With 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.
Here are 10 of the most misunderstood aspects California attorneys are hearing about the state’s newly legalized cannabis industry:
By Laurie Avocado ([1] Medical Marijuana]) [CC BY 2.0], via Wikimedia Commons
- The current collective model gets to rage on for the next year. Not entirely true, as has been covered elsewhere, including the Canna Law Blog.
The collective model created by a 2008 state attorney general memo and eventually addressed by Senate Bill 420 gets to live on until Jan. 9, 2019 (the California Bureau of Cannabis Control 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.
- During the “transition period,” licensees can buy product from unlicensed collectives. False.
Once businesses have received their temporary license from the state, they’re stuck in the temporary licensee system, meaning they 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 Jan. 1 until July 7, 2018. That period also allows temporary and annual licensees to sell “transition-period product,” meaning products they already had in their possession when they received their temporary license, under certain circumstances.
- 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 example, manufacturers that bring products into the temporary licensed market must adhere to the following standards: a) the product has to be packaged in child-resistant packaging that complies with the emergency MAUCRSA manufacturer rules (though a secondary package that is child-resistant is fine); b) it has to have the specific government warning set forth in Section 40408(3)(a) of the emergency MAUCRSA manufacturer rules; c) it has to meet the THC limits for edible and non-edible products; and d) 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.
- During the transition period, adult-use retailers can sell to qualified patients and medicinal retailers can sell to adults 21 and older. False.
Even though the transition period allows medicinal and adult-use licensees to do business with each other, the transition period rules do not allow adult-use retailers to sell to qualified patients or medicinal retailers to sell to adults 21 and older.
- Temporary licensees are not responsible for tracking and tracing commercial cannabis activity. 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 receiving their annual license, they have a set amount of time to get established in that system). However, under the Bureau of Cannabis Control 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. Manufacturer temporary licensees 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. Cultivators with temporary licenses have to record the commercial cannabis activity set forth in Section 8401 of the emergency MAUCRSA cultivation rules.
- Local approval isn’t necessary. False.
Local approval is pretty much everything when it comes to getting a state license. In turn, businesses need to check the local jurisdiction in which you plan to operate to ensure two things: a) they allow and regulate the license type desired, and; b) the business can locate and secure real property that complies with local and state laws.
- Profit sharing, intellectual property 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: a) a bank or financial institution whose interest constitutes a loan; b) individuals whose only financial interest in the commercial cannabis business is through an interest in a diversified mutual fund, blind trust or similar instrument; c) individuals whose only financial interest is a security interest, lien or encumbrance on property that will be used by the commercial cannabis business; and d) individuals who hold a share of stock that is less than 5% of the total shares in a publicly traded company. Of course, in other states, any right to receive a 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.
- Consultants will not be considered “owners.” Maybe, but it depends on what the consultant is doing and what the 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 or 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 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 businesses make some carve-outs in their consulting agreements, be sure consultants can meet all of the owner eligibility roles.
- Transition period product is taxable. True.
The California Department of Tax and Fee Administration 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 Jan. 1, 2018, but sold to customers on or after that day. Emergency Regulation 3701 was issued to close a perceived loophole in California’s cannabis excise tax. For more on Emergency Regulation 3701, see here.
- People can throw a “cannabis cup” wherever and whenever they 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 fewer and fewer sanctioned cannabis cups as we know them (meaning events in which people buy, sell, and ultimately consume a ton of cannabis and judge 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 regulations for consumption.
The other kicker is that to acquire one of these temporary event licenses, somebody would have to first receive a cannabis event organizer license, which entails all the vetting and disclosure requirements for any other license type. In addition, customers and consumers at the event must be 21 and older, 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.
Since joining the law firm Harris Bricken in 2010, Hilary Bricken has been an advocate for local businesses. She advises startups, entrepreneurs and companies in all stages of development and was named one of the top 40 young lawyers nationwide by the American Bar Association in 2017. She also authors a weekly column for Above the Law, focusing on marijuana policy and regulation. This article was previously published on the CannaLaw Blog and by Cannabis Business Executive.