When California was getting ready to legalize adult-use and medically commercial cannabis sales on January 1, 2018, we all knew it would be a bumpy ride. Going from the collective, cooperative, and non-profit models that governed marijuana operators (and I use the term “governed” loosely) prior to 2018, to a robust regulatory regime that was going to keep the federal government on the sidelines (hopefully) and better serve the public and the environment was never going to be easy.

When the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA) was enacted in June of 2017, it merged the Medical Cannabis Regulation and Safety Act (MCRSA) and the Adult-Use of Marijuana Act (AUMA) into one regulatory regime. Under MAUCRSA there are three state agencies responsible for regulating and licensing cannabis operators: 1) The California Department of Food and Agriculture (CDFA), regulates cultivators, processors, and nurseries; 2) The California Department of Public Health’s (CDPH) Manufactured Cannabis Safety Branch regulates cannabis manufacturers; and 3) The Bureau of Cannabis Control (BCC) regulates distributors, retailers, delivery-only retailers, microbusinesses, temporary cannabis events, and laboratories.

In November of last year, all three agencies released their emergency regulations and licensing requirements (which we covered here and here). Upon gathering input from the public and cannabis businesses, all three state agencies made changes to their emergency regulations and readopted them last month.

In both the initial and readopted regulations, cannabis businesses were provided with a transition period that allowed for exceptions from certain regulatory provisions. The goal of the transition period was to grant cannabis businesses with a period of less stringent regulations so that they could sell cannabis products that were already in their inventory. The cost of compliance is a steep one and the transition period was an attempt to soften the blow. The readopted regulations made a number of changes (which we covered here) but what they didn’t change is the transition period’s termination date. The transition period ends on June 30, 2018, so starting on July 1 (which is also Canada Day!) the following regulations will apply:

July 1 is almost here!
  • Untested cannabis goods cannot be sold by a retailer and must be destroyed, nor will a retailer will be able to send the untested cannabis goods for testing.
  • Untested cannabis goods manufactured or harvested before January 1, 2018, in possession of a distributor that are owned by the distributor will have to be destroyed.
  • Untested cannabis goods manufactured or harvested before January 1, 2018, in the possession of a distributor owned by a manufacturer or cultivator may be returned to them. The manufacturer or cultivator could then sell the returned cannabis goods after sending them to a distributor and they pass all of the testing requirements.
  • All packaging and labeling of cannabis goods must be properly performed before being transported to a retailer. This also applies to cannabis goods that were in a retailer’s inventory before July 1. The only exception is that a retailer will be able to affix “FOR MEDICAL USE ONLY” for medicinal sales.
  • Cannabis goods in a retailer’s possession that do not meet packaging and labeling requirements will have to be destroyed.
  • All cannabis goods must be in child-resistant packaging, only having exit or secondary packaging be child-resistant shall no longer suffice.
  • Edible cannabis goods may no longer exceed 10 milligrams of THC per serving and may not exceed 100 milligrams of THC per package.
  • Non-edible cannabis products shall not contain more than 1,000 milligrams of THC per package in the adult-use market.
  • Non-edible cannabis products shall not contain more than 2,000 milligrams of THC per package in the medicinal market.
  • All products sold by a retailer will have to meet the CDPH’s requirements for ingredients and appearance.

In the long-term, the end of the transition period will benefit the public as the cannabis goods consumed will have passed stricter testing requirements. However, come July 1, you can expect to see less inventory on retailers’ shelves as there will inevitably be a number of cannabis goods that cannot pass the stricter testing requirements. Cannabis businesses that have been planning for the expiration of the transition period regulations are going to be the ones with good compliance programs and they’ll be able to take advantage of a less crowded marketplace as less forward-looking operators struggle to adapt.

One major concern for the California cannabis industry is whether there are enough licensed laboratories to meet demand. The BCC has currently issued temporary licenses to approximately twenty-nine (29) laboratories and whether they have the capacity to test all the cannabis products supplied by cultivators and manufacturers will have a direct impact on how fast a retailer can restock their inventory. In the short-term, you can expect to see some steep discounts from retailers as they’re forced to unload all their marijuana products that they’d have to destroy if not sold by July 1. Be ready for longer than normal lines at your favorite cannabis retailer on June 30!

It’s no secret that the City of Los Angeles has struggled with implementing its commercial cannabis program under the Medicinal and Adult-Use Cannabis Act (“MAUCRSA“). The licensing of existing medical marijuana dispensaries (“EMMDs”) under Measure M has been a slow and opaque process, but Los Angeles is committed to the success of its cannabis program long-term and isn’t in any rush to act hastily when it comes to continued licensing by the Department of Cannabis Regulation (“DCR“) and Cannabis Regulation Commission. Indeed, just last week, the Los Angeles City Council adopted a handful of ordinances and made several recommendations to the City Attorney (and other City departments) to tighten, clarify, and technically fix its current commercial cannabis legislation. The amended regulations take effect on July 23, 2018.

Here are the major highlights:

  • Off-site Advertising. Ordinance No. 185607 addresses commercial cannabis advertising in the City. We now have a 700-foot distance buffer for any off premises advertising for “Cannabis, Cannabis Products, or Cannabis Activity” in any “Publicly Visible Location” from “any School, Public Park, Public Library, Alcoholism or Drug Abuse Recovery or Treatment Facility, Day Care Center, and Permanent Supportive Housing,” except for those advertising signs that are located inside the licensed premises (unless it’s a window sign), or if the advertising sign is on any “commercial vehicle used exclusively for transporting or delivering cannabis or cannabis products.” The distance buffer also doesn’t apply to “the display of public service messages or similar announcements cautioning against the use of Cannabis or Cannabis Products or that are designed to encourage minors to refrain from using or purchasing Cannabis or Cannabis Products.” However, this exemption won’t be used “. . .to permit an advertisement that purports to caution against the use of Cannabis or Cannabis Products when that message is conveyed in conjunction with the display of a logo, trademark or name used by any person or entity engaged in any Cannabis Activity for marketing or promotion of Cannabis or Cannabis Products.” Lastly, the 700-foot buffer is measured as the crow flies from the property line of the prohibited facility to the “closest visible edge of the advertising sign face of the off-site sign.”
  • On-site Advertising. Ordinance No. 185607 also tackles on-premises advertising. Only one on-site sign per street frontage is allowed. And that signage is included in the “maximum sign area” allowed for the property (this is in addition to any mandatory state signage under MAUCRSA). On-site signage is now going to be content controlled–you can only have the following information on the sign: “name of business; ‘logogram’ of business; and business’ address, hours of operation and contact information. Other than the foregoing information, no advertising for Cannabis or Cannabis Products shall be displayed on any sign in a Publicly Visible Location.” And here’s the list of all the fun signage you CAN’T utilize: Portable signs or sandwich signs located in the public right-of-way; Digital signs; Spinner signs; Monument signs; Illuminated architectural canopy signs; Pole signs; Marquee signs; Roof signs; Temporary signs; Moving signs and signs with moving parts; and Supergraphic signs.
  • Testing. Ordinance No. 185609 addresses quality assurance testing in that licensees won’t have to have their products fully tested “until 120 days after City licensure, or until required under State of California Code of Regulations Title 16, Division 42, Chapter 5, Section 5715, whichever is sooner, after which all cannabis goods shall be labeled and tested.”
  • Technical fix legislation. Ordinance No. 185608 is the first technical fix legislation for existing commercial cannabis regulations in L.A. Here are the need-to-knows:
    1. EMMDs that entered into a payment plan with the Office of Finance to become current on outstanding taxes owed will be considered fully paid up for priority licensure (which closed back in March).
    2. The Type 10 Delivery Retailer License has been deleted–Type 10’s under state law outright allow delivery anyway.
    3. Crimes that will bar you from applying from a license have been further amended to include: “A Person with a felony conviction for violating any State or local law involving violent crimes, sex trafficking, rape, crimes against children, gun crimes or hate crimes for a period of 20 years from the date of conviction or completion of a term of imprisonment, supervised release or probation imposed as a sentence for the conviction, whichever is later.”
    4. EMMDs can now be approved for the full type 11 distribution license (not just “self-distribution transport only”).
    5. Since the April 1, 2018 deadline for accepting “Non-Retail” priority applications has come and gone, the DCR’s new standard is that it will accept those applications for no more than 30 days after it opens that particular application window. There’s City-wide speculation that this window will open on July 1, but the City hasn’t made anything official yet.
    6. If a testing lab obtains and maintains an ISO/IEC 17025 accreditation, the DCR may issue temporary approval to the testing lab before completion of a pre-licensing inspection.

What is probably even more interesting than the foregoing is that the City Council also asked (based on a June 5th motion) that the City Attorney, in conjunction with the DCR and other City offices, prepare and present an ordinance to make the following additional changes to existing cannabis regulations:

  • Address and control cannabis management companies. The City proposed that “management company” be defined as “any person who participates in the management, direction or control of the operations of a business licensed to conduct commercial cannabis activity, or any person who participates in the management, direction or control of another person who participates in the management, direction or control of the operations of a business licensed to conduct commercial cannabis activity.” The City Council has also proposed that “a management company shall not hold equity ownership in the applicant licensee or have the authority to make major decisions impacting the corporate structure of the applicant or licensee or the license held by the applicant or licensee.” However, a management company would be able to “receive revenue or profit-based compensation, subject to limitations established by the DCR.” Of course, this would still make the management company a financial interest holder under MAUCRSA.

Social Equity Program applicants (“SEPs”) and regular licensees would also have to get written approval from the DCR before engaging with a management company. All SEPs and licensees would also have to disclose to the DCR all written agreements or contracts with a management company and all other documents the DCR requires to identify all persons who will act as the management company for the business premises. And if you can’t qualify for licensure from the DCR, the DCR may also stop you from acting as a management company. Or if you’ve violated any local or state cannabis laws, the DCR may also knock you out from acting as a management company to a SEP or licensee. SEPs and licensee will be responsible for all acts or omissions of its management company in connection with compliance with state and city laws. All management companies engaged in commercial cannabis activity within the City of Los Angeles would have to register and maintain appropriate records with the DCR. Finally, management companies would be limited to entering into management agreements for no more than 3% of commercial cannabis businesses within the City of Los Angeles, by license type. That percentage will increase 1% on July 1st of every year beginning in 2019 until a total of 7% is reached. Tier 1 and Tier 2 SEPs would be exempt from these management company license limits.

  • More clarity on the social equity program and allowing more flexibility for Social Equity-licensed businesses. Among other tweaks and additions, Tier 1 and Tier 2 SEPs would be able to apply for retail licenses under the 2:1 ratio already set by the City, and Tier 3 applicants won’t be able to apply for retail licenses. Tiers 1 through 3 applicants would though be able to apply for non-retail licenses under the 1:1 ratio set by the City. The City also wants to allow the DCR to license incubator projects with multiple licenses for the education, training, etc. for SEPs. The City also asked that SEPs be allowed to apply for licensure even if they do not have local land use authorization, but local land use authorization must be obtained prior to completing the licensing process. The City would also increase term of Social Equity Program agreements to five years, and would allow Social Equity-licensed businesses to terminate their agreement with the actual SEP after five years, all with the approval of the DCR. Interestingly, the City added that the Social Equity-licensed business would have the right of first refusal to buy out the SEP applicant (presumably at any time). The City is also planning to allow the Social Equity-licensed business to replace the SEP under certain criteria and conditions.
  • Taxes and Cannabis Reinvestment Act. The City Council also asked the City Attorney to draft an election “Ordinance and Resolutions” to place a ballot measure before the voters at the November 6, 2018 State General Election entitled the “Cannabis Reinvestment Act,” and that the ballot measure would, among other revenue captures, implement a one percent gross receipts tax on all commercial cannabis activity to be “reinvested in the community with all funds going to a newly created Cannabis Reinvestment Trust Fund” earmarked for various City items and groups.

Without a doubt in the coming weeks we’re going to see even more legislation from L.A. regarding amending its current cannabis regulations (with specific regard to its much-anticipated Social Equity program), and these forthcoming changes will also directly affect would-be licensees’ ability to pursue licensure in the long run in what may end up being California’s largest cannabis marketplace. So, stay tuned!

…all the way through the patent application process.

The cannabis industry relies on trade secrets and increasingly, patents, to protect intellectual property (IP) assets. Patents protect new and non-obvious inventions, including plants, processes, and machines, while trade secrets protect any information, including “patentable inventions,” that provide economic value to the holder if kept confidential. Accordingly, the same information could potentially be protected by patents or trade secrets.

Although patents and trade secrets are alternative protections, marijuana businesses should treat them as complementary to expand the lifetime of a trade secret disclosed in a patent application until the patent issues.

Patents afford the most powerful IP protection in that they provide their owner with a temporary monopoly to exploit her invention, including against those who independently discover the invention. In exchange for this temporary monopoly, the patent owner is required to fully disclose the invention to the public, so that once the patent expires, anyone may freely utilize the invention.

Generally, the disclosure of the invention occurs roughly eighteen months from the date of filing through a process known as “publication.” Publication does not grant the patent nor does it guarantee that the patent will be issued by the United States Patent and Trademark Office (USPTO). Instead, publication simply allows the public to examine the patent application while it is being reviewed.

The initial filing of a patent application does not immediately break the confidentiality of the trade secret disclosed in the application. The law requires the USPTO to keep all patent applications—with a few exceptions—confidential before they are published. Before publication, the trade secret will not lose its secrecy so long as the trade secret owner continues to take reasonable confidentiality measures.

At the end of the eighteen-month period, an applicant may extend the confidentiality of the patent application by avoiding publication. The applicant may do so by expressly abandoning the patent application, or by filing a request for non-publication (so long as the applicant does not seek patent protection in a foreign country). Maintaining an application as confidential as long as possible allows the applicant to delay the disclosure of its invention until the patent issues. In a highly fragmented and competitive market like cannabis, this can make a world of difference.

Once the USPTO decides that the patent application meets all the patentability requirements, the patent will issue in its final form. At that point, even an unpublished patent application inescapably becomes public and loses its trade secret protection. However, in return, the patent holder now has a patent that it can enforce against infringers. In other words, trade secret protection is no longer required.

So despite their significant differences, patents and trade secrets are closely intertwined and should be considered concurrently when applying for a cannabis-related patent. By keeping the patent application from becoming public for as long as possible, you can extend your trade secret protection until the moment the patent issues. That is a critical competitive advantage, especially in a rapidly developing industry.

For more on cannabis patents and trade secrets, check out the following:

bank marijuana cannabis
Banking is within reach for many cannabis businesses.

In my previous post, I wrote about avoiding the scammers that abound when it comes to cannabis banking. Because cannabis is federally illegal, getting a bank account has been very difficult for cannabis businesses even though the 2014 FinCEN guidelines (see here) allow financial institutions to provide banking services to cannabis businesses under certain circumstances — which guidelines are still alive despite Attorney General Jeff Sessions rescinding the Cole Memo. Ultimately, FinCEN makes clear in its guidelines that they “should enhance the availability of financial services for, and the financial transparency of, marijuana-related businesses.”

But what exactly should a cannabis business do to get a legitimate bank account with a real financial institution? Plain and simple, you make it as easy as possible for the bank or credit union to abide by the FinCEN guidelines. This means you do not lie about or omit anything regarding your cannabis business.

To even get to this point though, your cannabis business must be in a state with “robust regulations” that give its regulators the authority to tightly control and govern its cannabis industry. And not all states are created equal when it comes to this.

In states like Washington, Oregon, and Colorado, banking is made a little easier because those states have hardcore regulations ranging from financial and criminal background checking on all cannabis business owners to knowing every single dollar that comes into a given cannabis operation and its source. In medical cannabis states like New Mexico and Arizona, which are basically unregulated medical cannabis states, banking is non-existent.  And in California (where I am based), which still has relatively weak cannabis licensing rules (for example, there are no spousal vetting requirements for owners of cannabis businesses), it is still nearly impossible for a cannabis business to get a bank account and this is not likely to change until California tightens up on its licensing regime.

But if you’re in a state with robust cannabis regulation, here’s what you need to do and expect when pursuing a bank account under the FinCEN guidelines:

  1. Banks that follow the FinCEN guidelines do so in open violation of the Bank Secrecy Act (BSA). This is the case because they are directly engaging in money laundering because cannabis remains federally illegal and this is why virtually none of the really big banks (like Bank of America and Wells Fargo) will knowingly take on cannabis accounts. But for those banks that are willing to take on cannabis bank accounts, you need to be prepared to basically do whatever the bank tells you to do to secure that account because the bank will be the one to be held accountable to the federal government for violating the BSA.
  2. You should expect your bank or credit union to conduct comprehensive due diligence on your cannabis business – nearly always at your expense. This due diligence usually will include the following:

(i) verifying with the appropriate state authorities whether your cannabis business is duly licensed and registered;

(ii) reviewing your cannabis license application and other documents your cannabis business submitted to obtain its state license to operate;

(iii) requesting information about your business and its related parties from state licensing and enforcement authorities;

(iv) developing an understanding of the normal and expected activity of your business, including the products to be sold and the type of customers to be served (e.g., medical versus recreational customers);

(v) ongoing monitoring of publicly available sources for adverse information about your business and its related parties;

(vi) ongoing monitoring for suspicious activity, including for any of the red flags described in the FinCen guidance; and

(vii) constantly updating the above information.

  1. Don’t get frustrated with the bank or credit union over this mandatory due diligence. Your job is to fork over as much documentation as you can to demonstrate that you are licensed and in full compliance with state and local laws.
  2. The Cole Memo, though rescinded, still matters to FinCEN. Specifically, the FinCen guidelines state that “[a]s part of its customer due diligence, a financial institution should consider whether a marijuana-related business implicates one of the Cole Memo priorities or violates state law. This is a particularly important factor for a financial institution to consider when assessing the risk of providing financial services to a marijuana-related business. Considering this factor also enables the financial institution to provide information in BSA reports pertinent to law enforcement’s priorities. A financial institution that decides to provide financial services to a marijuana-related business would be required to file suspicious activity reports (“SARs”).” This means you should review the eight Cole Memo priorities and implement them in your business practices.
  3. Your bank will regularly file SARs on your business. A financial institution is required to file a SAR if it knows, suspects, or has reason to suspect that a transaction conducted or attempted by, at, or through the financial institution: (i) involves funds derived from illegal activity or is an attempt to disguise funds derived from illegal activity; (ii) is designed to evade regulations promulgated under the BSA; or (iii) lacks a business or apparent lawful purpose. Because commercial cannabis activity is federally illegal, SARs are a must in the cannabis banking world.
  4. The following SARs will likely apply to your cannabis business: (i) Marijuana limited SARs, which mean you are not violating state law or violating a Cole Memo priority; (ii) Marijuana priority SARs, which mean the bank believes you are violating state law or a Cole Memo priority; and (iii) Marijuana termination SARs, which mean the bank thinks you are a threat to its anti-money laundering systems under the BSA so it must end its relationship with you. All these SARs get sent to the federal government for possible investigation.
  5. Your bank will constantly monitor the financial activity of your cannabis business because it must do so under the FinCEN guidelines. Your bank will monitor everything from your deposits to your social media accounts to your ability to keep your license in good standing to ensure that you are complying with state laws and rules. Again, if you want to keep your bank account, you need to assist your bank with this continued due diligence.
  6. The FinCEN guidelines list various red flags banks must watch for. One of those red flags is using management companies or middlemen to secure your bank accounts. The FinCEN guidelines are clear that Cole Memo priorities may be violated if a “customer seeks to conceal or disguise involvement in marijuana-related business activity. For example, the customer may be using a business with a non-descript name (e.g., a “consulting,” “holding,” or “management” company) that purports to engage in commercial activity unrelated to marijuana, but is depositing cash that smells like marijuana.” Cash structuring, commingling of funds with an unrelated business, and “deposits by third parties with no apparent connection to the accountholder” are additional red flags. Pay attention to the FinCEN guidelines’ red flags list and strive to avoid them.

Securing a bank account will not be easy but it is possible if you are in the right state and you prepare and act accordingly. Though state public banking and cryptocurrency have been floated as ways to provide wider access to banking, the FinCEN guidelines are still the key for both cannabis operators and financial institutions. And that’s not likely going to change anytime soon.

Editor’s Note: This post originally appeared in an Above the Law column, also by Hilary Bricken.

“What do you do?”

When meeting someone for the first time this is a pretty standard ice-breaker. Usually the responses are pretty innocuous: “I’m in sales” or “I’m in IT”. But if you add “…in the cannabis industry” to those answers you’re bound to get a number of follow up questions. When I tell people that I advise businesses, investors, and ancillary service providers in the marijuana industry, without fail the first question that I get is “Aren’t you worried about the federal government?” I then go into discussion on the Rohrabacher-Blumenaur Amendment (formerly the Rohrabacher-Farr Amendment), the history of the Cole Memo (which although rescinded still plays an important role in banking), and the importance of complying with your state’s cannabis regulations. Lastly, I talk about the change in the national discussion and perception of the cannabis industry. Gone are the days of the “lazy stoner” stereotypes (although perhaps not for U.S. Attorney General Jeff Sessions). Instead we have sophisticated cannabis businesses providing products to a large and diverse section of America – with more and more states looking to legalize either medical or adult-use marijuana activities this year.

For those of us who follow cannabis bills in the U.S. Capitol and in our state legislative houses, it’s clear that there is momentum towards ending America’s shortsighted and draconian war on cannabis (we covered recent developments on the federal level here). While Republicans and Democrats in Congress can’t seem to agree on anything nowadays, support for individual states to regulate cannabis activities as they see fit for their constituents is one of the few areas where bipartisan support exists. Every day, more Republicans in Congress are signing on as sponsors to bills that will support the cannabis and hemp industries (we see you Mitch McConnell!). And now we can add to the list of cannabis supporting Republicans: President Donald Trump?

Could Trump actually point us in the right direction?

Just last week, the President, while boarding a helicopter for the G-7 summit in Canada, mentioned his support for what Senator Cory Gardner (R-CO) is doing. What exactly is Senator Gardner doing you ask? He, along with Senator Elizabeth Warren (D-MA), and Representatives David Joyce (R-OH) and Earl Blumenauer (D-OR), have introduced the Strengthening the Tenth Amendment Through Entrusting States (STATES) Act. You’ll recall that Senator Gardner didn’t take too well to A.G. Sessions rescinding the Cole Memo, so he vowed to block all Department of Justice appointments in return. After meeting with the President, Sen. Gardner put an end to his blockade (which we covered, here) when the President assured him that “he will support a federalism-based legislative solution to fix this states’ rights issue once and for all.” At the time of the meeting there was no agreement as to what the “federalism-based legislative solution” would look like. Today there is. Here’s a list of what the STATES Act would and wouldn’t do:

  • It would amend the federal Controlled Substances Act (“CSA”) so that the CSA would not apply “to any person acting in compliance with state law relating to the manufacture, production, possession, distribution, dispensation, administration, or delivery of marihuana.”
  • It would also amend the CSA so that the same exclusion would apply to persons acting in compliance with the law of a federally recognized Indian tribe within its jurisdiction.
  • It would deschedule industrial hemp from the CSA entirely.
  • It would make access to banking easier for cannabis businesses as state legal cannabis sales and transactions would no longer be considered trafficking.
  • It would not change the law in states that continue to criminalize cannabis activities.
  • It would not apply to any of the other substances identified in the CSA.
  • It doesn’t guarantee that President Trump will keep his word.

That last point isn’t actually written into the bill, but it’s the 800-pound gorilla in the room that no one can ignore. The President, to be polite, has had a tenuous relationship with the truth and keeping his word, so it’s far from certain that he will throw his support behind the STATES Act. An off-the-cuff remark before meeting with G-7 allies (or are they adversaries now?) does not constitute unwavering support. We’ll have to see more consistent and direct support from the President before we can feel confident that the STATES Act will become law. The President’s support is necessary because he’s still very popular with the Republican base and can therefore give recalcitrant Republicans in Congress cover if they’ve been cannabis opponents previously.

Let’s keep our fingers crossed that the North Korea Summit meeting goes well (who cares about cannabis legalization if nuclear war’s broken out?), that Congress pushes this one through, and that the President carries that high over to the STATES Act.

marijuana banking fraud california
“Offshore cannabis bank.”

Of the many issues that prevent cannabis businesses from acting like regular businesses, lack of access to banking is probably the most hindering. Since commercial cannabis activity remains a federal crime, the federal Bank Secrecy Act prohibits financial institutions from accepting cannabis-generated dollars. Most cannabis businesses therefore must operate on an all-cash basis. This makes them targets for actual criminals and helps further the need for access to a bank account.

This lack of bank access in turn creates desperation, which hucksters and fraudsters then prey upon. This post is dedicated to helping cannabis stakeholders avoid those who blow smoke about “marijuana banking.”

Because marijuana is still a Schedule I controlled substance, proceeds from cannabis sales trigger anti-money laundering laws for banks. The Bank Secrecy Act requires banks combat fraud and money laundering and protect against criminal and terrorist activity. Certain banking laws require that national banks and credit unions file Suspicious Activity Reports (“SARs”) with the Financial Crimes Enforcement Network (“FinCEN”), when the financial institution knows or suspects an account holder is engaged in or trying to cover up illegal activity. Consequently, banks routinely deny or shut down cannabis business bank accounts (and cannabis-based financing) even in cannabis-friendly states.

In 2014, new FinCEN guidelines for cannabis banking provided that financial institutions could provide services to state-legal marijuana businesses without running afoul of federal regulations so long as they do the following:

  • Verify with state authorities that the business is duly licensed and registered.
  • Review the state license application and related documentation the cannabis business used to obtain its state license to operate its marijuana-related business.
  • Request from the state licensing and enforcement authorities available information about the cannabis business and related parties.
  • Develop an understanding of the normal and expected activity for the cannabis business, including the types of products to be sold and the types of customers to be served.
  • Monitor publicly available sources for adverse information about the cannabis business and related parties.
  • Periodically refresh information obtained as part of customer due diligence using methods and timetables commensurate with the risk.

These guidelines are still in place, despite Attorney General Jeff Sessions’s rescinding of the 2013 Cole Memo, and the Department of Justice’s Guidance Regarding Marijuana Related Financial Crimes. Banks acting under the FinCEN guidelines must file SARs for all their marijuana businesses customers. There are no direct consequences arising from these SAR filings, but this means that the federal government knows exactly who is involved in the marijuana indusry and with whom they’re banking.

The FinCEN guidelines demand transparency and strict due diligence of cannabis customers. Because of this, in states like California that are just coming online with a regulated cannabis regime, there are a host of fraudsters who claim to have access to “marijuana banking,” when all they are really doing is opening bank accounts with shell companies and/or obscure offshore entities and then running cannabis operators’ money through those accounts. This clearly violates the FinCEN guidelines and it puts both the financial institution and the cannabis company at great risk. My firm’s California cannabis lawyers are seeing a lot of this in California, to the point that many cannabis companies are convinced that what they are doing is legal.

What are the specific red flags to look for if you’re being pitched on a “solution to the marijuana banking problem”?

  1. A refusal or inability to disclose the actual financial institution is the biggest red flag. There’s no reason why the financial institution that will hold your cannabis funds cannot be disclosed to you by the person pitching you. And any third party that’s telling you otherwise is probably illegitimate and not planning to operate in line with the FinCEN guidelines.
  2. If the third party does not discuss the FinCEN guidelines or the level of reporting you will need to do with your financial institution or the level of due diligence with which the financial institution will put you through, you are almost certainly dealing with a hack.
  3. Huge fees to third parties that are unrelated to opening a legitimate bank account. The third party will tell you that you need to pay them a large premium for them to get you a coveted bank account, but there is rarely any reason why this should be the case.
  4. Running money through various accounts and third parties that are supposed to be acting as wardens of your cannabis money without direct verification of a vendor relationship with the ultimate financial institution. The FinCEN guidelines don’t bar a bank or credit union from using third parties to provide account marketing or due diligence support, but full transparency between banks and cannabis customers is mandatory.
  5. Out-of-state bank accounts require significant caution. For banks and credit unions to comply with Fin-CEN, they need to have a due diligence system that is tailored to each specific state. Cannabis businesses need to verify not only that a bank is willing to take cannabis customers but also that the bank has the due diligence and cash handling resources to take customers in the specific state.

At least twice a week, one of my firm’s cannabis business lawyers will get contacted by an ancillary company trying to pitch us on referring our clients to them for “marijuana banking services,” claiming they’ve cracked the code on marijuana banking. We routinely ignore these solicitations and all cannabis stakeholders should do the same.

What then should you do to properly secure a legitimate cannabis bank account? I’ll cover that in my next post.

Editor’s Note:  A version of this post originally appeared in an Above the Law column, also by Hilary Bricken.

california marijuana cannabis

Whenever government enacts new regulations there will always be some people and businesses that will be unhappy with the new changes. So, it came as no surprise when California embarked on its mission to create a state licensing regime for cannabis businesses (as well as personal use) that issues would arise. What made enacting cannabis regulations in California so difficult is that ever since Californians voted for the Compassionate Use Act in 1996 (a/k/a Prop 215), cannabis cultivators, manufacturers, and dispensaries were operating without regulations in what everyone conveniently called the legal “grey” area (a Michael Cohen area of practice).

That all changed when the state legislature passed the Medical Cannabis Regulation and Safety Act (MCRSA) in 2015 and a majority of the good people of California voted in favor of the Adult Use of Marijuana Act in 2016 (AUMA). In June of 2017, California Governor Jerry Brown signed into law Senate Bill 94 (a/k/a the Medicinal and Adult-Use Cannabis Regulation and Safety Act a/k/a MAUCRSA). MAUCRSA merged medical and adult-use cannabis activities under one regulatory regime and empowered three state agencies to license and regulate the commercial cannabis industry: The California Department of Food and Agriculture (cultivators, processors, and nurseries); the Department of Public Health (manufacturers); and the Bureau of Cannabis Control (distributors, retailers, delivery-only retailers, microbusinesses, and testing labs). Each state agency released their emergency regulations in November of 2017, which we covered for cultivators, manufacturers, distributors, and retailers.

The emergency regulations were quite the departure from the previously unregulated “grey” market of the previous twenty years. They were however not without some hiccups: Such as the removal of the cultivation acreage cap or the steadfast intransigence of local jurisdictions in licensing commercial cannabis activities.

After the release of the emergency regulations, representatives from the three state cannabis licensing agencies travelled up and down the state to solicit public input on the regulations. The reason the state continued to solicit feedback from the public was due to the fact that the emergency regulations were actually just temporary regulations. All three state agencies were required to release permanent regulations later this year – when exactly the permanent regulations were going to be released was anyone’s guess. While current cannabis businesses and aspiring entrepreneurs have been busy figuring out how to navigate the licensing landscape, the state just went ahead and made changes to the emergency regulations. Just this Friday all three state agencies released new emergency regulations (nothing like a regulation drop on a Friday!). We’ll cover the changes in greater detail in future posts (stay tuned) but here are a couple of highlights:

  • Applicants can submit one application (and pay one fee) to obtain both an adult-use and medical cannabis license. Previously you had to submit two applications and pay two separate licensing fees if you wanted to operate in the medicinal and adult-use market. This applies to all three licensing agencies.
  • A licensee can now engage in commercial cannabis activities with any licensee, regardless of medical or adult-use designation. This is a permanent extension of the transition period in the emergency regulations that allowed medical cannabis licensees to contract with adult-use licensees and vice versa (the transition period was set to expire on July 1, 2018). This also applies to all three agencies.
  • The Bureau of Cannabis Control’s definition of financial interest holder was amended to specifically state that anyone that has an agreement to receive a portion of the profits of a commercial cannabis business will be considered a financial interest holder (there’s an exception for diversified mutual funds, blind trusts, and similar financial instruments).
  • The BCC regulations also specify that licensees authorized for retail sales may not sell or deliver cannabis goods through a drive-through window.
  • A retailer’s delivery employee can now carry cannabis goods valued up to $10,000 while making deliveries (the cap was previously set at $3,000).
  • The Bureau of Cannabis Control reduced the annual license fees for its licensees.
  • The Department of Food and Agriculture revised how it will measure canopy for indoor, mixed-light, and outdoor license types.
  • The Department of Public Health (DPH) formally incorporated the regulations for shared-use facilities, which we covered here.
  • The DPH specifically removed tinctures from the definition of a product containing alcohol. However, tinctures shall not be sold in a package larger than two fluid ounces and shall include a calibrated dropper or other measuring device.

The public will now have all of five days to comment on the re-adoption of the emergency regulations. The five day window for public comment will begin once the California Office of Administrative posts the emergency regulations on its website – which it can do no earlier than May 25, 2018. When these updated emergency regulations are formally adopted the licensing agencies will have 180 days to develop their final regulations. Be sure to check in as we update you with even more details on these emergency regulations and how they may impact your cannabis business.

California has 58 counties and 482 incorporated cities across the state, each with the option to create its own rules or ban marijuana altogether. In this California Cannabis Countdown series, we cover who is banning cannabis, who is embracing cannabis (and how), and everyone in between.  For each city and county, we’ll discuss its location, history with cannabis, current law, and proposed law to give you a clearer picture of where to locate your California cannabis business, how to keep it legal, and what you will and won’t be allowed to do.

Our last California Cannabis Countdown post was on the Town of Truckee, and before that the City of Cotati, the City of San Luis Obispo, the City of Redding, the City of San Rafael, the City of Hayward, Alameda County, OaklandSan FranciscoSonoma County, the City of Davis, the City of Santa RosaCounty and City of San BernardinoMarin CountyNevada County, the City of Lynwood, the City of CoachellaLos Angeles County, the City of Los Angeles, the City of Desert Hot SpringsSonoma County, the City of Sacramento, the City of BerkeleyCalaveras CountyMonterey Countyand the City of Emeryville.

Today’s post is on the city of San Jose.

Welcome to the California Cannabis Countdown.

Surely there’s room for a few more licensed cannabis businesses?

Location. San Jose is the third most populous city in California and the largest city in Northern California. Located south of San Francisco and Oakland, San Jose is the county seat of Santa Clara county and the soon to be home of a massive new campus for Apple. San Jose is also home to the San Jose Sharks (get them next year) and the fervent fans of the San Jose Earthquakes.

History with Cannabis: Back in 2011, the City Council began the process to enact a land use and regulatory ordinance to govern  medical marijuana operations. Unfortunately, the City Council ended up suspending the land use ordinance and then repealing the regulatory ordinance – the effect of which meant that all medical marijuana collectives, cooperatives, and dispensaries operating in San Jose were doing so illegally. Then in June of 2014, the San Jose City Council passed their Medical Marijuana Program (“MMP”). The MMP was an amended attempt to correct the City’s failure to pass a medical marijuana ordinance back in 2011. The MMP went into effect on July 18, 2014 and gave medical collectives up until October 17, 2014 to submit their applications with the City.

At the time the MMP was passed there were an estimated 78 collectives operating in the San Jose, of which 50 collectives submitted applications with the City. Of those 50 medical marijuana collectives that submitted applications, only 16 were able to successfully navigate the application process and maintain their license in compliance with the San Jose’s regulations. Since the passage of the MMP, there have been no new cannabis licenses issued — only the 16 registered collectives have been authorized to cultivate, manufacture, and sell medical cannabis within city limits.

In November of 2017, the City Council passed Ordinances 30029 and 30030 authorizing adult-use cannabis activities. However, the adult-use ordinances did not open up licensing to new applicants — it only allowed the previously registered medical collectives to operate as adult-use businesses as well. These registered collectives have had a really good run as the only cannabis operators in town (legal operators anyway) but that may change as the City Council is considering opening registration to new cannabis operators for the first time since the MMP.

Proposed Cannabis Laws: This Monday, May 21 (6pm at City Hall), the City Council will hold a public hearing to discuss allowing new cannabis businesses to register and operate in San Jose. The City Council is considering allowing new businesses to register for the following types of cannabis licenses:

  • Manufacturing (volatile and non-volatile).
  • Distribution.
  • Testing laboratories.
  • Additional cultivation licenses are not currently on the agenda.

These are just the additional stages of the discussion that’s set to take place. It’s still to be determined whether the City will cap the number of additional licenses (or remove some of the proposed license types altogether) so it’s especially important for cannabis entrepreneurs to show up on May 21st and voice their opinions. All in all, it’s about time that new cannabis businesses get a chance to enter the cannabis market of California’s third largest city.

San Luis Obispo California marijuana cannabis

As of May 1, the City of San Luis Obispo is one step closer to permitting adult-use cannabis retail stores. At its most recent meeting, council members approved the first reading of a draft ordinance intended to regulate marijuana businesses. Currently, Ordinance 1633 which was adopted in March 2017, expressly prohibits all commercial and industrial, medical and recreational cannabis activity within city limits.

Pursuant to Ordinance 1633, the Council directed staff to monitor developments in other jurisdictions, monitor development at the federal level, engage with the community regarding various land use and taxation issues, and return to the City Council with a recommendation. We now have those recommendations, which would establish new Municipal Code provisions that would become effective if a cannabis revenue measure is placed on the November 2018 General Election ballot and approved by voters.

Specifically, staff recommended “repealing the current ban on commercial cannabis business activity and establishing standards to protect public health and safety regulating personal cannabis cultivation, cannabis business operators, and permitted cannabis business activities in the City.” Staff also recommended land use regulations for commercial cannabis activity and personal cultivation and provided for the creation of overlay zones where the proposed regulations would apply.

Before regulations are adopted, though, staff will still need to return to City Council with additional implementing measures, including zoning map amendments for the proposed overlay zones, criteria for ranking permit applications, and a fee schedule for applications and annual licenses.

A summary of the proposed ordinance was provided in the Staff Report as follows:

  1. Allows for access to medical and recreational marijuana in the City, with storefront and delivery options (at least one storefront will be reserved for a holder of a medicinal retail license)
  2. Prohibits onsite consumption
  3. Establishes a two-step process requiring prospective business operators to be certified and ranked prior to applying for a land use permit
  4. Includes requirements for energy and water efficiency, and limits total amount of cultivation, to ensure consistency with City climate action goals
  5. Limits manufacturing uses to non-volatile extractions only
  6. Limits cultivation to indoors only, and total City-wide amount of cultivation allowed to 70,000 square feed of total canopy coverage within indoor areas, cumulatively (includes total canopy of either horizontal or vertical growing situations)
  7. Provides for the creation of overlay zones where cannabis business activity may be permitted, and buffers within those overlay zones for cannabis retail stores of 300 feet from residential zones, and 1,000 feet from schools, and parks
  8. Requires retail stores to be located at least 1,000 feet apart
  9. Only three retail storefronts, which must be on arterial streets, will be allowed within the City

According to the City Council, they intend to adopt regulations by early summer of 2018, but given that the voters must approve a tax revenue measure in November in order for the ordinance to go into effect, we’re still looking at quite some time before the City begins accepting permit applications. We will keep you posted!

california marijuana cannabisEver since the passage of the Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”), the California legislature has been busy debating and amending a wide variety of laws related to cannabis. We have been tracking these developments so you don’t have to. Below is an update on pending California cannabis legislation.

AB 2914 loosens the protections on alcohol and tobacco retailers and no longer prohibits those retailers from being able to apply for and obtain a commercial cannabis license. However, AB 2914 will continue to prohibit the infusion of cannabis and alcohol products. This bill was introduced on February 16, 2018 and was amended in assembly on May 1, 2018.

AB 2255 prohibits a law enforcement officer from being able to seize cannabis and cannabis products from licensed distributors who are in violation of MAUCRSA. If a licensed distributor is transporting cannabis in excess of what is stated on its shipping manifest, they will be issued a fine depending on whether this is a first, second, or additional violation. However, a law enforcement officer may still seize cannabis or cannabis products if the law enforcement officer has probable cause to believe a criminal violation has occurred. The bill clarifies that if a shipping manifest has been counterfeited, this would amount to a criminal violation. This bill was introduced on February 13, 2018 and was last amended in assembly on April 26, 2018. It was referred to committee on April 30, 2018.

AB 2641 places a restrictions on non-retailer cannabis businesses from holding temporary event licenses. If this bill were to pass, non-retailers would only be able to secure a maximum of 4 temporary event licenses within a calendar year. This prevents manufacturers, distributors, and cultivators from engaging in constant retails sale without a retail license. This bill was introduced on February 15, 2018 and was last amended in assembly on April 19, 2018. It was referred to committee on April 23, 2018.

SB 930 would provide for the licensure and regulation of cannabis limited charter banks and credit unions whose sole purpose would be to provide banking services to the cannabis industry. For more information about this, see our related post here. This bill was introduced on January 25, 2018 and was last amended in assembly on April 9, 2018. On May 1, 2018, committee recommended its passage and the bill is now awaiting the Governor’s signature.

AB 2555 makes a slight amendment to the unique identifier requirement under the state’s track and trace program. Instead of requiring cultivators to issue a unique identifier for all cannabis plants, the state would only require a unique identifier to be issued to mature cannabis plants. This bill was introduced on February 15, 2018 and was last amended in assembly on April 4, 2018. On April 25, 2018, committee recommended its passage and the bill is now awaiting the Governor’s signature.

AB 2215 allows medical and adult-use retailers to sell cannabis products to adults who intend to use the products for animals. This bill was introduced on February 12, 2018 and  was last amended in assembly on April 24, 2018. It was referred to committee on April 25, 2018.

SB 1409 allows individual cities or counties to prohibit the cultivation of industrial hemp regardless of whether the grower meets the requirements for the cultivation of industrial hemp. For more information on industrial hemp nationwide, see our related post here. This bill was introduced on February 16, 2018 and was last amended in assembly on May 1, 2018.  On May 1, 2018, committee recommended its passage and the bill is now awaiting the Governor’s signature.

The bottom line? We can expect some significant technical changes to California’s cannabis laws and regulations in the near future, so keep checking in, and prepare your marijuana business accordingly.