We’ve received a lot of questions from existing City of L.A. dispensaries regarding whether or not they can make any corporate entity, location, or “ownership” changes before submitting their Prop M Priority Applications to the Department of Cannabis Regulation (DCR) pursuant to the Prop M ordinances. With MAUCRSA allowing for for-profit operations, many Prop. D dispensaries now desire to leave behind the old “cooperative/collective” model and many want to leave their current locations for better digs. However, the DCR has made clear (at least to us based on our communications with them) that it likely will not honor or recognize those Prop. D dispensaries wanting to amend their business tax registration certificates (“BTRCs”) to reflect new corporate entities, “owners”, managers, or locations. Here is the rundown on key issues:
Converting to a For-Profit: MAUCRSA provides that commercial cannabis businesses can organize as for-profit companies. The issue Prop. D dispensaries are facing is that their past BTRCs (certain ones of which are necessary for priority processing under Measure M) will not match their new for-profit entities where most Prop. D dispensaries are already some form of non-profit. The DCR has relayed that it will most likely not accept your application if the new entity does not match entity listed on the relevant BTRC, and that it’s best wait until after City licensure to convert to a for-profit company.
Moving Locations: At this point, pretty much all cannabis businesses, especially retailers and deliveries, are hoping to capitalize on California’s robust tourist market and are seeking to open shops in high-traffic, popular areas. However, for Prop. D dispensaries, they’re likely going to have to wait on that real estate grab because of the BTRC issue–if you relocate before filing your Measure M application, and your new location fails to match the location listed on your old BTRCs, the DCR isn’t likely to recognize your City license application as valid. So, waiting to re-locate is probably wisest according to our communications with the DCR.
Ownership Changes: Lots of existing Prop. D dispensaries have had massive “ownership” and management disputes over their storefronts. Even more are looking to take on new owners or “sell” all of the business to new buyers looking to cash in on L.A. cannabis. However, just like changing entities and re-location, any changes to ownership that don’t match up with past BTRCs or manager disclosures probably won’t be recognized by the DCR.
Fear not, though: all of the above changes will be doable eventually, just probably not before the March 4th filing deadline for existing dispensaries.
We should note that the City has not made clear whether businesses will be able to make the foregoing changes while waiting for their actual City license (post receipt of Temporary Approval), after they are granted the City license, or upon renewal of that license. In turn, where City and state commercial cannabis licenses are not transferable, if existing L.A. dispensaries want to apply for their state temporary and/or annual licenses as for-profits with new owners, at new locations, they’re going to have to wait on the City of L.A. to acknowledge those moves, or they’ll face jumping through the same administrative hoops with the state.
As most everyone now knows California’s statewide licensing and regulatory regime for medical and adult-use cannabis businesses took effect on January 1st of this year. However what readers of our Canna Law Blog know is that every jurisdiction is free to decide whether to regulate or prohibit cannabis businesses within their border. It’s the state’s deference to cities and counties that make our California Cannabis Countdown series so popular. Not only are local jurisdictions regulating what types of cannabis businesses they’ll allow, but also WHO is eligible for a cannabis license.
In many of California’s major metropolises local legislators have made it a priority to enact social equity programs. The goal behind many of these social equity programs is clear: the war on drugs disproportionally affected communities of color and as a just society we need to right that wrong. In the Bay Area both Oakland and San Francisco have enacted legislation that stresses the importance of social equity programs.
We previously covered Oakland’s regulatory regime here but as a quick refresher Oakland’s ordinance requires that half of all cannabis businesses permits are issued to equity applicants. Oakland defines an equity applicant as an individual that:
Is an Oakland resident; and
Has an annual income at or less than 80% of Oakland’s average median income;
Was arrested after November 05, 1996 and has a cannabis conviction in Oakland, or;
Has lived for 10 of the last 20 years in a number of police beats
After equity applicants, Oakland’s licensing regime gives priority to general applicants that are equity incubators. In order to serve as an equity incubator a general applicant must provide the following:
Providing free rent for a minimum of three years;
Provide a minimum of 1,000 square feet to the equity applicant; and
Provide the equity applicant with all required security measures.
Oakland has also realized that just providing priority processing to equity applicants alone is not enough to combat a history of disproportionate targeting of communities of color for criminal law enforcement. Oakland will also be hosting cannabis summits, orientations, and bootcamps for equity applicants. They’ve also created an online portal for equity applicants to connect with incubation partners.
San Francisco, like Oakland, has also created an equity program but has also taken the extra step by placing restrictions on who can apply for a cannabis business license. In 2018, San Francisco’s Office of Cannabis (“Office”) will only issue cannabis licenses to applicants that meet one of following criteria:
Qualify as an equity applicant or equity incubator;
Previously possess a valid medical dispensary permit under Article 33 of the Health Code;
Were issued a temporary cannabis business permit by the Office of Cannabis (which required you to register with the Office and show proof of operation prior to September 26, 2017);
Demonstrate compliance with the Compassion Use Act of 1996 (a/k/a Prop 215) and were shut down by federal prosecution or threat of federal prosecution;
Applied and received approval for a medical cannabis dispensary from the Planning Commission; or
Registered with the Office as pre-existing non-conforming operator.
On top of restricting the individuals that can obtain a license in 2018, San Francisco is placing an emphasis on social equity by granting equity applicants and equity incubators with priority processing in the permitting process. San Francisco’s equity applicant definition and incubator requirements differ from Oakland’s. In San Francisco an equity applicant is defined as someone that meets at least three of the following six conditions:
Meet certain household income limits (income limit varies depending on the number of people in your household);
Have been arrested from 1971 to 2016 for a cannabis offense;
Had a parent, sibling, or child arrested from 1971 to 2016 for a cannabis offense;
Lost housing in San Francisco after 1995 through eviction, foreclosure, or subsidy cancellation;
Attended school in the San Francisco Unified School District for a total of five years from 1971 to 2016; or
For a total of 5 years from 1971 to 2016, have lived in San Francisco census tracts where at least 17% of the households had incomes at or below the federal poverty level.
On top of those requirements there are also certain ownership interests and corporate positions that an equity applicant must hold in the cannabis business. If you want to operate a cannabis business in San Francisco in 2018 and don’t meet any of the criteria previously mentioned (prior operator or equity applicant) you’ll have to act as an equity incubator, which requires ALL of the following for three years:
Have local residents perform 30% of all work hours;
Have half your employees meet three of the six conditions for equity applicants; and
Provide a community investment plan with businesses and residents within 500 feet of your location.
And at least one of the following conditions:
Submit a plan to the Office of Cannabis for providing guidance to equity applicants running a new cannabis business; or
Provide an equity applicant with rent-free commercial space and use of security services for three years. The rent-free space has to equal or exceed 800 square feet or be at least 10% of the incubator’s space.
Both Oakland and San Francisco will be issuing progress reports on the status of their respective social equity programs and it will be interesting to see how many cannabis permits end up being issued. These are noble and necessary programs and we hope that they succeed. We’ll be sure to keep you posted.
On December 11, 2017, Culver City Council voted to approve an ordinance that allows for the establishment of medicinal and recreational commercial cannabis businesses. Culver City becomes the fourth city in Los Angeles (including West Hollywood, Los Angeles, and Maywood) to implement a framework for regulating both medical and adult-use cannabis.
Since January 1 and the legalization of adult-use cannabis in California, clients have been asking us constantly about licensing their businesses. As we have explained time and again, getting local approval is paramount before getting a state license.
Here is how the rest of Los Angeles County currently looks:
The City of Los Angeles is only accepting Prop M Priority Applications until at least March 4, 2018. The city has stated that applications for the general public probably will not be available until mid-2018.
West Hollywood has been processing applications, but the city is known for having high rents and minimal property space.
Maywood is one of the smallest incorporated cities in Los Angeles County. Although they allow commercial cannabis businesses, there is not a lot of space to establish one.
Culver City expects to have an application process open soon, sometime during the first quarter of 2018. The ordinance allows for the establishment of storefront retail, delivery only retail, manufacturing, distribution, laboratory testing, and indoor commercial cultivation. There will be limits placed on the number of permits issued for each type of business, so it will be important to be ready once the application process opens. The city expects that getting a storefront retail business permit will be competitive.
The ordinance additionally lays out strict standards for business permits. A commercial cannabis business permit is not transferable to other persons, projects, or locations. Businesses will not be able to relocate unless approved by the City Council. The ordinance also sets forth rules for changing ownership and changing the form of the entity. These types of things will be important to get organized before applying for a commercial cannabis business permit in Culver City.
Located in the heart of West LA and easily accessible by many major freeways, Culver City offers a great alternative to those seeking business licenses in the City of Los Angeles. Anyone interested should continue to monitor closely, and be ready to move quickly.
This week, the Bureau of Cannabis Control (the “BCC”) announced that as of January 9, 2019, Section 11362.775 of the Health and Safety Code (the “Code”) will no longer be in effect. The BCC notice ends the popular collective and cooperative models of cannabis cultivation, manufacturing and distribution in California. These models were promulgated through the use of “creative” legal advice in order to take advantage of the Compassionate Use Act’s multiple loopholes and ambiguities, and usually involved patients joining a “closed loop” membership system (sometimes a formal corporate entity and sometimes not) to receive medical cannabis from other patients in the collective who grow or process it for them.
California’s transition into a regulated commercial cannabis system left many operators, particularly those with non-profit mutual benefit corporations structured as collectives or cooperatives, uncertain as to just how much time they have left to operate. We’ve encountered some operators who, for a variety of reasons including the time and expense of the process, or their inability to comply with local zoning requirements at their current location, are reluctant to abandon the collective model in favor of receiving a state license under MAUCRSA.
Unfortunately, these operators will have no choice but to join the regulated system, and there are a laundry list of reasons why it makes sense to do that sooner rather than later. Given the recent dismantling of the federal government’s former cannabis enforcement framework, operators will be opening themselves up to much greater risk if they are choosing to operate outside of the state’s licensing framework. U.S. Attorneys now have full discretion to determine to what extent they can and should enforce federal law in the context of marijuana crimes, and we would be willing to bet that California’s U.S. Attorneys won’t be turning a blind eye to cannabis businesses that continue to operate in contravention of local law, or without a state license.
Following the implementation of MAUCRSA, qualified patients and their caregivers may continue to operate with limited criminal immunity without a state license, so long as: (1) the patients and caregivers operate in full compliance with state law, and (2) the local government does not prohibit the activity. See, H&S Code sections 11362.5, 11362.765, 11362.77, and 11362.7. But as we stated above, immunities for medical cannabis collectives (i.e., non-profit mutual benefit corporations, non-profit corporations, non-profit cooperatives, etc.) will expire on January 9th of next year.
And although MAUCRSA expressly exempts qualified patients and caregivers from licensure requirements, it does not allow qualified patients, their caregivers, or cannabis businesses to conduct commercial cannabis activity without a license. Any collective currently engaging in commercial cannabis activity that exceeds the strict qualified patient and primary caregiver limits is in violation of MAUCRSA and is operating illegally.
As a reminder, to be immune from prosecution under the Compassionate Use Act and MAUCRSA, a primary caregiver (or a collective) must operate within the following confines when acting without a state license:
Cultivation, possession, storage, manufacture, transportation, donation, or provision of cannabis must be exclusively for the personal medical purposes of no more than five specified qualified patients for whom the caregiver is the primary caregiver. (B&P section 26033(b));
The caregiver cannot receive remuneration for these activities other than for actual expenses, including reasonable compensation incurred for services provided to an eligible qualified patient or person with an identification card to enable that person to use cannabis, or for payment for out-of-pocket expenses incurred in providing those services. (B&P section 26033(b), H&S Code section 11362.765(c));
The caregiver cannot possess more than eight ounces of dried cannabis per qualified patient unless a physician’s recommendation or local guidelines allow amounts in excess of this limit. (H&S Code section 11362.77(a)-(c)); and
The caregiver cannot maintain more than six mature or twelve immature cannabis plants per qualified patient unless a physician’s recommendation or local guidelines allow amounts in excess of this limit. (H&S Code section 11362.77(a)-(c)).
In addition, everyone, including collectives and caregivers, must still comply with applicable local law. And collectives and cooperatives that opt not to apply for a state license right away will be limited in their ability to distribute their product. The bottom line is that commercial cannabis activity is only permitted among licensees, and once a business entity or individual receives and active temporary license or a full license from the state, they must immediately cease doing business with non-licensed entities, or they risk losing their license. See B&P section 26053(a). And for those licensees looking to “have their cake and eat it too” by obtaining a state license while maintaining a collective or cooperative, keeping that non-licensed entity will put the state license at risk.
With local license caps quickly being reached, stringent legal limitations on collectives and cooperatives, and an uncertain federal enforcement landscape, we cannot emphasize enough the importance of integrating into the regulated state system as soon as possible. Holding on to the collective model through the next year will make that transition much more difficult, and perhaps even impossible.
Last month, we hosted a webinar analyzing the emergency cannabis regulations released by the California state agencies in charge of administering the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA). We had over 1,000 people sign up to find out what the California cannabis regulatory landscape will look like in 2018 for cultivators, manufacturers, distributors, retailers, and microbusinesses.
During the webinar, we took questions from attendees, but we couldn’t get to all of them due to the sheer number of questions asked. Alison Malsbury covered the webinar questions related to cannabis manufacturers, Habib Bentaleb handled the questions regarding cultivation, and I’ll cover the retail/distribution/microbusiness questions here.
Q: Please explain the logistics of distributors collecting excise tax from retailers. Is it collected at the time of invoice/delivery or can the retailer wait and not pay the distributor until up to 90 days later? If so, how the heck will distributors track all of this and what recourse do distributors have if a retailer doesn’t pay the excise tax?
A: The Distributor is the focal point in the California Cannabis and Excise Tax system. Cultivators and Retailers are prohibited from remitting Cannabis Taxes to the California Department of Tax and Fee Administration (CDTFA). The law intentionally places a serious burden on the Distributor to pay up. Although only a Distributor may remit taxes to CDTFA, all licensees in the supply chain are subject to a 50% late payment penalty if the tax is not paid when due. Accordingly, Distributors should receive payment of the Cannabis Excise Tax from the Retailer at the date of sale. This will likely be a serious point of contention as the Retailer will want to defer payment until product is sold to a consumer, so be sure to cover it in your distribution agreements.
Q: Do retailer Exit Bags need to be labeled?
A: 16 C.C.R. § 5413 requires an “opaque exit package” for all product leaving a retail storefront going into a consumer’s hands, but the regs say nothing about having to have a specific label on that exit packaging.
Q: What are the child resistant packaging requirements for retail sales in the first few months?
A: During the transition period (January 1 through July 1, 2018), cannabis goods in a retailer’s inventory at the time of licensure that are not in child resistant packaging may be sold if the retailer puts them into child-resistant packaging at the time of sale. “Child resistant” means designed or constructed to be significantly difficult for children under five years of age to open, and not difficult for normal adults to use properly.
Q: Can licensed dispensaries purchase manufactured material from nonlicensed manufacturers during the transition period?
A: No. Licensees may only conduct business with other licensees, even during the transition period.
Q: What is a microbusiness?
A: A commercial cannabis business engaged in at least three of the following activities: cultivation (less than 10,000 square feet), manufacturing (non-volatile or no solvnets), distribution, and retail sale.
Q: Do microbusinesses activities need separate addresses?
A: No. In fact, microbusinesses must conduct all cultivation, manufacturing, distribution and retail activities on the same premises.
Q: Can you clarify what adult use licensees and medicinal licensees are allowed to do during the transition period? Can an adult use licensee purchase products from a medicinal licensee? Can a medicinal retailer sell to non-patients?
A: During the transition period, from January 1 through July 1, 2018, licensees can transact business with each other regardless of the “M” or “A” designation. However, a medicinal retailer cannot sell products to “adult use” customers and vice versa. In other words, medicinal retailers can only sell products to qualified patients and caregivers. A medicinal retailer cannot act as an adult use retailer during the transition period, or ever, without an adult use license.
Q: Can you talk more about the distribution license and if you will have to package, test, etc.?
A: It depends. You could be a “storage only” or a “transport only” distributor that does not handle packaging and testing. Otherwise, a distributor may package, re-package, label and re-label cannabis flower for retail sale. A distributor cannot, however, package, re-package, label or re-label manufactured cannabis products unless the distributor also holds a manufacturing license and is packaging, re-packaging, labeling or re-labeling its own manufactured cannabis products. Testing and quality assurance services are also on the table for distributors. Regarding testing, after taking physical possession of a cannabis goods batch, the distributor must contact a testing laboratory and arrange for a lab employee to come to the distributor’s premises to select a sample for testing. The distributor also has duties and obligations for which it is responsible during the testing sample retrieval process.
Q: Is self-distribution considered a “transport only” distribution license or can businesses wishing to self-distribute do all distribution activities package/label/testing/quality assurance review?
A: To be clear, a testing licensee is totally separate from all other licensees. A distributor is responsible for the coordination and verification of testing, but cannot do the testing itself. An entity with a distribution license, so long as it is not “transport only” or “storage only,” can engage in any of the activities that a licensed distributor is authorized to do.
Currently, the licensing fee schedule divides the distributor license into three categories: Distributor, Distributor Transport Only Self-Distribution, and Distributor Transport Only. Obviously, if you apply for the Transport Only Self-Distribution license, you will be limited to transport only (and even that has certain limitations regarding what you can transport and to whom).
Q: Would a cannabis yoga and meditation business be OK?
A: It depends on the local government. If onsite consumption is authorized, and the location is zoned for yoga and meditation (as well as onsite consumption of cannabis), then such activity would presumably be allowed pursuant to a retail or microbusiness license so long as the following are met: (1) Access to the area where cannabis consumption is allowed is restricted to persons 21 years of age and older, (2) Cannabis consumption is not visible from any public place or nonage-restricted area, and (3) Sale or consumption of alcohol or tobacco is not allowed on the premises. Appropriate permits/licenses from your local government would need to be obtained for yoga or meditation as well.
Q: Are you able to start a cannabis lounge, like a Hookah lounge?
A: The foregoing rules apply for cannabis lounges, too. Be sure to check on whether your local government authorizes onsite consumption.
Q: Can you have entertainment and onsite consumption?
A: See above regarding onsite consumption. Entertainment is often restricted by local zoning codes, but as long as it is locally authorized, live entertainment is expressly permitted by the regs so long as there is no nakedness, no live sex and no nipples (male or female)! Basically no strip club/consumption lounges are allowed in this context. See 16 C.C.R. § 5807 for more on that.
Q: Can you cover which of these licenses can be held concurrently? Or, if it’s a shorter list, which licenses have restricted concurrent licensing?
A: All licenses can be combined, with the exception of testing (and Type 5 cultivation licenses, which are not yet available). A testing licensee cannot hold any other cannabis licenses.
Q: Can distributors use professional employment organizations (such as ADP) and have these count as employees for the purposes of transport?
A: No. 16 C.C.R. § 5311 specifically states that transportation shall only be conducted by licensed persons or their employees. Further, Business & Professions Code § 26070(c) says “[t]he driver of a vehicle transporting or transferring cannabis or cannabis products shall be directly employed by a licensee authorized to transport or transfer cannabis or cannabis products.” Employees are expensive, but distributors need to budget accordingly if they want to comply with MAUCRSA.
Q: Can autonomous vehicles distribute cannabis or manufactured goods?
A: No. Unmanned vehicles are prohibited per 16 C.C.R. § 5311(c).
Q: If a product has been tested by a lab and deemed clean or cleared to go to market, why is the liability on the distributor and not the lab, cultivator or manufacturer if something ends up being wrong with that product?
A: Distributors are statutorily obligated to oversee the quality assurance process. A distributor is responsible for ensuring that the certificate of analysis from the lab correctly corresponds with the batch, that the label is consistent with the certificate of analysis, the packaging complies with MAUCRSA and is tamper-evident, the weight or count of the batch comports with that in the track and trace system, and that all events prior to receipt have been entered into the track and trace system. That does not mean that the distributor will be solely liable if something is wrong with the product, but we believe we will see a lot of distributors named in lawsuits involving product liability issues because of their statutory duty to do everything mentioned in the previous sentence. This does not mean cultivators, manufacturers, and testing labs are not also liable. As a result, insurance and indemnity agreements are key here.
Q: Does an indemnification contract remove the liability for the distributor? Or only possibly?
A: An indemnity agreement is a good tool to use to shift liability, but as I mentioned during the webinar, an indemnity agreement only works if the other party is well-capitalized and/or well-insured. If you have an indemnity agreement with a party that goes bankrupt and never carried insurance, you will not recover your losses. Nothing, not even a great indemnity clause, can guarantee full insulation from liability.
Q: What type of permitting or licensing do I need for a compassion program that is currently running is not a storefront. We do not sell cannabis at all, host our donation day at a brick and mortar and deliver to homes at no cost to patients that are low income, disabled or suffering from an acute illness.
A: For an answer to this question, please see California Cannabis Licensing and The Collective Model: How Long Will That be Going On?
Q: Do I need to secure a location prior to applying for the license?
A: Yes. With your state application, you must submit the physical address of the premises, evidence of the legal right to occupy the premises, and a diagram of the premises, among other things.
Q: Is delivery considered a retail activity under the microbusiness license?
A: Yes. 16 C.C.R § 5500(e)(4) expressly contemplates non-storefront delivery as a retail element of a microbusiness.
One of the most common questions our California cannabis attorneys get asked is “where can I start or expand my cannabis business?” It can be a tough question: as we often say on this blog, every one of California’s 58 counties and 482 incorporated cities can decide whether or not they’ll authorize commercial cannabis activities in their jurisdictions. This means that California’s local jurisdictions are constantly discussing whether to regulate, amend, or prohibit commercial cannabis activities. Jurisdictions that had previously authorized medical cannabis businesses to operate are now considering how to regulate adult-use cannabis activities. This leads me to the recent (and positive) developments in Santa Rosa.
As part of our California Cannabis Countdown series we covered the city of Santa Rosa back in May. Shortly after our post, Santa Rosa residents overwhelmingly voted in favor of Measure D, which was a ballot measure setting tax rates for cannabis businesses. Santa Rosa takes its cannabis policy seriously, as the city has held over twenty (20!) meetings to discuss cannabis policy over the last two years. Many of the meetings were held by the city’s Medical Cannabis Policy Subcommittee (“Committee”).
Since inception, the Committee has solicited feedback from the community and interested stakeholders and provided guidance to the City Council. To its credit, the City Council and Planning Commission showed a willingness to incorporate the Committee’s findings into new cannabis ordinances. Specifically, the City Council passed ordinances that allowed medical cannabis cultivation (indoor only), non-volatile manufacturing, distribution, and laboratory testing in Santa Rosa. This was a welcome development after seeing what happened in Marin County, Santa Rosa’s southern neighbor.
While moving forward with regulating medical cannabis business activities, the next item on the Committee’s agenda was adult-use cannabis regulation. The Committee drafted a comprehensive cannabis ordinance that would regulate both medical and adult-use cannabis businesses. However, when the ordinance was first proposed at the end of June it did not include provisions for adult-use commercial cannabis activities. Though after the passage of Senate Bill 94 (a/k/a the Medicinal and Adult-Use Cannabis Regulation and Safety Act), the City Council added adult-use cannabis activities to the ordinance. The updated ordinance was first “noticed” in November, approved on December 19th, and will take effect on January 19, 2018.
Without further ado, then, here’s a breakdown of the types of medical and adult-use cannabis activities allowed in Santa Rosa:
Cultivation (only indoor for commercial cultivation although outdoor cultivation for personal use is allowed subject two a two plant limitation).
Manufacturing (non-volatile and volatile).
And here are some important things to keep in mind, under the new ordinance:
Cannabis businesses that have already received approval to conduct medical cannabis activities can incorporate adult-use activities into their permit with a zoning clearance.
Multiple cannabis business permits can be issued per site so long as there is a clear separation between license types.
The transfer of ownership or operational control of a cannabis business is allowed if the new owner/operator receives a zoning clearance from the city.
For cultivators square footage is determined by the size of the structure instead of by canopy.
Cannabis manufacturers that utilize a closed-loop system with will require approval from the city’s building and fire departments.
Only licensed cannabis retailers can conduct deliveries. The delivery-only dispensary model is currently not available.
Dispensaries may only operate between the hours of 9:00am and 9:00pm and are prohibited from having an on-site or on-staff physician to provide a cannabis recommendation.
On-site consumption and cannabis special events are allowed with the appropriate city approval.
Given Santa Rosa’s dedication to the conversation on cannabis, and the actual text of its new ordinance, we can safely way that the city is shaping up as a cannabis friendly jurisdiction (unlike these tough locales). Next, we will see how efficiently the city can administer its new marijuana ordinance come January 19th. We’ll be sure to keep you posted.
Our Los Angeles cannabis lawyers, including me, are constantly being asked about the local cannabis laws of the various 88 incorporated cities in Los Angeles County.
Because it is both important and difficult to decipher each individual city’s local laws, we thought it would be helpful to provide you with charts showing the same. We divided the county into 4 regions, and over the next few weeks we will publish charts for each of these regions to keep you updated on each of the cities and their current laws.
This week’s post highlights the cities located in and around the Long Beach Area. Here is the chart showing the laws regarding cannabis cultivation, dispensing, distribution, and manufacturing in the Long Beach Area Cities.
Before you can receive a California cannabis license (temporary or annual) you must provide the state with proof of local approval. Our charts in this series are intended to help you figure out whether such local approval is possible and, if so, what it takes to get it. Please note that although we hope you will find this research useful, local cannabis zoning ordinances tend to evolve, so you will want to confirm these findings and run related due diligence, prior to taking action.
Be sure to look for additional blog posts on the remaining incorporated L.A. County cities over the coming weeks.
Across California local jurisdictions are opening licensing windows and evaluating commercial marijuana license applications. Often the scoring process is conducted by the staffs of city councils, zoning boards and planning commissions, working on a compressed timeframe, and giving scores for various categories using a scoring matrix: “Location,” “Safety & Security,” “Community Benefit,” are common categories, for example. There is typically a “Financial Stability & Capitalization” category, as well, where companies disclose their balance sheet, and their business plan going forward.
The scoring of these categories is unpredictable. Typical requests from the local regulators may be:
A budget for construction, operation, maintenance, compensation of employees, equipment costs, utility costs, and other operation costs. The budget must demonstrate sufficient capital in place to pay startup costs and at least three months of operating costs, as well as a description of the sources and uses of funds.
Proof of capitalization, in the form of documentation of cash or other liquid assets on hand, Letters of Credit or other equivalent assets.
A pro forma for at least three years of operation.
As we’ve previously written, early-stage companies are often raising early capital using convertible notes, as a means of kicking the valuation can down the road into 2018. Although notes are much more akin to equity investments, they show up on a balance sheet as debt. The impact of an applicant having outstanding debt is uncertain, but one can imagine that an applicant that has almost all of their cash on hand through issuing debt may be viewed unfavorably. And that can be a problem.
To a city staffer unfamiliar with a convertible promissory notes, the debt may appear to be nothing more than a short-term loan, and with a balloon payment set at a 12 to 24 month maturity date, the company may look like it needs a moonshot to survive. In reality, though, the company will have no payment obligations, so long as it achieves a priced round equity financing within that timeframe. In that case, investors will convert to equity, the debt is extinguished, and no debt service payments are made. However, in a competitive licensing application environment, explaining the intricacies of a convertible note to a city staffer means you’ve likely already lost the battle.
Rather than carry debt on the balance sheet through the application process, an alternative instrument for early-stage financing can be borrowed from the tech world: the SAFE (Simple Agreement for Future Equity). This instrument was developed for early company financing by startup accelerator Y Combinator. It serves the same function of a convertible note, and will often convert to equity on nearly identical terms. But is explicitly NOT a debt instrument. It’s a more company-favorable means of raising capital, as compared to the convertible note: the investor loses the security of holding a debt instrument, and the leverage of having a maturity date.
To the local regulator – likely unfamiliar with either instrument – the SAFE would appear to be much more like a letter of intent to issue equity in the future. And the SAFE investment received by the company appears on the balance sheet as cash on hand and unencumbered, making the company appear much better capitalized than a company whose capital all comes with a corresponding debt obligation.
SAFEs are not for everyone, and an investor familiar only with convertible notes but not SAFEs will almost always prefer to hold the convertible debt. However, for companies that can raise funds with a SAFE, there are a few potential advantages: 1) these companies may find their applications get a critical boost in their “Capitalization” score; and 2) they are easy to put together, as a SAFE is just a standard agreement with few negotiable terms – the Cap, the Discount, the Most Favored Nation Clause. If the terms are right, companies planning to navigating multiple local cannabis application processes would be wise to consider taking the SAFE route.
Last week, we hosted a webinar discussing the emergency cannabis regulations released by the California state agencies in charge of administering the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA). We had over 1,000 people sign up to find out what the California cannabis regulatory landscape will look like next year for cultivators, manufacturers, distributors, and retailers. It was a lot of fun!
During the webinar, we took questions from attendees, but we couldn’t get to all of them due to the sheer number of questions asked (and please keep them coming!). My colleague in our San Francisco office, Alison Malsbury, recently covered the webinar questions related to cannabis manufacturers, and in this post I’ll address the most-asked questions regarding cultivation. Without further ado, here’s the Q & A:
Q: Do you need to have a separate license if you want to have a nursery?
A: It depends. A nursery is a cultivation license type that authorizes a licensee to produce clones, immature plants, seeds, and other agricultural products for the reproduction and cultivation of cannabis. So long as you have a cultivation license from the California Department of Food and Agriculture (CDFA) you won’t need a separate nursery license for your own in-house cannabis reproduction requirements. Though you will need a nursery license if you want to distribute immature plants or seeds to another licensee.
Q: Is there a cap on the number of cultivation licenses you can hold?
A: There are currently fourteen different license types that fall under the CDFA’s jurisdiction (three more will be added in 2023). Twelve of the license types are distinguished by cultivation method (outdoor, indoor, and mixed-light) and canopy size (the designated area on the premises that contains mature cannabis plants). The other two license types are for nurseries and processors (discussed below). You can hold any number of these licenses except for the medium size a/k/a Type 3 cultivation license type (between 10,0001-22,000 square feet indoor or mixed light, and up to one acre for outdoor). For now, you (or your company) can only hold one Type 3 cultivation license at a time.
Q: Is there a statewide plant canopy cap?
A: The short answer is no, and we covered this question in greater detail here. This was by far one of the more controversial omissions to come out of the CDFA’s regulations. I call it an omission because when the CDFA released their medical regulations under the MCRSA (now withdrawn) back in April they placed a four-acre statewide cap on plant canopy for cultivators, which is now gone under MAUCRSA. Further upsetting the small-scale California cannabis farmer is the fact that in its Environmental Impact Report (released in November), the CDFA recommended a one-acre canopy cap. What motivated the CDFA to remove the acreage cap is anyone’s guess (although you can likely chalk it up to private interest lobbying of the CDFA).
Q: Will all cannabis cultivated before 1/1/2018 that enters the new market have to be tested?
A: Eventually all harvested cannabis that enters the commercial market will have to be tested but the Bureau of Cannabis Control (BCC) issued temporary rules to enable an orderly transition into the regulated commercial market for existing products, including flower. Until July 1, 2018, cannabis goods held by a licensee that were cultivated or manufactured prior to January 1, 2018 but that have not been tested may be transported and sold (with certain exceptions for manufactured cannabis goods). However, you’ll still have to affix a label to the cannabis product stating that it has not been tested and that includes the requisite government warnings.
Q: Can a cultivator transport their cannabis product to a manufacturer?
A: No. All transfer of cannabis from a licensed cultivation site must be conducted by a distributor licensed by the BCC. It’s important to note that a person or company can hold a cultivation and distribution license and they can do so on the same property so long each license type has its own separate and distinct contiguous premises on the property.
Q: Can you act as a processor if you have a cultivation license?
A: Yes. A processor is a license type that only allows for trimming, drying, curing, grading, packaging, or labeling of cannabis and non-manufactured cannabis products (i.e.,flower, shake, kief, leaf, and pre-rolls). If you hold a cultivation license (specialty cottage, specialty, small, or medium), you can process cannabis on your premises without having to obtain a separate processor license so long as you: 1) designate your processing area in your cultivation plan; and 2) you’re compliant with all packaging and labeling requirements. Notably, you cannot cultivate in the processing area and a stand alone processor cannot cultivate any cannabis.
When Colorado and Washington kicked off recreational marijuana legalization and business licensing, both states limited ownership of licensed marijuana businesses to their own state residents. Oregon’s ballot measure, passed two years later, followed suit. But Oregon’s legislature almost immediately removed that restriction. Colorado’s legislature similarly lifted the restriction in 2016, allowing U.S. citizens to qualify for ownership of licensed cannabis businesses. California, Nevada, and the clear majority of legal cannabis states allow at least some level of out of state ownership of licensed businesses. Washington, however, continues to maintain its strict residency requirement for ownership of marijuana businesses.
Washington’s residency requirement does not have any de minimis baseline — a 0.01% business owner is subject to the same restrictions as a 100% business owner. And the residency requirement doesn’t only apply to owners: any person that can exert control over a business (such as a director, officer, or contract manager), anyone that has the right to receive business profits, and the spouses of all those people are all required to live in Washington. The restrictions even rope in things that may not be apparent on first read. For example, the state Liquor and Cannabis Board still considers royalties on branded products (e.g. a trademark license for 2% gross sales on products carrying the mark) to invoke the residency restriction.
As with all regulated industries, businesses push as much as they can at the bounds of these rules to accomplish their objectives. Out of state residents enter into business deals that include providing capital loans for a fixed interest return, which was itself restricted for the first few years of legalization. They lease or sublease real property, purchase and lease capital equipment, enter into consulting contracts, and enter into branding deals with fixed payments. The closest that they can come to a profit share or revenue share is an agreement to sell inputs at a markup to licensed cannabis businesses – be they branded packages or ingredients for edibles. The various restrictions and promises in these agreements test the boundaries of whether or not the out of state businesses exert “control” over cannabis businesses.
Some state lawmakers and many licensed businesses cite these out of state business deals as reason to partially lift the residency restrictions. If these types of deals are being entered into anyway, why not allow them to encourage transparency, the logic goes. It’s a similar argument to the one made about legalization in the first place.
But there are voices in Washington that support maintaining the residency restriction. Retailers, craft and cottage industry advocates, and established businesses think that the negative ramifications of more out of state money flowing into the state would outweigh any potential benefits. And for now, Washington agrees. While the August 2013 Cole Memorandum put out by the Department of Justice did not have any language touching on state residency of cannabis business owners, the follow-up financial guidance from FinCEN did include payments to non-state residents as a red flag event for marijuana businesses.
A quirk about marijuana businesses is that the states really don’t want them to fail. If this were any other new industry getting a lot of press buzz, you would expect to see lots of business failure in the early days. Businesses that are not adequately capitalized would have a tough time going up against competitors with large bankrolls that can afford to sell at a loss in the early days of the market. In a regular market, that trend would course correct in a reasonable amount of time, and the market would stabilize. But with cannabis, business failure can be a scary thing for the state. A dying marijuana business is a risky candidate for black market and out of state diversion of product. And that type of diversion is precisely the type of activity that could trigger direct involvement from the DEA and DOJ, agencies that would love nothing more than to have a good reason to bust up state-legal cannabis businesses. Many business owners and legislators in Washington think that maintaining the state residency requirement contributes to current industry stability, and they prefer the status quo to the unknown possibilities of a large influx of out of state capital.
The Washington legislature goes back into session in January, now under unified Democratic Party rule. After taking on cannabis issues every year since 2014, the legislature seems ready to move on to other things, but don’t be surprised to see the state residency restriction rear its head in proposed legislation.