In California, beneath the Medicinal and Grownup-Use Cannabis and Regulation Security Act (MAUCRSA), short-term licenses started issuing to hashish companies on January 1, 2018. Since then, the state businesses answerable for MAUCRSA’s implementation (the Bureau of Cannabis Management (BCC), the California Division of Public Well being (CDPH), and the California Division of Meals and Agriculture (CDFA)) have labored just about around the clock on adopting everlasting laws. In case you forgot, the businesses dropped their preliminary proposed everlasting guidelines this previous summer time, tweaked these, after which launched one other spherical of revised proposed everlasting laws final month (which at the moment are within the palms of the Workplace of Administrative Regulation (OAL) for an general assessment). That final spherical of proposed everlasting guidelines (see right here, right here, and right here) could be very more likely to grow to be efficient (pending OAL’s evaluate) in early January. Proper now, all licensees are nonetheless working underneath the emergency guidelines that got here out in fall of 2017. And just about everyone seems to be racing to get their short-term licenses, which can NOT be out there after December 31.
Although the state has made nice progress in the direction of everlasting guidelines, many questions and ambiguities round licensing and operational conduct stay. In reality, a number of the grayer areas of the emergency laws have been expanded by the proposed everlasting guidelines for higher or worse. In flip, with 2019 simply across the nook, right here’s my record of the highest 10 unknowns that also stay for California hashish:
1. IP licensing and white labeling restrictions.
In case you’ve been dwelling beneath a rock, one of the surprising proposed everlasting guidelines to return from the BCC is part 5032(b) (which, sure, impacts all licensees). Primarily, part 5032 (b), as initially written, principally prohibited all IP licensing and white labeling agreements between hashish licensees and non-licensees. That rule said that:
(a) Licensees shall not conduct business hashish actions on behalf of, on the request of, or pursuant to a contract with any individual that isn’t licensed underneath the Act. Such prohibited business hashish actions embrace, however are usually not restricted to, the next: (1) Procuring or buying hashish items from a licensed cultivator or licensed producer; (2) Manufacturing hashish items in accordance with the specs of a non-licensee; (three) Packaging and labeling hashish items beneath a non-licensee’s model or in line with the specs of a non-licensee; (four) Distributing hashish items for a non-licensee.
For extra element on that unique rule, see our write-up right here. Throughout public touch upon 5032, there was a great quantity of dissent (together with our personal) in that it’s fairly apparent if such a rule went by way of lots of branded product at present on the cabinets must be tossed. As well as, California can be the one state within the hashish union to undertake such a strict rule. When the BCC then launched the revised proposed guidelines, 5032(b) was pared right down to learn as follows:
(b) Licensees shall not conduct business hashish actions on behalf of, on the request of, or pursuant to a contract with any individual that isn’t licensed underneath the Act.
As you possibly can see, the IP licensing and white labeling examples have been deleted, however the rule nonetheless makes clear that licensees can’t undertake business hashish exercise (i.e., manufacturing, labeling, processing, and so on.) “on behalf of, at the request of, or pursuant to a contract” with a non-licensee. Simply eradicating former examples (1)-(four) might haven’t any influence in any respect right here, and it’s definitely confused the state of affairs consequently. And whereas the BCC’s personal feedback to 5032 (in its Remaining Assertion of Causes) point out that it takes no situation with non-licensee to licensee IP licensing and white labeling relationships, a plain studying of the rule signifies in any other case.
2. Possession points.
The BCC struck once more within the proposed guidelines revising “owner” disclosure requirements to be a lot stricter at part 5003. Now, along with anybody with 20% or extra in fairness, the board of administrators, the CEO, and anybody or any entity that workouts any path, management, or administration over the licensee, is additionally an proprietor. Any particular person or entity merely entitled to revenue share at or greater than 20% can also be an proprietor. This calls into query although how the BCC plans to deal with issues like cashless choices and warrants that haven’t any speedy entitlement to possession in or revenue sharing with the licensee. And what about husbands and wives (that are in group property marriages in California) since there’s no spousal disclosure requirement they usually’re technically one individual underneath present regulation? The BCC has been silent on all the foregoing and I’ve little question that these new revised guidelines may very well incentive individuals to be much more “creative” with a purpose to keep away from proprietor (and monetary curiosity holder) standing.
three. Monetary Curiosity Holder woes.
Figuring out monetary curiosity holders (FIHs) is extra difficult than house owners as a result of the FIH definition now encompasses quite a lot of people and entities. I just lately spoke to the OC Register about how now even legal professionals who take a share of the income of a hashish enterprise (in trade for authorized providers) will now should be disclosed as FIHs underneath the brand new guidelines. The BCC additionally made clear that it’s going to type via extra convoluted company buildings round FIHs to get to the people offering the capital to or revenue sharing with hashish companies. At part 5004 of the proposed guidelines, the BCC now mandates that:
“When an entity has a financial interest in a commercial cannabis business, then all individuals who are owners of that entity shall be considered financial interest holders of the commercial cannabis business. For example, this includes all entities in a multi-layer business structure, as well as the chief executive officer, members of the board of directors, partners, trustees and all persons that have control of a trust, and managing members or non-member managers of the entity. Each entity disclosed as having a financial interest must disclose the identities of persons holding financial interests until only individuals remain.”
In fact, we now have no approach of actually understanding how far the BCC will go right here in vetting the people behind these buildings, although I’m positive various publicly traded corporations are struggling extreme heartburn at studying this new rule.
four. Packaging and labeling compliance in 2019.
Underneath CDPH proposed everlasting laws, producers won’t should implement baby resistant packaging (CRP) for his or her hashish merchandise till 2020. Within the interim, retailers will fill the hole through the use of CRP exit luggage. And whereas CRP goes away for producers, there are a slew of revised and new packaging and labeling requirements being carried out upon the principles turning into efficient within the new yr. The excellent concern then is that CDPH created no affirmative grace interval for manufactured product that’s on the market proper now and compliant with the emergency laws, however that doesn’t meet the brand new packaging and labeling laws. (An awesome instance is that producers of sure merchandise now should put the common image not solely on outer packaging but in addition on the product container itself if that outer packaging is “separable” from the product container.) What’s for positive is that retailers can’t possess or promote completed product that doesn’t adhere to the brand new packaging and labeling guidelines. So, what precisely will occur to present, non-compliant product in 2019? That is still a thriller.
5. Provisional licensing.
Provisional licensing is the brand new temp licensing. (See right here for extra on the temp license race to safe provisionals for 2019.) Regardless that a provisional license is the brand new scorching ticket on the town, the BCC and CDPH have given no perception into how a licensee truly secures this license. I surmise that the issuance of provisionals can be automated (just like how the state was simply renewing temp licenses mechanically if a short lived licensee was in clear and earnest pursuit of its annual license). CDFA is the one company that’s produced a reality sheet on the subject, however no company has publicly introduced the precise logistics round provisional licensing but.
6. Social fairness packages.
For each metropolis that’s completed a social fairness program, it’s been a problem out of the gate to do it appropriately and sustainably. Los Angeles is simply getting began with its program whereas sure different California cities try however are producing meager outcomes at greatest. Whereas the state lastly determined to financially again native social fairness packages, it’s clear that the state and the cities want to review this specific social experiment for a while earlier than a gold normal will truly emerge. In flip, the success of those packages is certainly a big unknown.
Banking in California is the quantity query I get on a weekly foundation at this level: specifically, when the hell is it going to begin? I’m a agency believer that until and till our everlasting laws are finalized and are confirmed to work relative to obstacles to entry and vetting house owners and FIHs, we won’t see personal sector banking in California. Our licensing and enforcement methods are nonetheless too unfastened/inchoate to fulfill the 2014 FinCEN tips, and no public financial institution goes to materialize right here both for numerous difficult and sensible authorized causes (make sure you be careful for banking fraudsters, too). And whereas California hashish corporations will possible proceed to make use of administration corporations to assist them alleviate a number of the incapability to entry banking, it’s definitely not a long-term answer and it’s downright unlawful when that relationship isn’t authentic or at an arm’s size anyway.
eight. Charge slotting agreements and anti-competitive techniques.
Regularly now, I’m seeing retailers introduce to my cultivation and manufacturing shoppers quite a lot of charge slotting agreements in order that my shoppers can safe recognized shelf-space with a view to stay aggressive. This month, I questioned whether or not such contracts have been legitimate underneath MAUCRSA the place anti-competitive conduct is strictly barred. Solely time will inform whether or not regulators will tackle these agreements and their impression on the marketplace.
9. Tech platforms and supply.
The BCC appears to have developed an urge for food for wading into elevated regulation relating to retailers and supply tech platforms. Pursuant to part 5415.1 of the proposed everlasting BCC laws, we now have a extra strong code of conduct between retailers and tech platforms in terms of supply. Now that the BCC has lastly opened the door to invading this relationship relating to contractual limitations and restrictions on promoting and advertising for licensees by way of tech platforms, it begs the query as as to if California goes to go additional down the street of making an attempt to primarily regulate tech platforms or not. Given the truth that California is likely one of the few states that’s embraced supply, it’s an important space for improvement, each legally and for public coverage.
10. Company versus cottage debate rages on.
Each single state that’s undertaken leisure hashish has to battle between company and cottage pursuits. And each single state is totally different in the way it’s dealt with the difficulty. Within the proposed everlasting laws, it’s arduous to inform which approach California is leaning since these guidelines nonetheless include some pretty huge enterprise pleasant propositions (akin to nonetheless with the ability to safe numerous small cultivation license varieties, native regulation allowing, so as to combination massive acreage) in addition to some guidelines that minimize towards “Big Marijuana,” like having to reveal shareholders in a publicly traded firm as FIHs until they maintain 5% or much less of the fairness. In 2019, I feel we will absolutely anticipate the talk between small and enormous enterprise pursuits to hold on, however the place California lands stays unknown. That’s going to in all probability proceed for fairly a while as it really works out the kinks spurred by the proposed laws.