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“California’s cannabis industry is undergoing major change... By Elisabeth Connell"

Introduction:

As of September 27, 2021, cannabis businesses in California have a new set of regulations to comply with, which are set forth in Division 19 of Title 4 of the California Code of Regulations. The Department of Cannabis Control (“DCC”) first gave notice of these proposed changes on September 8, 2021 and filed the proposed text for these regulations with the Office of Administrative Law (“OAL”) on September 15, 2021. After a short period for public review and comment, the OAL approved the proposed regulations, with slight revisions from the initially published text, on September 27, 2021. These regulations now govern all commercial cannabis licensing in California.

Before the formation of the DCC, three separate programs housed within different state departments performed regulatory, licensing and enforcement functions for cannabis businesses: the Dept. of Consumer Affairs’ Bureau of Cannabis Control, the Dept. of Food and Agriculture’s CalCannabis Cultivation Licensing Division, and the Dept. of Public Health’s Manufactured Cannabis Safety Branch. Following the establishment of the DCC on July 12, 2021, the three existing sets of regulations for those programs were renumbered and moved into Title 4, Division 19 on July 14, 2021 without change to the text. The DCC’s new regulations revise those old rules in a number of ways, including eliminating inconsistencies in the separate regulations, clarifying many of the existing rules and making a number of other changes. A few of these significant changes, along with the author’s notes and observations, are summarized below:

Changes to Key Definitions:

- The definitions of “owner” and “financial interest holder” no longer differ depending on the type of cannabis license being applied for or renewed.

- “Financial interest holder” includes any individual, firm, partnership, joint venture, association, corporation, limited liability company, estate, trust, business trust, receiver, syndicate, or any other group or combination acting as a unit that is entitled to receive 10% or more of the profits.

- “Owner” is no longer defined as including any individual or business that is entitled to receive at least 20% of the profits.

- Inconsistencies in the old definitions of other key terms have also been eliminated: e.g., cannabis waste; edible cannabis product; limited access area; package; wholesale cost; and terms related to cannabis in different stages of the supply chain, etc.

Author’s Notes/Observations: Previously, each of the three regulatory bodies had their own definitions of “owner” or “financial interest holder,” which both overlapped and differed in meaningful ways, creating confusion for businesses seeking multiple license types. The new regulations provide a single, consistent definition of these terms for all applicants and license holders.

However, the new definition of “owner” introduces new ambiguity by allowing the DCC to independently identify individuals who may qualify as an owner based on available evidence, on a case-by-case basis. The DCC can then require the applicant to disclose this individual as an owner and provide the information required for all owners, or demonstrate that the individual does not qualify as an owner. The regulations provide no further guidance as to what evidence would lead the DCC to make this determination, so it remains to be seen how and when the DCC will use the authority granted to it under this rule.

New Labeling Requirements Taking Effect December 31, 2021:

- Branded merchandise packaging must include the license number of the licensee responsible for its contents, clearly visible from the outside of the packaging.

- Supplemental labels cannot be used to display the name of the licensed manufacturer of a product and their contact number or website address.

Author’s Notes/Observations: Cannabis product packaging requires a significant amount of information to be displayed and businesses have long been authorized to use supplemental labels, i.e., hang-tags, peel-back labels, and inserts, to help meet these requirements. The use of supplemental labeling is especially important for products with small outer packaging, which might lack the surface area to display all of the required information in the required font size. The new regulations still allow the use of supplemental labels for much of what is required to be included on the informational panel, but introduce a new prohibition on the use of supplemental labels to display the name and contact phone number or website of the licensed manufacturer of the product. After December 31, 2021, this information must be included on the product’s outer packaging.

Changes to Application Requirements:

- Applicants are no longer required to disclose other state commercial cannabis licenses.

- Applicants are no longer required to submit all business formation documents. Now, an applicant may only be required to submit formation documents that are not available online through the California Secretary of State, if requested. One exception exists for businesses held in trust, which are required to submit a copy of the certificate of trust establishing trustee authority.

- Applicants with multiple licenses are no longer required to hold a separate surety bond for each license.

- Applicants are no longer required to identify funds, loans and gifts.

Author’s Notes/Observations: The Department of Cannabis Control is now responsible for processing and issuing all commercial cannabis business licenses. The new application requirements are in some ways less onerous than before, perhaps to encourage businesses to seek licensure and bolster the legal market, which continues to lag behind California’s illicit market. Filing forms published by the DCC have been revised to correspond to the new application requirements and are available here.

Provisional Licenses:

- The DCC will issue certain provisional licenses through June 30, 2023 under the following schedule set forth in the new regulations:

o Provisional licenses for any type of commercial cannabis business will be issued until June 30, 2022, to applicants who submit a complete application and the required application fee on or before March 31, 2022.

o After June 30, 2022, provisional licenses for cultivation will continue to be issued until September 30, 2022, to applicants who submit a complete application and the required fees on or before June 30, 2022.

o Provisional licenses will also continue to be issued after June 30, 2022 and until June 30, 2023, to local equity license applicants who submit a complete application and the required fees on or before March 31, 2023.

- Provisional cultivation license applications received after January 1, 2022 will not be approved if issuance of the license would cause the business to hold multiple cultivation licenses on contiguous premises – meaning connected, touching, or adjoining – exceeding one acre of total canopy for outdoor cultivation, or 22,000 square feet for mixed-light or indoor cultivation. After January 1, 2023, the same restriction will apply to renewals of provisional licenses.

- No provisional license will be effective after January 1, 2026.

- Provisional license renewals from July 1, 2022 through June 30, 2023 will require evidence of certain action or progress by the local jurisdiction toward compliance with the California Environmental Quality Act (CEQA) or other environmental review efforts, which are specified in the regulations. Renewals after June 30, 2022 will require evidence demonstrating that the local jurisdiction has achieved one or more of the benchmarks specified in the regulations of effort towards completion of the environmental review process and compliance with CEQA.

Author’s Notes/Observations: Under the new regulations, DCC will issue provisional licenses – formerly called temporary licenses- to applicants who submit completed applications within the time frames noted above. The old regulations explicitly stated that “temporary” licenses were valid for 120 days from issuance and could be renewed or extended for up to 90 days, but the new regulations do not say exactly how long a provisional license will be valid after issuance, only that they will no longer be valid upon issuance of an annual license, abandonment or withdrawal of an application for licensure, or surrender of the provisional license. The regulations state that holders of provisional licenses are required to “actively and diligently pursue requirements for an annual license to continue to hold a provisional license…” That said, there are also new specific requirements for evidence of environmental review efforts for provisional license renewals, as noted above, the language of which seems to indicate that provisional licenses will be valid for one year from issuance. Renewal forms for provisional licenses must be submitted “no earlier than 60 calendar days before the expiration of the license and no later than . . . the last business day before the expiration of the license,” which is the same as for annual license renewals. Provisional license holders will want to confirm exactly when their provisional license will “expire” to avoid running afoul of the timing requirements for renewal.

Update to the Labor Peace Agreement Requirements:

- Businesses with 20 or more employees can now submit a notarized statement with their applications that they will enter into a labor peace agreement if they have not already entered into one.

- Businesses with fewer than 20 employees must submit a notarized statement with their applications that they will enter into a labor peace agreement within 60 days of hiring their 20th employee.

Author’s Notes/Observations: Cannabis businesses with 20 or more non-supervisory employees have long been required to enter into a labor peace agreement and provide evidence of having done so with their applications for licensure. Licensed businesses who later hired a 20th employee have been required to enter into a labor peace agreement “as soon as reasonably practicable” after reaching that threshold and applicants with fewer than 20 employees have been required to submit a notarized statement promising to abide by this rule. Under the new rules, businesses must now apparently enter into such an agreement within 60 days of hiring their 20th employee.

Specifically, businesses with fewer than 20 employees at the time they apply for licensure must submit a notarized statement promising that they will enter a labor peace agreement within 60 days of hiring their 20themployee. Businesses with 20 or more employees at the time they submit an application are no longer required to enter into a labor peace agreement before submitting the application or to submit a copy of the signature page from their labor peace agreement with their applications. Instead, those businesses can submit a notarized statement with their applications that they will enter into a labor peace agreement or provide evidence that they have already done so. Somewhat curiously, the regulations governing business modifications after licensure require licensees to submit a notarized statement to the DCC within 60 days of hiring their 20themployee that they will enter into a labor peace agreement, rather than a statement or evidence of having actually done so. Nevertheless, given the notarized statement required with the application, businesses should enter into a labor peace agreement within 60 days of hiring their 20th employee.

Changes to Branded Merchandise Rules:

- Approval is no longer needed to sell any item of branded merchandise, which is now defined as a non-consumable consumer good utilized by a licensee for advertising and marketing purposes.

- Retailers are now allowed to sell any licensee’s branded merchandise.

Author’s Notes/Observations: Under the former rules promulgated by the Bureau of Cannabis Control (“BCC”), licensees were required to get pre-approval from the BCC before selling any item of branded merchandise outside of the specific items enumerated in their regulations. Retailers were also limited to selling only their own branded merchandise. The new DCC regulations remove these restrictions, now allowing all licensees to sell their own and other licensees’ branded merchandise and no longer requiring department approval for any branded merchandise. Note, however, that labeling rules for branded merchandise have also changed, as discussed above. Elimination of the old restrictions on branded merchandise sales expands the ability of licensees to advertise their products. This change should help the legal cannabis market expand.

New Permission to Transfer Trade Samples Between Licensees:

- Cultivators, manufacturers, distributors, and microbusinesses authorized to engage in those activities may now designate limited amounts of cannabis and “cannabis products,” i.e., cannabis that has undergone a process whereby the plant material has been transformed into a concentrate, as “trade samples,” to be provided at no cost to other licensees for purposes of targeted advertising. This designation must be marked in METRC and cannot be changed.

- Samples must be lab-tested before they are transferred to other licensees.

- Samples must be packaged and labeled in accordance with the requirements for retail sales and include an additional label stating: “TRADE SAMPLE. NOT FOR RESALE OR DONATION.”

- Live plants and seeds cannot be designated as trade samples.

Author’s Notes/Observations: This is a further expansion of cannabis businesses’ ability to advertise and market their products. Samples must, however, be tracked and specially designated as such in METRC and cannot be given or sold to consumers. In conjunction with the elimination of old restrictions on branded merchandise sales, permission to trade samples among licensees significantly expands the ability of cannabis businesses to market and advertise their products. The regulations include numerous restrictions and requirements for designating and trading samples that are beyond the scope of this summary and licensees should consult with an experienced attorney to review and discuss these rules in depth.

Cultivator-Specific Updates:

- Applicants for specialty cottage, specialty, small and medium cultivation licenses using a shelving system to stack flowering plants must include the surface area of each shelf level in the calculation of the aggregate square footage of the canopy area.

- Provisional cultivation license applications received after January 1, 2022 will not be approved if issuance of the license would cause the business to hold multiple cultivation licenses on contiguous premises – meaning connected, touching, or adjoining – exceeding one acre of total canopy for outdoor cultivation, or 22,000 square feet for mixed-light or indoor cultivation.

- Cultivators are no longer required to pay a fee in connection with making modifications to their premises.

Author’s Notes/Observations: The new regulations seek to prevent cultivators from “stacking” licenses on contiguous properties to expand their total canopy beyond one acre for outdoor cultivation, or 22,000 square feet for indoor or mixed-light cultivation, which are the upper limits for a single license under the current regulations. However, these upper limits are set to increase in 2023 when Type 5, a/k/a “large” licenses for more than one acre of outdoor cultivation or more than 22,000 square feet of indoor or mixed-light cultivation, become available by statute. It will be interesting to see how the DCC will enforce this rule after Type 5 licenses come available. The new requirement to include the surface area of each shelf in the calculation of the canopy area also prevents cultivators from increasing the number of flowering plants they can grow in each harvest without exceeding their canopy limit by using a shelving system to stack plants on top of each other. One bright light for cultivators is the elimination of fees previously required when a licensee modified its premises.

Conclusion:

The DCC’s newly adopted regulations successfully eliminated many ambiguities and inconsistencies while, unfortunately, also introducing a few new ones. This summary is meant to provide guidance and insight into some of the significant changes made by the new regulations, but it is not a substitute for a comprehensive review and understanding of the new regulations as a whole, as they also make other changes and adjustments to the former regime. We encourage business owners to consult with a licensed attorney to review and discuss these changes, especially those most applicable to their particular field or enterprise. HK Cannabis Law attorneys are knowledgeable and experienced in this area and would welcome the opportunity to be of service. Please contact us to inquire about scheduling a consultation.




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