Buying, Selling, and Operating your Cannabis Business in California

Cannabis Compliance Lawyers have the experience, creativity, and influence needed to make profitable business transactions work for our clients.

There is a substantial market for cannabis related businesses, and that trend will continue. These transactions can be very complex, with a myriad of regulatory hurdles, rife with tax and liability implications.

This emerging market is full of interested buyers and motivated sellers looking to cash out or take advantage of the next big opportunity in California.

A knowledgeable legal advisor is crucial when it comes to navigating private equity, corporate governance, restructuring, debt management, tax ramifications, and other complex issues.

Cannabis Compliance Lawyers assists clients across California with a range of transactions involving the buying and selling of their cannabis business and any connected intellectual property.

Cannabis Compliance Lawyers represent buyers and sellers in a wide range of mergers, acquisitions and divestitures.

From simple business sales to more complicated issues of shareholder approval or spin-off of company divisions, Cannabis Compliance Lawyers gives our clients a critical edge in negotiating and understanding their most critical needs to consider when closing a deal.

Our lawyers assist with the structuring, negotiation, document preparation and the amicable closing of a deal, using our firm’s full resources for everything from due diligence to tax-efficient deal structures.

Our clients get the assistance they need to discuss and prepare letters of intent, conduct due diligence investigations, arrange financing arrangements and form special purpose entities for finishing the business deal.

Whether the buyer is a direct or strategic acquirer or even a financial sponsor, and whether the seller is an inexperienced entrepreneur or a very sophisticated business owner, we always bring expertise to your transaction to ensure that the deal is completed, correctly.

What Proposition 64 Means for Recreational Marijuana in California

By Kathleen E. Finnerty, Esq. 

Medicinal marijuana has been legal in California since 1996. When the Compassionate Use Act of 1996 passed, people went to their doctors in droves because they were finally able to legally use marijuana upon advice of a doctor.

According to ProCon.org, as of March 2016, an estimated 758,607 California residents are card-carrying marijuana patients, who  can legally purchase cannabis from medicinal dispensaries.

Now that Proposition 64 (Adult Use of Marijuana Act or “AUMA”) has passed, adults (those over the age of 21) will no longer need a medical card to consume cannabis products in designated businesses or in the comfort of their homes.

One would expect countless Californians to be dancing in the streets now – blasting Jefferson Airplane while relaxing on their favorite hammock or passing a bong with their closest friends.

But, what does this mean for you? What exactly does Proposition 64 say?

Here we discuss the elements of Proposition 64, how it works, and what it means for the recreational marijuana in California.

Not surprisingly, it’s not all roses and hand blown pipes for all. Even some in the cannabis industry opposed the proposition.

Keep reading to find out why this proposition is good for California, yet may have some negative impact on certain Californians.

California Proposition 64 – Legalization of Adult Use of Recreational Marijuana in California

Proposition 64 won in a landslide with 8 million voters choosing “Yes” on their ballots. But, what exactly does that mean?

According to the Proposition, cannabis use will still be illegal anywhere where smoking cigarettes is, anywhere in public, and while driving. You can only legally smoke pot in your home or at designated businesses.

You can face fines of up to $100 for smoking in public.

You need to be 21 or older to buy marijuana, as with alcohol, and sellers must abide by a massive set of state regulations.

You also won’t see advertisements for marijuana on television or radio. Since Mary Jane is still illegal at the federal level, advertising across federal air waves is strictly prohibited.

While this is good news for the Californians who are excited to imbibe, who benefits the most from legalization of adult use of marijuana?

California state and local governments are poised to collect millions of dollars in tax revenue off the cultivation, manufacture, transportation and sale of cannabis.  Recreational marijuana in California is subject to two new excise taxes:

• A cultivation tax of $9.25 per ounce for flowers and $2.75 per ounce for leaves, with exceptions for certain medical marijuana sales and cultivation; and

• A 15 percent tax on the retail price of marijuana.

With California already having the highest sales tax rate in the country at 7.25%, 15% additional tax at the retail level, on top of a 15% tax to the cultivator (which is a cost that naturally flows through to the consumer) results in a substantial hit for the marijuana consumer.  For many, however, the ability to legally purchase cannabis without risk of arrest is a worth the cost.

Exactly How Legal Are We Talking?

Immediately upon passing, Proposition 64 meant it was no longer illegal to buy, possess, or transport limited amounts of marijuana for personal recreational use.

A person can cultivate up to 6 plants inside their home so long as the cannabis is not visible to the public. That cannabis cannot be sold however; it must only be for personal use.

A person cannot use cannabis at all, including edibles, unless at home or at a business licensed for on-site marijuana consumption.

What Does This Mean For Me?

If you use cannabis, it means you no longer need to hold a medical permit for your cannabis.

For the savvy entrepreneur, opportunities abound. The legalization of recreational marijuana in California has unleashed an entire industry – and the Green Rush stands to vitalize the California economy in astronomical ways.

Traditional businesses, such as irrigation, heating and air conditioning, greenhouse construction, software, lighting, packaging and even insurance, are embracing the multitude of new opportunities creating in this long-prohibited industry.  The opportunities appear to be infinite, and the craft and creativity of those in this industry is impressive.

The National Cannabis Industry Association (“NCIA”) just completed its Cannabis Business Summit and Expo in Oakland.  Over 4,500 people attended the conference, and over 750 vendors displayed and demonstrated their wares (where legal) in over 80,000 square feet of booths and demonstrations.  Top industry leaders convened to educate and share ideas about current legal and business challenges.  Many thought leaders extolled the need for best practices to protect this burgeoning industry from over-regulation and corruption.

Yes, you can open a cannabis business. To explore this opportunity, and its multiple layers of state and local regulation, please see our licensures and registration page.

This industry is so new, and complex, we recommend that you speak with a lawyer that specializes in the aspect of marijuana law that is important to you.  Remember, criminal lawyers defend against crimes, while business lawyers, tax lawyers and real estate lawyers specialize in their respective areas of expertise.

Every new industry come many stops and starts, and the risks in cannabis are great. Proper legal representation can be the difference between success and bankruptcy, or even jail, when treading new, yet treacherous, waters.

What Comes Next?

California is in the process of writing the entire scope of regulations for an industry that has long been unregulated. Given that California is projected to be the largest cannabis market in the United States, this is a Herculean task.

California’s proposed regulations for cultivation, manufacturing and sale of cannabis were posted for public comment on April 28, 2014.  The public comment period for the cultivation regulations officially ended June 14, 2017.  The public comment period for dispensaries, transportation, distribution only and testing lab regulations will close June 20, 2017.  After the comment periods close, the regulators will review and consider the numerous comments received, and will make revisions where the comments are consistent with the purposes of the regulations; namely:

• safeguarding of the environment through implementation of environmental protection measures and enforcement of existing environmental protection laws;

• creation of legitimate businesses and tax revenue sources;

• increased worker safety through enforcement of existing employee protection laws; and

• reduction in crime.

It is important to note that the regulatory community wants to work with the cannabis industry to develop regulations that encourage compliance, and assist the industry. Lori Ajax, the Director of the Bureau of Medical Cannabis Regulation, who is commonly referred to as the Pot Czar of California recently emphasized the importance of working with the community.  Ajax says the goal of their community outreach is to educate and pull those businesses into state compliance.

“We want them to come into the regulated market and stay in the regulated market,” said Ajax.

Ajax also said that the agency fully expects to make changed to the proposed regulations after input from the public.  Those final regulations are scheduled to be issued in October, 2017, with licenses being first issued on January 2, 2018.

We can expect more regulations as the industry matures.  Key features of the regulations also include consumer protections in sanitation methods of product handling, proper weighing and labeling of products, child-proof packaging and strict inventory controls to prevent products from being diverted to illegal uses.  Staying abreast of these ever-changing regulations will be critical for all business owners.

Is Proposition 64 Good or Bad for California?

Many in the cannabis industry, particularly those who advocated during the era of “prohibition” caution that the industry must protect itself to survive. Without substantial compliance with the new regulations, maintaining good working relationships with the regulators, and mitigating adverse publicity (e.g. hash explosion caused by improper handling), the industry could be crushed overtime by overregulation.

Importantly, because of the significant profits to be made, many fear that large corporations will take hold in the cultivation sector and drive the small, craft growers out of the market.  Governor Brown recently included protections for small enterprise, to maintain the art and craft of cannabis cultivation, by authorizing appellations and other market distinguishers to promote the small to mid-size operators that currently comprise most of this industry.

A lesser known part of the proposition also requires what is known as seed-to-sale tracking. This process is designed to track of the path of a cannabis product from its status as a seed to its end-product.  This is a complex process, that requires rather intensive software investments by all persons and businesses that touch the cannabis in the supply chain.  The purpose is to allow for better quality control, but also to prevent product from being dissipated outside the legal marketplace.

Many farmers are concerned that the regulations impose costs that are simply too high for many small farmers, and will simply the corporatize the marijuana industry.

Don’t Forget

Please remember that cannabis is still a Schedule I drug at the federal level and therefore illegal to possess or consume.  This means that the federal government could arrest and punish growers, manufacturers, retailers and even consumers.  Please don’t carry or consume cannabis on federal property, and be particularly cautious when travelling across state lines.

Conclusion

With more states legalizing medical and recreational cannabis every day,  are we headed toward marijuana being completely legalized? Only time will tell, but in the interim, let’s work together to make this industry the best it can be.

If you are interested in starting your own marijuana based business, please contact us.

Legal Complexities and a Maze of Laws

California's Proposition 65:  The Latest Surprise For Cannabis Dispensaries And Others

By Kathleen E. Finnerty, Esq.

The cannabis industry is rife with legal complexities and a maze of federal, state and local laws. In additional to the purely cannabis regulations, cannabis businesses must also comply with numerous other laws relating to their facilities, employees and products.

Among those product laws that this new industry must encounter in California is Proposition 65. In just the month of May 2017 over 700 “Notices of Violation” were issued to cannabis businesses across the state. Those notices each accused cannabis dispensaries and distributors of failing to properly warn their customers, as required by Proposition 65, that marijuana smoke is a cancer causing chemical, and that certain edibles containing Malathion, Carbaryl or Myclobutanil constituted “reproductive toxicants”.

WHAT IS PROPOSITION 65?

Proposition 65 is the Safe Drinking Water and Toxic Enforcement Act of 1986 (commonly known as “Prop. 65”) and requires the governor to publish an annual list of known carcinogenic or reproductively toxic chemicals.

Chemicals are only added to the list if they are proven to either cause cancer or reproductive issues. There are currently more than 800 chemicals covered in the Proposition 65 list located on the California Office of Environmental Health Hazard Assessment (“OEHHA”) website. http://www.oehha.ca.gov/prop65.html.

The law states that:

No person in the course of doing business shall knowingly or intentionally expose an individual to a chemical known by the state to cause cancer or reproductive toxicity without first giving a clear and reasonable warning to such individual… 

The exposure may result from a person’s acquisition, purchase, storage, or other foreseeable use of a consumer good, or any exposure that results from receiving a consumer service.

ONLY MARIJUANA SMOKE IS LISTED ON THE PROP. 65 LIST. 

Although a plausible argument can be made that no retailer knows how their products will be used, it is a rational proposition that a retailer has reason to believe that at least some of the cannabis they sell will be smoked, rendering the products subject to regulation under Prop. 65.

DOES PROP. 65 APPLY TO YOUR BUSINESS? 

Prop. 65 will apply to any company with 10 or more employees. Under the law, a notice of violation must be sent to the business, district attorneys and to the California Attorney General’s office at least 60 days before a lawsuit can be filed. Such notices are often referred to as “60-day” notices.

Each of the entities receiving a copy of a notice of violation is permitted 60 days in which they can investigate and elect whether or not to file a lawsuit. In the case that none of those governing bodies wishes to file suit, the law allows local citizens to file a civil action for penalties that cannot exceed $2,500 per day for each violation, plus attorney’s fees and injunctions.

The most typical targets of Prop. 65 actions are companies that manufacture, distribute or sell retail consumer or commercial products. However, both retail online or brick and mortar stores are subject to the law and its regulations.

In order to adequately defend itself, the business will have to prove the absence of the chemical, that the level chemical in their product falls within an exemption zone or that they do have an adequate warning for the presence of the chemical.

However, the overwhelming majority of these cases are settled out of court; unfortunately, such settlements are often the least expensive and most rsource efficient solution.

NEW RULES EFFECTIVE AUGUST 30, 2018. 

OEHHA, the agency that oversees the enforcement of Prop. 65, recently released new regulations in late 2016 that become effective after August 30, 2018.

These new regulations and requirements will provide customers with more precise notice of the chemicals that makeup the products sold in the state. In the interim, before these new regulations are enacted, businesses have two options regarding how they wish to move forward.

The first is to continue business as usual with the current regulations and get into compliance later. The second is to get into compliance with the new regulations immediately and reduce the risk of lawsuits or punishment in the future.

The new regulations shift burden to warn from the retailer, except in certain instances, to the manufacturers and distributors. However, as long as the consumer receives adequate warning, the retailer and distributor/manufacturer can reach a contractual agreement about how to allocate the legal responsibility for providing the warning.

Under the new regulations, warnings must be provided through signs or product labeling where it is applicable. Warning signs under the new regulations must be prominently displayed and conspicuous, in order to make them as likely to be spotted and read by customers as possible.

The warning must be clearly written and understandable for the average customer. Your warning may include supplemental materials that provide the customer with information that identifies the source of exposure or points out ways to avoid exposure to the problem chemicals.

However, supplemental materials will not be an adequate substitute for clear warning signs and product labeling.

The new exposure warning messages must include the following:

(1) A symbol consisting of a black exclamation point in a yellow equilateral triangle with a bold black outline. Where the sign, label or shelf tag for the product is not printed using the color yellow, the symbol may be printed in black and white. The symbol shall be placed to the left of the text of the warning, in a size no smaller than the height of the word “WARNING”.

(2) The word “WARNING” in all capital letters and bold print, and:

(A) For exposures to listed carcinogens, the words, “This product can expose you to chemicals including [name of one or more chemicals], which is [are] known to the State of California to cause cancer. For more information go to www.P65Warnings.ca.gov.”

Additionally, on-product warnings for products containing a known cancer-causing agent require the symbol required in §25603(a)(1), the word “WARNING” in bold capital letters, and the following words: “Cancer – www.P65Warnings.ca.gov.” The name of the listed chemical is not required to be printed on a product warning label.

There are several differences between the current and new system of warning regulations which can be read below:

• Under current regulation there is no requirement for your business to list the chemical for which you are warning. Whereas in the new regulations your business is required to list the chemical for which the customer is being warned.

• The warning sign has been changed and will require a yellow or black and white triangle surrounding an exclamation point.

• The burden for warning the customer has been shifted from the retailer to the manufacturers and packagers where possible, while allowing the manufacturer/packager and the retailer to allocate legal responsibility for warnings.

WHAT CAN YOU DO? 

Be sure to clearly post signs in dispensaries as well as other facilities where consumers are present warning individuals that there may be chemicals in the facility that are linked to causing cancer or reproductive toxicity.

The products have to be either marked on their packaging or have a notice posted reasonably close to the product that clearly identifies the possibly dangerous chemical or chemicals.

The notices need to be clearly identifiable by the customer when they are making a decision on whether or not they will buy the product.

Prop. 65 warnings can also be provided on receipts, customer handouts or collective membership agreements.

Any agreements with suppliers should include indemnification of the retailers or others in the sales chain to provide defense and indemnity protection in case a Prop. 65 action is filed. If your business receives a notice of violation it is important to contact an experienced lawyer capable of providing quality assistance defending any Prop. 65 notices or lawsuits.

It is also wise to to notify your local cannabis association so they warn others or help association members join forces to defend against the claims in as cost efficient a manner as possible.

This article is intended as general information and not legal advice. Please contact a lawyer to evaluate your legal needs. 

Kathleen E. Finnerty is a respected California lawyer, experienced in handling Prop. 65 matters. She is currently representing dozens of clients in similar matters and can be contacted at KFinn@KFinnertyLaw.com or 916.899.5072.