How California's Proposed Cannabis Regulations Will Impact Your Business.

In California, the Bureau of Cannabis Control (“BCC”) is charged with licensing and regulating distributors, testing labs, retailers, delivery-only retailers, microbusinesses, and cannabis events. The process of adopting permanent regulations started back in July of this year, which kicked off a forty-five-day comment period for public feedback. The BCC then released modifications to the proposed permanent regulations this October, with an additional fifteen days for public comment. We are now close to the finish line as the BCC submitted their proposed permanent regulations (“Regulations”) for review by the California Office of Administrative Law (OAL).

 Now that the BCC’s Regulations have been made public many of my clients have been asking me some variation of “can I do this?” Answering that question is tricky because the Regulations do not take effect until approved by the OAL – which we are expecting to happen in January. In the interim, cannabis businesses are still operating under the emergency regulations that were readopted and approved back in June. However, cannabis businesses must be prepared for approval of the Regulations and here are couple of rules that have garnered much attention so far:

 Delivery: Delivery services are one of the biggest winners as the Regulations specifically state that they can deliver to any jurisdiction in the state (except to publicly owned land). This specific authority would apply to medical and adult-use deliveries. Under the emergency regulations local jurisdictions are free to prohibit deliveries into their borders, but they are not allowed to prevent delivery services from passing through to make deliveries into jurisdictions where that activity is allowed. The League of California Cities has taken objection to this new provision by claiming that the BCC has superseded its authority. This is issue is far from settled and delivery services should take that into consideration before spending time and capital on planning to make deliveries into jurisdictions that currently have outright bans.

 Intellectual Property Licensing Agreements: For a large number of cultivators and manufacturers licensing their IP is the only way for them to remain involved in today’s regulated cannabis industry – local prohibitions, zoning restrictions, and the high cost of compliance have acted as effective barriers that many legacy operators can’t clear. Section 5032(b) states that “Licensees shall not conduct commercial cannabis activities on behalf of, at the request of, or pursuant to a contract with any person that is not licensed under the Act.” At first glance many people were concerned that white labeling and IP licensing agreements were going to be prohibited under this section, but in response to public comments the BCC made clear that so long as the holder of the IP and/or brand owner is disclosed as an owner of the licensee then such agreements would be allowed (see page 173 of the Final Statement of Reasons Appendix C).

 Ownership and Financial Interest Holder Disclosures: It’s clear that the BCC is placing an emphasis on transparency. The BCC has added that an individual receiving at least twenty percent of the profits of a licensee will be considered an owner. The previous percentage threshold only applied to aggregate ownership interest instead of profits, now they would apply to both. Furthermore, if there was ever any doubt whether financial interest holders could bypass disclosure through an entity, that’s been put to rest. If an entity is a financial interest holder (with none of the applicable exemptions) then the identity of every owner and financial interest holder of that entity must be disclosed. This may pose a concern for the risk averse and those that for professional or personal reasons are unwilling to be publicly associated with a cannabis business.

 Advertising and Promotions: One way for a company to stand out is through their marketing and advertising plans. Creative and outside the box marketing strategies must comply with the regulations. The BCC is extremely concerned about advertisements that might appeal to minors. Before embarking on an expensive marketing campaign you’ll have to be certain (at least 71.6% certain) that your audience is reasonably expected to be at least twenty-one and that you don’t use any depictions or images of minors or anyone under twenty-one. A new provision was also added banning the use of objects (for ex: toys, movie characters, or cartoons) or images designed in any manner likely to appealing to minors or anyone under twenty-one. If your marketing strategy involved free product giveaways, you can toss that idea in the trash bin – that includes giving away non-cannabis products as that is also prohibited. Although not a part of the BCC’s mandate, if your business will be using an email campaign as a component of its marketing plan make sure you are in compliance with the CAN-SPAM Act.

 This is by no means an exhaustive list as there are a number of other important additions to the proposed permanent regulations that a licensee must be familiar with. In the meantime, we’ll have to hold our breath in anticipation of the OAL’s review.   

 

 

 

 

 

 

Courting Investors For Your Cannabis Company: Your Business Plan.

It seems like every day there’s a new story about a cannabis company securing a significant investment or being acquired at a significant valuation. Unless you’ve been hiding under a rock, the “green rush” is in full effect. The country wide legalization of cannabis by our northern neighbors (Canada, eh!), combined with the potential that the STATES Act will be a top priority now that the U.S. House of Representatives flipped back to the Democrats, has many investors feeling quite bullish (perhaps a little too much so) about the cannabis industry going into 2019. If you own a cannabis business or are planning to start one, the recent flurry of investments and acquisitions may have you believing that there’s a ton of money out there just waiting to fill your coffers. Au contraire, except for some of the biggest players with licenses covering seed-to-sale, small cannabis operators are still finding it difficult to secure investment capital.

 Small cannabis operators and those still in the start-up phase have to work twice as hard as some of the bigger players to survive in California’s cannabis industry: The costs of real estate, licensing, and compliance are significant financial burdens for the little guy. You might have a great product or idea but not enough capital to get your product to market, so you’ve got to raise funds. Initially, you might reach out to friends and family for a loan but that will most likely not be enough to get you started. Friends and family know you, so you might not have to put in significant work for your pitch but that won’t be the case with savvy investors – they’ll want to see your business plan.

The thought of putting together a business plan might seem like a daunting task at first. Perhaps you don’t feel confident because you didn’t go to business school or you feel that you don’t have the right pedigree. Don’t do that to yourself, that’s hogwash. All you need is patience, determination, and a good understanding of your business. Here are just a couple of pointers to get you started:

  • State your company’s objectives.

  • Describe your product(s) and services.

  • Identify your market and tell investors why your company will succeed in it.

  • Describe the growth of the company and its market.

  • Give a detailed explanation of your funding requirements and how the funds will be used.

  • Tell them about you and your team and what motivates you.

  • How is your product or service different? Will you be competing based on price or based on other features?

  • What is your marketing and advertising strategy?

  • Show that you’ve done research on your competition.

These are just a few examples of what investors would like to see in a well-thought-out business plan. As I said earlier you don’t need a degree from an Ivy League business school to put your business plan together but it’s not something that you can just spit out during an all-night session either. Don’t lose sight of the fact that you’re asking people for money and a good business plan will go a long way in letting them know that their investment is in good hands.

Legislative Setback for Small Cannabis Cultivators & Manufacturers

If you are a consumer or patient looking to legally purchase cannabis flower or cannabis products in California, the method of purchase is severely restricted. That’s because under the Medicinal and Adult Use Regulation and Safety Act (“MAUCRSA”), only retailers and delivery-only retailers licensed by the Bureau of Cannabis Control (“BCC”) can sell cannabis and cannabis products to the public. Unfortunately, you are not able to purchase cannabis products directly from the people that grow the flower or manufacture the products. Big cannabis companies that are vertically integrated (meaning they hold cannabis licenses covering seed to sale) are able to connect with their customers in ways that smaller operators cannot.

 Assembly Bill 2641, introduced by Assembly Member Jim Wood, would have opened up opportunities for small cultivators and cannabis manufacturers to sell their products directly to the consumer. AB 2641 can best be characterized as a farmer’s market type of bill, it would have allowed cultivators and manufacturers to sell their products directly to their customers at temporary special events. Equally as important, AB 2641 would have opened up another potential revenue stream for small cultivators and manufacturers that are already facing tight margins. Unfortunately, I’m using the past tense to describe AB 2641, because although the bill passed the State Assembly, it was held up in the Senate appropriations committee.

 At the most recent quarterly meeting of the California Growers Association, the setback to AB 2641 was lamented, but there was also a resolve to press on and to make sure the bill is a legislative priority for 2019. Even though the Compassionate Use Act was enacted in 1996, California is moving in fits and starts trying to find the right balance of regulation and open commerce. Right now, the scales are tilted towards over-regulation. California’s legislators and cannabis regulators must address and alleviate the burdens that excessive regulation is placing on cannabis operators. Let’s hope the California State Senate reverses course on AB 2641 in 2019.