True or False? Analyzing California Cannabis Legalization Hearsay

california cannabis licensingWith the beginning of California cannabis licensing under the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA), there has been a lot of confusion regarding how the new system will operate. The below are the top ten pieces of hearsay our California attorneys are hearing most regarding California’s newly legalized cannabis industry:

  1. The current collective model gets to rage on for the next year. Not entirely true, as we have covered elsewhere on this blog. The collective model created by a 2008 state attorney general memo and eventually addressed by SB 420 gets to live on until January 9, 2019 (if you didn’t get it, the Bureau of Cannabis Control (“BCC”) notified stakeholders by email that it posted to its website its notice to repeal Health and Safety Code section 11362.775 one year after regulators begin issuing licenses). However, if existing collectives undertake any sales of cannabis for profit or operate outside of the caregiver model set up by the Medicinal and Adult-Use Cannabis Act, or if they operate outside of local law mandates, they’re going to be in trouble with state and/or local authorities. Essentially, there’s been a legal narrowing of the collective model that pretty much no one is following because we haven’t seen the state or locals start to police accordingly yet, but that’s bound to change.
  2. During the “transition period,” licensees can buy product from unlicensed collectives. False. Once you have your state temporary license, you’re stuck in the temporary licensee system–you can only buy and sell product from and to other temporary licensees. The transition period is set up under the MAUCRSA emergency regulations to allow medicinal (M) and adult use (A) licensees to do business with each other from January 1 until July 7, 2018. That period also allows temporary and annual licensees to sell “transition period product,” i.e., products they already had in their possession when they received their temporary license, under certain circumstances.
  3. Transition period product doesn’t have any packaging, labeling, or testing standards. Mostly false. While transition period product doesn’t have to undergo testing, it absolutely has to meet certain packaging, labeling, and content standards depending on the licensee holding it. For manufactures, for example, the products brought into the temporary licensed market must adhere to the following standards: 1) the product has to be packaged in child-resistant packaging (CRP) that complies with the emergency MAUCRSA manufacturer rules (though a secondary package that’s CRP is fine); 2) it has to have the specific government warning set forth at Section 40408(3)(a) of the emergency MAUCRSA manufacturer rules; 3) is has to meet the THC limits for edible and non-edible products; and 4) it has to contain and show the amount of THC and, if applicable, CBD per serving and per package as required by the emergency MAUCRSA manufacturer rules.
  4. During the transition period, retailers can sell to qualified patients and M retailers can sell to adults 21 and up. False. Even though the transition period allows M and A licensees to do business with each other, the transition period rules do not allow A retailers to sell to qualified patients or M retailers to sell to adults 21 and up.
  5. As a temporary licensee, I’m not responsible for tracking and tracing commercial cannabis activity. Unfortunately, this is false. Under the emergency MAUCRSA rules, temporary licensees aren’t obligated to record commercial cannabis activity in the state’s formal track and trace system (though, after they receive their annual license, they have a set amount of time to get set up and into that system). However, under the BCC emergency regulations, temporary licensees “shall track and record all cannabis commercial activities and information required . . .  at a minimum, on paper receipts, invoices, or manifests.” The amount of track and trace activities for distributors, microbusinesses, and retailers is fairly significant, so temporary licensees should prepare themselves accordingly. For manufacturer temporary licensees, they have to record: name, address, and license number of the seller; name, address, and license number of the purchaser; date of sale or transfer; description or type of cannabis or cannabis product; weight or quantity of cannabis or cannabis product sold or transferred; and cost to the purchaser of the cannabis or cannabis product. And cultivators temporary licensees have to record that commercial cannabis activity set forth at section 8401 of the emergency MAUCRSA cultivation rules.
  6. Local approval isn’t necessary. False. Local approval is pretty much everything when you’re talking about getting a state license. In turn, you need to check the local jurisdiction in which you plan to operate to ensure two things: 1) they allow and regulate the license type you want; and 2) you can locate and secure real property that complies with local and state laws.
  7. Profit sharing, IP royalties, and sales as rent are disclosable financial interests. True. The emergency MAUCRSA regulations make clear that financial interests in a licensee are disclosable to regulators. A financial interest means “an investment into a commercial cannabis business, a loan provided to a commercial cannabis business, or any other equity interest in a commercial cannabis business.” The only exceptions are: 1) A bank or financial institution whose interest constitutes a loan; 2) individuals whose only financial interest in the commercial cannabis business is through an interest in a diversified mutual fund, blind trust, or similar instrument; 3) individuals whose only financial interest is a security interest, lien, or encumbrance on property that will be used by the commercial cannabis business; and 4) individuals who hold a share of stock that is less than 5 percent of the total shares in a publicly traded company. Of course, in other states, any right to receive any net or gross profit often triggers this kind of disclosure rule. As to California state regulators, they have relayed to us that profit sharing, intellectual property royalties, and sales as rent also constitute disclosable financial interests under MAUCRSA.
  8. Consultants will not be considered “owners”. Maybe, but it depends on what the consultant is doing and what your consulting agreement says. The emergency MAUCRSA regulations define “owner” as “[a] person with an aggregate ownership interest of 20 percent or more in the person applying for a license or a licensee, unless the interest is solely a security, lien, encumbrance; the chief executive officer of a nonprofit or other entity; a member of the board of directors of a nonprofit; an individual who will be participating in the direction, control, or management of the person applying for a license; an owner who is an individual participating in the direction, control, or management of the commercial cannabis business includes any of the following: a partner of a commercial cannabis business that is organized as a partnership; a member of a limited liability company of a commercial cannabis business that is organized as a limited liability company; an officer or director of a commercial cannabis business that is organized as a corporation.” A consultant can easily be construed as an “owner” in the license applicant if that consultant is controlling entire product lines, acting as a “master” anything with complete authority over the process, hiring and firing people without going through the actual owners, brokering and engaging in sales of product, and generally directing, controlling, and/or managing the business. In turn, unless you make some carve outs in your consulting agreements, be sure your consultants can meet all of the owner eligibility roles.
  9. Transition period product is taxable. True. The California Department of Tax and Fee Administration (“CDTFA”) back in December adopted Emergency Regulation 3701, Collection and Remittance of the Cannabis Excise Tax, clarifying that California’s Cannabis Excise Tax applies to sales of cannabis acquired before January 1, 2018, but sold to customers on or after January 1, 2018. Emergency Regulation 3701 was issued to close a perceived loophole in California’s Cannabis Excise Tax. For more on Emergency Regulation 3701.
  10. I can throw a “cannabis cup” wherever and whenever I want where cannabis is bought, sold, and consumed. False. As I’ve written time and again, legalization pretty much kills a lot of innovation and, with that, there are less and less sanctioned cannabis cups as we know them (i.e., people buying, selling, and ultimately consuming a ton of cannabis and judging it accordingly). Most California cannabis cups at this point are going to require a temporary event license under MAUCRSA, which will only be given if the “event” is thrown at a county fair or district agricultural association event. Any cannabis sales or consumption, would have to comply with MAUCRSA as well as local government approval standards for consumption. The other kicker is that to acquire one of these temporary event licenses, you would have to first receive a cannabis event organizer license, which entails all of the vetting and disclosure requirements for any other license type. In addition, customers and consumers at the event must be 21 and up, cannabis consumption cannot be visible from any public place or non-age-restricted area, no alcohol or tobacco can be consumed on the “cannabis event premises”, and sales of cannabis can only be conducted by existing microbusinesses or retailers.