Recreational Marijuana

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 City of Cotati, an before that, 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 County and the City of Emeryville.

Today’s post is on the town of Truckee.

Welcome to the California Cannabis Countdown.

LocationTruckee is an incorporated town in Nevada County. Truckee is about 200 miles northeast of San Francisco and is just a short drive to Lake Tahoe. With its historic (and often bustling) downtown, background views of the Sierra Nevada mountains and proximity to world class ski resorts in the Lake Tahoe area, Truckee has become an attractive tourist destination. If you’re driving during the winter make sure to bring snow chains as you don’t want to veer off the road, get lost, and meat (pun intended) the fate of the Donner Party.

california cannabis marijuana Truckee
Is delivery coming to Truckee?

History with Cannabis: Truckee is known for its open beautiful landscape but no one would ever say it’s a jurisdiction that’s been open to cannabis. Dating back to 2005 the city adopted an interim ordinance prohibiting dispensaries. In 2008 the Community Development Director released a statement that dispensaries were not allowed under Truckee’s Development Code. It was only in 2015, when the California state legislature passed the Medical Cannabis Regulation and Safety Act and the Adult Use of Marijuana Act was going to be placed on the 2016 statewide ballot, that Truckee decided to revisit its prohibitionist stance towards cannabis. At this point the Town Council began to earnestly look into the feasibility of regulating cannabis businesses in jurisdiction. To gauge community feedback the Town Council held public workshops in February, March, April, and May of 2017. After those workshops the Council held three public meetings that focused on the following options: 1) continued prohibition; 2) allowing only commercial medicinal access; or 3) allowing medicinal and adult-use access. In the end the Truckee Planning Commission developed Resolution 2018-04 (“Resolution”) that would authorize delivery services.

Proposed Cannabis Laws: The proposed Resolution is by no means a gigantic step for Truckee cannabis businesses, but it’s still a step in the right direction. And a step forward is still better than the status quo of outright prohibition. Here are some of the Resolution’s highlights:

  • Allows for both medical and adult-use delivery services;
  • All other cannabis activities are prohibited (unfortunately);
  • The buffer from schools, day care centers, and youth centers would be 1,000 feet as opposed to the state’s 600 foot requirement;
  • The delivery service shall be in a fixed structure and not open to the public;
  • There are no caps on the number of licenses;
  • A license is only transferable with the approval of the Community Development Director; and
  • The term of license is for perpetuity so long as the licensee is operating in compliance with local and state law.

If you’ve been following the slow rollout of cannabis licenses from California’s state agencies, you know that the biggest impediment to securing a cannabis permit has been local regulations. Would we like to see local jurisdictions reasonably regulate all seed to sale license types? Of course we would, but that doesn’t mean that we won’t encourage smaller locales that decide to take their first step into regulating cannabis. This is especially true when a local jurisdiction is putting in place regulations to provide patients and consumers with access to tested cannabis as opposed to forcing residents to buy from the black market.

Making sure Californians have access to cannabis through delivery services has also faced initial hurdles in 2018, so having smaller locales, like Truckee, authorize cannabis delivery will benefit all legal cannabis operators along the supply chain. A hearing on the Resolution was held two weeks ago, but the Planning Commission continued the matter to the next Commission meeting, which will be held on April 26 at 6pm. We’ve seen how public support (and opposition) can sway undecided local legislators so if you want safe access to cannabis in Truckee, it’s paramount that you show up at the Planning Commission meeting!

marijuana cannabis federal policy
Let’s hope so, when it comes to prohibition.

The election of Donald Trump as president of the United States caught many pundits and prognosticators off guard. President Trump’s victory also instilled a level of uncertainty in America’s burgeoning state-legal cannabis industry. During the presidential campaign, Trump routinely professed his adherence to states’ rights when it comes to cannabis legalization (at least for medical cannabis activities). Once elected, however, President Trump appointed known cannabis prohibitionist Jeff Sessions to be his choice as U.S. Attorney General for the Department of Justice (DOJ) and cannabis operators went from feeling uncertain to outright fear.

It now appears that those fears may have been unfounded. After his confirmation, Sessions didn’t immediately seek to enforce federal laws against marijuana operators (to the pleasant surprise of many in the cannabis industry). The honeymoon lasted until January 4, 2018. Just four days into adult-use cannabis sales being legal in the state of California, Sessions formally rescinded the Cole Memo and the cannabis industry was once again thrown into turmoil. The rescission of the Cole Memo, when added with the Environmental Protection Agency’s refusal to register pesticides on cannabis crops and the Federal Drug Administration’s (FDA) threatened crackdown on medical cannabis claims, painted an ominous picture for the cannabis industry throughout the United States (although some of us were more optimistic).

It’s been over four months since Sessions rescinded the Cole Memo and although he’s rattled his saber on some occasions, the dreaded crackdown has not occurred. For that we may have Russia to thank. Sessions’ self-recusal from the DOJ’s investigation into Russian government meddling in the presidential election has made him persona non grata in the Trump administration — thereby placing his priorities at the very bottom of President’s Trump list.

Rather than a return to federal enforcement actions, we’ve begun to see quite a few positive developments as of late. Last week, President Trump told U.S. Senator Cory Gardner (R-CO) that he was committed to supporting a legislative solution to the tension between state’s that regulate cannabis activities and federal law (which we covered here). This could be a very important development, and let’s hope that this is one issue in which the President doesn’t change his mind.

Besides the commitment that the President made to Senator Gardner, there have been a number of other developments that have given cannabis businesses a reason to be optimistic:

  • The FDA just released a report that a CBD based drug has shown to have positive effect on those that suffer from seizures and epilepsy. This is a big blow to the federal government’s position that the cannabis plant has no medical value.
  • U.S. Senator Mitch McConnell (R-KY) recently introduced a bill in the Senate that would authorize hemp as an agricultural product. Any progress in the federal legalization of hemp will eventually also benefit marijuana legalization.
  • Senators Orrin Hatch (R-UT) and Kamala Harris (D-CA) sent a letter to the DOJ and the Drug Enforcement Agency, calling on them to increase the pace of medical research in cannabis. There have been approximately twenty-five applications submitted to the DEA to produce federally approved research-grade marijuana but none of them have been approved.
  • U.S. Representative  Dana Rohrabacher (R-CA) recently issued a statement that he plans on introducing a stand-alone bill that will respect a state’s right to regulate cannabis and would make the Rohrabacher-Bluemenaur Amendment permanent.

Taken as a whole, these are all encouraging developments– especially considering their bipartisan support. However, this is not the time to rest on our precarious laurels. The November mid-term elections will be on us before we know it and it will be up to all of us to elect officials that are against the government’s draconian war on cannabis. We can’t leave this up to Russia to decide for us, after all.

california alameda marin marijuana
Alameda and Marin Counties are moving ahead, slowly.

Our offices in San Francisco and Los Angeles constantly get calls from entrepreneurs looking to launch or expand their cannabis businesses. By far, one of the most challenging aspects for any attorney advising clients in the cannabis industry is staying up to date on all the developments in the Golden State’s 58 counties and 482 cities. And although it’s a daunting task, we work hard to stay on top o things.

Avid readers of our California Cannabis Countdown series are well aware of the ever-changing cannabis regulatory landscape at the local level. Every week there are a number of Board of Supervisors or City Council hearings throughout the state where cannabis-related rules and ordinances are enacted and amended. We are constantly advising our clients about any changes in the cannabis ordinances of the local jurisdictions of interest.

It’s this constant flux of change at the local legislative level that brings me to today’s topic: an update on the counties of Alameda and Marin. We last covered Alameda here and Marin here.

Let’s start with Alameda County. The County passed its most recent cannabis ordinance last September (with some minor amendments since then). That ordinance created a medical cannabis pilot program that authorized up to three dispensaries, and up to four mixed-light and two indoor cultivation permits. The County’s Cannabis Interdepartmental Work Group (“Work Group”) has taken direction from the Planning Department and has proposed to amend their cannabis ordinance to include the following:

  • Authorize adult-use cannabis activities;
  • Allow for up to five dispensaries;
  • Allow for up to ten cultivation permits (only in the East County);
  • Remove cultivation from a pilot program to a permanent use; and
  • Establish a permit fee structure (the fees are quite significant so if the County is serious about bringing operators into the legal market they will hopefully lower the proposed fees).

The Board of Supervisors will meet this Wednesday to discuss these amendments as well as determine whether the County should allow for manufacturing, distribution, and testing. The County has also expressed an interest in the recently released emergency regulations by the Department of Public Health in regard to Type S manufacturing licenses, which we covered here. If you’d like to see Alameda expand the types of cannabis activities it is willing to authorize, showing up is paramount.

As for Marin County, it is still moving at a deliberate pace– some might call it too deliberate. After the County rejected all applications for medical dispensaries, its cannabis ordinance was amended to only authorize medical delivery-only services: Adult-use cannabis activities are still some ways away in Marin County. The County hopes to begin accepting applications this month but that might be overly ambitious. Marin’s delivery-only ordinance only authorizes up to four delivery licenses and applications will be graded on a 100 point scale: Business plan (20 points), operating plan (50 points), and public benefits plan (30 points). Today at 2 p.m., the Board of Supervisors will hold a briefing to discuss the following items:

  • The medicinal cannabis license application;
  • The license application submittal guide (which provides guidance on what to include in your business, operating, and public benefits plan);
  • The owner submittal form;
  • The owner submittal form guide; and
  • The financial information form.

Although these are steps in the right direction, both Marin and Alameda can still make more progress. At the very least both counties should be open to testing laboratories and non-volatile manufacturing. Marin, with nearly 70% of its residents voting in favor of the Adult-Use of Marijuana Act (Prop 64), needs to stop dragging its feet when it comes to allowing adult-use. The slow and restrictive pace of cannabis legislation at the local level is one of the biggest impediments to cannabis operators entering the regulated market. Let’s applaud Marin and Alameda for making progress, but let’s also reach out to our local officials to let them know they can also do better. There are two great opportunities to let them know in person this week.

merger cannabis marijuana

The cannabis industry in California in 2018 is still finding its feet on many fronts – with both a regulatory framework and a banking solution being very much under construction. As these normalize, companies will establish their business metrics and get a firmer idea of the size of their opportunity, and then naturally increased M&A activity will follow, as has been the norm in other states, like Oregon and Colorado.

There’s a strong argument to be made that the M&A market for cannabis ancillary technologies will be very active in coming years, with companies having tremendous opportunities for exits at high valuations relative to their business metrics. Certainly those companies that create technologies and prove business models now stand to gain from future expansion in legalization of adult use, and any future, positive change in federal policy. With a few exceptions, such as Constellation Brands (makers of Corona) buying a minority stake in a Canadian medical cannabis company, almost all large U.S. companies cannot be owners in the cannabis industry, meaning the future acquisition of established companies is likely to be at a premium.

M&A activity for direct operators will continue to be driven by regulatory concerns, including local ownership requirements, political pushback against widespread “big marijuana” acquisitions, and the transferability of underlying permits and licenses. State licenses are not transferable in California, or Oregon, and if other states follow this model, then acquisitions are unlikely to be a primary means to achieving scale for direct operator businesses.

Preparing for M&A Opportunities: Get Your House In Order Now

The M&A diligence process is notoriously comprehensive, invasive, and painful – an acquirer is not only confirming the business assets and backing up the numbers, but just as importantly they are trying to avoid acquiring any liability or future regulatory issues. Therefore, by taking the steps below, you not only minimize the pain of any diligence process, but you also get out ahead of any the issues, and even without M&A on the horizon, you’ll never regret paying more attention to organization and compliance in your business. Here are some steps you can take now to best prepare for future M&A:

  1. Create a Secure Data Room. Include everything a potential acquirer wants to see: business and financial records, tax records and all government filings, equity ownership documents including vesting details, key business contracts, contracts with employees, and all agreements with investors. With all this data, did we mention that it must be secure? Look for a provider with encrypted transmission and two-step authorization, and limit those who have access.
  2. Standardize key contracts, and contemplate M&A Scenarios. If your business depends on key contracts with partners, suppliers, distributors, key customers, etc., and those contract all contain a strict “no assignment” clause, then your desirability as an acquisition target will be severely diminished.
  3. Tie Up Loose Ends and Prepare for the Disclosure Schedule. M&A can be a delicate scenario, and a surprising percentage result in disputes – in my experience, 90% of M&A disputes stem from an undisclosed issue of the target company. Hence, the disclosure schedule, which will list every known issue – the company’s key contracts, financing arrangements, and every claim threatened or brought against the company. Therefore, any claims should be resolved prior to the transaction, if at all possible, and all others will need to be disclosed.
  4. Get a Chief Compliance Officer and Document their Work. We’ve written previously about the work of a Chief Compliance Officer, and although it’s a more primary concern for direct operators, even ancillary business should maintain in strict compliance with applicable state laws.

M&A Consultants – Some are Great, Some are Useless, and Some are Downright Dangerous

The cannabis industry, as a whole, is experiencing an explosion of industry-focused consultants, whose levels of competence run the gamut. As an industry still in its infancy, the consulting market hasn’t yet matured, to weed out the bad actors through reputation or elevate the best firms. I regularly hear from clients that past consultants added zero value or (worse yet) badly mismanaged aspects of their business. Also, remember that consultants are not bound by the same ethical rules as attorneys, for example, concerning confidentiality and conflicts of interest.

So for consulting services in 2018, it’s very much buyer beware, and you should assume no level of competence until competence is demonstrated. If you are hiring an M&A consultant – consider that because so few large-scale cannabis M&A deals have been successfully consummated to date, you may be better served to retain a top M&A consultant that services businesses generally, and then rely on your excellent cannabis-focused attorneys (*ahem*) to guide you on all of the cannabis-related aspects.

Finally, if you have your house in order as described above, you may have much less of a need for an M&A consultant and a much smoother time through the M&A process. Ultimately, that’s what it’s all about.

For more on cannabis company acquisitions, see:

marijuana trademark canada
Some U.S. companies are looking north for trademark protection

With U.S. federal trademarks being impossible to obtain for cannabis goods and services that violate the Controlled Substances Act, my trademark clients are beginning to ask questions about their options for international trademark protection. Canada, having legalized cannabis and being our closest neighbor, is usually one of the first countries my clients are interested in.

According to a recent piece written by a group of Canadian attorneys at Torys LLP, the number of trademark filings covering cannabis-related goods and services in Canada has increased dramatically since talk of cannabis legalization began.

Canada has made some big changes to its Trademarks Act that will likely be implemented early next year, and these changes will make it much easier to register trademarks. In particular, Canada will remove the requirement that a trademark be “used” prior to registration issuing. In the U.S., an applicant can file a trademark application prior to making use of their mark in commerce if they have a bona fide intent to do so (this is called an “intent to use” application), but in order for a registration to actually issue, the applicant will need to submit a “Statement of Use” to the USPTO within six months from the date the Trademark Office gives a “Notice of Allowance.” One of the policy reasons for this “use” requirement in the U.S. is to prevent trademark “squatting,” where individuals register marks without any intent to use them in order to either prevent others from making use of the marks, or to extract payment from those wishing to do so.

It is indisputable that by removing the “use” requirement for trademark registration, Canada will be opening the doors to “trademark trolls” and “squatters.” According to the Torys attorneys, there are nearly 2,000 trademarks listed on the Canadian trademarks register with goods or services containing the words “cannabis” or “marijuana.” More than half of those applications were filed since January 2017 (apparently, as of five years ago, fewer than 100 such applications had been filed, making for a 1,900 percent increase in cannabis-related Canadian trademark applications). This rush to file for trademark protection makes sense, where companies will be forced to either register their marks, or risk losing them to third parties or squatters.

But given how relatively straightforward it is to obtain a trademark for cannabis goods or services in Canada, there are many restrictions placed on how those cannabis trademarks can be used via the proposed cannabis regulatory framework. For example, cannabis trademarks may not be used to promote cannabis goods:

  • In a manner that appeals to children;
  • By means of a testimonial or endorsement;
  • By depicting a person, character or animal, whether real or fictional;
  • By presenting the product or brand elements in a manner that evokes a positive or negative emotion about or image of, a way of life such as one that includes glamour, recreation, excitement, vitality, risk, or daring;
  • By using information that is false, misleading or deceptive, or that is likely to create an erroneous impression about the product’s characteristics, value, quantity, composition, strength, concentration, potency, purity, quality, merit, safety, health effects or health risks;
  • By using or displaying a brand element or names of persons authorized to produce, sell or distribute cannabis in connection with the sponsorship of a person, entity, event, activity or facility, or on a facility used for sports, or a cultural event or activity; and
  • By communicating information about price and distribution (except at point of sale).

With the exception of the fourth point, which could be construed as somewhat vague and certainly subjective, many of these restrictions on advertising and labeling are contained in the various state cannabis regulatory regimes here in the U.S., so these limitations should come as no surprise to cannabis business owners.

For cannabis business owners in the U.S., it may make strategic sense to consult with a trademark attorney with experience filing cannabis-related applications to consider filing for trademark protection in Canada. Successful brands will be those that think globally, not nationally.

california marijuana public consumption
Coming to a California locale near you?

As more cities begin to allow for and regulate commercial cannabis businesses, the State of California is seeing an influx of cannabis tourism. We’ve written before about the touchy relationships governments have with the idea of “cannabis lounges” (see here and here) and often questioned who will lead us in regards to cannabis tourism (our bets have often been on California).

Consumption of cannabis in public is illegal in the State of California, and many hotels and Air B&B’s do not allow smoking or “drug use” in their guest rooms. Nonetheless, MAUCRSA allows local jurisdictions to authorize the on-site consumption of cannabis by state-licensed retailers and/or microbusinesses, which gives tourists at least one legal way to consume. Specifically, so long as your city or county okays it, retailers and microbusinesses can have on-site consumption if: (1) access to the area where cannabis consumption is allowed is restricted to persons 21 years of age and older, (2) cannabis consumption is not visible from any public place or nonage-restricted area, and (3) the sale or consumption of alcohol or tobacco is not allowed on the premises. However, most local governments have explicitly prohibited “cannabis lounges” and on-site consumption by licensees (including the City of Los Angeles). Some cities, however, are capitalizing on the tourism potential in The Golden State. We have compiled a list of notable locales below.

The City of West Hollywood is the only city in the Los Angeles area that allows for on-site consumption. The City plans to permit eight (8) on-site consumption businesses for smoking, vaping, and ingesting, and it will also allow 8 on-site consumption businesses for edible ingestion only. The window for submission for on-site consumption applications (and for other commercial cannabis businesses) is expected during the month of May, so we may see on-site consumption up and running for the busy summer months. Los Angeles, which is an area already known for tourism, will see a lot of its cannabis tourism go to the City of West Hollywood.

San Francisco has been California’s leader when it comes to the cannabis lounge concept (and cannabis businesses in general). San Francisco’s regulations outright permit retailers and microbusinesses to allow customers to engage in on-site consumption. Unlike other cities that have placed strict limits on consumption lounges or outright banned them, San Francisco is fully embracing the cannabis lounge model.

The City of Oakland allows medical and adult-use cannabis dispensaries the opportunity to apply for and “obtain a secondary on-site consumption permit in order for cannabis to be consumed on the premises of the dispensary.” See Oakland Municipal Code §5.80.025. The City has not disclosed any limits as to how many on-site consumption permits may be issued, but the City has thus far only allowed eight dispensary permits and, as a result, there won’t be more than eight on-site consumption permits available (because only retailers and microbusinesses are allowed to undertake on-site consumption under state law).

The City of Alameda will only issue two dispensary/retailer permits. The City’s ordinance allows those retailers to have on-site use or consumption of cannabis or cannabis products in interior areas of the licensed premises. The City has made it relatively easy for those granted a dispensary/retail permit to also capitalize on on-site consumption.

Palm Springs has expanded its cannabis regulations to allow for cannabis consumer lounges. “Cannabis Lounge Facility” permits are available in the City, and those holding the proper permits may additionally sell medical and adult-use cannabis and cannabis products. With festival activities fast-approaching in the desert cities, many tourists will flock to the Palm Springs area looking to partake under California’s new cannabis laws. Palm Springs will likely see a high demand in cannabis and cannabis products from tourists looking to consume during festival time.

Other California cities that have explored the idea of cannabis lounges are Cathedral City and South Lake Tahoe, but nothing official has happened in either city as of yet. Over time, as legalized cannabis becomes more normalized (and socialized) in the state, California will likely see an increase in cities that allow cannabis lounges. For now though, on-site consumption is a rare occurrence and a political hot potato. And for the few on-site consumption lounges that exist, we expect nothing but success and increased tourism.

cannabis marijuana josephine county oregon
Josephine County is ALL IN on prohibition.

For the past several months we have been following Josephine County’s efforts to regulate away its cannabis industry, specifically in rural residential zones. This saga has taken many twists and turns (see here, here, here, and here), but this week brought perhaps the biggest twist yet: Josephine County has sued the State of Oregon in a suit that could effectively invalidate its cannabis program.

The legal skirmishes began back in December, when Josephine County passed an ordinance to severely curtail cannabis production on over 16,000 rural residential properties. A group of growers appealed the ordinance to Oregon’s Land Use Board of Appeals (LUBA), raising a procedural argument (improper notice to affected properties) and two substantive arguments (the county cannot ban pre-existing lawful uses and the ordinance exceeds the county’s ability to impose reasonable time, place, and manner regulations on cannabis production). Last month, LUBA ruled against the county, solely on the procedural issue. Josephine County failed to provide proper notice of the public hearings where the ordinance was discussed. As a result, LUBA did not reach the substantive merits. As expected, Josephine County elected to appeal the procedural question.

Surprisingly, Josephine County also decided to take the drastic step of filing a lawsuit against the State of Oregon in federal court. We gave our initial take on this aggressive move in news coverage here and here. In short, Josephine County wants the federal court to:

  1. Declare that cannabis production cannot qualify as a pre-existing “lawful use” because of federal prohibition;
  2. Declare that counties can place any restrictions they want, including a full ban, on cannabis businesses because state legal regimes are pre-empted by federal law;
  3. Declare that Oregon’s medical and recreational regimes unlawfully restrict the county’s police powers in light of federal prohibition;
  4. Enjoin the State from bringing official misconduct charges against any local or county official that ignores their duties under state law.

This is a stunning overreach, as a victory could presumably give counties the ability to even ignore Oregon’s decriminalization statutes. As a county that allegedly wants to crack down on bad actors and the black market, and is apparently struggling to provide basic services, Josephine County should be welcoming law abiding, tax paying cannabis farms with open arms. Instead, I am reminded of my young daughter breaking her own toy when she doesn’t get her way.

This lawsuit raises core constitutional questions, involving states’ rights to promulgate cannabis programs despite the federal Controlled Substances Act, and over the objection of local jurisdictions. In the past, we have seen prohibitionist states attempt to invalidate neighboring states’ cannabis programs, to no avail. This may be the first time, however, that a county in an adult use state has filed such a lawsuit against its sovereign. We will be monitoring this case closely, as will the Oregon cannabis industry at large and other prohibitionist counties nationwide.

california cannabis labeling
It’s not optional for California packaging and labeling.

California is just starting to get its cannabis packaging and labeling regulations right under MAUCRSA.  As part of this multi-part series on these regulations, I covered transition period product packaging and labeling in a previous post, and I analyzed the packaging and labeling for “New Products” in another post. Today’s post will cover Proposition 65 labeling issues for California’s cannabis businesses. Note that MAUCRSA makes no specific mention of Prop. 65 compliance, so marijuana business owners are on their own in identifying whether or not they must adhere to that law.

The Safe Drinking Water and Toxic Enforcement Act of 1986 (a/k/a Prop. 65), requires theOffice of Environmental Health Hazard Assessment (OEHHA) to publish a list of chemicals known to cause cancer, birth defects or other types of reproductive harm. The list now includes more than 850 chemicals. Given this fact, there is hardly a manufacturing business in California that won’t find itself subject to Prop 65 warning requirements at some point.

Prop. 65 requires businesses to provide their customers with notice of these chemicals when present in the products they purchase, in their homes or workplaces, or that are released into the environment. The ultimate intent is to allow consumers to make informed decisions with respect to chemical exposure (though there have been allegations of abusive lawsuits against businesses by “bounty hunters” almost from the outset of the passage of Prop. 65).

Effective June 19, 2009, marijuana smoke was added to the Prop. 65 list of chemicals known to cause cancer. The Carcinogen Identification Committee of the Office of Environmental Health Hazard Assessment  “determined that marijuana smoke was clearly shown, through scientifically valid testing according to generally accepted principles, to cause cancer.” And back in 2015, a “citizen enforcer” served the first five 60-day notices on medical cannabis dispensaries around the state.

As MAUCRSA licensing and regulation steadily comes online, you can bet that we will see a smattering of Prop. 65 attacks on cannabis business owners who fail to properly label their products. So, what do you need to look out for as a cannabis business? The first thing is to realize that, yes, Prop. 65 likely applies to you where any of the products you’re selling may contain Prop. 65 chemicals above safe harbor levels that warrant the mandated labeling warnings: Prop. 65 applies to everyone in the chain of distribution, not just retailers. Also, just because your products do not contain “marijuana smoke” doesn’t mean you don’t have to adjust your label: If your products contain any of the other ~849 chemicals, you have to disclose accordingly under Prop. 65. For example, any carcinogens or toxins that go into any oil inserted into a vapor pen cartridge are likely going to warrant a Prop. 65 warning.

There have also been updates to Prop. 65, the latest of which passed in 2016 and will be fully effective on August 30, 2018 of this year. These updates to the law affect how you must label your products to secure the safe harbor. The typical warning that’s out there right now in the cannabis community is some iteration of:

WARNING: This product contains a chemical known to the State of California to cause cancer.

With the new laws coming into play on August 30, the foregoing will no longer be good enough. Instead, unless you meet one of the few exceptions (one of which is that your product was manufactured prior to August 30, 2018 and contains the September 2008 safe harbor warnings), you’ll need to follow the new regulations. One of the most important changes with the new regulations is that you now need to actually identify at least one triggering chemical depending on the type of harm caused by that chemical. Specifically, OEHHA mandates that:

If, for example, there are five possible chemical exposures from a given product, and all five chemicals are listed only as carcinogens, then the business would only be required to name one of those five chemicals in the warning. . . If there are exposures to both carcinogens and reproductive toxicants, a business would be required to name one of the chemicals that is a carcinogen and one of the chemicals that is a reproductive toxicant, but the business could choose to identify more chemicals in the warning.

In turn, your new Prop. 65 warning labels will look like one of the following:

For carcinogens: “This product can expose you to chemicals including [name of one or more chemicals], which is [are] known to the State of California to cause cancer. For more information go to www.P65Warnings.ca.gov.”

For  reproductive toxicants: “This product can expose you to chemicals including [name of one or more chemicals], which is [are] known to the State of California to cause birth defects or other reproductive harm. For more information go to www.P65Warnings.ca.gov.”

For exposures to both listed carcinogens and reproductive toxicants: “This product can expose you to chemicals including [name of one or more chemicals], which is [are] known to the State of California to cause cancer, and [name of one or more chemicals], which is [are] known to the State of California to cause birth defects or other reproductive harm. For more information go to www.P65Warnings.ca.gov.”
For exposures to a chemical that is listed as both a carcinogen and a reproductive toxicant: “This product can expose you to chemicals including [name of one or more chemicals], which is [are] known to the State of California to cause cancer and birth defects or other reproductive harm. For more information go to www.P65Warnings.ca.gov.”
If you’re starting to worry, you can also use a short-form label under certain circumstances. Finally, the look of the label has also changed with the new regulations:

“A symbol consisting of a black exclamation point in a yellow equilateral triangle with a bold black outline. Where the sign, label or shelf tag for the product is not printed using the color yellow, the symbol may be printed in black and white. The symbol shall be placed to the left of the text of the warning, in a size no smaller than the height of the word ‘WARNING'”.

You can download the symbol here.

There are a slew of other mandates under Prop. 65, but the bottom line is that if you fail to comply with this law, you’re going to be facing costly legal challenges and/or settlements, none of which will have to do with your MAUCRSA compliance. So double check your labels now to ensure that you’re prepared and in compliance for August 30, 2018.

Equity incentives can help you motivate the team and grow fast.

It’s a good time to revisit the very basics of cannabis company structuring, particularly in light of two new developments in 2018: tax reform and California state-wide legalization. Thus, this is the second article in our three-part “Reviewing Corporate Law Basics” series. The first post discussed cannabis entity selection. Today’s posts moves past the initial formation phase, and covers equity incentives for startups.

In the startup world, employee equity is as ubiquitous as the logo t-shirt, the bean bag chair, and the ping pong table. The potential upside employees perceive in their equity incentives brings the talent in and keeps them engaged: Employees are both incentivized to increase the value of the company and stay at the company through their equity vesting schedule. In theory, everybody wins.

Cannabis startups, particularly those developing technologies and building capital-intensive businesses to scale, will increasingly find the need to offer employee equity to stay competitive. In making the decision on what types of equity incentives to offer, companies must consider their growth path and the effect on future financing options, their employee base’s preferences, their own capacity to manage an equity incentive plan (or hiring experienced counsel to do so), and, most importantly, the tax consequences for the company and its employees.

This post cannot exhaustively cover each of the below structures, but will provide the key advantages and disadvantages, to inform the business owner (or employee) faced with the choice:

  • Stock Options (ISOs and NSOs)
  • Restricted Stock with an 83(b) Election
  • Restricted Stock Units (RSUs)
  • Something Else – Profit Share, Target Bonus, Performance Incentives

Stock Options

Stock Options come first because this type of equity incentive sits foremost in the public consciousness: Many company founders want a “stock option plan” before they consider what that entails. However, most founders that evaluate all of the potential forms for employee equity incentives eventually choose not to go with stock options. In the end, whether its Incentive Stock Options (ISOs) or Nonqualified Stock Options (NSOs), the calculus generally boils down to the plans being complicated and unpredictable.

On the company side, the plans are complicated because management must regularly run 409A valuations to determine strike prices, then track all of the exercise dates and received paperwork (and the company’s ever-fluctuating number of shareholders), and then calculate the proper tax withholding for all options exercised based on the delta to the stock’s fair market value set by the 409A valuation.

On the employee side, stock options are complicated because the employee must decide whether or not to exercise the the options, and then pay out-of-pocket if choosing to do so. Options are also unpredictable in that a downtown in the company’s value could result in “underwater options”– employees stuck with tax consequences but with no chance of selling stock to cover the tax bill. While these issues have some solutions to reduce the pain to the company (third-party administrators of option plans are recommended), and while the underwater options issues is rare-but-very real (ask those that lived through the tech bubble bursting in 2000), there’s no escaping that stock option plans inherently complicated and unpredictable, and thus make sense for a small percentage of startups.

Restricted Stock with an 83(b) Election

I use the “…with an 83(b) Election” qualifier when discussing Restricted Stock Plans with clients, because filing an 83(b) election is critical to making Restricted Stock Grant work in an employee’s favor – and it’s an election the company had better inform its employees of, as missing the filing deadline is a mistake that can’t be undone.

So what is a Section 83(b) Election? Simply stated, it’s a “tax election” the employee taxpayer makes with the IRS, under IRC Section 83(b). The election must made within 30 days of the grant of restricted stock (simply by filling out and mailing the IRS a form). The election informs the IRS that the taxpayer elects to realize income as of the grant date, rather than on the grant date. This can be particularly advantageous for very early-stage companies, that can credibly state the value of their shares is minimal. Then, any future gain in value recognized upon selling the stock would be capital gain or loss. Further, if shares are held for more than 12 months, the employee may get long-term capital gain treatment.

Restricted Stock may become more difficult for later-stage companies, because even with an 83(b) election, paying tax on fair market value may be prohibitive for some employees. However, a company that’s later stage and better capitalized may be in a better position to offer an employee a bonus to make up for the tax burden, or can look to switch equity plans now that the company has more resources. But for early-stage companies Restricted Stock with an 83(b) Election is the right choice 90% of the time. The “Restricted” part is to be discussed with your securities counsel – all stock will carry certain securities legends, will initially be subject to a company’s right of repurchase (which lapses over the course of a vesting schedule), as well as other transfer restrictions to prevent sale on public markets and preserve the company’s closely-held status.

Restricted Stock Units (RSUs)

An RSU award is essentially a contract to award stock at a later date, or award an employee cash as value for stock. RSUs are not stock, and because they are not property, an 83(b) Election is inapplicable. They have risen in popularity among later-stage tech companies, primarily at the expense of stock options, because they are significantly more straightforward (particularly from the employee’s perspective). They give the employee what employees want– the ability to receive “stock” without having to pay to exercise or purchase it. Then, upon meeting vesting requirements, the employee either receives their specified shares of common stock, or cash equal to the value of a their common stock.

Many companies had come to disfavor RSUs in recent times, though. Employees with RSUs are not putting in any purchase or exercise price, the 409A valuation requirements are amplified, and the company must pay employees cash upon each vesting milestone (because the 83(b) is not available). Thus, until recently, the RSU only made sense for large, cash-rich “startups” (which at that point, were full-blown companies). However, a new tax election created in the Tax Cuts and Jobs Act (“TCJA”) may make the RSU more feasible for certain companies and employees: The 83(i) election allows an employee that owns 1 percent or less of a company to delay realizing income until there’s an exit (or for up to 5 years), so long as the company has a plan in place that awards some equity to 80 percent or more of the total employees in the company.

Other Incentive Plans

While equity incentives may seem overly complicated, with a well-drafted Employee Equity Incentive Plan and competent counsel, companies can and do manage all of the structures listed above. So maybe you can, too…. but do you need to? Equity incentives work best for startup companies that are building towards an exit: an acquisition, a merger, a public offering. Often these companies want to conserve as much cash as possible, to devote to product development, and offering employee equity allows the company to compete with larger companies for top talent. However, if your company anticipates fewer costs on its runway to profitable liftoff, and is built to operate profitably, then perhaps your business needs another form of employee incentives– a profit share, a target bonus for profit or revenue, or other performance bonuses. Although these aren’t as sexy as the “stock options”–and you may miss out on a few potential employees that have stars in their eyes–crafting an incentive plan that fits your business will ultimately help you attract and retain the right type of talent.

Finally, one thing should be noted: Regardless of the equity incentive plan your cannabis company chooses, you can still get the logo shirts, bean bag chairs, and ping pong table.

When the California Bureau of Cannabis Control (BCC) first released its proposed medical cannabis regulations under the Medical Cannabis Regulation and Safety Act (MCRSA) last April it created license types for laboratories, retailers, distributors, and transporters. Most people were surprised (and worried) when they found out that the MCRSA did not create a license type for cannabis delivery-only services. Under the MCRSA, only storefront medical retailers could deliver to a qualified patient or primary caregiver. Just like that, delivery services were about to be locked out of America’s biggest cannabis market.

As you can imagine the BCC and state legislators were inundated with calls to their offices as well as comments at public hearings about the glaring omission of delivery licensure. Whether the BCC was going to rectify this mistake became moot upon the withdrawal of their emergency regulations. The regulations were withdrawn when the state legislature passed the Medical and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA) – which merged the MCRSA and the Adult-Use of Marijuana Act (AUMA) under one regulatory regime. We covered that here.

When the BCC issued their emergency regulations under MAUCRSA it was clear that the Bureau learned its lesson: This time, the BCC included a license type for delivery-only services. For delivery services that were previously a part of a collective or cooperative, this inclusion in the new regulations was a much-needed lifeline. However, since the BCC started issuing temporary licenses in January it hasn’t exactly been a smooth road for delivery services. Delivery services have been facing the same major obstacle that all other cannabis businesses are dealing with: local jurisdictions.

marijuana delivery california
Delivery is not guaranteed.

In order to be eligible to receive a commercial cannabis license from the state, you must first obtain a cannabis permit from your local city or county. As readers of our California Cannabis Countdown series are well aware, each of the state’s 482 cities and 58 counties have their own regulations. For delivery services, this dual licensing structure can cause a number of impediments to both obtaining a license and then operating a successful cannabis business. First and foremost, a local jurisdiction can enact an outright ban on all commercial cannabis activities, including delivery. In other instances, local jurisdictions are either only authorizing storefront retailers to conduct deliveries or only allowing deliveries within their borders by local permit holders. All these obstacles, when combined, limit competition and choice and thereby ultimately harm the consumer. This is especially true of qualified patients that live in prohibitionist jurisdictions or aren’t able to drive themselves to the nearest dispensary.

It is under this backdrop that State Senator Ricardo Lara (Senate District 33) introduced Senate Bill 1302 (SB 1302). The goal of SB 1302 is pretty simple: make sure every Californian that wants access to cannabis does in fact have access to cannabis (for many Californians growing their own isn’t a feasible option). The pertinent provision of SB 1302 is found in Section 26090(e):

“A local jurisdiction shall not prevent delivery of cannabis or cannabis products on public roads, or to an address that is located within the jurisdictional boundaries of the local jurisdiction, by a licensee who is acting in compliance with this division and who is acting in compliance with a license, permit, or other authorization obtained from another local jurisdiction, pursuant to the authority granted by that other local jurisdiction under Section 26200.”

SB 1302 is off to a slow start as it has yet to pickup any co-sponsors and has currently been referred to the Senate Governance and Finance Committee. Now would be a good time to let the Committee members know that you support SB 1302 and that they should too: You can find the Committee members here. SB 1302 would ensure that a licensed delivery service can provide cannabis anywhere in the state to a qualified patient, primary caregiver, or adult aged twenty-one and over. Although this would seem like a given after a majority of Californians voted for the AUMA, in practice the delivery option is far from reality. In that respect all SB 1302 is seeking to accomplish is to bring the spirit of the AUMA into practical effect. Let’s hope (and call your legislators!) it succeeds.