The Impact on Growers – California’s Emergency Cannabis Regulations

Last Thursday, California’s three cannabis licensing agencies published emergency regulations to govern both the medical and adult-use cannabis industry in California under the Medical and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA) (Bus. & Prof. Code 26000 et seq.).

The California Department of Food and Agriculture (CDFA), through its CalCannabis Cultivation Licensing Division (CalCannabis), is the licensing authority for all cannabis cultivators in California. CalCannabis is also developing the track-and-trace systems that will record the movement of cannabis through the supply chain from cultivation to sale. Below are the highlights of the CDFA’s emergency regulations and how they may impact growers.

This post is the second in a series of entries on the Duane Morris Cannabis Industry blog that will provide an analysis of the new regulations. If you have any questions about the regulations, please contact Jennifer Briggs Fisher in our San Francisco office or Justin Santarosa in our Los Angeles office.

The Big News – No 1-Acre Limit on Farm Size

On November 13th, three days before the emergency regulations were released, the CDFA issued an environmental impact report that proposed a 1-acre cap on cannabis farms and nurseries until 2023. However, when the actual regulations were released – they scrapped the cap.

While CDFA’s emergency regulations do not include the 1-acre cap proposed in its environmental review, they do limit the size of a grow farm depending on what kind of license the farmer obtains. For example, a “medium” cultivation license allows for one acre of outdoor cultivation per license, but a person is limited to only one “medium” license. In contrast, there are no limits on smaller cultivation licenses, which allow up to about a quarter-acre of cannabis cultivation.

Licenses for cultivators are defined by the size of canopy (see below). Licenses are also available for the following categories:

  • Nurseries – facilities that produce only clones, immature plans, seeds and other products used in cultivation.
  • Processors – sites that conduct only trimming, drying, curing, grading or packaging of cannabis and non-manufactured cannabis products. Processors may not grow cannabis under their license.

Definition of “Canopy”

The emergency regulations define “canopy” as “the designated area(s) at a licensed premise that will contain mature plants at any point in time.” The regulations also provide the following:

  • canopy will be calculated in square feet and measured using clearly identifiable boundaries of all area(s) that will contain mature plants at any point in time, including all of the space(s) within the boundaries;
  • canopy may be noncontiguous, but each unique area included in the total canopy calculation shall be separated by an identifiable boundary which includes interior walls, shelves, greenhouse walls, hoop house walls, garden benches, hedgerows, fencing, garden beds, or garden plots; and
  • if mature plants are being cultivated using a shelving system, the surface area of each level shall be included in the total canopy calculation.

Compliance Considerations for Cultivator Licensees

Local Approval: Applicants must submit proof of approval by their local jurisdiction for commercial cannabis activity; CDFA will not issue licenses to applicants in local jurisdictions where cannabis cultivation is banned.

Environmental Compliance: Applicants must be in compliance with CEQA (the California Environmental Quality Act) and will be required to comply with conditions imposed by the State Water Resources Control Board and Department of Fish and Wildlife. Applicants will be required to disclose all water sources used for cultivation activities and must provide all well logs, statements of diversion and any other applications, permits or licenses relating to water use. The State Water Resources Control Board or the Department of Fish and Wildlife can stop the issuance of new licenses in certain areas if they determine cannabis cultivation has had an adverse impact on a watershed or geographic area.

Renewable Energy Requirements: The renewable energy requirements for cultivators have been revised and will be phased in. Licensees will be required to report on energy use and sources beginning in 2022 and will be required to meet the average electricity greenhouse gas emissions intensity required of their local utility provider by 2023.

Cannabis Waste: All cannabis waste must be disposed of in a secured waste receptacle or in a secured area and must be managed in compliance with applicable waste-management laws.

Track-and-Trace System: After a license is approved, licensees will have 10 business days to register for training and 30 business days to move all inventory into a track-and-trace system.

Criminal History: Applicants will have to submit Live Scan fingerprinting and undergo a criminal history check to determine if any convictions are substantially related to their commercial cannabis cultivation license.

Further Updates

Please continue to check the Duane Morris Cannabis Industry blog, as we will be providing further updates and a more detailed analysis of how these regulations will impact distributors, dispensaries, and other licensed entities.

David Feldman

Sessions Reconfirms Status of Cole Memo

The entire cannabis industry descended on Las Vegas this week for the MJBiz conference where over 18,000 professionals gathered. While we were there, US Attorney General Jeff Sessions made some news during a Congressional grilling focused more on his involvement with Russian players.

Many have worried that Sessions intends to change or eliminate the Cole Memo. Issued in 2013, in this memo Obama’s Attorney General declared, essentially, that the US will not put any priority on enforcing federal cannabis laws against those legally complying with state laws. Certain exceptions were included, such as keeping cannabis away from children and keeping organized crime out of the business.

Many in the industry felt a bit of relief when Sessions said to Congress this past Tuesday, “Our policy is the same really, fundamentally, as the Holder-Lynch [ie Obama] policy, which is that the federal law remains in effect and a state can legalize marijuana for its law enforcement purposes, but it still remains illegal with regard to federal purposes.”

Sessions made some more news as well. For the first time, he agreed that cannabis is not as dangerous as heroin, even though both are listed as Schedule I drugs, i.e. deemed the most dangerous of all. He had previously called cannabis “only slightly less awful” than heroin.

In addition, he acknowledged that “we are bound” by the Rohrabacher-Blumenauer amendment, a statutory mandate. This amendment, renewed annually since 2014, prevents the use of federal funds to go after those complying with state medical marijuana laws.  There had been some question after the most recent amendment thanks to a confusing statement issued by President Trump. Some interpreted the statement as potentially suggesting Trump views the amendment as not constitutional. Sessions has been attempting to convince Congress not to renew the amendment in the current budget.

California Releases Emergency Cannabis Regulations

On November 16, 2017, California’s three cannabis licensing agencies published emergency regulations to govern both the medical and adult-use cannabis industry in California under the Medical and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA) (Bus. & Prof. Code 26000 et seq.). The regulations published by the Bureau of Cannabis Control, the Department of Food and Agriculture and the Department of Public Health cover, among other things, cultivating, manufacturing, testing, growing, packaging and potency requirements.

Below are highlights of the emergency regulations. This post is the first in a series of entries on the Duane Morris Cannabis Industry blog that will provide an analysis of the new regulations. If you have any questions about the regulations, please contact Jennifer Briggs Fisher in our San Francisco office or Justin Santarosa in our Los Angeles office.

Licenses

Temporary licenses will be issued to qualifying businesses beginning on Jan. 1, 2018. A qualifying business is one that is holding a valid license, permit, or “other authorization” issued by the jurisdiction where the business operates. The State has indicated that it will be “very flexible” on what constitutes “other authorization.”

The full annual license application requires detailed information, including:

  • whether you’re applying for an “M License” or an “A License”
  • ownership information (an owner is a person who owns 20% or more of the licensed business)
  • a detailed premises diagram
  • a list of all of financing and financiers, including:
    • the funds held in savings, checking, or other accounts maintained by a financial institution;
    • loans and gifts;
    • investment funds and names of the investors; and
    • identifying information of anyone with a “financial interest” in the business.

“Identifying information” includes name, birthdate and a government issued identification number (driver’s license or passport) and “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.”

Cultivators will have additional requirements including information regarding water and power use and compliance with the California Environmental Quality Act.

There will be an application fee of $1,000 and license fees will range from $500 to $125,000 depending on the type of license and the size of operations, with cultivation licenses topping out at almost $80,000, based on production.

Grow Size

In a surprising move, California has not limited the size of farms. The Department of Food and Agriculture had previously proposed limiting the size to one-acre.

Limitations on Cannabis Products

The State has kept its low limit on the THC levels that may be contained in adult-use edibles. The state will limit the serving-size of edibles for adult-use to 10 milligrams of THC, with no more than 100 mg allowed in a single product package. Other cannabis products, such as tinctures, concentrates, and topicals, are limited to a maximum of up to 1,000 mg of THC per package, while medical-use products can 2,000 mg of THC per package.

In response to concerns regarding marketing to children, all designs depicting human beings, animals, insects, or fruit are prohibited.

Retail Restrictions

Retail stores – or dispensaries, as they are more commonly known – will be limited to operating between the hours of 6 a.m. and 10 p.m. Delivery is allowed, but only by a delivery employee of a licensed retailer. Retail stores will need to be at least 600 feet from a K-12 school, day care center, or youth center in existence when the license issued. Cannabis window displays are forbidden, and interior displays must not be visible to the outside public. Keep in mind that local town, city or county ordinances may impose further restrictions on dispensaries.

Employment Issues

All employees of a licensed entity must be at least 21 years old. In addition, every employee must have an identification badge on at all times (the regulations detail the specific requirements of the identification badge). Additionally, applicants with more than 20 employees must attest that they have entered into a labor peace agreement, and provide a copy to the Bureau of Cannabis Control. (A labor peace agreement is a neutrality agreement between a company and unions in which the employer agrees not to resist organizing attempts by its workers.)

Further Updates

Please continue to check the Duane Morris Cannabis Industry blog, as we will be providing further updates and a more detailed analysis of how these regulations will impact cultivators, distributors, dispensaries, and other licensed entities.

FDA Warns Cannabidiol-Infused Products Manufacturers Over Health Claims

The U.S. Food and Drug Administration (FDA) has recently issued warning letters to four companies concerning the marketing of products containing cannabidiol (CBD). FDA alleged that claims made on websites and social media webpages concerning the health benefits of CBD violated the Federal Food, Drug and Cosmetic Act. The products at issue included CBD-infused oils, edibles, tinctures and creams, and the manufacturers included statements claiming various health benefits from CBD.

To read the full text of this Alert, please visit the Duane Morris website.

Cannabis Industry Blog

San Diego Issues Guidance for Marijuana Cultivators, Dispensaries and Testing Facilities

By Nick Ferraro and Joe Machi

With recreational sales beginning in California on January 1, 2018, the City of San Diego has developed a website to explain the permitting and application process for established and emerging companies in the cannabis industry.  The website is part of an effort on the part of the City of San Diego to help individuals and companies understand Ordinance No. O-20793 (passed February 22, 2017) and Ordinance No. O-20859 (passed October 17, 2017), which amend the Land Development Code and the Local Coastal Program.

Though the City of San Diego’s regulatory guidance website is not meant to provide a comprehensive overview of the patchwork of permitting and licensing laws that apply at the city-level to marijuana businesses, it is a good starting point.

The website provides an overview for those subject to the ordinances:  Marijuana Production Facilities, Marijuana Outlets and Marijuana Testing Facilities.

Continue reading San Diego Issues Guidance for Marijuana Cultivators, Dispensaries and Testing Facilities

David Feldman

NY Adds PTSD to Medical Cannabis Conditions

New York Gov. Andrew Cuomo yesterday signed a bill into law permitting those suffering from post-traumatic stress disorder (PTSD) to access legal medical cannabis. It was particularly symbolic that the bill was signed on Veterans’ Day, since many battle-scarred veterans suffer from PTSD. Most states with medical cannabis permit its use to treat PTSD. New York remains one of the most restrictive states in limiting what ailments trigger the right to obtain this treatment.

The PTSD bill was one of five that Cuomo signed yesterday aimed to help veterans. He did not specifically comment on the PTSD bill in his press release. But the release did note that it appears as many as 19,000 New Yorkers with PTSD could benefit from this treatment. The release further acknowledged that PTSD victims include “military veterans, police officers and fire fighters, as well as survivors of domestic violence, rape, violent crime, and accidents.” Here in NY, I know folks who would want to add “survivors of terrorist attacks.”

The irony is that those same veterans cannot access medical cannabis through the free VA hospital system as long as cannabis use remains a federal crime. Therefore, these too often financially struggling vets have to go out of pocket to access this medicine. However, many simply may not be able to afford it. In 2010 the VA did make clear that vets accessing legal medical cannabis in their state outside the VA system are not at risk of losing their VA benefits. But the VA itself still cannot offer cannabis to vets.

Veterans groups like the American Legion have been lobbying for the VA directly to supply cannabis. They argue that the VA provides highly addictive opioids, whereas medical cannabis can help vets avoid these dangerous drugs. Let us hope that it is not too long before those who served our country can access all the help they need from our federal government.

High Cannabis Taxes Could Help Grow California’s Black Market

As California gears up to issue the first set of adult-use cannabis licenses on January 1, 2018, state and local taxes on adult-use cannabis may reach as high as 45% in some parts of the state. According to a recent report by Fitch Ratings, cannabis consumers are expected to pay a sales tax ranging from 22.25% to 24.25%, which includes an excise tax of 15%, and additional state and local sales taxes ranging from 7.25% to 9.25%. Local cannabis businesses will have to pay taxes ranging from 1% to 20% of gross receipts, or $1 to $50 per square foot of cannabis plants, and farmers will be taxed $9.25 per ounce for flower, and $2.75 per ounce for leaves.

These rates are considerably more than in other states that have already legalized adult-use cannabis.  Colorado and Nevada, for example, each have a tax rate of 36%. Oregon comes in at 20% and Alaska has a rate of up to 20%. Massachusetts, which legalized adult-use cannabis, and should begin retail cannabis sales in July 2018, is expected to have a tax rate of 24%. Maine has not established a tax rate yet. Washington is the only other state with higher taxes, at an effective tax rate of approximately 50%.

The legitimate cannabis industry in California has a projected value of $7 billion with the potential to collect $1 billion per year in tax revenue. However, industry leaders in California believe that a higher effective tax rates on consumers, retailers and growers could potentially divert sales to the already well-established cannabis black market. For example, the black market price for an eighth of an ounce of cannabis is approximately $20, as opposed to approximately $50 at a licensed dispensary. High taxes, coupled with a cheaper source of product, could ultimately hamper California’s efforts to legitimize the cannabis industry.  However, since legal cannabis is subject to stringent quality assurance testing which will be overseen by the California Bureau of Cannabis Control, consumers may be willing to pay a premium to ensure that they are getting a better, safer product than they would on the black market.

 

Appellate Ruling Confirms New Jersey’s Authority to Reschedule Marijuana, But Does Not Mandate Rescheduling

By Paul P. Josephson

In a rare 2-1 decision, New Jersey’s intermediate appeals court has overturned the decision of New Jersey’s Director of Consumer Affairs that he does not have the authority to reschedule marijuana from a Schedule I to Schedule IV substance.  The dissent affords the state the right of appeal to the New Jersey Supreme Court, and the state quickly confirmed it will appeal.

Contrary to several early press reports, including Associated Press coverage reprinted nationally, the appellate judges did not require the Director to review Schedule I status.  Continue reading Appellate Ruling Confirms New Jersey’s Authority to Reschedule Marijuana, But Does Not Mandate Rescheduling

DM Speaks on New Jersey Recreational Cannabis Bill

By Paul P. Josephson

In anticipation of electing a new governor in November 2017 and enactment of adult use (recreational) cannabis legislation in the first half of 2018, the New Jersey Cannabis Industry Association and industry thought leader Weedmaps sponsored the first education seminar on Cannabis Policy, Zoning & Licensing designed for New Jersey public officials on September 14 in New Brunswick, New Jersey.

Moderated by David O’Brien, Director, East Coast Government Relations, Weedmaps, the panel discussed what constitutes good local cannabis policy, what has worked and not worked in legalized jurisdictions, and how to create a responsible local marketplace for the cannabis industry while ensuring public safety, protecting public health, and deterring youth from use.  Continue reading DM Speaks on New Jersey Recreational Cannabis Bill

David Feldman

Cannabis Deal Sizes “Growing”

Two big announcements this week on the finance side of the emerging global cannabis industry. First, yesterday’s word that the giant alcohol company, Constellation Brands, the maker of Corona Beer among others, is acquiring a stake in Canada’s Canopy Growth Corporation. Canopy is possibly the biggest medical cannabis producer in Canada and is a public company. The terms? $245 million for a 9.9% ownership interest. Established industries like tobacco, alcohol and pharma have stayed away from investing in US cannabis companies since it is still a federal crime to produce or sell cannabis. But the Constellation investment is into a totally legal enterprise in Canada.

Separately, this week we also learned that a large US operator of cultivation and dispensary facilities in the US announced it is seeking to raise a $250 million investment fund for buying into cannabis companies in several US states. While tremendous capital has flown into the cannabis industry, it has come principally from high net worth individuals and family offices. Established venture and private equity funds generally are prohibited from investing in illegal enterprises. Several funds have been established for cannabis investment, but none known to be as big as this one is planned to be.

One can only imagine the deluge of capital that will descend on US cannabis businesses if/when the US federal criminal restrictions are eliminated. We have already seen it happening in Canada, mostly driven by a group of very active investment banking firms. Once the shackles of the federal restrictions are removed, it appears the growth trajectory of this toddler US industry will expand exponentially.