California

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 The League of California Cities has taken objection to this new provision by claiming that the BCC has superseded its authority.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.