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RE: WINTER LLP Update (COMMENTS SUBMITTED RE DRAFT REGULATIONS)

Hello all,

We wanted to share with you the formal comments we submitted to the BCC re the recent draft regulations. These comments were submitted prior to the deadline Monday.

In our opinion and experience in this industry, the draconian approach the state has taken on each of these two issues (addressed below) will be catastrophic if approved. Not only to many of our clients, but the entire industry. We are hopeful the state receives many similar comments and backlash from other cannabis professionals, and responds favorably to our comments below.

We will keep you posted as we learn more. And regardless of the outcome, we will figure out a path forward for each of you. We’ve had to retool our legal/business approaches many times over the last 11 years, so that’s nothing new. We will always get you to the finish line in the end.

Here are our comments on these two particular draft regulations:

Letter to BCC re IP Licenses / While Labelling:

Dear BCC,

Please see comments regarding Section 5032(b), Commercial Cannabis Activity.

We do not believe that licensees should be prohibited from (1) manufacturing cannabis goods according to the specifications of a non-licensee (IP licensing); (2) packaging and labeling cannabis goods under a non-licensee’s brand (white-labeling), or (3) distributing cannabis goods for a non-licensee.

The authority upon which Section 5032 is based, BPC Section 26013(c) states: “Regulations issued under this division shall be necessary to achieve the purposes of this division, based on best available evidence, and shall mandate only commercially feasible procedures, technology, or other requirements, and shall not unreasonably restrain or inhibit the development of alternative procedures or technology to achieve the same substantive requirements, nor shall such regulations make compliance so onerous that the operation under a cannabis license is not worthy of being carried out in practice by a reasonably prudent businessperson.” (emphasis added.)

Section 5032(b) unreasonably restrains or inhibits the development of alternative procedures to achieve the same substantive requirements. There are already hundreds of pages of regulations in place to ensure that cannabis products are grown, manufactured, tested, transported, and sold in a manner that will promote public peace, health, safety, and general welfare. Section 5032, which restricts a licensee’s ability to accept IP licensing contracts or white-labeling contracts does not increase the health, safety or welfare of the public. All products that are manufactured or packaged for a non-licensee must still comply with all testing, packaging and labeling regulations. Labels are already required to contain the name and contact information of the manufacturer. Products are not more dangerous to society merely because there is different IP/branding.

Moreover, IP licensing and white-labeling are well-established business practices in almost every goods and services industry in the U.S. and abroad, and have been successfully utilized by the cannabis industry for years. If a manufacturer has sufficient equipment, materials, and employees in place to produce goods for others and achieve economies of scale, the BCC should not limit that manufacturer’s ability to produce goods with different IP. Requiring each brand/company to manufacture goods under their own license dramatically drives up costs (license fees, equipment, employees), slows time to market, while wasting natural and environmental resources to build out these additional facilities. It also creates a monopoly for the limited manufacturers that have obtained licensing to date. This draft regulation will significantly damage the California cannabis industry and put long-standing companies out of business through an immediate devaluation.

If the issue is disclosure of participants in the legal market, the BCC should implement something similar to the Beer Brand Registration model, in which the ABC requires beer brands to register and disclose whether beer is “contract brewed.” Licensees that contract with IP companies or white label companies may be required to fill out a simple disclosure form each year. This would resolve the disclosure issue, while allowing manufacturing licensees, IP companies, and brands opportunities to continue to manufacture safe cannabis products in an efficient and cost-effective manner. Whatever the solution, it cannot be this draft regulation, which if passed will have immediate and catastrophic consequences, including loss of thousands of jobs, bankrupt businesses, and loss of industry leaders, to name a few.

Letter to BCC re Designation of Owner:

Dear BCC,

Please see comments regarding Section 5003(b)(6)(D), Designation of Owner, which states:

Owner means any of the following:

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:

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.

As we disagree with the addition of Section 5032(b), we cannot agree that individuals who determine how non-plant touching portions of the commercial cannabis business is run, such as branding or marketing, should be considered owners.

The authority upon which Section 5032 is based, BPC Section 26013(c) states: “Regulations issued under this division shall be necessary to achieve the purposes of this division, based on best available evidence, and shall mandate only commercially feasible procedures, technology, or other requirements, and shall not unreasonably restrain or inhibit the development of alternative procedures or technology to achieve the same substantive requirements, nor shall such regulations make compliance so onerous that the operation under a cannabis license is not worthy of being carried out in practice by a reasonably prudent businessperson.” (emphasis added.)

Requiring independent consultants and advisors to register as “owners” is onerous and impractical for a reasonable businessperson. The BCC is overreaching by defining an owner as individuals who determine how “non-plant touching portions of the commercial business” are run, because this could potentially include almost all advisors (attorneys, CPAs) and ancillary business consultants (equipment manufacturers, marketing companies, IP companies, etc.) who provide guidance to permitted licensees. Seeking the professional guidance of independent consultants and advisors is a well-established business practice that does not rise to the level of involvement as an “owner” in any other industry. It does not make sense that they are required to register as “owners” when these ancillary individuals are not required by State law to be on any corporate formation documents, such as Statements of Information, Bylaws, or Operating Agreements. Requiring the registration of these ancillary individuals not only complicates corporate documents and structures, it could potentially lead to unnecessary and frivolous litigation between and against all of the “owners” of a license, especially those with “deep pockets.”

Instead of defining these individuals as “owners,” it should be sufficient that IP companies and brands are disclosed as having financial interests in the business. This would still allow the BCC to track the involvement of these companies, while not further complicating business structures and “ownership” obligations.

WINTER LLP UPDATE: 2018 Cannabis Legislation

2018 CANNABIS LEGISLATION

The California State Legislature has passed numerous cannabis-related bills this legislative session. Several of these bills were signed into law by Governor Brown in the final moments of the session. Many take effect immediately, while others take effect January 1, 2019. We will be closely tracking additional cannabis-related bills as they wind their way through both houses of State Congress next year.

The new laws that affect the cannabis industry in California include the following:

ALL CANNABIS LICENSE TYPES

SB 1459 – Provisional Cannabis License:

Effective immediately, all licensing authorities (BCC, MCSB, CalCannabis) may issue “provisional cannabis licenses,” as a bridge between temporary and annual licenses. A provisional license will act in the same manner as an annual license, except that it is not renewable.

To qualify for a provisional commercial cannabis cultivation license, an annual applicant must:

  • Hold, or have held, a temporary cannabis cultivation license for the same premises and the same commercial cannabis activity for which the provisional license will be issued; and
  • Submit a completed state annual cultivation license application (all applicable requirements pursuant to California Code of Regulations section 8102 still apply), including evidence that compliance with the California Environmental Quality Act (CEQA) is underway; and
  • Pay the application fee for the associated license type.

AB 1741 – Payment of State Taxes by Means Other than Electronic Funds Transfer:

Effective immediately, state taxing authorities must temporarily accept money for cultivation, sales and excise taxes by means other than electronic funds transfer. This law temporarily waives the current 10% penalty for paying taxes in cash.

AB 2799, CalOSHA Requirements:

Effective January 1, 2019, licensed cannabis business that have at least one employee and manager must complete a 30-hour course from the California Occupational Safety and Health Administration (CalOSHA) to ensure compliance with job-related safety and health hazards.

AB 2899, No Advertising During License Suspension:

Effective January 1, 2019, the new law prohibits a cannabis licensee from publishing or disseminating advertising or marketing (including web sites) while the licensee’s license is suspended.

CULTIVATION LICENSES

AB 873, CalCannabis Peace Officer Duties:

Effective January 1, 2009, investigators with the California Department of Food and Agriculture to have arrest and search warrant powers with regard to enforcement of cannabis laws.

DISTRIBUTION LICENSES

SB 311, Distribution to Other Licensed Distributors:

Effective immediately, all licensed distributors are able to transport to other licensed distributors after the required cannabis testing.

RETAIL LICENSES / SPECIAL EVENTS

AB 2020, Temporary Event Licenses:

Effective January 1, 2019, provides that a state temporary event license can be issued in places other than county fairgrounds or district agricultural association events by the local authority, including the retail sale and consumption of cannabis, with the appropriate licenses by its participants. Starting January 1, 2019, cannabis special events can be held at any other venue approved by a city or county.