Destination Unknown California’s cannabis regulations cause uncertainty

Despite the fact that the state has made great progress towards permanent rules under the Medicinal and Adult-Use Cannabis and Regulation Safety Act (MAUCRSA), many questions and ambiguities around licensing and operational conduct remain. In fact, some of the grayer areas of the emergency regulations have been expanded by the proposed permanent rules for better or worse. There are many unknowns regarding the industry’s future; here are just a few concerns that still remain for California’s cannabis industry.

 

IP licensing and white labeling restrictions

In case you’ve been living under a rock, one of the most shocking proposed permanent rules to come from the Bureau of Cannabis Control (BCC) is section 5032(b) (which, yes, affects all licensees). Essentially, section 5032 (b), as originally written, basically prohibited all IP licensing and white labeling agreements between cannabis licensees and non-licensees.

During public comment on 5032, there was a good amount of dissent since it’s pretty obvious if such a rule went through, then a lot of branded product currently on the shelves would have to be tossed. In addition, California would be the only state in the cannabis union to adopt such a strict rule. And while the BCC’s own comments to 5032 (in its Final Statement of Reasons) indicate that it takes no issue with non-licensee to licensee IP licensing and white labeling relationships, a plain reading of the rule indicates otherwise.

 

Ownership issues

The BCC struck again in the proposed rules revising “owner” disclosure standards to be much stricter at section 5003. Now, in addition to anyone with 20 percent or more in equity, the board of directors, the CEO and anyone or any entity that exercises any direction, control or management over the licensee, is also an owner. Any individual or entity merely entitled to profit share at or more than 20 percent is also an owner. This calls into question though how the BCC plans to treat things like cashless options and warrants that have no immediate entitlement to ownership in or profit sharing with the licensee. The BCC has been silent on all of the foregoing and there is no doubt that these new revised rules may actually incentive people to be even more “creative” in order to avoid owner (and financial interest holder) status.

“This calls into question though how the BCC plans to treat things like cashless options and warrants that have no immediate entitlement to ownership in or profit sharing with the licensee.”

 

Packaging and labeling compliance in 2019

Under California Department of Public Health (CDPH) proposed permanent regulations, manufacturers will not have to implement child-resistant packaging (CRP) for their cannabis products until 2020. In the interim, retailers will fill the gap by using CRP exit bags. And while CRP is going away for manufacturers, there are a slew of revised and new packaging and labeling standards being implemented upon the rules becoming effective in the new year. The outstanding issue then is that CDPH created no affirmative grace period for manufactured product that’s out there right now and compliant with the emergency regulations, but that doesn’t meet the new packaging and labeling regulations. What’s for sure is that retailers cannot possess or sell finished product that doesn’t adhere to the new packaging and labeling rules. So, what exactly will happen to existing, noncompliant product in 2019? That remains a mystery.

 

Social equity programs

For every city that’s done a social equity program, it’s been a challenge out of the gate to do it correctly and sustainably. Los Angeles is just getting started with its program while certain other California cities are trying but are producing meager results at best. While the state finally decided to financially back local social equity programs, it’s clear that the state and the cities need to study this particular social experiment for some time before a gold standard will actually emerge. In turn, the success of these programs is definitely a large unknown.

 

Banking

Banking in California is the number one question that is constantly asked. Unless and until our permanent regulations are finalized and are proven to work we will likely not see private sector banking in California. Our licensing and enforcement systems are still too loose to satisfy the 2014 FinCEN guidelines, and no public bank is going to materialize here either for various complicated and practical legal reasons (be sure to watch out for banking fraudsters, too). And while California cannabis companies will likely continue to use management companies to help them alleviate some of the inability to access banking, it’s certainly not a long-term solution and it’s downright illegal when that relationship isn’t legitimate or at an arm’s length anyway.

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