2018 Was a Huge Year for Cannabis

The 2018 Farm Bill and Hemp CBD Vape Products Manufacturing in California

Last week, the 2018 Farm Bill became law. Included in that law is a milestone provision that removes hemp from the Controlled Substances Act (CSA), and another that prohibits states from preventing transportation or shipment of hemp or hemp products across state lines– even if a state has itself outlawed hemp or hemp products. However, following passage of the Farm Bill, the Food and Drug Administration (FDA) issued a statement virtually ensuring that regardless of changes to the CSA, the FDA will effectively maintain the prohibition on most uses of CBD until further notice, because it retains control over the safety of foods and dietary supplements that include cannabis or cannabis products.

A quick review of some relevant terminology for context: The cannabis plant (Cannabis sativa L.) is cultivated in many strains, with varying levels of the psychoactive ingredient tetrahydrocannabinol (THC) and the non-psychoactive ingredient cannabidiol (CBD), along with hundreds of other constituent ingredients. The Farm Bill amends the CSA to define “hemp” (formerly referred to as “industrial hemp”) as the cannabis plant, any parts of the cannabis plant, and all derivatives therefrom, to the extent they contain a THC concentration of not more than 0.3% on a dry weight basis (i.e. not psychoactive). Any cannabis plant or derivative with more than 0.3% THC remains a Schedule I controlled substance that is illegal under the CSA.

The FDA’s statement clarifies that with respect to foods and dietary supplements, absent further action by the FDA, CBD-infused food or dietary supplements still cannot be legally sold in interstate commerce, even if the Farm Bill mandates that interstate transport and shipment of hemp and hemp CBD must be allowed. The FDA has also taken the position that if CBD-infused products of any kind are marketed as having medical uses or disease-curing properties, they will be subject to FDA regulation as “drugs” under existing law.

But a question that has not yet been answered is how these recent developments affect the legality of hemp-derived CBD extract oil used as an additive in vape products, which is a common application for CBD, but which is not within the realm of foods or dietary supplements. Electronic nicotine delivery systems such as vape pens are regulated separately by the FDA as tobacco products, but it’s unclear how a hemp CBD-only (i.e. containing no tobacco-derived or cannabis-derived products) vape pen would fare under federal law post-Farm Bill. It’s also not clear how the FDA would view hemp CBD as a standalone additive to vape products, and whether it would fall within FDA regulatory purview.

Here in California, it’s also unclear how the Department of Public Health (CDPH), the agency charged with regulating manufactured cannabis products in the state, will view hemp CBD use in vape products. We’ve previously looked at the muddy state of California hemp CBD regulation. Although current CDPH regulations allow cannabis-derived CBD as an additive in licensed manufacturing of cannabis vape products, they also mandate that “[a] manufacturer licensee shall only use cannabinoid concentrates and extracts that are manufactured or processed from cannabis obtained from a licensed cannabis cultivator.” This would seem to foreclose hemp CBD altogether as an option for manufacturing licensees. However, California cannabis statutes make clear that regulated cannabis does not include hemp, and that hemp is an entirely separate regulated substance for which only cultivation is currently regulated by state law.

We already know that the CDPH has determined that hemp CBD will not be a permitted food additive until either the FDA says it is or the CDPH determines it is safe for human consumption, even though cannabis-derived CBD is already allowed as a food additive under state law. And although it may seem reasonable for CDPH to seek to prohibit licensees from using any CBD (including hemp CBD) derived from unlicensed sources, as well as to prohibit unlicensed persons from manufacturing at least cannabis-derived CBD from any source given that existing regulations restrict it, we will not know for sure how the state is going to deal with hemp CBD use in vape products until CDPH issues guidance as it did with respect to hemp CBD as an additive to foods.

So what does all of this mean? Despite passage of the 2018 Farm Bill legalizing hemp, it may not have helped much with the confused state of regulation in California and other states. Use of hemp CBD in vape products is still a grey area at best, and use of hemp CBD as a food additive is still prohibited in California. There appears to be interest in passing California legislation regulating the sale of hemp CBD, and perhaps this legislation will also address the use of CBD in manufacturing in a way that reconciles potential inconsistencies with existing state cannabis regulations as well as federal deregulation. For now, this might be the first time in modern history that a cannabis substance appears to be treated more permissively by the federal government than California—at least for now.

source https://www.cannalawblog.com/the-2018-farm-bill-and-hemp-cbd-vape-products-manufacturing-in-california/

California Cannabis: The Pasadena Permitting Countdown is On

On January 1, 2019, the City of Pasadena in Northeastern Los Angeles County will open up its 30-day window to apply for one of six retail, four cultivation, or four testing facility permits. These 14 licenses will be highly coveted and sought after, and the winners will not be derived from a lottery system, but selected instead on scored applications. For anyone looking to get licensed in Pasadena, it’s going to be a busy month and an uphill battle.

Licensing in Pasadena is based on the June 2018 approval of local ballot measures CC and DD, which allow these limited permits and establish local taxing regimes. These ballot measures set hard caps on the license types as noted above. Unless Pasadena elects to allow more license types or licenses at later dates, this one-month window will be the only time to apply for commercial cannabis licenses in this city. And where the majority of California cities and counties still ban commercial cannabis activity, having Pasadena come online is a big win for overall legalization.

Notably, section 17.50.66 of the Pasadena Municipal Code precludes businesses from being licensed within the same building or even within 500–1,000 feet of one another, depending on the license type. In other words, Pasadena won’t be allowing combined license types in the same building or even anywhere near one another (which is much stricter than applicable state laws). Nor will it allow manufacturing or distribution, so there won’t be complete vertical integration for businesses in the near future in Pasadena.

Pasadena’s official screening information can be found here. To summarize, Pasadena will require information about owners of the business and about the proposed business generally. This includes detailed operations and security plans, statements of the owners’ previous experience, and statements of how the proposed business would be compatible with the surrounding community. The paper applications will have a hard cap of 100 pages. If you tried for a license in West Hollywood earlier this year, this should all sound very familiar.

Every aspect of these written plans will be reviewed based on scored criteria (found here). This scoring, in combination with the detailed plan requirements and page limitations mean that applications will need to be both comprehensive and polished. Pasadena will be evaluating these applications for owner experience, and if the applications are not well done or formatted properly, they may be dead on arrival.

Applicants may be tempted to approach this like a lottery as there are relatively few spots open. But this process will be very different from a lottery, where putting together a quick application or using a lot of the same boilerplate materials from other applications may be in the applicant’s best interest. Here, Pasadena has made pretty clear that it wants to see top-shape applications from folks with business acumen and industry experience. It’s even more important to ensure that applications are as perfectly formatted and complete as they can be, as the fee is a whopping $13,654 per permit.

Our L.A. cannabis business attorneys expect many Pasadena applicants, as there were with other popular L.A. cities with very limited license openings, and which awarded on a merit basis. For anyone who is applying in Pasadena, sharpen your pencils. January’s going to be a busy month.

source https://www.cannalawblog.com/california-cannabis-the-pasadena-permitting-countdown-is-on/

DRAFT Ethically Navigating Local and State Licensing of Cannabis Businesses

As we’ve stated time and time again, the cannabis industry is rampant with risks and scams, and can be an ethical minefield for attorneys to navigate. Legalized cannabis is a multi-billion dollar industry, however, and legitimate businesses need good and ethical attorneys to provide legal advice.

This is complicated, because due to federal laws, an attorney providing legal advice to a cannabis business in compliance with state and local laws could technically be aiding and abetting violations of the federal Controlled Substances Act.

Earlier this month, I gave a presentation to California attorneys regarding ethical representation of cannabis businesses and how to navigate the complicated tension between state and federal laws. I was joined by municipal lawyer Ruben Duran, partner with Best Best & Krieger, who advises public agencies.

This post will focus on the ongoing tension between state and federal laws, and the application of California’s new Rules of Professional Conduct. My next post will focus on attorney-client privilege concerns and real life ethical scenarios.

 

source https://www.cannalawblog.com/draft-ethically-navigating-local-and-state-licensing-of-cannabis-businesses/

Tax Court Deals Another Blow to Cannabis Management Company Model

On December 20^th, U.S. Tax Court issued its opinion in Alternative Health Care Advocates et al. v. Commissioner of Internal Revenue. The long opinion details various issues related to the specific case, but we will concentrate on one relatively small piece of it. How would the Tax Court treat income paid from a marijuana retailer to a management services company for that retailer?

In this case, Alternative Health Care Advocates provided medical marijuana to individuals in California under California law. Another company, Wellness Management Group, Inc., provided management services to Alternative Health Advocates. These services included hiring employees and managing HR for those employees, paying wages for those employees, paying advertising expenses, paying rent, etc. Wellness did not provide services of that nature or any nature to any other business entity. Wellness made money by collecting fees for its services from Alternative Health Care Advocates.

Under Section 280E of the Internal Revenue Code, businesses that are engaged in trafficking controlled substances cannot take regular business deductions, so they end up paying taxes on their gross receipts less their allowed cost of goods sold (COGS). If an expense doesn’t fit into the category of COGS, a company that is considered to be “trafficking” would have to pay taxes as if the expense hadn’t been incurred in the first place. This is how the effective tax rate for marijuana businesses can be outrageously high.

Marijuana businesses set up management companies for a few reasons. Tax avoidance under 280E can be one of them, but trying to set up a management company structure to avoid 280E-related tax problems can be complex and can backfire. Instead, most of the value of the management company model comes from the ability of the management company to get banking and enter into regular electronic transactions with third parties, including running payroll services.

But the model backfires if the management company is considered to be trafficking, because a management company introduces new transactions to the system involving the same pot of money. Imagine that a marijuana retail company generates $1 million and has $500,000 in 280E non-deductible expenses. That company standing alone would pay tax on the full $1 million. Now imagine that a management company is set up to handle the $500,000 in expenses and charges the marijuana company $500,000 to do so. The marijuana company now has $1 million in revenue and a non-deductible $500,000 bill to the management company and pays taxes on $1 million. The management company receives $500,000 from the marijuana company and pays salary and other expenses that also equal $500,000. If the management company is treated like any other business, the transaction is a wash and ends the same way as if there were no management company. If the management company is deemed to be “trafficking” however, then the marijuana business will find itself paying tax on both entities for the same revenue. The $500,000 paid to the management company ends up being taxed twice.

Unfortunately, the Tax Court decided that Wellness’s management activities were “trafficking” as much as Alternative Health Care Advocates’ activities were. In response to the taxpayers’ arguments that disallowing the 280E deductions for both businesses was inequitable, the Tax Court simply stated that the tax consequences were a direct result of the organizational structure the taxpayers put together.

Here are the takeaways for existing businesses, especially management companies. First, it’s worth noting that this case will likely be appealed, so keep an eye on that. Second, businesses have to plan their transactions involving management companies as if management company revenue is subject to 280E. Some management companies that offer broader services to a variety of different businesses may have some additional arguments that they are not engaged in “trafficking.” But if your management company is just a stand-in for your operating marijuana company, the Tax Court has indicated that it will approve of the IRS considering you to be trafficking as well. This case is one more reminder that Section 280E presents an ever-present obstacle to the ongoing health of marijuana businesses. Advocates must continue to concentrate their efforts to finally get Congress to repeal Section 280E.

source https://www.cannalawblog.com/tax-court-deals-another-blow-to-cannabis-management-company-model/

Oregon Cannabis: State of the State

Here we are at the end of 2018, which means it’s time for the third annual “State of the State” post on Oregon cannabis (the 2017 post is here and the 2016 post is here). The year 2018 was truly remarkable in the Oregon industry, and we saw a lot of change, from regulatory evolution to industry consolidation to overall market dynamism. Below is a high-level summary of what we are seeing in the industry as we move into the new year.

Competition is intense.

The marijuana market is saturated with both licensees and product. October is always the peak month for harvest, and the Portland Business Journal, by way of OLCC, reports that producers brought in 2.54 million pounds that month (measured in wet weight). This was a slight increase from 2.48 million harvested pounds in 2017. For the full year, production was running 9% higher than 2017, and wholesale prices fell by more than 50% from mid-2017 to mid-2018. As any store owner will tell you, retail prices have fallen significantly too.

In addition to product saturation in the market, the number of licensees has continued to grow. OLCC issued an additional 300+ producer licenses in 2018, bringing the total number to 1,110. There are also 1,141 additional producers awaiting licensure. With respect to retail, there are now 606 active dispensaries in the state, including 173 of them in the City of Portland alone. Although OLCC officially “paused” its review of all new applications submitted after June 15^th, we don’t see the market becoming less competitive anytime soon.

The M&A market is also intense.

There are no readily available statistics on the number of purchases and sales of marijuana businesses statewide. Anecdotally though, the amount of this activity coming through our office is remarkable. In the past 12 months, we have handled more cannabis business mergers and acquisitions than we ever could have predicted. These transactions range from people giving up failed businesses for a song, to leading local brands joining forces, to the seemingly never-ending stream of reverse mergers and acquisitions involving Canadian public companies. Although Oregon is no longer the only state to allow non-resident ownership, we don’t see a slowdown in this type of activity anytime soon. Expect Oregon to remain a buyer’s market in 2019.

The rules are pretty settled…

Oregon’s statutory changes and administrative rules didn’t change radically in 2018– at least compared to the past few years. OLCC continues to work around the edges, as with the recent push to end the alternating proprietor arrangement and to tighten up the definition on banned “added substances” in finished products. Overall, though, much of the legislative and agency efforts were centered on black market eradication and on building out the industrial hemp program. We applaud both of those efforts.

… But people keep stepping in it.

If the leading 2018 activity for our Portland marijuana business lawyers was buying and selling businesses, dealing with administrative violations was a close second. OLCC has stepped up its efforts program-wide in this manner: It begins with application scrutiny and extends through notices of violation against licensed operators. Certain violations are unfortunately common. Those include “financial interest” violations (yes, lenders must be disclosed), unapproved site changes, camera issues and manifest issues. We are seeing the same types of things, over and over, from companies large and small. Although many of these matters can be settled, they require extreme care and attention, and are best avoided through vigilant compliance.

People are suing each other.

We mentioned litigation last year, and this year is no different. Some of these disputes stem from business failure, undocumented transactions or deals gone south. We still come across the odd con job. There are also more exotic matters like RICO lawsuits and nuisance battles between marijuana and hemp farms. As long as the industry continues to evolve at its current rapid pace, we expect to see more litigation than in other commodities markets.

Hemp just keeps getting bigger.

This has been another big practice area for our office. Industrial hemp demand skyrocketed in 2018 with the CBD craze. Many Oregon farms and processors capitalized, with the number of Oregon Department of Agriculture (ODA) growers rapidly expanding from 233 to 568. As compared to OLCC licensing, acquiring a hemp grower’s or handler’s registration from the ODA is fast and easy, and restrictions on sale are far less cumbersome. Now that hemp is legal nationwide, we only expect this trend to continue into 2019.

source https://www.cannalawblog.com/oregon-cannabis-state-of-the-state-2/

Top 10 Unknowns About California’s Cannabis Regulations

In California, under the Medicinal and Adult-Use Cannabis and Regulation Safety Act (MAUCRSA), temporary licenses began issuing to cannabis businesses on January 1, 2018. Since then, the state agencies in charge of MAUCRSA’s implementation (the Bureau of Cannabis Control (BCC), the California Department of Public Health (CDPH), and the California Department of Food and Agriculture (CDFA)) have worked pretty much round the clock on adopting permanent regulations. In case you forgot, the agencies dropped their initial proposed permanent rules this past summer, tweaked those, and then released another round of revised proposed permanent regulations last month (which are now in the hands of the Office of Administrative Law (OAL) for an overall review). That last round of proposed permanent rules (see here, here, and here) is very likely to become effective (pending OAL’s review) in early January. Right now, all licensees are still operating under the emergency rules that came out in fall of 2017. And pretty much everyone is racing to get their temporary licenses, which will NOT be available after December 31.

Despite the fact that the state has made great progress towards permanent rules, many questions and ambiguities around licensing and operational conduct remain. In fact, some of the grayer areas of the emergency regulations have been expanded by the proposed permanent rules for better or worse. In turn, with 2019 just around the corner, here’s my list of the top 10 unknowns that still remain for California cannabis:

    1.    IP licensing and white labeling restrictions.

In case you’ve been living under a rock, one of the most shocking proposed permanent rules to come from the BCC is section 5032(b) (which, yes, affects all licensees). Essentially, section 5032 (b), as originally written, basically prohibited all IP licensing and white labeling agreements between cannabis licensees and non-licensees. That rule stated that:

(a) 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. Such prohibited commercial cannabis activities include, but are not limited to, the following: (1) Procuring or purchasing cannabis goods from a licensed cultivator or licensed manufacturer; (2) Manufacturing cannabis goods according to the specifications of a non-licensee; (3) Packaging and labeling cannabis goods under a non-licensee’s brand or according to the specifications of a non-licensee; (4) Distributing cannabis goods for a non-licensee.

For more detail on that original rule, see our write-up here. During public comment on 5032, there was a good amount of dissent (including our own) in that it’s pretty obvious if such a rule went through a lot of branded product currently on the shelves would have to be tossed. In addition, California would be the only state in the cannabis union to adopt such a strict rule. When the BCC then released the revised proposed rules, 5032(b) was pared down to read as follows:

(b) 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.

As you can see, the IP licensing and white labeling examples were deleted, but the rule still makes clear that licensees can’t undertake commercial cannabis activity (i.e., manufacturing, labeling, processing, etc.) “on behalf of, at the request of, or pursuant to a contract” with a non-licensee. Just removing former examples (1)-(4) may have no impact whatsoever here, and it’s certainly confused the situation as a result. And while the BCC’s own comments to 5032 (in its Final Statement of Reasons) indicate that it takes no issue with non-licensee to licensee IP licensing and white labeling relationships, a plain reading of the rule indicates otherwise.

    2.    Ownership issues. 

The BCC struck again in the proposed rules revising “owner” disclosure standards to be much stricter at section 5003. Now, in addition to anyone with 20% or more in equity, the board of directors, the CEO, and anyone or any entity that exercises any direction, control, or management over the licensee, is also an owner. Any individual or entity merely entitled to profit share at or more than 20% is also an owner. This calls into question though how the BCC plans to treat things like cashless options and warrants that have no immediate entitlement to ownership in or profit sharing with the licensee. And what about husbands and wives (which are in community property marriages in California) since there’s no spousal disclosure requirement and they’re technically one person under existing law? The BCC has been silent on all of the foregoing and I have no doubt that these new revised rules may actually incentive people to be even more “creative” in order to avoid owner (and financial interest holder) status.

    3.   Financial Interest Holder woes.

Identifying financial interest holders (FIHs) is more complicated than owners because the FIH definition now encompasses a variety of folks and entities. I recently spoke to the OC Register about how now even lawyers who take a share of the profits of a cannabis business (in exchange for legal services) will now have to be disclosed as FIHs under the new rules. The BCC also made clear that it’s going to sort through more convoluted corporate structures around FIHs to get to the humans providing the capital to or profit sharing with cannabis businesses. At section 5004 of the proposed rules, 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.”

Of course, we have no way of really knowing how far the BCC will go here in vetting the individuals behind these structures, though I’m sure more than a few publicly traded companies are suffering severe heartburn at reading this new rule.

    4.    Packaging and labeling compliance in 2019. 

Under CDPH proposed permanent regulations, manufacturers will not have to implement child resistant packaging (CRP) for their cannabis products until 2020. In the interim, retailers will fill the gap by using CRP exit bags. And while CRP is going away for manufacturers, there are a slew of revised and new packaging and labeling standards being implemented upon the rules becoming effective in the new year. The outstanding issue then is that CDPH created no affirmative grace period for manufactured product that’s out there right now and compliant with the emergency regulations, but that doesn’t meet the new packaging and labeling regulations. (A great example is that manufacturers of certain products now have to put the universal symbol not only on outer packaging but also on the product container itself if that outer packaging is “separable” from the product container.) What’s for sure is that retailers cannot possess or sell finished product that doesn’t adhere to the new packaging and labeling rules. So, what exactly will happen to existing, non-compliant product in 2019? That remains a mystery.

    5.    Provisional licensing. 

Provisional licensing is the new temp licensing. (See here for more on the temp license race to secure provisionals for 2019.) Even though a provisional license is the new hot ticket in town, the BCC and CDPH have given no insight into how a licensee actually secures this license. I surmise that the issuance of provisionals will be automatic (similar to how the state was just renewing temp licenses automatically if a temporary licensee was in clear and earnest pursuit of its annual license). CDFA is the only agency that’s produced a fact sheet on the topic, but no agency has publicly announced the exact logistics around provisional licensing yet.

    6.    Social equity programs. 

For every city that’s done a social equity program, it’s been a challenge out of the gate to do it correctly and sustainably. Los Angeles is just getting started with its program while certain other California cities are trying but are producing meager results at best. While the state finally decided to financially back local social equity programs, it’s clear that the state and the cities need to study this particular social experiment for some time before a gold standard will actually emerge. In turn, the success of these programs is definitely a large unknown.

    7.    Banking.

Banking in California is the number question I get on a weekly basis at this point: namely, when the hell is it going to commence? I’m a firm believer that unless and until our permanent regulations are finalized and are proven to work relative to barriers to entry and vetting owners and FIHs, we will not see private sector banking in California. Our licensing and enforcement systems are still too loose/inchoate to satisfy the 2014 FinCEN guidelines, and no public bank is going to materialize here either for various complicated and practical legal reasons (be sure to watch out for banking fraudsters, too). And while California cannabis companies will likely continue to use management companies to help them alleviate some of the inability to access banking, it’s certainly not a long-term solution and it’s downright illegal when that relationship isn’t legitimate or at an arm’s length anyway.

    8.    Fee slotting agreements and anti-competitive tactics. 

On a regular basis now, I’m seeing retailers introduce to my cultivation and manufacturing clients a variety of fee slotting agreements so that my clients can secure known shelf-space in order to remain competitive. This month, I questioned whether such contracts were valid under MAUCRSA where anti-competitive behavior is strictly barred. Only time will tell whether regulators will address these agreements and their impact on the marketplace.

    9.    Tech platforms and delivery. 

The BCC seems to have developed an appetite for wading into increased regulation regarding retailers and delivery tech platforms. Pursuant to section 5415.1 of the proposed permanent BCC regulations, we now have a more robust code of conduct between retailers and tech platforms when it comes to delivery. Now that the BCC has finally opened the door to invading this relationship regarding contractual limitations and restrictions on advertising and marketing for licensees via tech platforms, it begs the question as to whether California is going to go further down the road of trying to essentially regulate tech platforms or not. Given the fact that California is one of the few states that’s embraced delivery, it’s a very important area for development, both legally and for public policy.

    10.    Corporate versus cottage debate rages on. 

Every single state that’s undertaken recreational cannabis has to battle between corporate and cottage interests. And every single state is different in how it’s handled the issue. In the proposed permanent regulations, it’s hard to tell which way California is leaning since those rules still contain some fairly big business friendly propositions (such as still being able to secure countless small cultivation license types, local law permitting, in order to aggregate big acreage) as well as some rules that cut against “Big Marijuana,” like having to disclose shareholders in a publicly traded company as FIHs unless they hold 5% or less of the equity. In 2019, I think we can fully expect the debate between small and large business interests to carry on, but where California lands remains unknown. That’s going to probably continue for quite some time as it works out the kinks spurred by the proposed regulations.

source https://www.cannalawblog.com/top-10-unknowns-about-californias-cannabis-regulations/

Merry Christmas!

Here’s wishing all of our readers a bright and festive holiday.

We appreciate all of you, and we will be back here tomorrow with the goods.

Merry Christmas!

source https://www.cannalawblog.com/merry-christmas-from-canna-law-blog-3/

Washington Marijuana Business Owner-Finance: Some Regulatory Improvement

After years of us banging the drum for the WSLCB to change its financier approval process, there is a glimmer of hope out there that the agency is willing to listen to reason. The WSLCB has issued a new interim policy, BIP-06-2018, that allows existing true parties of interest and financiers to get clearance for providing additional funds to licensed marijuana businesses concurrently with contributing the funds.

The problem was that the WSLCB has required pre-approval of any new funding contributed to or spent on behalf of a marijuana licensee. That includes additional funding coming from financiers and true parties of interest that had already been approved by the state. This cumbersome process could take months, and it was creating a significant compliance problem in the state.

In the crowded marijuana business market, companies have needed to run extremely tight margins to stay competitive. Tight margins mean that any bit of bad luck can cause a company to go temporarily into the red. If a company doesn’t have the cash reserves to handle operating expenses in that time, the owners must often dip into their own pockets and fund the difference. But if payroll is due next week, it doesn’t help much that the WSLCB will allow an owner to contribute additional funds three months later. Faced with an impossible decision, most owners flouted WSLCB rules and contributed the money anyway. The penalty if the WSLCB found out about that was license cancellation, but there wasn’t much of an alternative. Failure to make payroll is a death sentence for most businesses regardless.

Under BIP-06-2018, however, existing true parties of interest and financiers may now contribute additional funds to a licensed marijuana business before those funds are approved. To benefit from this policy, the true party of interest or financier must have already been approved by the WSLCB with respect to the marijuana license they are contributing to. They must also submit the application for approval of funds prior to making the contribution.

There is a different type of risk at play in this new regime, namely what happens if the WSLCB does not approve the funding that has already happened. In its policy notice, the WSLCB clarifies that it can cancel the marijuana license if it cannot verify the source of funds. Hopefully the WSLCB would also allow the business to return the funds if it had cash on hand, but that isn’t guaranteed. So any true party of interest or financier taking advantage of this policy would need to feel confident that the source of funds is verifiable through tax reporting or other documentation.

We complain a lot about WSLCB policies, so it is nice to see them move in the direction to make life easier for regulated businesses every now and then. Here’s hoping this interim policy sticks, and for more smart rules changes in 2019.

source https://www.cannalawblog.com/washington-marijuana-business-owner-finance-some-regulatory-improvement/

Washington Regulators Ban Certain Colors and Shapes on Marijuana Packaging

Fourth Circuit: Possessing Marijuana Stems Does Not Necessarily Make You a Criminal

Breaking News: FDA Issues Statements on CBD and Industrial Hemp (and What it Means for California)

Yesterday, President Trump signed the 2018 Farm Bill, paving the way for industrial hemp legalization. Within hours, the U.S. Food and Drug Administration (“FDA”) Commissioner, Scott Gottlieb, issued a statement clarifying the FDA’s position on industrial hemp.

The FDA’s position: Just because industrial hemp is legal doesn’t mean that you can put it in food or call it medicine.

Gottlieb was quick to point out that even though the Farm Bill modified the Controlled Substances Act, the FDA still retains the authority to “regulate products containing cannabis or cannabis-derived compounds under the Federal Food, Drug, and Cosmetic Act” (or “FDCA”). Gottlieb went on to state that the FDA fully intends to exercise that authority:

[I]t’s unlawful under the FD&C Act to introduce food containing added CBD or THC into interstate commerce, or to market CBD or THC products as, or in, dietary supplements, regardless of whether the substances are hemp-derived. This is because both CBD and THC are active ingredients in FDA-approved drugs and were the subject of substantial clinical investigations before they were marketed as foods or dietary supplements. Under the FD&C Act, it’s illegal to introduce drug ingredients like these into the food supply, or to market them as dietary supplements. This is a requirement that we apply across the board to food products that contain substances that are active ingredients in any drug.”

Moving on, Gottlieb was careful to point out that the FDA is open to taking steps to clearing pathways for those who wish to seek FDA approval—as it did for Epidiolex. And in fact, the statement incorporates yet another statement by the FDA issued yesterday which concluded that the FDA “has no questions about Fresh Hemp Food’s conclusion that the following ingredients are GRAS under their intended conditions of use: hulled hemp seed (GRN765), hemp seed protein powder (GRN771), and hemp seed oil (GRN778).”

But Gottlieb was careful to cite, in general terms, a number of different kinds of conduct by companies selling products containing CBD that, according to the statement, are unlawful. These include things like claiming CBD or cannabis products cure diseases prior to undergoing FDA approval. And Gottlieb noted that the FDA will not hesitate to warn consumers and even initiate enforcement actions. In that sense, status quo prevails.

What does this mean for California? We’ve written pretty extensively on the California Department of Public Health’s FAQs which take the position that industrial hemp derived food products are unlawful. In fact, we wrote just days ago that the Farm Bill was unlikely to change the core of the FAQs.  The FDA’s statement from yesterday in combination with the FAQs seem to hammer home that in California, CBD in food products will not be considered lawful unless the FDA and CDPH say otherwise.

source https://www.cannalawblog.com/breaking-news-fda-issues-statements-on-cbd-and-industrial-hemp-and-what-it-means-for-california/

BREAKING NEWS: Farm Bill Signed, Industrial Hemp is Now Legal

Why 2018 was a Tough Year for the California Cannabis Industry

2018 has been a roller coaster for California cannabis businesses. The cannabis laws and regulations in California have made life difficult, to say the least, for anyone wishing to obtain licensure. This isn’t necessarily the fault of any single legislature, municipality, or agency, but instead was the result of a perfect storm of legal and non-legal issues.

The beginning of the year saw the opening of adult use licensing under the Medicinal and Adult Use Cannabis Regulatory and Safety Act (or “MAUCRSA”). Businesses that sought licensure could apply as of January 1, 2018 for an annual application. In theory, this could have been simple, but it turned out to be far more complex than anyone probably intended.

One provision in MAUCRSA that has been the bane of any applicant’s existence is the requirement to have local approval when applying for an annual (or temporary) license. What this means is that applicants couldn’t apply for state and local licenses concurrently; instead, they had to apply for and obtain full local approval first, and then move onto the statewide licensing. Localities have been all over the map in terms of how they process applications, which means that it could take months between finding an eligible parcel of land and even starting the process of applying for state licensing.

Many cities (for example, Los Angeles) have created complex, phased licensing schemes that meant that certain applicants couldn’t even apply until late in the year. (For Los Angeles, the final, third phase won’t even open until some undisclosed time in 2019.) It’s understandable why larger cities would want to phase their application processes—but for operators, this posed a pretty big problem in terms of delays to apply for annuals and the temporary license deadline.

And regarding temporary licenses, MAUCRSA set up a scheme to allow for temporary licenses that last for 120 days and could be renewed for 90 days. The intent appears to have been to allow operators with local approval to start engaging in business while applying for annual licenses. For reasons that in hindsight appear to not make too much sense, these temporary licenses could only be issued during 2018.

This end-of-2018 cutoff meant that applicants needed local approval prior to the cutoff date so that they could obtain temporary licenses while awaiting the very, very slow annual license application process. But the problem was that cities were so backlogged—or in some cases hadn’t opened all phases until too late in 2018. To solve this issue, many localities started providing applicants with local approval letters late in 2018, and there was a bottleneck in applications in November and December.

Additionally, over the summer, the California legislature, recognizing the delay in processing local approvals (some of which was caused by environmental disasters and other forces that nobody drafting MAUCRSA probably anticipated), created a new kind of “provisional license” to be issued through 2020, which is similar to the temporary license but will last longer. This could have been a saving grace for applicants who were delayed by phasing or other local issues into late 2018. However, the legislature expressly required that an applicant for a provisional license had to have obtained a temporary license at some point in 2018. In other words, the provisional license scheme really only benefits those who were already first in line in 2018.

Separate from these licensing issues, the regulations have undergone numerous and drastic changes many times in 2018. For example, in October 2018, the Bureau of Cannabis Control (“BCC”)—which regulates distributors and retailers, among other things—issued modified proposed regulations that seemed to ban many IP licensing agreements and vastly broaden the ownership definitions in requirements in a manner unlike the other California cannabis regulators. It appears that some of these expansions may have been drawn back in subsequent proposed final regulations. But these many rounds of proposed or emergency regulations have imposed a lot of stress on applicants already under the stress of the foregoing application process.

This is only a short post and we can certainly point out many more areas in which the cannabis industry in California undergone growing pains this year.  We intend to write soon about what 2019 will look like for applicants, but suffice it to say, for those who don’t have temporary licenses, there will be more delay.

source https://www.cannalawblog.com/why-2018-was-a-tough-year-for-the-california-cannabis-industry/

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ICYMI: Los Angeles Updates Its Phase 2 Cannabis Licensing Process

The ups, downs, and unknowns around L.A. cannabis licensing have abounded from the passage of Measure M back in March 2017. This is not uncommon, especially in large cities, as regulators determine how to handle things on the fly and as issues arise (see, for example, social equity in L.A. and the ability to re-locate for Existing Medical Marijuana Dispensaries (“EMMDs“). L.A., to its credit, has been transparent and pretty consistent in the way it’s treated licensees and stakeholders. To that end, this month, L.A.’s Department of Cannabis Regulation (“DCR”) released a Phase 2 licensing bulletin that’s significantly important for those Phase 2 would-be licensees that seek a temporary license.

Recall, to qualify for Phase II temporary approval/licensing (which triggered priority licensing for existing “non-retailers” like growers and manufacturers) — folks had to meet all of the following criteria:

1. Engagement prior to January 1, 2016, in the same Non-Retailer Commercial Cannabis Activity for which it sought a license;
2. Supplier to an Existing Medical Marijuana Dispensary prior to January 1, 2017;
3. The Business Premises meet all the land use and sensitive use requirements under cannabis laws and the existing City code;
4. The applicant’s premises have to pass a pre­-license inspection without any fire or life safety violations either;
5. All outstanding City business tax obligations were paid to the City and the Applicant had to indemnify the City;
6. Provision to the City of a written agreement with a testing laboratory for testing all Cannabis and Cannabis products and attests to testing all its Cannabis and Cannabis products in accordance with state standards;
7. Attestation that the Applicant would cease all operations if denied a State license or City License, and the Applicant cannot do any retail activity at its premises;
8. Qualification under the City’s Social Equity Program (see here for more info); and
9. Attestation that the Applicant will comply with all operating requirements imposed by DCR and that DCR may immediately suspend or revoke the temporary approval if the Applicant fails to abide by any City operating requirement.

Number 4 above was causing a lot of heartburn amongst Phase II license applicants in that they didn’t really know what to expect. Pre-licensing inspections can be fairly labor intensive depending on the state of the property at issue versus the build out and business plans of a given applicant, and each City has a different standard for a passing grade. In L.A., pre-licensing inspection (which is a pre-requisite to temporary approval) “may include, but is not limited to [an inspection of the business premises by], employees or agents of the following City or county departments: DCR, Building and Safety, Police Department, Fire Department and Los Angeles County Department of Public Health.” And a pre-License inspection consists of, but is not limited to, the following: “approval of the premises diagram; on-site inspection of all applicable building code and fire code requirements; approval of the security plan; fingerprinting; and approval of the fire safety plan (if applicable).”

Plus, applicants must upgrade all applicable electrical and water systems to Building and Fire Code standards before their application will move forward. Again, this is no small task depending on how your building is holding up/what its previous uses and occupancies were.

Temporary approval in L.A. is essential for applicants to also apply for and receive their temporary licenses from the state, which will not be given out or renewed after December 31. This month, L.A. thankfully illuminated for Phase II applicants what to expect for pre-licensing inspections in the City. In its bulletin, the City states:

To be eligible for Phase 2 Priority Processing, among other requirements, an applicant must pass two inspections. One is a DCR inspection to confirm that the applicant’s business premises is built out to substantially match its business premises diagram (i.e., the location and layout of entry points, interior doorways, rooms and walkways match the diagram) and that the business premises is sufficiently secured. The other is a Los Angeles Fire Department Cannabis Unit inspection to confirm that the applicant’s business premises and operations comply with the Los Angeles Fire Code.

The onus here is on the applicant to confirm for the City that it’s ready for pre-licensing inspection. In addition, when DCR confirms a date for an applicant’s inspection, the applicant will be asked to provide its most up-to-date premises diagrams to the DCR (including showing. accurate placement of security cameras). The bottom line of the City’s bulletin is that the physical premises be substantially similar to the premises diagram submitted to the DCR and that the premises be sufficiently secured per City and state law. During the inspection, the DCR will:

• Walk through each room or area in the premises and assess whether its layout and location is substantially similar to the premises diagram;
• Determine whether surveillance cameras are recording all areas required to be under surveillance (practically, this is anywhere on the business premises where cannabis goods will be present at any point in time);
• Determine whether the surveillance system is in a secured area, is functional and can play back recordings upon request; and
• Determine whether the premises are equipped with a functioning alarm system.

Another big question in L.A. was what the DCR would do with premises that are not 100% built out. The bulletin tells us that:

DCR will inspect the built out area and if all other Phase 2 eligibility requirements are met, grant Temporary Approval for cannabis activities limited to that specific area. Once the remaining areas of the premises are built out, DCR will send out an inspection team again before authorizing cannabis activities in those areas. However, given the large number of Phase 2 eligibility inspections to complete, DCR cannot provide a timeline for when it will be able to schedule a second inspection for an applicant.”

All of this means that it is best to be fully built out (in accordance with your premises diagram and with the fire and safety code) and ready for inspection if you want to get your temporary approval in L.A. anytime soon for your entire facility.

On inspection, also don’t expect to sweet talk the DCR investigator or to learn about the status of your application. Neither will advance your cause with the DCR at this point. Instead, applicants should proceed with business as usual in a professional manner and be as helpful as possible to the DCR investigators and to LAFD.

source https://www.cannalawblog.com/icymi-los-angeles-updates-its-phase-2-cannabis-licensing-process/