Recreational Marijuana

San Luis Obispo California cannabis
SLO is thinking through its options for cannabis.

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 marijuana 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 Redding, and before that the City of San Rafael, 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 City of San Luis Obispo (not the County). We’ll provide an update on what the County is up to next week.

Welcome to the California Cannabis Countdown.

LocationSan Luis Obispo (affectionately referred to as SLO) is a city in San Luis Obispo County and is home to California Polytechnic State University (well sort of, since Cal Poly’s campus sits just outside the City limits and is part of the County). SLO is located in California’s Central Coast at about the halfway point if you’re driving from San Francisco to Los Angeles. If you need to spend the night or make a pit stop, check out the quirky Madonna Inn.

History with Cannabis: San Luis Obispo currently prohibits all commercial and industrial cannabis business activities. The City, like a many number of other California jurisdictions, enacted its ban prior to January 01, 2018 (SLO enacted its cannabis prohibition ordinance in March of 2017). The City’s prohibition wasn’t meant to be permanent as nearly sixty-eight percent of SLO voters approved the Adult-Use of Marijuana Act (a/k/a Prop 64). Instead, the purpose of the City’s ban was to act as a temporary stopgap while the City sought community feedback for a long-term cannabis solution. This “prohibit while we study the issue dance” is currently playing out throughout California. Since its moratorium, the City held a number of hearings and workshops in order to engage the community so that it could begin to develop a cannabis regulatory structure. To that end the City’s Community Development Director (CDD) prepared a report for the City Council to discuss today, February 20th.

Proposed Cannabis Laws: The CDD report is the first step in enacting a cannabis ordinance. When drafting the report, the CDD used community feedback and cannabis regulations in other jurisdictions as guideposts. The goal of the report is to propose an ordinance that will regulate the cannabis marketplace and that is acceptable to the City Council and the community. Here are some of the report’s highlights:

  • It authorizes both medical and adult-use cannabis activities.
  • Authorizes up to three retail licenses.
  • Delivery is allowed.
  • Outdoor cultivation is prohibited.
  • There will be three types of indoor cultivation license types: Special Cultivator (up to 5,000 square feet), Small Cultivator (up to 10,000 square feet), and Nursery (up to 10,000 square feet).
  • Special and Small cultivators can include processing.
  • There will be a citywide cultivation cap of 70,000 square feet.
  • Only non-volatile cannabis manufacturing is allowed.
  • Distribution and testing are allowed.
  • Onsite consumption and cannabis events are prohibited.
  • Applications would be reviewed and ranked by a third party consultant (the City is still working on a criteria for ranking applications).
  • The CDD asked whether cannabis products with high concentrations of THC should be banned.
  • The CDD asked whether persons under the age of 21 (regardless of medical recommendation) should be prohibited from dispensaries.

The CDD report is by no means a finished product, as further direction from the City Council and input from the community can drastically alter (for better or worse) what the final cannabis regulation will look like for SLO. If all goes well, the City will hold another hearing in front of the Planning Commission on March 28 and potentially adopt a resolution on May 01. We’ll be sure to keep you posted.

California marijuana packaging and labeling
What are the packaging and labeling requirements for new marijuana products?

California is just starting to get its cannabis packaging and labeling regulations right under MAUCRSA. The state has a mandated transition period from January 1 to July 1, 2018, during which time adult use and medical marijuana licensees can do business with each other, and temporary and annual state licensees can transport and sell cannabis products already in their possession in the newly regulated market. This means there are two packaging and labeling standards during this transition period: one for products that licensees bring into the marketplace from before January 1, 2018 and another for products cultivated or made on or after January 1, 2018. I covered transition period product packaging and labeling in a previous post. This post will cover the packaging and labeling requirements for those products made or cultivated on or after January 1, 2018 (collectively, “New Products”).

Retailers

For New Products, retailers won’t package or label anything. Instead, all New Products will come to retailers already packaged and labeled by either cultivators, processors, manufacturers, or distributors. The only packaging requirement retailers have for New Products is exit packaging. Specifically, per section 5413 of the Bureau of Cannabis Control Emergency MAUCRSA rules, “[c]annabis goods purchased by a customer shall not leave the retailer’s premises unless the goods are placed in an opaque exit package.”

Distributors

While distributors have lost a lot of power via MAUCRSA, they may still package, label, re-package, and re-label flower for retail sale (in line with cultivation packaging and labeling rules). That said, they cannot package, label, re-package, and re-label manufactured products unless they also own a manufacturing license and they’re dealing with their own manufactured products. The lone exception for manufactured products is if lab testing shows that the tetrahydrocannabinol (THC) content, per package or serving, was labeled incorrectly but is still within allowable THC limits. In that case, the distributor may then re-label the package with the correct amount of THC. Lastly, “transport only” distributors can’t package, label, re-package, or re-label any cannabis goods at all.

Manufacturers

For manufactured New Products, manufacturers (and Type Ps that label, package, re-label, and re-package cannabis products) must ensure that the label is in English and that all required labeling is “unobstructed and conspicuous” so that it can be “read by the consumer”. Moreover, all required labeling must go on the outside of the package or container (supplemental product information and “side effects” information can go on the inside of the packaging through inserts). There are two mandatory panel labeling requirements for manufactured New Products: the primary label and the informational label.

The primary label must contain the following items, in no less than 6-point font and in relation to the size of the primary panel and container/package:

  1. the identity of the product in a text size reasonably related to the most prominent printed matter on the panel;
  2. the net weight or volume of the contents of the package; and
  3. the THC content and cannabidiol (CBD) content for the package in its entirety (even if the CBD content is zero), expressed in milligrams per package.

If the manufactured New Product is an edible, the following requirements also apply:

  1. the words “cannabis-infused” must go immediately above the identity of the product in bold type and a text size larger than the text size used for the identity of the product; and
  2. the THC content and CBD content per serving, expressed in milligrams per serving; and
  3. this crazy symbol must be included:

You can include additional product information on the primary panel, but the foregoing MUST be on the outside label as relevant.

The informational label must also contain (in no less than a 6-point font in relation to the size of the primary panel and container/package, with limited exceptions depending on how much room you have with the label):

  1. the licensed manufacturer and its contact number or website address;
  2. the date of the cannabis product’s manufacture;
  3. the following statement: “GOVERNMENT WARNING: THIS PRODUCT CONTAINS CANNABIS, A SCHEDULE I CONTROLLED SUBSTANCE. KEEP OUT OF REACH OF CHILDREN AND ANIMALS. CANNABIS PRODUCTS MAY ONLY BE POSSESSED OR CONSUMED BY PERSONS 21 YEARS OF AGE OR OLDER UNLESS THE PERSON IS A QUALIFIED PATIENT. THE INTOXICATING EFFECTS OF CANNABIS PRODUCTS MAY BE DELAYED UP TO TWO HOURS. CANNABIS USE WHILE PREGNANT OR BREASTFEEDING MAY BE HARMFUL. CONSUMPTION OF CANNABIS PRODUCTS IMPAIRS YOUR ABILITY TO DRIVE AND OPERATE MACHINERY. PLEASE USE EXTREME CAUTION;
  4. if the product is intended for the medical market, the statement “For Medicinal Use Only”;
  5. a list of all product ingredients in descending order of predominance by weight or volume;
  6. if an edible product that contains an ingredient, flavoring, coloring, or an incidental additive that bears or contains a major food allergen, the word “contains,” followed by a list of the applicable major food allergens;
  7. if an edible product, the names of any artificial food colorings contained in the product and the amount, in grams, of sodium, sugar, carbohydrates, and total fat per serving; Instructions for use, such as the method of consumption or application, and any preparation necessary prior to use (which is completely up to the manufacturer); and
  8. the product expiration date, “use by” date, or “best by” date, if any; and, when available from the state, the UID and, if used, the batch number.

For the required packaging of all manufactured New Products, manufacturers must have packaging that is:

  1. capable of protecting the product from contamination and that shall not expose the product to any toxic or harmful substance;
  2. tamper-evident, which means that the product shall be packaged in packaging that is sealed so that the contents cannot be opened without obvious destruction of the seal;
  3. child-resistant, which means the package shall be designed or constructed to be significantly difficult for children under five years of age to open or otherwise obtain access to the product contained therein within a reasonable time, and shall not be difficult for normal adults to open or obtain access to the product contained therein;
  4. not imitating any package used for products typically marketed to children;
  5. if an edible New Product, opaque; and
  6. if the package contains more than one serving of cannabis product, re-sealable so that child-resistance is maintained throughout the life of the package.

Cultivators and Processors

Cultivators can grow and process their own flower. Processors only trim, dry, cure, grade, package, and/or label flower or non-manufactured cannabis: they don’t grow anything. Both are charged with the following packaging and labeling requirements for cultivated New Products headed for retail sale (including the same font, conspicuous placement, and English language requirements as manufacturers):

  1. all cannabis has to be labeled and placed in a resealable, tamper-evident, child-resistant package and must include, once available, a unique identifier for the purposes of identifying and tracking cannabis and cannabis products;
  2. the following statement in bold print:  “GOVERNMENT WARNING: THIS PACKAGE CONTAINS CANNABIS, A SCHEDULE I CONTROLLED SUBSTANCE. KEEP OUT OF REACH OF CHILDREN AND ANIMALS. CANNABIS MAY ONLY BE POSSESSED OR CONSUMED BY PERSONS 21 YEARS OF AGE OR OLDER UNLESS THE PERSON IS A QUALIFIED PATIENT. CANNABIS USE WHILE PREGNANT OR BREASTFEEDING MAY BE HARMFUL. CONSUMPTION OF CANNABIS IMPAIRS YOUR ABILITY TO DRIVE AND OPERATE MACHINERY. PLEASE USE EXTREME CAUTION.”;
  3. the net weight of cannabis in the package;
  4. identification of the source and date of cultivation, the type of cannabis, and the date of packaging;
  5. the appellation of origin, if any;
  6. list of pharmacologically active ingredients, including, but not limited to THC, CBD, and other cannabinoid content, the THC and other cannabinoid amount in milligrams per serving, servings per package, and the THC and other cannabinoid amount in milligrams for the package total; and
  7. information associated with the unique identifier issued by the state Department of Food and Agriculture.

Additionally, a flower label may specify the county of origin only if 100% of the cannabis or nonmanufactured cannabis product contained in the package was produced within the designated county, as defined by finite political boundaries. For more on cannabis appellations in California, see here.

In all, the packaging and labeling requirements for California cannabis products are extremely detailed and must be followed to a T by any business that wishes to maintain its medical or adult use license. All prospective licensees should begin preparations today.
Stay tuned for Part 3 of this series on California cannabis packaging and labeling, where I’ll cover the warnings and disclaimers that should go on your products (not covered under or mandated by MAUCRSA), including how to handle new Prop. 65 rules.

A growing number of startups in the cannabis space are engaging brokers and online platforms to assist in their fundraising. This makes sense: as we’ve written previously, most investors (particularly institutional capital) are staying on the sidelines and taking a wait-and-see approach to the cannabis industry. Thus, cannabis startups will always target a smaller, more dispersed, more specialized investor base, and going through experts is a logical way to reach them. Note that 506(c) is one of the relatively new options for company financing, implemented as part of the JOBS Act of 2012. It allows for companies to engage in a more public “general solicitation”—but with strings attached, as we’ll detail below.

From a securities law perspective, the engagement of a broker-dealer or online platform converts the offering exemption from the ever-popular 506(b) offering to a 506(c) offering – changing this one letter has a number of significant consequences:

1 – You must ensure that the broker-dealer is registered, or else.

Section 3(a)(4)(A) of the Securities Act generally defines a “broker” broadly as “any person engaged in the business of effecting transactions in securities for the account of others.” This broad definition includes any “finder,” “fundraising consultant,” or anyone else receiving any transaction-based bonus or commission in return for introducing or engaging an investor. You should always consult your securities counsel when a third party is assisting the company on fundraising. Once it is established whether broker-dealer registration is required, FINRA provides an online Broker-Dealer Check. The penalties for using an unregistered broker-dealer are extremely harsh, so it’s always wise to err on the side of caution.

2 – You are limited to accredited investors, and you must take additional steps to confirm an investor’s accredited status.

In a 506(b) offering companies have the flexibility to raise from an unlimited number of accredited investors, as well as up to 35 unaccredited investors. Only around 2% of the US population would meet the accredited investor conditions (in short: at least $1 million of assets not including one’s home, or a recurring annual income of at least $200,000 (or $300,000 if married)). The loss of the unaccredited investor option may eliminate some of the classic “friends and family” seed investors, that write smaller—but often critical—checks to keep the company afloat in the early going.

Further, raising under 506(c) puts a higher burden on the company to complete its own diligence to confirm an investor’s accredited status. Under 506(b) you can essentially take the investor’s word for it. The SEC has laid out the types of records one would examine under a “principles-based verification method” and they include the investor’s bank statements, brokerage statements and records of securities holdings, tax returns and tax assessments or appraisal reports prepared by third-parties. Looking at these records may not seem like such a big deal, but the hurdle of developing this method and implementing for each investor can be a significant undertaking for startup company.

3 – You can engage in a general solicitation under 506(c), but with greater visibility comes…greater visibility.

The advantage of expanding your potential investor base beyond those with whom you have a “substantial pre-existing relationship” (which is required under 506(b)) may seem to open a world of possibilities. But putting your company out in the open may have drawbacks: any proprietary info in your investor materials will get passed around, you may pick up shareholders that cause you problems down the line, you may attract attention from the not-in-my-backyard types, and some investors prefer their cannabis investments to keep a lower profile.

Finally, it bears repeating: seek an experienced corporate and securities attorney. With these choices you need principled and consistent counsel, because there is a final consideration: once you’ve engaged a broker-dealer or otherwise engaged in a general solicitation, you are committed for the entirety of your financing round. Any unaccredited “friends and family” are out—they can’t write checks under any circumstances—and you cannot revert to the more relaxed requirements of 506(b).

blockchain cannabis california

We have previously discussed blockchain technology and the effect it can have on the cannabis industry here and here. This post serves as a more detailed analysis of how blockchain can and may disrupt the tracking of cannabis from seed to sale, specifically within the new California adult use market.

Currently, cannabis businesses are spending significant amounts of money to implement track and trace systems compatible with Franwell’s Metrc. Metrc is a government-designed software that many states have elected to use, including California, that allows regulators to ensure that cannabis products are not being diverted to illegal markets. Cannabis products are given a radio frequency identification (“RFID”) tag, which licensees along the supply chain must input into their systems. This allows regulators to track the chain of custody of marijuana products. Under this system, however, licensees and regulators spend significant time ensuring compliant transfers.

Enter blockchain. In its simplest form, blockchain is a dispersed ledger. Transactions, or “blocks,” are added in a linear fashion, or “chain”, after they have been verified by other members of the blockchain as valid. All transactions on the chain are trackable to the initial entry. A blockchain platform can have various levels of supply chain information gathering, such as record keeping, tracking, assigning verifications, linking products together and sharing information.

Using blockchain technology, cultivators can input details about each crop: e.g., the date the flower was harvested, pesticide levels throughout the growth cycle, and information about cross-pollinated plants. The data can be stored and verified via blockchain, and instantaneously shared with all parties on the blockchain platform. These parties can be other members of the cultivation team, cultivators in different facilities, potential retailers or producers, and even end-use consumers. This data will travel with the flower from seed to sale.

When the product is ready for pick-up from a grow site, the blockchain platform can verify that a distributor is licensed. Implementing blockchain can therefore prevent unlicensed distributors with fabricated paperwork from stealing goods. The platform will also maintain all records of a transaction or series of transactions: e.g. shipping manifests, receipts, purchase orders, lab results, etc. Blockchain can also help ensure that products are being properly labeled. When a label is created, a photograph or file of the label can be uploaded to the blockchain. Members of the blockchain can verify that the label is correct before it reaches the product.

Because all information recorded in blockchain is verifiable by other members on the platform, blockchain will remove the need for tedious paperwork at each step in the supply chain. Cannabis will be able to move freely from licensee to licensee without any added hassle. Regulators will gain a streamlined audit tool, and customers will be able to ensure that they are only getting the best and safest products. Ultimately, blockchain can improve the overall integrity of the track and trace system, and minimize the time it takes for the product to get from seed to sale.

The million dollar question with all of this is whether and when blockchain will burst through and finally become mainstream enough for adoption by a state regulatory body, like California in the case of cannabis. There are a range of opinions on the inevitability and timing of blockchain (for just a few of the many examples, see here, here and here). In our view, blockchain and cannabis are a perfect marriage of emerging trends. We will continue to partner with individuals and businesses interested in this technology, and we foresee a bright future for blockchain and cannabis once the implementation and educational hurdles are cleared– hopefully, in a few years at most. In the meantime, California businesses and regulators will have to muddle along with Franwell’s Metrc product.

oregon cannabis processor
Licensees and employees only: them’s the rules!

Our Oregon marijuana processor clients often approach us with requests to draft agreements that will allow third-parties to process cannabis in the client’s licensed premises. Typically, the processor is not operating at capacity and would like to supplement income by charging fees to keep the premises open around the clock. Previously, we have explained that this arrangement only really works if the third-party is also a licensed OLCC processor, pursuant to Oregon’s new alternating proprietor rules (OAR 845-025-3255). However, we are most often approached with proposals to have non-licensee third-parties enter the kitchen and physically create cannabis products that will be owned and sold by the licensee.

Here is a more concrete example: Kelly’s Kitchen is an Oregon Liquor Control Commission (OLCC) licensed processor. Kelly meets Cindy, who has developed a recipe, labels, and packaging. Cindy doesn’t want to go through the OLCC application process, she just wants to make her Bud Brownies. Kelly invites Cindy to personally make her brownies on Kelly’s property, and Kelly agrees pay Cindy for each unit sold. The prevalence of these arrangements suggests that the industry has been treating this as a grey area. However, we recently reached out to the OLCC and received confirmation that this is black and white: The OLCC will view Cindy as illegally processing cannabis without a license, even if Kelly always retains ownership of the cannabis and resulting product. This arrangement can also put Kelly’s license at risk. No arrangement that allows non-licensees to personally process cannabis within a licensed premises is allowed under the rules.

The OLCC’s view should not come as a surprise when you consider the significant restrictions in the new alternating proprietor rule that allows multiple OLCC licensed processors to share kitchen space:

  • The kitchen must have a pre-approved schedule posted on its front door showing when each processor will be using the kitchen.
  • The kitchen must have a separate secure area for each processor to store its cannabis products.
  • Any concentrates produced under an alternating proprietor arrangement can only be used within that processor’s edibles or topicals.

In effect, Cindy and Kelly are trying to bypass these restrictions, and the processor licensing regime as a whole.

The only viable alternative to alternating licensed proprietors appears to be a standard intellectual property licensing agreement, whereby Cindy would license her recipe, branding, and packaging to Kelly as co-packer. Kelly or her employees then process the brownies and sell them retailers or wholesalers without Cindy’s involvement. Cindy will likely expect to be paid based on the number of brownies that Kelly manages to sell. However, anyone considering this arrangement needs to carefully look at the OLCC’s financial interest disclosure requirements.

The definition of financial interest is fairly broad and includes anyone “having an interest in the [licensed] business such that the performance of the business causes, or is capable of causing, [an individual or entity] to benefit or suffer financially.” The OLCC will view Cindy as a financial interest holder because her compensation depends on Kelly’s success in moving the product. This isn’t the end of the world, but it does mean that Kelly must submit a Change in Financial Interest form and receive approval from the OLCC before Kelly begins making Cindy’s brownies. All this means is that Cindy will likely need to be fingerprinted and pass a background check.

We expect that we will continue to be approached by clients that want to invite non-licensees into their licensed premises to make products, but now we can confidently say that this common industry practice violates OLCC rules. Be warned!

California marijuana businesses Culver City
Cannabis businesses are finally coming to the Heart of Screenland.

Culver City plans to release its commercial cannabis applications before the end of March. On monday, the City Council voted to adopt its proposed cannabis business permit application process. Based on the released draft application documents, getting a commercial cannabis permit in Culver City is not going to be an easy process.

Here is a breakdown the application processes per license type:

Storefront Retail Applications:

In the first phase of the application process, applicants must submit live scans, zoning verification documents, and their cannabis business application. City staff and the Culver City Police Department will review that information and, if sufficient and complete, applicants will move on in the process. A three-person panel of City staff members will review and rank the applications; reviewers will read business plans, security plans, and design/location documents and rank each application on a point scale.

The panel will then choose a minimum of three and a maximum of six applicants with the highest average ranking to proceed. Other applicants will be put on hold pending the outcome of the permitting process. A five-person review committee composed of City staff members will then interview the ranked applicants. At least two of the largest equity holders and the day-to-day operations manager of the applicant must be present for the interview. The three applicants with the highest average scores will then proceed in the licensing process. In the event of any tie amongst applicants, a lottery will be used to choose who moves on.

Only after interviews or the potential lottery will these 3-6 applicants finally apply for a Conditional Use Permit (“CUP”) and other required Los Angeles County permits. Upon applying for the CUP, applicants will present their building and operational proposals at a public City Council meeting, and the Council will either approve or deny the permits accordingly. If the Council approves, the applicants will then apply for their Culver City Business Tax Certificate (“BTC”), all required City permits, and begin moving forward with their build-outs. Applicants will then pay permit fees, complete their build-outs, and City staff will perform on-site inspections. If everything checks out, the CUP and BTC will finally issue to the applicant.

Non-Storefront Retail Applications (i.e., Manufacturing, Distribution, Delivery-only retail, Cultivation, and Testing Labs):

In the first phase of the application process, applicants must submit live scans, zoning verification documents, and part one of their cannabis business application. City staff and the Culver City Police Department will review that information and, if approved, applicants will move forward. If more than the maximum number of permits allowed (6 manufacturing, 6 distribution, 3 cultivation, and 4 testing laboratories) qualify, then the City will use a lottery to determine the applicants that will ultimately receive a permit.

Successful applicants will then apply for a BTC, all applicable permits from LA County Department of Public Health, all required City permits, and submit part two of their cannabis business application.

Without a doubt, Culver City will be one of the most competitive jurisdictions in L.A. County. In such a setting, potential operators need to prepare themselves by organizing their business and operational plans as well their communal impact and outreach plans and methods, which will take significant preparation. Because the City plans to release its cannabis permit applications as soon as the middle of next month, would-be operators should start organizing themselves now: it’s going to be an uphill (and expensive and time-consuming) process in the Heart of Screenland.

marijuana event california
Like this, but with cannabis.

In order for a business to succeed, it has to create a connection with customers. This is especially true if the product sold is one that customers consume. Think about the importance of tasting rooms for wineries, or of tap rooms for breweries (especially craft brewers). These venues allow customers to connect with a product in a social setting, giving those businesses a valuable marketing platform.

When the California state legislature passed the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA), it granted local jurisdictions authority to regulate on-site marijuana consumption for retailers and microbusinesses, and temporary cannabis events. The focus of this post is on temporary events, but first, a quick refresher on the microbusiness license type is in order. A microbusiness is a cannabis licensee that must engage in at least three of the following commercial cannabis activities:

  • Cultivation (up to 10,000 square feet);
  • Manufacturing (Type 6 only);
  • Distribution; or
  • Retail.

All three (or four) of the commercial cannabis activities need to take place on the same premises. If a microbusiness chooses to cultivate, manufacture, and conduct sales, it would give that business a great opportunity to directly connect with its customers and tell a story. This is even truer if the local jurisdiction allows for on-site consumption. (For additional information on the microbusiness license type, see my thoughts here for Leafly Magazine.)

Now, back to temporary cannabis events. The Bureau of Cannabis Control (BCC) is the agency in charge of regulating and issuing temporary cannabis event licenses. If done right, participating in a cannabis event is another great way to connect and build up your consumer base and brand. There are a number of regulations that cover what is allowed at temporary cannabis events. Here are just a couple of highlights:

  • A temporary cannabis event license can only be issued to a cannabis event organizer.
  • A cannabis event organizer licensee is not authorized or licensed to cultivate, distribute, manufacture, or retail cannabis or cannabis products without first obtaining the appropriate licenses or authorizations to engage in such commercial cannabis activities.
  • No temporary cannabis event license will be issued for more than 4 days. Temporary cannabis event licenses will not be issued separately for consecutive days for the same event.
  • An application for a temporary cannabis event license shall be submitted to the BCC no less than 60 days before the first day of the cannabis event.
  • Cannabis sales at the event can only be conducted by a licensed cannabis retailer or microbusiness license holder.
  • Cannabis goods sold on site must be transported to the site by a licensed cannabis distributor.
  • Cannabis consumption is allowed but access to the consumption area shall be restricted to persons 21 years of age or older.
  • All cannabis goods at a cannabis event shall be in compliance with the state’s testing, labeling, packaging, and track and trace requirements.
  • Sale or consumption of alcohol or tobacco shall not be allowed on the premises.

What I didn’t mention is where these cannabis special events can take place. Under MAUCRSA, cannabis special events can only take place at a county fair or district agricultural association event. Restricting cannabis events to these locales eliminates California’s largest cities from hosting them. State Assemblyman Bill Quirk is seeking to rectify this through Assembly Bill 2020 (AB 2020). This bill was introduced last week and its most important provision can be found in Section 26200 (a)(1)(e), which provides:

“This division does not prohibit the issuance of a state temporary event license to a licensee authorizing onsite cannabis sales to, and consumption by, persons 21 years of age or older at a county fair or fair event, district agricultural association event, or at another venue expressly approved by a local jurisdiction for the purpose of holding temporary events of this nature, provided that the activities, at a minimum, comply with the requirements of paragraphs (1) to (3), inclusive, of subdivision (g), that all participants are licensed under this division, and that the activities are otherwise consistent with regulations promulgated and adopted by the bureau governing state temporary event licenses. These temporary event licenses shall only be issued in local jurisdictions that authorize such events.”

The goal of AB 2020 is to give ALL local jurisdictions the flexibility to determine when, where, or if they want to hold a cannabis special event within their borders. One of the first supporters of AB 2020 is the city of Oakland, which has shown an interest in adding cannabis sales at its Art and Soul Festival. If Oakland is able to add cannabis to an already popular festival – which might prove difficult, since Art and Soul is an all ages event – other cities are sure to follow.

AB 2020 is eligible to be heard in committee next month. We will be sure to keep you posted on its progress.

California marijuana banking
A public marijuana bank is a red herring.

It seems like every state in its own way has tried to grapple with a state-legislated solution to the notorious banking issue across the cannabis industry. And now California is going to study its own banking solution that, in all reality, probably isn’t going to go anywhere.

California is predicted to take in $7 billion by 2020 because of adult-use legalization. Its licensed operators have nowhere reliable to put all of that cash, and you can be sure that the California Department of Tax and Fee Administration doesn’t want those operators trucking hundreds of thousands of tax dollars to Sacramento. Additionally, the cash epidemic was complicated by the fact that Attorney General Sessions’s rescission of the 2014 Department of Justice (DOJ) Financial Crimes memo, which allowed financial institutions to bank marijuana businesses in states with “robust regulation”, in concert with the 2014 FinCEN guidelines. Thankfully, those guidelines still exist, but the Department of Treasury is currently looking at them in the wake of Sessions’s decision.

Back to California.

This month, Treasurer John Chiang announced that his office (along with the California State Attorney General’s office) would undertake a two-part feasibility study around forming a state-backed bank to serve California cannabis businesses. In his office’s November 2017 report, Chiang admitted that creating and supporting a state cannabis bank would be a “formidable” task and that the “definitive solution” is for the federal government to either legalize cannabis or for Congress to create some kind of legal safe harbor for financial institutions that bank the industry. Nonetheless, Chiang’s report proposed two options for a state cannabis bank:

  • “A public institution that would either (1) finance public infrastructure and expand banking for underserved groups, including the cannabis industry; or (2) take deposits, make loans, and provide other services primarily to cannabis producers, distributors, retailers, and related businesses.” Or,
  • “A privately owned bankers’ bank, supported by the state, which would not take retail or small business deposits, but instead provide financial services, compliance services, and technical assistance to financial institutions serving the cannabis industry.”

Chiang’s report goes into great detail about the pros and cons of choosing either a public financial institution or the banker’s bank model. The report runs the gamut of concerns over federal asset forfeiture risks, industry volatility, special problems with closed loop banking and the Federal Reserve, public costs, profitability, capitalization, federal and state regulatory issues, the inability to secure federal depository insurance, and various and complicated ownership structures over either model. Overall though, both models sound nearly impossible to create, capitalize, and sustain due to exiting federal regulations that are insurmountable in every way, because “marijuana” is still a Schedule I controlled substance.

While we appreciate the state’s desire to find a banking solution for cannabis operators, a state-owned, operated, and financially backed bank would have a gargantuan task just to get started–just ask Massachusetts and Colorado. Federal deposit insurers want nothing to do with a bank that is focused on marijuana businesses, regardless of whether it is state-owned. The Federal Reserve also seems unlikely to grant a master account to any newly chartered financial institution whose reason for being is to serve marijuana businesses. Without that master account, the bank wouldn’t have access to the federal money transfer system, a key aspect of banking.

California would be wise to examine state-legal marijuana banking in the Northwest. Washington and Oregon boast a small but stable number of banks and credit unions that provide services to state-licensed marijuana businesses. Private banking in those jurisdictions grew slowly as those states developed their regulations, and the vast majority of rules are promulgated by state government.

California has only just started, and banks that would serve marijuana businesses there would only now be in a position to start working with California cannabis operators. Additionally, with the level of control that California regulators allow local authorities, marijuana businesses in different, local jurisdictions still face significantly different hurdles from one another. It is more challenging for institutions in California to keep up with the myriad of state and local rules that have been promulgated, most of which are still untested and with new ambiguities being found daily.

Now that the 2014 DOJ Financial Crimes enforcement memo is gone, it’s anyone’s guess as to what Treasury will do going forward and whether increased MAUCRSA regulation will matter to banks and credit unions in California. If banks are going to participate, regulations need to be significant enough that banks believe that they are as “robust” as the Treasury guidance requires, but simple enough that a bank can feel confident about its ability to judge whether or not one of its account holders is complying with state law.

Ultimately, a public bank of any kind is a red herring for the cannabis industry. Instead, existing financial institutions need to be sufficiently supported by the states so that they feel comfortable taking on the risk of servicing cannabis accounts.

Editor’s Note: A version of this post previously ran in the author’s Above the Law column.

Oregon RICO marijuana
This is not the racketeer you’re looking for.

In this series (Part 1, Part 2, and Part 3) we have been looking at two RICO cases filed in District Court in Oregon against cannabis producers. The first, McCart v. Beddow, appears to have settled pursuant to a confidential settlement agreement. The second, Ainsworth et. al. v. Owenby et. al., is just getting started. The common thread here is that the pro se (self-represented) plaintiff in McCart v. Beddow, is an attorney who is now representing the plaintiffs in Ainsworth.

Due to this common thread, we think we can draw some likely conclusions about the contents of the confidential McCart settlement from the issues raised in the Ainsworth complaintNote that the Ainsworth complaint was filed just about two months after the McCart defendants filed their motions to dismiss. As discussed below, it is clear that the Ainsworth complaint learned some valuable lessons from the motions to dismiss. Let’s engage in a bit of idle speculation:

Dispensaries can breathe a sigh of relief.

The McCart lawsuit named each and every OLCC licensed retailer that purchased the defendant farm’s product. In sharp contrast, the Ainsworth complaint doesn’t name any such “dispensary defendants.” Given that one of the goals of these RICO cases is to get a windfall under RICO’s treble damages clause, it is probably safe to assume that the McCart dispensary defendants didn’t end up being a pot of gold at the end of the RICO rainbow. Perhaps the attorney now agrees with our initial assessment: “It seems unlikely the Dispensary Defendants in this case had anything to do with operating or managing the enterprise. They appear to have merely been customers, in which case they shouldn’t have liability here.” This suggests that dispensaries are unlikely to be targets of future RICO suits based on the conduct of their suppliers.

The protections of ORS 30.936 (Right to Farm Act) played an important role in the McCart settlement negotiations.

As we explained in a previous entry in this series:

“ORS 30.936(1) . . . provides farmers in farming areas with immunity from suit for any trespass or nuisance claims, defined elsewhere as claims ‘based on noise, vibration, odors, smoke, dust, mist from irrigation, use of pesticides and use of crop production substances.’ Since RICO case law suggests that harms to property interests should be determined by state law, plaintiffs’ diminution of value claims are likely dead on arrival.”

The Ainsworth complaint takes pains to avoid the protections of 30.936. For example, paragraph 91 reads:

“Defendants are not entitled to ‘right to farm’ immunity pursuant to ORS 30.936 because Defendants’ use of the [Defendant] Property does not comply with applicable laws. For example, the [Defendant] Property is zoned ‘rural residential’ and therefore Defendants’ use of the [Defendant] property to produce and process marijuana commercially violates Linn County Ordinance 940.400(A) and 940.500(A).”

Plaintiffs are correct that Ordinances 940.400 and 940.500 appear to bar marijuana production on the Defendants’ property, but that only suggests that Defendants must have been grandfathered in when Chapter 940 (Marijuana Code) was adopted. Otherwise, they presumably would not have been able to receive state authorization to cultivate cannabis. If the Defendants’ use was grandfathered in, then the Ainsworth trespass and nuisance claims should still be barred by ORS 30.937, which extends the farming immunity to any “preexisting nonconforming use” as a farm.

Lessons Learned

Like with the McCart complaint, we can also analyze the Ainsworth complaint to draw some broader lessons for cannabis businesses that want to avoid similar lawsuits.

As quick reminder, we identified two initial lessons from the allegations in the McCart case:

  • Don’t be a jerk.
  • Control the odors.

Taking the allegations at face value, the Ainsworth defendants violated both of these rules. Like in McCart, there are (as yet unsubstantiated) allegations of harassment (although much less severe than in McCart). Also as in McCart, a major sticking point for the Ainsworth plaintiffs is the “unmistakeable skunk-like stench” that “pervades” the neighborhood, “stagnates” in the Plaintiffs’ yards, and “completely overpowers the gentle and pleasant scents of [one of] the [Plaintiffs’] flower gardens.” These lessons still clearly apply: Be a good neighbor, and control the odors.

We can pull a few new lessons from the Ainsworth complaint:

  • Avoid smoke. The Ainsworth complaint alleges that the Defendants regularly burned cannabis debris in their yard, causing smoke to trespass onto their neighbors’ property. Producers seeking to avoid similar lawsuits should think twice before lighting bonfires.
  • Limit noise. The Ainsworth plaintiffs complain of the noise caused by the industrial fans in the defendants’ greenhouses. Producers would be wise to take any reasonable steps to limit noise pollution.
  • Try to limit traffic. Both McCart and Ainsworth complained about the increased traffic caused by the cannabis farm at all hours of the night. It seems the ideal farm will have direct access to a major road instead of access through residential roads. Barring that, producers should at least try to limit after-hours traffic.
  • Don’t live next to a county commissioner. One of the plaintiffs is Linn County Commissioner John Lindsey. One would expect that Mr. Lindsey will recuse himself from any future attempts to rewrite Linn County’s cannabis ordinances.

The Ainsworth defendants have only recently lawyered up, so it may be a few weeks before we can see their answer to these charges. We’ll keep you updated.

marijuana oregon cananbis
Follow the rules or risk having to close your doors–permanently.

Recreational cannabis is highly regulated. In Oregon, the Oregon Liquor Control Commission (OLCC) is the agency tasked with implementing and enforcing the recreational cannabis rules. The rules are complex and frequently change (see posts on that here, here, here, and here) meaning compliance can be difficult even with the best of intentions. For that reason, marijuana businesses should set up a comprehensive compliance plan to avoid violating OLCC rules. But what happens when a rule is violated?

When the OLCC determines a cannabis business or its employee has violated a rule, it issues what is known as a “charging document.” The charging document will list what rule has been violated and the penalty the OLCC plans to assess. The rules identify six categories of violations. The categories identify different levels of egregiousness and the OLCC, while not required to assess a penalty, has adopted guidelines for the kinds of penalties cannabis businesses can expect:

Category I: These are considered the most egregious violation and can result in license revocation. These violations include things like failure to verify the age of a minor, intentional false statements made to the OLCC, or intentional destruction or concealment of evidence

Category II: These are violations that create a present threat to public health or safety and include things such as being under the influence of intoxicants while on duty or failure to permit a premises inspection. These violations can result in a 30 day suspicion of a license or up to $4950 penalty.

Category II(b): This is a special category reserved for the unintentional sale of marijuana to a minor. It results in either a 30 day license suspension or up to $4950 penalty.

Category III: These violations create a potential threat to public health or safety and include things such as allowing a minor to enter a prohibited area or permitting sales by an employee without a marijuana workers’ permit. Category III Violations can result in a 10 day suspension or a $1650 fine.

Category IV: These violations create a climate conducive to abuses associated with the sale or manufacture of marijuana items and include operating a business after lawful hours for the sale of marijuana or removal of required signs and notices. These violations can result in a 7 day suspension or a $1115 penalty.

Category V: These are the least egregious violations and include things such as permitting marijuana items to be given as a prize or failure to notify the commissions of temporary closure of a licensed business. Category V violations can result in a 3 day suspension or up to a $495 penalty.

The OLCC determines the proper sanction by taking into account the egregiousness of the violation, the number of violations in the past two years, and any mitigating factors. Mitigating factors include: (1) making a good faith effort to prevent a violation and (2) extraordinary cooperation in the violation investigation, demonstrating the licensee or permittee accepts responsibility.

If you ever receive an OLCC charging document, it is important to understand that the inquiry has only just begun. The OLCC charging document is not a final finding. The business has the opportunity to contest the charging document and request an administrative hearing. If the charging document alleges a category I or a category II violation, a written answer must be filed along with the request for hearing. The written answer requires more than just a general denial and should specify specific defenses to the allegation in the charging document. It is absolutely critical to make this submission timely, and to be comprehensive and persuasive in reply.

Contested case hearings are similar to trials but not quite as formal. The parties are allowed to be represented by attorneys. Evidence can be submitted and witnesses can be called to the stand. Administrative law judges (ALJs) preside over the contested case hearing. After the hearing is completed, the ALJ will issue a proposed order. The proposed order will include a evidentiary background and findings about whether the cannabis business has violated a rule. The OLCC will review and issue a final order. The final order either adopting the ALJ’s findings or rejecting the findings. The cannabis business can appeal the final order to the Court of Appeals. The final order will include information regarding appeal procedures and timelines.

Rule violations can and do occur. Cannabis businesses should have comprehensive plans in place to stay in compliance at all times. When a rule violation does occur, know that qualified attorneys can help you navigate the administrative hearing process.