Congratulations, California cannabis industry, after a year of operating licensed businesses, we finally have permanent regulations!! And they WENT INTO EFFECT IMMEDIATELY… as in last week. You read that right, there’s no grace period, no slow role, the rules went into effect as soon as the Bureau of Cannabis Control, the Department of Public Health and the Department of Food and Agriculture dropped their press releases. Here’s what you need to know TODAY to make sure that you’re not an enforcement target TOMORROW.
1. No Agreements for Commercial Cannabis Activity with Non-Licensees. From our perspective, this is the biggest change in the rules that affects the most cannabis businesses, and everyone has a different theory on how to address the issue. In short, BCC Rule 5032 only permits commercial cannabis activity between licensees, such that a person or entity that holds a cannabis license cannot do any cannabis activities on behalf of, request of or pursuant to a contract with persons not holding licenses themselves. Who exactly is affected by this rule?
Management companies that don’t have licenses but are receiving funds from cannabis operations and have been entering into various agreements with licensees
Out-of-state Brands licensing their IP with various controls over how the products are made by in-state manufacturers
Brands that have tried for licensing and been unable to get local licenses so have had to seek contract manufacturing deals and arranging for their own distribution
Licensees like distributors, retailers, and contract manufacturers, that have been entering into various agreements with the folks above
We’ve heard clients and other lawyers come up with a variety of solutions to BCC Rule 5032, but the bottom line is that companies either need to restructure third-party agreements so that the agreements do not involve commercial cannabis activity, or if they do involve commercial cannabis activity, licensees must be clear on who is a licensee and who is not. There’s a lot that non-licensees CAN do that falls outside the scope of “commercial cannabis activity” as defined by MAUCRSA, and we have been approaching these relationships in line with how we’ve done it for unlicensed celebrities/brands and the various technology, marketing and other service providers that work with the alcohol industry.
We recommend consulting with your counsel, getting clear on what your approach will be and how risk tolerant you are (especially when it comes to putting people outside your company on your license as an owner – yikes!), and putting together a policy around how the company will work with non-licensees. We’ve put together many of these policies for our clients in hopes of easing some of the fears that the sky is falling. It’s not, and there are many lessons from the alcohol industry, which has very similar restrictions in place and solutions for doing business. Where there’s a will, there’s a compliant way, as we’ve found for the many decades we’ve been advising our alcohol, celebrity, tech and e-commerce clients of all shapes and sizes.
2. State-Wide Delivery Is Now Permitted. If you are a cannabis retailer or microbusiness with delivery privileges, you can now deliver to any jurisdiction within the State of California. (BCC 5416). This means that non-storefront retail licenses are even more valuable and are getting harder to come by, since now literally every direct to consumer model is looking for Northern California and Southern California hubs, so that they can get to all the many localities in between with state-wide delivery. Other important things to note:
Deliveries must be made by your employees – no independent contractors or third-party providers (BCC 5415)
You will still be responsible for the many taxes the locals are charging folks outside of their jurisdiction coming in, which means double (triple? quadruple?) taxes for folks doing business across multiple jurisdictions.
You can use a technology platform to facilitate the sale and delivery, but these tech platforms cannot:
i. Use their people to deliver
ii. Share in the profits
iii. Advertise or market cannabis on your behalf or use your license number
3. No More Temp Licenses Are Being Issued. In case you missed it, temp licenses are no longer being issued and those issued are only valid for 120 days. We’re still waiting on provisional licenses for non-cultivation licenses, since CDFA is the only agency so far with a provisional license program in accordance with B&P Code Section 26050.2.
4. Ownership and Financial Interest Holder (FIH) Categories Are Now More Comprehensive. California cannabis licensing has been difficult, mainly due to local restrictions, but state licensing has also gotten more complicated with this new round of regulations. Of note is that there are differences between all the ownership and FIH rules across the BCC, DPH and DFA, so if you’re getting licenses across all the tiers of the industries, the required information may be different (for example, BCC Rule 5004 wants to know about employee profit-sharing plans and commissions, landlords, consultants, agents and brokers—anyone taking a percentage—but the other agencies do not need this info).
One appreciated clarification on ownership changes (BCC Rule 5023) is the ability to continue operations if at least one existing owner stays on the license. This is helpful for guiding structuring for the proliferation of acquisitions (if not ideal for more most buyers and sellers, who would prefer a clean break).
5. Marketing Restrictions:
No Cannabis Wine, Beer or Spirits. BCC Rule 5040.1 clarifies that cannabis products cannot be marketed as alcoholic beverages or use “any other term that may create a misleading impression that the product is an alcoholic beverage.” Do grape varietals create a misleading impression or are they just grapes? What about rose, which is a color, but also commonly associated with wine? We expect our clients to push the boundaries on this one.
Age confirmation. This isn’t a change, but worth noting that one of the downsides of being regulated in the Internet Age is that regulations may contemplate online marketing, something the alcohol industry has largely avoided through voluntary industry association policies that are not law. The BCC requires age confirmation prior to any advertising communication, newsletter add or social media dialogue.
Packaging Changes & Beverages. Child-resistant packaging (CRP) changed again, such that manufacturers have another requirement to do CRP that sunsets at the end of 2019 and new rules that go into place in 2020. (CDPH Rule 40401, 40417). Importantly, they also allow for a lot of the required label content (which we wonder consumers will even be able to read given how small the information ends up being) to be placed on supplemental labeling which can be a package insert, fold-out or booklet label, or a hang tag. (CDPH Rule 40408). That means that other than the UID and batch or lot number, everything can be put on a separate label. This should be a relief for those licensees who produce various products under a single brand at different manufacturing facilities. For our cannabis beverage producers, take note that bottles must be opaque (amber is okay), and serving sizes can be identified with a clear strip in accordance with CDPH Rule 40415. Tinctures are also exempted from the ABC Act, as long as the ABV is under 0.5% and the packaging is under 2.0 fl oz with calibrated dropper or measuring instrument. (CDPH Rule 40308).
Cannabis Licensees Can Only Sell Cannabis & Branded Merch (NOT HEMP). Our clients have been pretty excited about the legalization of hemp, despite the federal government shutdown and lack of clarification about how it is actually going to work. But California is clear that cannabis retailers can only sell cannabis products and branded merch (BCC Rule 5407), that cannabis manufacturers cannot use their licensed premises to manufacture or store products other than cannabis produced by licensed cultivators (CDPH Rule 40175) and distributors can’t distribute anything besides cannabis products, accessories, merch and promotional materials (BCC Rule 5300). Note also that branded products, and items that aren’t specifically mentioned as being permissible must be pre-approved under BCC Rule 5041.1.
6. Distributors Can Roll & Transfer. There’s a probably a good pun here, but now distributors can package, repackage, label and roll kiefed pre-rolls without an additional manufacturing license, which means cultivators can work with distributors directly to get pre-rolls to market without having to add a manufacturer into the mix. (BCC Rule 5303). Additionally, distributors can transfer product between distributors under BCC Rule 5307.2 if the product has already met testing and quality assurance reviews, which means we will likely see a lot more distributors get even more granular with their skillsets, such that cultivators and manufacturers may be working with distributors focused on compliance testing, and separately engage distributors specializing in retail relationships.
7. The Scary Emergency Decision and Order Process Stayed in the Rules. BCC Rule 5815, which allows the BCC to issue emergency decisions and orders to prevent “immediate dangers to the public health, safety and welfare,” seems like an agency grab for power if we’ve ever seen one. This means no hearing before immediate license suspensions in certain circumstances at the agency’s discretion, and due process only after you’ve stopped doing business and lost significant revenue. We defend these kinds of cases, but this is a pretty broad rule to defend against. No other industry would tolerate this kind of thing, but let’s cross our fingers this is only used against truly bad actors and the agency uses its vast discretion wisely.
Of course, we couldn’t talk about all the rule changes, but these are our highlights and the issues we’ve had the most amount of discussion with our clients about. Please consult your own counsel for advice on complying with the new regulations and enjoy a little certainty about the law for the first time in the history of cannabis regulation in California.