Takeaways from the Medicinal and Adult-Use Cannabis Regulation and Safety Act

While most of us were hitting the beaches over the summer, California lawmakers updated California’s regulations for the cannabis industry when they passed California Senate Bill 94, or the Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA” or “the Act”). MAUCRSA repeals the Medical Cannabis Regulation and Safety Act and amends the Adult Use of Marijuana Act, resulting in MAUCRSA regulating both adult use (i.e. recreational) cannabis businesses and medicinal cannabis businesses. For purposes of the Act, an adult is considered to be anyone 21 years of age or older. Bus. & Prof. Code § 26001.

While the Act provides a comprehensive regulatory framework for key segments of the cannabis industry, it also raises new questions and concerns that will require further clarification from, and coordination with, California lawmakers and agencies. The discussion below addresses some of the key provisions of the Act.

A.                Licensing

A triad of separate government authorities listed below oversees the licensing for cannabis activities:

  • The Bureau of Cannabis Control (formerly known as the Bureau of Marijuana Control) oversees licensing for retailers, distributors, testing laboratories, microbusinesses, and the majority of transport and security matters. Bus. & Prof. Code § 26012.
  • The Department of Food and Agriculture oversees licensing for the cultivation of cannabis as well as the newly initiated “track and trace” system. Bus. & Prof. Code § 26012.
  • The Department of Public Health oversees licensing for manufacturers. Bus. & Prof. Code § 26012.

Prior to the Act, a cannabis business was required to establish a two and a half year residency in California in order to be licensed. MAUCRSA has done away with this requirement. In addition, even though the types of licenses that are issued for medical and adult use are the same, licensees are required to distinguish each operation as either a medical use operation or an adult use operation, along with additional requirements. Bus. & Prof. Code § 26050. The Act has made temporary licenses available during a business’s approval process, which are issued at the licensing authority’s discretion. Bus. & Prof. Code § 26050.1.

While a business is no longer limited in the number of licenses it can obtain (with the exception of Type 8 licenses (i.e. testing laboratories)), and vertical integration is also now generally permitted, monopolization is expressly prohibited by the Act. Likewise, collusion between market participants, so as to create a monopolistic effect, is also prohibited under the Act. Bus. & Prof. Code §§ 26053, 26222.3.

The Act did not include what the cost will be for most licenses, which will likely be addressed in future regulations issued by the governing agencies.

B.                 Marketing

The Act places restrictions and requirements on business advertising and labeling. For example, businesses cannot advertise on interstate highways, near elementary and high schools or youth centers. They may not advertise in a manner that attracts children or through broadcasting where less than 71.6% of the audience is reasonably likely to be 21 or older. Bus. & Prof. Code § 26152. Businesses are also required to label products with information identifying the licensee, describing the product’s origin, and communicating whether the product is edible. Bus. & Prof. Code § 26130(c). Furthermore, edible cannabis products must be labeled with information that explains its potential effects and directs customers on how to consume it. Bus. & Prof. Code § 26130.

C.                Distribution

A cannabis business can now act as its own distributor (with the exception of Type 5 licensees (large-scale growers)), with distributors being held responsible for most transportation, testing, packaging, and labeling requirements. Requirements include but are not limited to: quality assurance testing, testing at a fixed location, and collecting and remitting taxes to the state. Distributors are required to be bonded and insured to an extent established by the Bureau of Cannabis Control. Bus. & Prof. Code § 26070. While businesses are not required to use distributors as an intermediary, cultivators and manufacturers are required to use distributors for testing, packaging, and labeling. Bus. & Prof. Code § 26070.

D.                Cultivators

Cultivation is defined as any activity involving the planting, growing, harvesting, drying, curing, grading, or trimming of cannabis. Bus. & Prof. Code § 26001(l). All cultivator applicants must provide in their application the source of their water supply. Bus. & Prof. Code § 26060.1.

While many ambiguities still exist, the Act has now made cooperative associations permissible. However, the Act has restricted such cultivation to not more than four acres of cannabis throughout the state. Bus. & Prof. Code § 26223. Although this clearly applies to cooperatives, the Act is unclear as to whether the acreage restriction applies to non-cooperatives as well.

By 2021, the Department of Food and Agriculture will establish a process by which cultivators may establish appellations of standards, practices, and varietals applicable to cannabis grown in a particular area of California. Bus. & Prof. Code § 26063.

E.                 Retailers

Retailers are required to have a licensed premises from which cannabis activities are conducted. Although it can be closed to the public, it must be a physical location. Retailers may also deliver cannabis products from non-storefront facilities. To do so, retailers are permitted to use technology platforms provided that the retailer owns and controls the platform. Bus. & Prof. Code § 26070.

In addition to the state, the city or county in which the business is located must give approval for operation, and such localities have discretion to approve or deny on-site consumption facilities for retailers and microbusinesses. Bus. & Prof. Code § 26200. Apart from local laws, an on-site consumption facility cannot have cannabis consumption visible from any public place or non-age-restricted area, cannot sell or allow the consumption of alcohol or tobacco on its premises, and must restrict access to the cannabis consumption area to adults (persons 21 years of age or older). Bus. & Prof. Code § 26055.

F.                 Manufacturers

Manufacturers are subject to heightened sanitation, preparation, storage, handling, and marketing standards. The Act incorporates standards from the California Health and Safety Code that are similar to the standards imposed on other commercial food products. It is unlawful to adulterate a cannabis product or receive in commerce an adulterated cannabis product. If a cannabis product has been produced, prepared, packed, or held under unsanitary conditions, consists in whole or in part of any filthy, putrid, or decomposed substance, bears or contains poisonous, deleterious, or otherwise restricted substances, or violates other key standards, it is considered adulterated. Bus. & Prof. Code §§ 26130, 26131.

MAUCRSA includes significant restrictions on edibles. They must not be designed to be appealing to children or easily confused with commercially sold candy or foods that do not contain cannabis. Also, they must be produced and sold with a standardized concentration of cannabinoids not to exceed 10 milligrams tetrahydrocannabinol (THC) per serving. In addition, they must be delineated or scored into standardized serving sizes if the product contains more than one serving and is in solid form. Furthermore, products must be homogenized to ensure uniform disbursement of cannabinoids throughout the products. Lastly, all edibles must be marked with a universal symbol as determined by the Department of Public Health. Bus. & Prof. Code § 26130.

G.                The Year to Come

While the implementation of MAUCRSA has changed the regulatory framework for the cannabis industry, it has also created a number of unanswered questions that requires further clarification and additional rulemaking from government authorities. While the state has set minimum standards for applicants and licensees by implementing the Act, it is also of utmost importance to consider the vested powers of local cities and counties to place additional restrictions and requirements on cannabis businesses.

MAUCRSA is part of a series of licensing and permitting, corporate, banking, tax, real estate and land use, employment, intellectual property and general business and regulatory issues that businesses must face as they break into the nation’s most lucrative legal cannabis market at the start of the new year. Duane Morris is among the largest full-service law firms serving the needs of the industry. To learn more about MAUCRSA and its legal implications and for assistance in cannabis licensing matters in California, please contact a member of the Duane Morris Cannabis Group.