Final changes to California's Cannabis Regulations
California’s newest cannabis regulations have been in place for nearly three months, and the industry is settling into the latest changes. This is the third set of regulations, so far, and after each revision, the cannabis businesses have groaned loudly they it strives for (and pay for) compliance. These latest rules are the final regulations for annual licenses, or at least they are final for now.
On Wednesday January 16th, 2019, the California Bureau of Cannabis Control (BCC) had its final regulations approved by the Office of Administrative Law, which rubber stamped the regulations with their official seal after over a month of review. These “final” regulations replace the emergency regulations that the BCC adopted in 2018, upon commencement of issuing commercial cannabis business licenses in California. The BCC and her sister agencies, the California Department of Food and Agriculture (CDFA) and the California Department of Public Health (CDPH), have all now issued and published their final versions of these regulations, which are now the operational law.
Below is a summary of the most important changes. To get a complete understanding of the rules, it’s advisable to retain a professional who can guide you through them. This is especially true for cannabis business owners, as compliance is mandatory, and companies can be fined or closed for violations
The most welcomed change comes in the form of statewide market access for non-storefront retailers, a.k.a. deliveries. There was some ambiguity among local governments as to whether they had the authority to ban commercial cannabis deliveries by companies from outside jurisdictions that have issued permits for them. The final regulations end this debate conclusively for the state. §5414 of the BCC regulations says, “A non-storefront retailer licensee shall be authorized to conduct retail sales exclusively by delivery as defined in Business and Professions Code §26001(p).” The Business and Professions code further clarifies that delivery is allowed in all local jurisdictions in California, including in any “city, county, or city and county.” So, for example, a delivery company licensed in Oakland, CA, has the right to deliver to consumers anywhere, even in cities and counties that ban cannabis retail sales.
Statewide delivery may still find opposition from the police unions and other prohibitionist local governments in the form of a lawsuit, and there is also push back from local cannabis retailers, who hoped to capture clients from municipalities with bans by requiring consumers to drive to their facility. But, although California’s legal system gives deference to local control and authority, especially on issues of public health and safety, Proposition 64 was meant to benefit all responsible adults in California, and not just those who live in communities that have zoned land for commercial cannabis. Despite opposition, it’s unlikely that the new regulations regarding cannabis deliveries will be overturned or watered down in the near future.
Exit packaging is another issue cannabis business owners need to understand. §5413 of the BCC regulations make clear that by 2020, all cannabis goods sold to customers that leave the retail facility must do so in resealable, tamper-evident, and child resistant packaging. The CDPH regulations §40417 note that cannabis products intended to be inhaled or applied topically may utilize packaging that is child-resistant only until first opened. The statement “This package is not child-resistant after opening” is required on such products. CDPH released packaging and labeling checklists recently, which are included with this article, in an attempt to simplify compliance with these often confusing regulations.
Cannabis Equity Licensing
Cannabis equity licensing is not part of the “final” regulations, per se, but the final rules allow the BCC to provide applications for cities with cannabis equity programs to receive funds from a $10 million fund. This fund, created by the state legislature last year, was awaiting the final approval of the BCC and sister bureaus in the form of these final regulations. Only cities with cannabis equity programs will be eligible to apply for the funds. In early March, the BCC finally put out equity grant applications, requiring municipalities to apply for the funds before April 1, 2019.
“Owner” and “financial interest holders” are the two terms that define all the moneyed interests in a commercial cannabis license.
BCC final regulations define an owner as:
- Someone who holds an aggregate interest of 20% or more
- The CEO
- Members of the board of directors of a nonprofit
- Trustees who have control of a commercial cannabis business held in trust
- An individual entitled to a share of 20% of the profits or more, an individual who will be in the direction, control, or management of the person applying for a license.
- The general partner of a commercial cannabis business
- A non-member manager or managing member of a commercial cannabis business organized as an LLC
- Officer or director of a commercial cannabis business organized as a corporation
A significant addition to ownership requirements is language requiring all individual members or owners of an entity with a financial interest in a commercial cannabis license must be disclosed. This means, LLCs and other corporate entity owners of a commercial cannabis business must reveal all members of the LLC and all owners of the company.
Financial interest holders include individuals who enter into an agreement to receive portions of profits of a commercial cannabis business. An exception to this rule includes ““persons” who hold a share of stock that is less than 5% of the total shares in a publicly traded company.” This last section, found in BCC regulations §5004(d)(4), alludes to persons who don’t actually exist yet, as this author has not yet heard of a publicly traded licensed California commercial cannabis business. This language should be telling as to what the cannabis lobby expects in the coming near-term future.
Deliveries facilitated by technology platforms have been a topic of discussion at the regulatory level since early 2018. This set of regulations includes significant changes that clarify how third-party technology platforms such as Eaze and GreenRush may partner with licensed commercial cannabis delivery businesses. No longer will Eaze be allowed to use their drivers and their vehicles to deliver cannabis goods from a licensed delivery retailer. The transactions must be delivered by employees of the delivery business and the vehicles must be owned by the delivery business. A third party technology platform cannot share in the profits of a licensed cannabis delivery retailer. Flat fee agreements will be needed to substitute any current agreements that require a portion of profit share as payment for services rendered.
There are many more significant changes, but the above addresses the most pressing matters facing the cannabis industry during the process of adapting to the final regulations issued by BCC and its sister agencies.