensees. Unlike other states, California hasn’t really broached the subject of massive restrictions on contracts between licensees (the lone exception is the most recent of proposed permanent regulations that attacked IP licensing and white labeling between licensees and non-licensees). Other states are very particular about licensees exerting undue influence over each other via contract when it comes to things like control, term, and the legitimacy of services/goods being provided to the licensee. Here in California, though, the following are pretty much the only contractual restrictions that exist between licensees in the marketplace:

A licensee shall not perform any of the following acts, or permit any of the following acts to be performed by any employee, agent, or contractor of the licensee:
(1) Make any contract in restraint of trade . . .
(3) Make a sale or contract for the sale of cannabis or cannabis products, or to fix a price charged therefor, or discount from, or rebate upon, that price, on the condition, agreement, or understanding that the consumer or purchaser thereof shall not use or deal in the goods, merchandise, machinery, supplies, commodities, or services of a competitor or competitors of the seller, where the effect of that sale, contract, condition, agreement, or understanding may be to substantially lessen competition or tend to create a monopoly in any line of trade or commerce.
(4) Sell any cannabis or cannabis products at less than cost for the purpose of injuring competitors, destroying competition, or misleading or deceiving purchasers or prospective purchasers . . .
(6) Sell any cannabis or cannabis products at less than the cost thereof to such vendor, or to give away any article or product for the purpose of injuring competitors or destroying competition . . .
In turn, licensees pretty much have free reign to contract for whatever they want for however long they want without fear of interference from state regulators (so long as such agreements basically don’t amount to anti-competitive behavior). In addition, in case you’re thinking that licensee contracts don’t matter, California already passed legislation ensuring that commercial cannabis contracts are indeed enforceable in state court so that no one is left holding the bag over some illegality defense to performance.
On to slotting fee and pay-to-stay agreements. When you walk into the grocery store, the retailer likely isn’t just arranging products by name or color. In fact, what’s likely going on is that certain shelf space for new products has been negotiated and paid for by a manufacturer. And with good reason. In commodities, especially saturated ones, face time with consumers isn’t great and margins can be really poor and the competition is vast. In California, only cannabis retailers can sell to the public, so it’s hugely important for wholesale and distributor licensees to have good placement on shelf space in dispensaries and on the retailers’ online menus. The slotting fee agreement essentially amounts to the lump sum fee the supplier pays to the retailer to reserve their sacred, strategic shelf space. The pay-to-stay agreement (which can be similar to the slotting fee) typically takes things a step further where it’s instituted after the initial slot and addresses issues for existing products like marketing, promotion, inventory stocking, failure fees, and paying extra to ensure that your competitors don’t get any valuable shelf space near you or at all.

What should go into these contracts? Like any other agreement, if you’re the supplier, you want to fully articulate exactly where your placement will be in the store, how often that placement occurs, your inventory schedule, what happens in the event you cannot deliver on the inventory, what happens if no one wants your product despite its placement, what happens if the retailer (for its own benefit) wants to place another, better performing product in close proximity to yours, and the list goes on and on. Suppliers of cannabis in California should not be paying robust slotting fees to retailers willy-nilly. Even though retailers have a lot of leverage where there are still so few of them and because they’re the only licensees with a daily, face-to-face relationship with the public, if you are a supplier of a recognized brand (or even if you’re consistent with product potency and quality assurance testing), you still have some leverage where many cannabis consumers are still coming to the marketplace trying to decide what they like. The other reason cannabis suppliers shouldn’t be paying super high slotting fees is because the contract could be invalidated not because of the cannabis aspect, but because it’s anti-competitive in nature.

You’ve probably already concluded that the companies that can afford the highest slotting fees are the ones who will make it to the shelves of cannabis retailers in California. And you’re likely not wrong since retailers also have to financially survive in this newly regulated marketplace and slotting fee agreements certainly help to allocate the risk on what products to buy and re-sell (or not). In addition, the bigger cannabis brands may not even face the prospect of these contracts from retailers because the retailers desperately want to carry on them on their shelves anyway. That begs the question then of whether slotting fee agreements and pay-to-stay contracts are actually anti-competitive in violation of MAUCRSA. There’s no doubt that they certainly could be if retailers band together and start to create extremely high, universal slotting fees. Or if suppliers decide to lock up entire dispensaries. The upside, though, can be that retailers are actually more willing to take on new products since they shift liabilities for their failure back to the supplier, the slotting relationship makes product distribution more efficient, and consumers can benefit from lower prices where the retailer can better allocate its risk on investing in the presentation of new products. In any event, state regulators have stayed silent on this practice for now (although the FTC, the sleeping giant of the cannabis world, has debated the subject a good amount).

The bottom line? Unless and until regulators squarely address it or suppliers start to sue over the practice, if you’re presented with or need a fee slotting agreement or a pay-to-stay contract, make sure that you check the box on the details of the relationship. Make sure, too, that you’re avoiding anti-competitive terms and conditions if you want to make hay in California.

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.

cannabis marijuana scams
DON’T BE THE MOOCH.

This morning when I went to the gym before work, I put on an NPR podcast that delved into the story of the FTC’s bust of David Diamond. Diamond is an infamous Angeleno who defrauded hundreds of people via telemarketing scams. In the podcast, the interviewee does a great job of explaining the common scammer term, “mooch.” A mooch is, according to the podcast, “… someone who will essentially buy anything from anybody who calls [them] on the telephone.”

This got me thinking about the ideal marijuana mooch since so much fraud and bad behavior is rampant in the national marijuana marketplace. We’ve covered multiple marijuana scams here, here, and here (and have written about fraud and important red flags (and red herrings) in the industry multiple times in this past).

This time however, I want to dedicate this post to the top 5 red flags of which a marijuana mooch should be aware:

1.  Anyone who tells you to invest in cannabis at all costs because you might “miss the boat.”

News flash–big alcohol, big tobacco, and big pharma are not active in the U.S. cannabis space. Even though they may be thinking about it and may have future plans for it (and even if states may already creating “Big Marijuana” interests), there’s not one single U.S. cannabis company (that actually traffics in cannabis under state licensing laws) that’s tied officially or legitimately back to these big business interests. Normally, the mooch hustle is “You’re going to miss this once in a lifetime opportunity with cannabis since the bigger companies are flooding the space already, so you better invest all you have now, now, now.” Utilize your judgment to understand that this statement is not only overblown, but it’s untrue, and the source of the information is seriously suspect, even today. In any event, before you invest cannabis, which is an extremely volatile prospect, do your homework and determine whether there’s real value at the end of the elevator pitch.

2.  Marijuana penny stocks. 

Stay away from most marijuana penny stocks. As both we and the SEC keep pointing out, many (but not all) publicly traded cannabis companies are vehicles for investor fraud. As we have written before:

It almost seems that publicly traded stock companies are more focused on selling their stocks than on competing in the market. The herd mentality of investors seems to encourage this. Here’s how that basic logic works: Marijuana is booming. Therefore, marijuana businesses must be booming. In turn, all marijuana businesses must be booming. Therefore, I need to invest in a marijuana business. The only way I can easily invest in a marijuana business is to buy the stock in a publicly traded marijuana business. And so the stocks just keep booming.

All of which leads to pump and dump scams where “the group behind the scam increases the demand and trading volume in the stock and this new inflow of investors leads to a sharp rise in its price. Once the price rise has formulated, the group will sell its position to make a large short-term gain.” Pump and dump scams with publicly traded marijuana companies are still quite popular, especially as more and more states have legalized and “medicalized.”

3.  Marijuana franchises. 

Most marijuana franchise “offers” are just plain garbage because they fail to account for all of the reporting, registration, and disclosure requirements required by federal and state franchise laws and regulations. Franchising is governed by FTC and various state agency rules. Because of the state and federal law conflict with cannabis, franchising a cannabis business is a very risky proposition, and we are finding that most cannabis “franchisors” are not providing their potential “franchisees” with nearly enough risk disclosures to really inform franchisees and their investors what they’re getting themselves into at the end of the day.

4.  Marijuana reverse mergers (ESPECIALLY CANADIAN ONES).

Seems like everyone and their mother is trying to accomplish a Canadian reverse merger in the U.S. cannabis industry. Reverse mergers are a relatively fast, cheap and easy way for a private company to “go public” without having to go through all of the SEC reporting, disclosure, and registration requirements required by a standard initial public offering. Just like penny stock fraud though, reverse merger stock fraud is nothing new. In the typical reverse merger transaction, a privately operating company seeks to acquire controlling shares in an already publicly traded company with the goal of acquiring the public company’s listing. In the reverse merger scam, the underlying publicly traded company is usually just a shell company with little or no assets or positive business history. Because the underlying publicly traded shell has no assets, no real management base, and oftentimes no business at all, the whole point of these scams is to acquire investors and raise capital based on pumped-up stock statistics, prices, and claims before everything eventually goes bust. These scams tend to involve the same subset of marginal accounting and law firms that assist by securing IRS and SEC reporting delays. Like anything else, if you’re looking at acquiring stock in a reverse merger company, do your due diligence and know the red flags.

5.  Marijuana crowdfunding.

Back in May of 2015, the SEC released new crowdfunding rules designed to let the small fry swim with the sharks. As of May 16, 2016, companies were able to solicit $2,000 from anyone (and more in many cases) in exchange for an equity stake in their business. Companies can now raise up to $1 million annually through these offerings, which fall under Title III of the 2012 JOBS Act. As we have written before, the SEC does not care whether your business is a pot business, so long as you follow its offerings rules. Though the SEC’s rules for crowdfunding advertising are incredibly strict, we know there are a wind of crowdfunding cannabis companies seeking to skirt these new rules to the detriment of investors and mooches.

Don’t be the marijuana mooch! For more on cannabis scams, check out the following:

As we wrote on Tuesday, the midterm elections were monumental for cannabis: Michigan voters approved of a proposal legalizing recreational marijuana for adult use, Utah and Missouri will soon establish medical marijuana regimes, and Texas Representative and marijuana antagonist Pete Sessions lost to a Democrat.

All in all, Tuesday was a good day at the state and national level. But cannabis wasn’t just on the ballot at the state or national level—many cities had measures on that would regulate cannabis in one form or another. This post discusses some of the more impactful ballot measures that won and lost in California.

california elections cannabis marijuana

To start, dozens of cities and counties in California had cannabis taxation measures, which is a good sign for the expanding market. Oakland voters, for example, approved of Measure V, which amends the local code to allow cannabis manufacturers and cultivators to deduct the value of raw materials when calculating gross receipts for tax purposes. Fresno voters approved of Measure A, which adopts a cannabis business license tax. As noted above, numerous cities had tax measures on the ballot—and they are quite literally all over the map.

El Dorado County had a number of cannabis measures on its ballot. Measures P, Q, R, and S each passed, allowing the retail sale, delivery, distribution, and outdoor/indoor cultivation of commercial cannabis for recreational and medicinal purposes. Interestingly, El Dorado County’s Measure N (a tax measure), didn’t pass.

Los Angeles County’s well-publicized Measure B, which would have established a municipal bank, failed. This was a closely watched measure in the cannabis industry, as many had hoped for a local bank in which to bank their earnings. Because the California effort to charter a state bank has cooled, local businesses may have limited options until a federal fix occurs.

Elsewhere, the City of Malibu passed Measure G, which will now allow retail sales of commercial cannabis and deliveries. Before, Malibu only allowed medicinal sales. But wait before delivering into Malibu from other cities; you’ll need a regulatory permit from the City of Malibu to do so. No word yet on what that application process will look like.

As noted above, these are just a few of the measures that were adopted (or not) on Tuesday. California, like many other places nationally, is certainly moving toward a more open marijuana landscape.

 2018 marijuana cannabis midterms michigan utah missouri

Today was a stellar day for marijuana advocates around the country. Not only did a handful of states authorize legalization of medical and recreational marijuana at the polls, but the Democratic Party took control of the House of Representatives, and one very problematic Congressman, Pete Sessions, was sent packing down in Texas.

Below is a summary of the big changes nationwide, with many of these results still firming up at the time of writing. Note that this post does not detail some of the “smaller” local developments, such as decriminalization in certain Ohio cities, enthusiasm for cannabis by Wisconsin voters, or many other positive developments ushered in by this evening’s voting.

Michigan

Congratulations to the Wolverine State, which voted to legalize adult use (recreational) marijuana statewide. Individuals who are at least 21 years of age will be permitted to possess and use marijuana and marijuana-infused edibles, and grow up to 12 marijuana plants for personal consumption (that’s quite a bit). Permitted retail sales will be subject to a relatively modest 10% tax. Per state law, ballot initiatives take effect 10 days after results are certified, which can take up to three weeks from yesterday. So, legalization should take effect by the end of the year. Michigan is the tenth most populous state in the nation, and the first Midwestern state to legalize cannabis– which is a big deal. (Yes, Michigan is a part of the Midwest.)

Missouri

Missouri is another Midwestern state to make giant strides on cannabis, legalizing medical marijuana statewide. Missourians reviewed three medical cannabis legalization measures on the ballot: the one that passed is known as Amendment 2. Amendment 2 is an impressive entrée into legalization for a couple of reasons: first, it actually amends the state constitution to allow medical cannabis; and second, it contemplates a licensing program extending far beyond decriminalization, to state licensure for cultivators, manufacturers, testing labs and dispensaries. Under the new regime, qualified patients with physician approval will be allowed to receive cards for any condition the physician sees fit. There will be a 4% tax on retail transactions. Of the three initiatives on Missouri’s ballot, this one was the best.

North Dakota

Alas, North Dakota failed to move beyond the confines of its medical marijuana program. Measure 3 would have allowed people 21 and older to possess, use, grow, buy and sell marijuana for recreational purposes, and it would have expunged previous cannabis convictions from criminal records. Stepping back, Measure 3 was an odd initiative in that it failed to include any language regarding regulation or taxes. Apparently, the idea was to let the legislature figure that part out, but Measure 3 advisers may be kicking themselves for that strategy today.

Utah

Like North Dakota, Utah is a fairly conservative state. In keeping with that ethos, Utah passed a fairly conservative ballot measure last night to legalize medical marijuana – but passed it nonetheless. Proposition 2 allows qualified patients with physician approval to a purchase two ounces of medical marijuana in any two week period, or products containing 10 grams of CBD or THC. Curiously, smoking medical marijuana isn’t allowed. To the good, patients who live more than 100 miles from a dispensary will be able to cultivate 6 plants at home, and there will be a caregiver program. The state will issue licenses for cultivation, processing, testing and dispensaries.

In all, Proposition 2 had a very interesting backstory, such that today’s legalization of medical marijuana in Utah was something of a fait accompli. You can read about that here.

Congress

Democrats took back the House of Representatives last night, which is great news for federal legislation prospects. Although cannabis is not a distinctly partisan issue these days, most progressive cannabis legislation tends to come from the House, and the prospects of moving marijuana legislation are far superior today than yesterday. The fact that the Senate is still solidly Republican is not ideal for federal legalization, but the prospect of compromise legislation on everything from decriminalization to banking to taxes — to say nothing of issues like industrial hemp — is better than ever.

Pete Sessions (“Prohibition Pete”)

This one could probably fall under the “Congress” paragraph above, but it’s a significant enough development to merit special mention. Back in March, I had fun writing about how Pete Sessions was almost single-handedly blocking cannabis reform, including bipartisan proposals, from his perch as Chair of the House Rules Committee. Well, Pete lost yesterday. This means that the undemocratic nonsense of blocking floor votes on issues that both parties want to vote on, is likely over. This development will probably be under-reported given everything else that occurred today, but it’s huge.

All in all, voters across the U.S. once again expressed their desire to do away with prohibition on November 6. This morning, 33 states and the District of Columbia have laws broadly legalizing marijuana in some form. The President may be open to reform, and we expect industrial hemp to be legalized within a couple of months. Interestingly, the U.S. has also found itself in a marijuana sandwich of sorts, between Canada’s recent federal legalization and Mexico’s imminent legalization. But that’s a story for another day.

For now, cannabis reform advocates should rejoice: Voters rejected prohibition in many places, nationwide.

los ángeles california medical dispensary licensing
Certain L.A. dispensaries may soon be stuck in place.

Los Angeles’s existing medical marijuana dispensaries (“EMMDs”) under Measure M will soon be precluded from relocating from their current operations unless and until they receive their local annual licenses from the City of Los Angeles. Movement post-initial application to L.A. has been a common practice for  EMMDs for some time, and has apparently caused a rift with other potential commercial cannabis licensees who were effectively “zoned out” based on buffer requirements when an EMMD moved into their planned licensed territory (non-EMMD storefronts have to be no less than 700 feet from each other). The new requirement goes into effect soon—but just how soon remains to be seen.

On October 19, 2018, the Los Angeles Rules, Elections, and Intergovernmental Relations Committee (the “Committee”) held a meeting which dealt with various cannabis-related matters. Shortly before the October 19 meeting, the Los Angeles Department of Cannabis Regulation (“DCR”) submitted a letter requesting amendments to the City’s cannabis procedures, which are codified in the Los Angeles Municipal Code (“LAMC”). The letter requested that the City Council instruct the DCR to stop processing EMMD relocation requests or amend the LAMC accordingly. The DCR is concerned with EMMD relocation requests because:

In certain instances, an EMMD has re-located to a business premises within 700 feet of a location a Phase 3 applicant has secured as a potential retail business premises. Because the City does not permit a Phase 3 retailer to be within 700 feet of another retailer, in those instances, the Phase 3 applicant must abandon the location it has secured and find an alternate location. As this re-location issue may impact the Tier 1 and Tier 2 Social Equity Applicants applying for retail licenses, DCR recommends that the City Council either instruct DCR to stop processing EMMD re-location requests or amend Sec. 45.19.7.2 of Article 5.1 of Chapter IV of the LAMC to prohibit EMMD re-locations as of January 1,2019.

In other words, EMMD relocations could create a block on real estate for potential other dispensary licensees, and based on the social equity program in the City (for more on social equity, see here), the City wants to make sure that phase 3 social equity retailers get a fair shot at a more static real estate situation.

Also on October 19, the Committee issued a report that requests that the City Attorney, working with the DCR, “prepare and present an Ordinance to amend [the LAMC] to prohibit future Existing Medical Marijuana Dispensaries re-locations prior to the issuance of an annual license, and instruct the DCR to cease accepting and approving new re-location requests while this ordinance is under consideration by the City Council.”

EMMDs whose local annual licenses are still under review will thus no longer be able to change locations (unless and until they get that annual local approval)—but the big question is when that will kick in. From the text of the report, the DCR will be instructed to cease accepting and approving new relocation requests while the to-be-drafted ordinance is under consideration. It does not look like the ordinance is yet under consideration, so relocation requests may still be processed by the DCR if you get in the queue now.

One other important issue is whether relocation requests submitted before the ordinance is passed can still be approved after the ordinance is implemented–meaning, is the ordinance going to be retroactive? The text of the report suggests that the DCR’s ban will be only for new relocation requests made after the ordinance is under consideration. That said though, it really depends on what the ordinance ultimately says in the end and whether the City Attorney and DCR decide to prohibit any already-pending relocation requests.

For now, stay tuned. We will be sure to provide updates on the EMMD relocation prohibition as it evolves.