Here are the top 10 legal questions or industry hearsay attorneys are hearing most regarding California’s newly legalized cannabis industry.

With the beginning of California cannabis licensing under the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA), there has been a lot of confusion and hearsay regarding how the new system will operate. The below are the top 10 legal questions or industry hearsay our California attorneys are hearing most regarding California’s newly legalized cannabis industry:

The current collective model will continue for another year. Not entirely true. The collective model created by a 2008 state attorney general memo and eventually addressed by SB 420 will live on until January 9, 2019. However, if existing collectives undertake any sales of cannabis for profit or operate outside the caregiver model set up by the Medicinal and Adult-Use Cannabis Act, or if they operate outside of local law mandates, they will be in trouble with state and/or local authorities. Essentially, there has been a legal narrowing of the collective model and though state and local authorities have not policed this yet, that is bound to change.
During the “transition period,” licensees can buy cannabis product from unlicensed collectives. False. Once you have your temporary license, you’re stuck in the temporary licensee system and you can only buy and sell product from and to other temporary licensees. The transition period is set up under the MAUCRSA emergency regulations to allow medicinal (M) and adult use (A) licensees to do business with each other from January 1 until July 7, 2018. That period also allows temporary and annual licensees to sell “transition period product” — product they already had in their possession when they received their temporary license, under certain circumstances.
Transition period product doesn’t have any packaging, labeling, or testing standards. Mostly false. Though transition period product doesn’t have to undergo testing, it must meet certain packaging, labeling, and content standards, depending on the licensee holding it. For example, manufactures must adhere to the following standards: their cannabis product must be packaged in child-resistant packaging (CRP) that complies with the emergency MAUCRSA manufacturer rules and has the specific government warning set forth in Section 40408(3)(a) of the emergency MAUCRSA manufacturer rules and these products must comply with the THC limits for edible and non-edible products.
During the transition period, A retailers can sell to qualified patients and M retailers can sell to adults 21 and over. False. Though the transition period allows M and A licensees to do business with each other, A retailers cannot sell cannabis product to qualified patients and M retailers cannot sell to adults 21 and over.
As a temporary licensee, I’m not responsible for tracking and tracing commercial cannabis activity. False. Under the emergency MAUCRSA rules, temporary licensees are not required to record commercial cannabis activity in the state’s formal track and trace system but under the BCC emergency regulations, they must “track and record all cannabis commercial activities and information required . . . at a minimum, on paper receipts, invoices, or manifests.” Local approval is pretty much everything when you’re talking about getting a state license. In turn, you need to check the local jurisdiction in which you plan to operate to ensure two things: 1) they allow and regulate the license type you want; and 2) you can locate and secure real property that complies with local and state laws.
Local approval isn’t necessary. False. Local approval is pretty much everything when it comes to getting a state license. You should check the local jurisdiction in which you plan to operate to ensure that it allows for the license type you want and that you can secure real property that complies with local and state laws.
Profit sharing, IP royalties, and sales as rent are not disclosable financial interests. False. The emergency MAUCRSA regulations make clear that financial interests in a licensee must be disclosed to regulators and a financial interest means “an investment into a commercial cannabis business, a loan provided to a commercial cannabis business, or any other equity interest in a commercial cannabis business.” The only exceptions are: 1) A bank or financial institution whose interest constitutes a loan; 2) Individuals whose only financial interest in the commercial cannabis business is through an interest in a diversified mutual fund, blind trust, or similar instrument; 3) Individuals whose only financial interest is a security interest, lien, or encumbrance on property that will be used by the commercial cannabis business; and 4) Individuals who hold a share of stock that is less than 5 percent of the total shares in a publicly traded company. Based on discussions my firm’s California cannabis lawyers have had with California state cannabis authorities, profit sharing, IP royalties, and sales as rent also constitute disclosable financial interests under MAUCRSA.
Consultants will not be considered “owners.” Maybe, but it depends on what the consultant is doing and what your consulting agreement says. The emergency MAUCRSA regulations define “owner” as “[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, encumbrance; the chief executive officer of a nonprofit or other entity; a member of the board of directors of a nonprofit; an individual who will be participating in the direction, control, or management of the person applying for a license; an owner who is an individual participating in the direction, control, or management of the commercial cannabis business includes any of the following: a partner of a commercial cannabis business that is organized as a partnership; a member of a limited liability company of a commercial cannabis business that is organized as a limited liability company; an officer or director of a commercial cannabis business that is organized as a corporation.” A consultant can be construed as an “owner” in the license applicant if that consultant is controlling entire product lines, acting as a “master” anything with complete authority over the process, hiring and firing people without going through the actual owners, brokering and engaging in sales of product, or generally directing, controlling, and/or managing the business.
Transition period product is not taxable. False. In December, the California Department of Tax and Fee Administration adopted Emergency Regulation 3701, Collection and Remittance of the Cannabis Excise Tax, clarifying that California’s Cannabis Excise Tax applies to sales of cannabis acquired before January 1, 2018, but sold to customers on or after January 1, 2018. For more on Emergency Regulation 3701, see here.
I can put on a “cannabis cup” wherever cannabis is bought, sold, and consumed. False. Most California cannabis requires a temporary event license under MAUCRSA, which will be given only to an “event” at a county fair or district agricultural association event, provided that the cannabis sales and consumption comply with both MAUCRSA and local government approval standards for consumption. To get one of these temporary event licenses, you must first receive a cannabis event organizer license, which has all the vetting and disclosure requirements as any other license type. Additionally, those attending the event must be 21 or older and cannabis consumption cannot be visible from any public place or non-age-restricted area and cannabis sales may be conducted only by existing microbusinesses or retailers.

Hilary Bricken

Hilary Bricken is a partner with the law firm Husch Blackwell, where she advises clients in the cannabis, healthcare, and life sciences spaces on transactions, regulatory compliance, governance matters, and other corporate needs. Hilary may be reached at [email protected].

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