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WINTER LLP Update: Final Cannabis Regulations Approved

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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 Please note, these new cannabis regulations take effect immediately, meaning the previous emergency regulations are no longer in effect.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 Requirements. We 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 Requirements. We 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: State Licensing Regulations – Summaries

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Hello Again,

We understand that most of you are working hard towards achieving compliance beginning January 1. So as a follow-up to our recent update regarding the newly released state regulations, we want to provide you with summaries of some of the more important details that we have identified in the state regulations.

As many of you may know, the California cannabis industry will now be governed by three state agencies. The California Bureau of Cannabis Control (BCC) is responsible for regulating distribution, retail and testing, the California Department of Public Health (CDPH) will oversee manufacturing (which includes packaging and labeling), and the California Department of Food and Agriculture (CDFA) will govern cultivation.

BCC Regulations – Distribution, Retail, and Testing

Distribution

There are three different types of distribution licenses (all falling under License Type 11) under the BCC Regulations. All transportation of cannabis or cannabis products must be conducted by a Distributor Licensee or its employees.

  • Distributor (Standard)
    • The holder of a Distributor License does the following: arranges for testing, checks for appropriate packaging and labeling, collects taxes, transports cannabis and cannabis products, and acts as a cannabis wholesaler.
    • Cannabis and cannabis products must pass through a Standard Distributor prior to being sold to customers at a retail establishment.
    • Distributors may package and label cannabis, but not manufactured cannabis products.
  • Transport Only – Self Distributor
    • The holder of a Transport Only Self Distribution License is permitted to transport only its own cannabis and cannabis products, but cannot perform any other function of a Distributor.
    • Transportation to retail licensees is prohibited by a Transport Only License. The lone exception is for the transportation of immature plants and seeds from a nursery to a retailer.
      • Allowed: Cultivator wants to transport its raw products to manufacturer.
      • Not Allowed: Manufacturer wants to transport its products to Dispensary.
  • Transport Only – Third Party
    • A Third Party Transport Only License is identical to a Self-Distributor License, except that it allows the permit holder to transport the cannabis and cannabis products of other licensees rather than their own.
    • Transportation to a retail licensee is prohibited.
      • Allowed: Transportation company wants to deliver products among licensees.
      • Not allowed: Manufacturer wants to transport products to Dispensary.

Retail

  • Retailers cannot package or label cannabis or cannabis products on the premises. All products must be packaged and labeled prior to arriving at the retailer.
  • During the Transition Period, which lasts between January 1 and July 1, retailers may receive products that do not meet packaging and labeling standards. However, before selling to consumers, the retailer must place the products in secondary packaging subject to certain requirements.
  • Retailers may only be open to the public between 6:00 a.m. and 10:00 p.m.
  • All products must be placed in an opaque bag before leaving the retail premises.
  • All deliveries must be made by a direct employee of the licensee to a physical address within CA.
  • Delivery vehicles may contain a maximum of $3000 worth of cannabis or cannabis products at any time.

Testing

  • Provisional Licenses – Testing Labs that are awaiting accreditation from the joint technical committee of the International Organization for Standardization and the Electrotechnical Commission may obtain a 12 month provisional license if they meet all other requirements. The Provisional License may be extended an additional 12 months if the applicant is still awaiting accreditation.

CDPH Regulations – Manufacturing

  • Ethanol is now considered a nonvolatile solvent
  • There are four types of manufacturing licenses:
    • Type 7 – Extraction using volatile solvents (can also do everything a Type 6, Type N, and Type P licensee can do)
    • Type 6 – Extraction using only non-volatile solvents (can also do everything a Type N and Type P licensee can do)
    • Type N – Infusions (can also do everything a Type P licensee can do)
    • Type P – Packaging and labeling only
  • A new license, “Type S,” is expected to be issued starting in early 2018 which will allow businesses to share facility space.

CDFA Regulations – Cultivation

  • Type 5 Large Cultivation licenses will not become available until 2023
  • All individuals and entities are limited to only one Type 3-Medium Outdoor, Type-3A-Medium Indoor, or Type 3B-Medium Mixed-Light A-License or M-License. This means that an individual owner in an entity that holds a Medium Cultivation license cannot also own 20% or more of any other entity that also holds a Medium Cultivation license of any type.
    • There is no equivalent limit on Type 1 or 2 Cultivation Permits or aggregate limit on cultivation. Meaning that an applicant may own 10, 20, or more Type 2 Small Outdoor, Indoor, or Mixed Light grows, and all on the same Premises if you have a large enough parcel or building.
      • Practical Note: Based on the limits of Type 3 permits above, we see no net benefit in trying to obtain a Type 3 permit unless that is all you ever want to own, or unless you are part of a group where each of you will always own less than 20% of the permit. Instead, since many of our clients have multiple cultivation projects, and large enough Premises (parcels or warehouses), we recommend breaking up your cultivation projects into the unlimited variety with the smaller Type 2 permits.
  • A new Processor License type has been created which allows licensees to trim, dry, cure, grade, and package cannabis. Growing cannabis is not permitted under a Processor License.

The newly issued regulations are quite extensive, totaling around 300 pages, and address nearly every aspect of the cannabis industry. The information above is intended only to highlight some of the more important details we have identified in the regulations, and by no means is meant to serve as a complete summary of the regulations. Should you have questions about any of the information above, or about any of the rules and requirements contained in the regulations, please do not hesitate to reach out.

Next, please be on the lookout from our team for further information on Temporary Permits, including required documents, fees, and due dates.

With the addition of Kurt Ketchum, Esq. as an Associate Attorney in our Costa Mesa office, and the promotion of Wendy Lei, Esq. to Senior Associate, we are poised and ready to help each and every one of you navigate and obtain Temporary State Licenses. In addition to everything else we do for our clients…corporate transactions, contracts, regulatory, real estate, trademarks and intellectual property licensing.

You’ve all worked incredibly hard and faced adversity every step of the way the past several years to get to this moment. This is finally your time. Let’s go!

Winter LLP Update: Self-Distribution of Cannabis Products

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There has been a lot of confusion recently about Self-Distribution under state and local laws. It hasn’t helped matters that some local (city/county) ordinances, in jurisdictions such as Monterey County, for example, allow cultivation and manufacturing permit holders to “self-distribute” their material or products without the use of a third-party distributor.

As such, this update is being provided to help you understand what, exactly, “self-distribution” means at the state level.

Under current California law, there are only two types of businesses that can legally transfer or transport cannabis: (1) Licensed dispensaries that are authorized to provide delivery services can “transfer” cannabis or cannabis products directly to a customer, and (2) licensed distributors can “transport” cannabis and cannabis products between licensees. It is important to emphasize that Section 26070 of the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA) expressly states that “the transportation of cannabis and cannabis products shall only be conducted by persons holding a distributor license.”

Section 26110 of MAUCRSA does allow a cultivation or manufacturing licensee to self-distribute its cannabis or cannabis products to other licensees. However, this is only allowed if the business also holds a valid Type 11 state distribution license. Accordingly, while a local city or county ordinance may allow a permitted manufacturer or cultivator to distribute its own cannabis or cannabis products without a separate locally issued distribution permit, a Type 11 state distribution license is still required.

Whether self-distributing or not, all must comply with the regulations and requirements placed upon regularly licensed distributors, which include the following:

  • Prior to transportation, distributors shall:
    • Complete an electronic shipping manifest.
    • Transmit the manifest to the bureau and the licensee receiving product.
  • During transportation, distributors shall:
    • Maintain a physical copy of the manifest and make it available upon request to the Department of Consumer Affairs and law enforcement officers.
  • Upon receipt, licensee receiving shipment shall:
    • Submit to the licensing authority a record verifying receipt of the shipment and the details of the shipment.

We hope this clears up some of the confusion surrounding the requirements placed on cannabis businesses that hope to Self-Distribute their material or products to other licensees.

As always, should you have any questions or want any additional information regarding Self-Distribution, or any other local permitting or state licensing requirements, please let us know.

Thank you, stay safe, and good luck out there! Todd Winter, WINTER LLP.