BREAKING NEWS: California Drops New Emergency Cannabis Regulations

On September 8, 2021, the California Department of Cannabis Control (DCC) published proposed emergency cannabis regulations. These emergency regulations harmonize the previous regulations that were ported over from the prior three agencies into one combined set, and they modify some of those rules and add also new ones. The DCC also published a revised set of Disciplinary Guidelines to go along with the emergency regs.

In terms of procedure, the DCC sent an email to stakeholders stating that:

DCC will file the emergency package with the Office of Administrative Law (OAL) after the required five-working day notice to the public. The public comment period, which lasts five-calendar days, will begin when OAL publishes the proposed regulations as being “under review” on its website: https://oal.ca.gov/.

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If approved, the proposed regulations would become effective at the end of September. More work is anticipated over the coming months, after the emergency rulemaking process is completed, to further improve the regulations for commercial cannabis activity.

We plan on writing a lot about these emergency regs, but wanted to highlight a few key things in this initial post giving the quick timing around their effectiveness:

Restrictions on Cultivation License Stacking on Connecting Premises

Rule 15001.1 allows the issuance of provisional cultivation licenses so long as:

Issuance of the license would not cause the commercial cannabis business to hold multiple cultivation licenses on contiguous, connecting premises to exceed one acre of total canopy for outdoor cultivation, or 22,000 square feet for mixed-light or indoor cultivation, if the application is received on or after January 1, 2022.

The rules go on to say that “For the purposes of this section, premises will be considered contiguous if they are connected, touching, or adjoining.” So, it’s clear that there will be restrictions on aggregating multiple cultivation licenses throughout connecting premises, but what’s not clear is how the DCC will deal with contiguous real estate parcels that have licensed premises on each but where those premises don’t necessarily touch each other border to border. We don’t know just yet, but it looks like the answer is that this practice may not be forbidden outright.

Owner/FIH Issues

DCC is changing how it determines who constitutes an “owner” or “financial interest holder” (FIH) of a cannabis business. Here are some of the key points:

• Previously the “owner” rule stated that a person with an “aggregate” ownership interest of at least 20 percent was an owner. The term “aggregate” was not defined. Now, the DCC defines “aggregate” specifically to mean “the total ownership interest held through an entity. For example, an individual owning 50% of an entity that owns 50% of the cannabis business would have a 25% aggregate ownership interest in the cannabis business.” This means that cannabis businesses with entity ownership will need to do the math to determine exact aggregate percentages. This could be a tough exercise for bigger businesses or public companies.
• Anyone who has “authority to provide strategic direction and oversight for the overall operations of the commercial cannabis business” is now an owner. This is not too different from the rule as it was previously written, especially because the examples the DCC gives for hitting this threshold are “the chief executive officer, president or their equivalent, or an officer, director, vice president, general manger or their equivalent.”
• The DCC now considers someone who has “authority to execute contracts on behalf of the commercial cannabis business” to be an owner. This, frankly, is overkill. For example, any lower-level sales person who can execute contracts (like sales invoices) could now be considered an owner. If this rule sticks, it’ll make compliance in this area a huge headache.
• In entity ownership situations, anyone associated with that entity owner that manages the actual licensee business is now an owner of the licensee business. Again, this is not much different from the prior rule, but it’s interesting to see the DCC spelling this out in full.
• DCC has authority to determine that people are owners on a case-by-case basis and can demand that licensees require such people to be disclosed as such.
• For FIHs, the rule previously defined any kind of loan to or investment in a cannabis business to create a financial interest. Now, the DCC removed the concept of an investment but does state that any person entitled to receive at least 10% of the profits of a business is an FIH.
• Businesses that contract with cannabis companies to cultivate, manufacture, package, or label cannabis under their brand name are considered FIHs. This too was sort of the lay of the land before but it’s good to see the details finally on the table to avoid massive confusion for licensees.  This will provide a lot of clarity for IP licensing transactions.
• Previously, anyone or any entity that held less than 5% of the shares of a public company were not considered FIHs. Now, that number is 10% for both public and private companies.

Trade Samples

The proposed regulations would finally allow licensees to provide each other, and for a licensee to provide its employees, with cannabis goods for sampling purposes to aid in making purchasing decisions. Trade samples will still need to be plugged into METRC and will need to be designated as trade samples and in their final form for sale. There are a host of restrictions and rules that apply to trade samples, which licensees will need to study closely.

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Again, this is a big development and we’ll be updating the Canna Law Blog in the coming weeks with more from these proposed emergency regs, so please stay tuned.

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