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WINTER LLP Update: Final Cannabis Regulations Approved

Dear All,

On January 16, 2019, California’s three state cannabis licensing authorities announced that the Office of Administrative Law (OAL) officially approved state regulations for cannabis businesses across the supply chain. Please note, these new cannabis regulations take effect immediately, meaning the previous emergency regulations are no longer in effect.

First, we would like to address the sections that we previously commented on during the 15-day comment period back in October.

Section 5032(b), Commercial Cannabis Activity.

(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.

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.

The Bureau has removed the specific examples of “prohibited commercial cannabis activity,” such as “packaging and labeling cannabis goods under a non-licensee’s brand or according to the specifications of a non-licensee. However, this does not mean that the State is authorizing white labeling/branding for unlicensed brand owners; in fact the opposite holds true. Practically, this means that (1) the operating company (licensed/permitted entity) needs to hold the IP (trademarks, copyrights, brands) instead of the management company; and (2) companies that do not hold a permit/license cannot get their products made by permitted manufacturers (white-labeling) unless they are included as an owner of the license.

The Bureau provided a few examples of an authorized brand owner/licensee relationship:

  • “if a licensee includes as one of their owners a brand owner, the licensee can produce the branded products because in this case the licensee is not engaged in commercial cannabis activity on behalf of an unlicensed person. Because the owner of the brand is an owner of the licensee, there is no unlicensed person involved.”
  • “Generally, where a brand-owner may be dictating the standards and specifications of a product (i.e. providing direction or control), they would likely be considered an owner that would need to be disclosed under section 5003. Where ownership is properly disclosed, such persons would not be considered non-licensees, and would be able to conduct business under their license.”

We understand there is a lot of confusion/debate surrounding this issue. We are reviewing angles and alternatives to work through these vague/troubling rules. Additionally, we are seeking further clarification from the State regarding how IP licensors/licensees may be classified (as owners, financial interest holders, etc.). Please stay tuned.

Section 5003(b)(6)(D), Designation of Owner.

(b)Owner means any of the following:

(6) An individual who will be participating in the direction, control, or management of the person applying for a license. Such an individual includes any of the following:

(1) A person with an aggregate ownership interest of 20 percent or more in the person applying for a license or a licensee, unless the interest is solely a security, lien, or encumbrance.

(2) The chief executive officer of a nonprofit or other entity.

(3) A member of the board of directors of a nonprofit.

(4) The trustee(s) and all persons who have control of the trust and/or the commercial cannabis business that is held in trust.

(5) An individual entitled to a share of at least 20 percent of the profits of the commercial cannabis business.

(6) An individual who will be participating in the direction, control, or management of the person applying for a license. Such an individual includes any of the following:

(A) A general partner of a commercial cannabis business that is organized as a partnership.

(B) A non-member manager or managing member of a commercial cannabis business that is organized as a limited liability company.

(C) An officer or director of a commercial cannabis business that is organized as a corporation.

(D)Any individual who assumes responsibility for the license. Such an individual includes but is not limited to, the following:

(i) An individual who is managing or directing the commercial cannabis business in exchange for a portion of the profits.

(ii) An individual who assumes responsibility for the debts of the commercial cannabis business.

(iii) An individual who is determining how a portion of the cannabis business is run, including non-plant-touching portions of the commercial cannabis business such as branding or marketing.

(iv) An individual who is determining what cannabis goods the commercial cannabis business will cultivate, manufacture, distribute, purchase, or sale.

The Bureau has removed section D, “any individual who assumes responsibility for the license” completely. The Bureau addressed comments as follows: “A salesperson earning a fractional share in profits would not be considered an owner under this section but would be a financial interest holder. Commenter’s comment demonstrates that rather than providing clarification, subsection (b)(6)(D) created more confusion. Therefore, the Bureau has determined that it is necessary to withdraw the subsection.”

Therefore, consultants, Marketing Managers, etc. will not have to be disclosed as “owners” unless they fulfill one of the other definitions of an owner (20% or more profits, 20% or more ownership interest, board of directors, etc.)

Second, please find a brief summation of some important regulatory changes for each license type. Please note that this is not a comprehensive summary and we advise you to contact us with any questions regarding your specific operation.

BCC Regulations (Retail, Delivery, Microbusiness, Distribution, Testing)

  1. Annual License Application Forms. All BCC applicants will be required to use the applicable forms supplied by the Bureau to submit Transportation Procedures, Inventory Procedures, Non-Laboratory Quality Control Procedures, Security Procedures, and Delivery Procedures.
  2. Cal-OSHA training. Businesses with more than 1 employee must complete a Cal-OSHA 30-hour general industry outreach course within one year of receiving a license.
  3. Business/Owner Modifications. If one or more of the owners of a license change, the new owners shall submit their required information within 14 calendar days of the effective date of the ownership change, but may not need to submit a new license application if at least one existing owner is not transferring his ownership interest.

Distributors

  1. Pre-rolls. Distributors may package and label pre-rolls that consist exclusively of any combination of flower, shake, leaf, or kief for retail sale.
  2. Exit Packaging. Until January 1, 2020, the child-resistant packaging requirement may be met through the use of a child-resistant exit package at retail.
  3. Distributor to distributor transfer. After a batch passes testing, the goods packaged as they will be sold at retail, may be transported to one or more licensed retailers, distributors, or microbusinesses (previously was only retailers). However, cannabis goods that have not been transported to retail within 12 months of the date on the Certificate of Analysis must be destroyed or re-tested.
  4. Ownership of Vehicles. All vehicles used to transport cannabis goods must be owned or leased by the licensee.

Delivery

  1. Delivery to prohibited cities. A delivery employee may deliver to any jurisdiction within the State of California.
  2. Value of Goods. A delivery vehicle may not carry cannabis goods in excess of $5,000 at any time.

Testing

  1. Sampling. Once a representative sample has been obtained for compliance testing, the testing laboratory that obtained the sample must complete the regulatory compliance testing.
  2. Final Form. All testing of the samples shall be performed on the final form in which the cannabis or cannabis products will be consumed or used.

Temporary Cannabis Event

  1. Other venues allowed. Temporary cannabis event may be held at county fair event, district agricultural association event, or at another venue expressly approved by a local jurisdiction for the purpose of holding a temporary cannabis event.

MCSB Regulations (Manufacturing)

  1. Cal-OSHA training. Businesses with more than 1 employee must complete a Cal-OSHA 30-hour general industry outreach course within one year of receiving a license.
  2. Cannot use CBD from hemp. Manufacturers may only use cannabinoid concentrates and extracts that are manufactured or processed from cannabis obtained from a licensed cannabis cultivator (and not from hemp cultivators).
  3. Retail Food/ABC Premises. A manufacturer shall not manufacture, prepare, package, or label cannabis products in a location that is operating as a retail food establishment, or that is licensed by the Department of Alcoholic and Beverage Control.
  4. Requirements of Operating Procedures and Policies have changed (new written protocols required).
  5. Final Form. Cannabinoid content may be included on the product label or added to the product at the distribution premises after issuance of the regulatory compliance testing Certificate of Analysis.
  6. Child-Resistant Packaging. Until January 1, 2020, the child-resistant packaging requirement may be met through the use of a child-resistant exit package at retail.
  7. Edible cannabis product label may not contain a picture of the edible product.
  8. New Labeling and Packaging RequirementsWe strongly encourage you to contact us with any questions regarding the new comprehensive packaging and labeling checklist and/or to have us review your packaging and labeling for compliance with the new regulations.

CalCannabis Regulations (Cultivation)

  1. Cal-OSHA training. Businesses with more than 1 employee must complete a Cal-OSHA 30-hour general industry outreach course within one year of receiving a license.
  2. Separate processing areas for each license type. Processing areas, packaging areas, and storage of cannabis subject to administrative hold areas may not be shared among multiple licenses held by one licensee (need to identify separate areas for each license)
  3. Common areas. Pesticide and chemical storage areas, composting areas, and secured waste areas may be shared between licenses held by one licensee.
  4. Light deprivation. Outdoor licensees may not use light deprivation.
  5. Processing. Cultivators may process cannabis, which includes all activities associated with the drying, curing, grading, trimming, rolling, storing, packaging, and labeling of flower, shake, leaf, pre-rolls, and kief that is obtained from accumulation in containers or sifted from loose flower with a mesh screen.
  6. New Labeling and Packaging RequirementsWe strongly encourage you to contact us with any questions regarding the new comprehensive packaging and labeling checklist and/or to have us review your packaging and labeling for compliance with the new regulations.

As always, we hope that you find the above useful in navigating this rapidly-evolving landscape. This is by no means a comprehensive summary of all of the changes that were implemented; it is simply a quick overview of relevant rules that may be applicable to our Clients.

Please do not hesitate to contact us if you have further questions or need clarification regarding any of the new regulations.

WINTER LLP Update: Guidance On Commercial Cannabis Activity

You will note some very important clarifications on interactions between LICENSEES and NON-LICENSEES. One of the most noteworthy clarifications in our opinion, is the ability to license intellectual property to a LICENSEE from a NON-LICENSEE. As many of you who use our corporate structures know, this is a huge break and departure from the written regs, and one we thought would be the case all along. Now, it appears to be settled in our favor.There are many other important clarifications, so please review carefully. And, as always, please let us know if you have questions or need assistance with anything.

Take good care out there, WINTER LLP

GUIDANCE ON COMMERCIAL CANNABIS ACTIVITY

• Under the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA), all commercial cannabis activity shall be conducted between licensees. The employees of a licensee may engage in commercial cannabis activity on behalf of the licensee.
• Commercial cannabis activity includes activities that are plant touching such as cultivating, manufacturing, and transporting cannabis, as well as activities that are not plant touching such as procuring and selling cannabis.
• Below are examples of activities that are provided for informational purposes only to assist licensees by providing some general, generic examples. However, whether or not an activity is compliant with statute and regulation requires a case-by-case analysis and is determined by the specific facts and circumstances of the unique situation. Therefore, the examples below are not automatically allowable but rather provide a sampling of potentially allowable activities based on information derived from inquiries submitted to the Bureau.
Examples of Potentially Allowable Activities:
• Licensees may enter into intellectual property licensing agreements with unlicensed entities. However, the intellectual property holder cannot exert control over the licensee’s commercial cannabis operations. If the intellectual property holder is exerting control over the licensee’s commercial cannabis operation, then the intellectual property holder must be disclosed as an owner on the license.
GUIDANCE ON COMMERCIAL CANNABIS ACTIVITY
• Licensees may use the services of unlicensed entities such as consultants and brokers to conduct non-commercial cannabis activity such as renting property, purchasing packaging, or leasing equipment for use by the commercial cannabis business. Consultants or brokers that are engaged in commercial cannabis activity for a licensee, such as procuring or purchasing cannabis for a licensee, must be included as either an owner or financial interest holder on the license.
• Licensees may package and label cannabis with another licensee’s brand. For example, a licensed distributor may package and label cannabis with a licensed retailer’s brand on behalf of the licensed retailer.
• Licensees may use a referral service or agency to find a licensed distributor to distribute cannabis goods. The referral service or agency is not permitted to share in any profits or revenue from the agreement or have any direction or control over a license, unless the referral service or agency is disclosed as an owner or financial interest holder of the license.
• Licensees may procure or purchase cannabis on behalf of or at the request of another licensee, such as a licensed distributor procuring cannabis for a licensed manufacturer. Licensees may not procure or purchase cannabis on behalf of any person that is not licensed under MAUCRSA.
• Licensees may enter into rental agreement where the landlord takes a percentage of a licensee’s profits if the landlord is disclosed as an owner or financial interest holder of the license.
• Licensed retailers and licensed microbusinesses may contract with a service that provides a technology platform to facilitate delivery of cannabis goods to customers if the service does not share in the licensee’s profits.
• Licensees may hire an advertising agency or marketing firm to build and/or promote the licensee’s brand. The advertising agency is not permitted to share in any royalties or a percentage of profits or revenue of the licensee unless disclosed as an owner or financial interest holder of the license.
• Licensees may purchase the right to use a patent for cannabis extraction. The patentholder is not permitted to share in any royalties or a percentage of profits of the licensee unless the patent-holder is disclosed as an owner or financial interest holder on the license.
• Licensees may purchase non-cannabis materials such as empty cartridges, batteries, packaging, extraction equipment, grow lights, and transportation and delivery vehicles, from unlicensed businesses.
• Licensed cannabis event organizers may only coordinate cannabis events. Licensed cannabis event organizers are not authorized or licensed to engage in commercial cannabis activity governed by manufacturing licenses, cultivation licenses, distribution licenses, or retail licenses.
This informational document is not meant to implement, interpret, or make specific any existing laws or regulations.
REVISED: 03/19
Bureau of Cannabis Control
2920 Kilgore Road
Rancho Cordova, CA 95670
E bcc@dca.ca.gov | P (833) 768-5880
For the latest updates, follow the Bureau on social media
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