Last week I spoke on a panel about compliance at the Cannabis Cultivation Conference hosted by the Cannabis Business Times. If you’ve been following the latest developments in California you’d know that compliance with the myriad of regulations is the biggest obstacle for businesses looking to join the state legal cannabis market.
For commercial cannabis purposes California is a dual licensing state (although some would call it a “duel” licensing state, as it can be quite a battle to obtain a cannabis business license). Dual licensing means that in order to operate a commercial cannabis business you have to obtain a cannabis permit from your local jurisdiction before you can receive your license from the state. That means you’ve got to comply with two sets of regulations and in some occasions, many more.
For those that have been operating as collectives, cooperatives, or non-profits under the Compassionate Use Act (1996), Senate Bill 420 (2003) and the California Attorney General Guidelines (2008), compliance requirements were practically non-existent. That all changed when the state passed the Medical Cannabis Regulation and Safety Act in 2015 and California voters approved the Adult Use of Marijuana Act in 2016: Both the MCRSA and the AUMA were merged under the Medical and Adult-Use Cannabis Regulation and Safety Act to form one regulatory regime. In that sense, compliance is more manageable than it may appear at first blush.
Still, for many people who have dedicated themselves to providing medical cannabis to Californians for the last two decades, the thicket of regulations is the equivalent of a meteor-level extinction event. For the last twenty years most cannabis operators have looked at record-keeping as something you’d do if you wanted to go to jail — handshakes, your word, and cash transactions were the non-incriminating way of the land. Due to banking issues, cash transactions are still prevalent, but handshake deals should be sitting on a shelf at Blockbuster now that cannabis businesses are legitimate, licensed entities.
It is also worth noting that record-keeping and compliance does not end once you’ve obtained your local and state cannabis permits. Compliance is not only a prerequisite to obtaining but is also vital in maintaining your cannabis license. If the thought of compliance is overwhelming you and you don’t where to start, don’t worry, we’ve got you covered. This list should not act as a substitute for obtaining competent legal representation but it will give you an idea on what the road to compliance looks like. Without further ado:
- Prepare a List Of The Regulatory Agencies That You’ll Need To Work With. At the state level, the three main regulatory agencies are the Bureau of Cannabis Control (distributors, laboratories, retailers, delivery-only retailers, microbusinesses, and temporary special events); the Department of Food and Agriculture (cultivators, processors, and nurseries); and the Department of Public Health (manufacturers). Other agencies include the Department of Fish and Wildlife, Regional Water Boards, the California Department of Taxes and Fees Administration, and the California Department of Insurance to name a couple more (there are others out there). On the local side, you’ll likely need the approval of some combination of the following: the City Council or Board of Supervisors, the City Manager, the Planning Department, the Zoning Administrator, and Police, Fire, and Building Departments. Put a list together of all the agencies (and their requirements) that will regulate your cannabis business.
- Read Your Local Ordinance. Remember, you can’t get your state license until you obtain your local permit. Your local cannabis ordinance will list the criteria you’ll need to meet to get a license. You’ll likely need a security plan, a business plan, an odor mitigation plan, and a community relations plan. Some local ordinances have hours of operation requirements that are stricter than the state’s regulations so make sure your application abides by your local rules. It’s essential that the business, operating, and security plans you submit align with your local ordinance. I also highly recommend that you attend all of the cannabis ordinance public hearings in your local jurisdiction to familiarize yourself with the decision makers and any community concerns.
- Make Sure Your Location Is Properly Zoned For The Activity. This coincides closely with familiarizing yourself with your local cannabis ordinance. You’ve got to make sure that your business is located in a district zoned for your cannabis activity and satisfies state and local setback requirements. If you’re leasing the property make sure the lease properly lists all of your cannabis operations as a permitted use.
- Prepare Standard Operating Procedures And Train Your Employees To Follow Them. Prepare SOPs for every part of your operation. If you don’t know where to start, begin with your local and state applications. Every plan or action item that was listed in your applications should have a corresponding SOP.
- Conduct Financial, Security, And Inventory Audits. Not only is important to have SOPs but you need to make sure your business is following them. Let me be brutally honest here: At some point, something is going to go wrong. If that mistake brings a regulator to your door, you’ll want to show them that mistake was an anomaly and not due to poor business practices. Conducting audits and following SOPs will go a long way in mitigating potential penalties. For more on the importance of audits, see here.
- Compliance With Securities Regulations. Will you need to raise funds from investors? If so, you’ll need to consult with your attorney to determine whether the investment constitutes a security and if so, whether a securities exemption is applicable or not. For more on securities compliance, see here.
- Review The Representations, Warranties, And Indemnity Provisions In Your Contracts. When’s the last time you looked over any of your contracts? Make sure the other contracting party has obtained the necessary licenses, represents that they’re in compliance with all regulations, and will indemnify you if they’re negligent or otherwise deviate from their representations and warranties.
- Have a Compliance Team. Depending on the size of your cannabis business, compliance should not be a one-person operation. Your business will benefit from having a compliance team. Not only is this important for regulatory reasons but having a compliance team will allow you to identify inefficiencies and irregularities in your operation and correct them. Make sure your compliance team or compliance officer meets regularly with your employees as improved communication will also improve profits.
The bottom line is that compliance is necessary for cannabis businesses and should be given the appropriate attention. Compliance isn’t a four-letter word, nor should it be treated like one. A robust compliance protocol will lead to a standardized and reliable cannabis product, and if a purchaser down the supply chain (and ultimately the consumer) can rely on your product to meet the same standard every time, you will differentiate yourself in a competitive marketplace. Life might be like a box of chocolates but you shouldn’t have to guess when it comes to compliance and your product.
