Earlier this year, California’s three cannabis agencies – the BCC, MCSB, and CDFA – were consolidated into one mega-agency, the Department of Cannabis Control (DCC). The new agency’s goals include boosting the number of participants in the legal market, reducing the licensing burden, and increasing compliance for licensed operators. For cannabis owners, operators and investors, the effects of the changes are likely to trickle in over the coming years. But, it’s important to note that changes are coming. Here are some of the notable changes that have emerged in the DCC’s recent emergency regulations:
Addressing Discrepancies in Key Definitions
Cannabis industry participants have expressed frustration in the past over the differences in key definitions between the BCC, MCSB, and CDFA. With those agencies now melded into one, the DCC has started addressing and amending discrepancies to provide clarity and continuity for market participants. Two key terms that have been refined are the definition of a cannabis ‘owner’ and ‘financial interest holder’.
Updated definition of ‘owner’ in cannabis
The DCC has indicated, in its emergency regulations, that it prefers a broad definition of ‘owner’ that includes:
- A person with an aggregate ownership interest of 20 percent or more in the person applying for a license or a licensee commercial cannabis business, unless the interest is solely a security, lien, or encumbrance.
- An individual who manages, directs, or controls the operations of the commercial cannabis business, including:
- A member of the board of directors of a nonprofit.
- A general partner of a commercial cannabis business that is organized as a partnership.
- A non-member manager or managing member of a commercial cannabis business that is organized as a limited liability company.
- The trustee(s) and all persons who have control of the trust and/or the commercial cannabis business that is held in trust.
- An individual with the authority to provide strategic direction and oversight for the overall operations of the commercial cannabis business, such as the chief executive officer, president or their equivalent, or an officer, director, vice president, general manager or their equivalent.
- An individual with the authority to execute contracts on behalf of the commercial cannabis business.
Updated definition of ‘financial interest holder’ in cannabis
‘Financial interest holders’ include:
- (1) A person with an aggregate ownership interest of less than 20 percent.
- A person providing a loan to the commercial cannabis business.
- A person that contracts with the cannabis business to cultivate, manufacture, package, or label cannabis or cannabis products under that person’s brand name.
This is an important change. There was previously uncertainty about whether a non-licensed cannabis brand had to be disclosed as a financial interest holder on the license of a licensee that cultivates, manufactures, or sells cannabis products on behalf of the non-licensed brand. The DCC’s updated definition removes this uncertainty.
- A person entitled to receive 10 percent or more of the profits of the commercial cannabis business, including:
- An employee who has entered into a profit share plan with the commercial cannabis business.
- A landlord who has entered into a lease agreement with the commercial cannabis business for a share of the profits.
- A consultant who is providing services to the commercial cannabis business for a share of the profits.
- A person acting as an agent, such as an accountant or attorney, for the commercial cannabis business for a share of the profits.
- A broker who is engaging in activities for the commercial cannabis business for a share of the profits.
- salesperson who earns a commission.
This new definition eliminates reference to investment in a cannabis business. Previously, any investor in a cannabis business, no matter how small, was technically required to be disclosed. Under this new definition, this is no longer the case. This change should provide investors with much needed comfort to infuse capital into the California cannabis market, since investors with a share of less than 10% are no longer subject to disclosure.
The following stakeholders are excluded from disclosure as financial interest holders:
- A bank or financial institution whose interest constitutes a loan;
- Persons whose only financial interest in the commercial cannabis business is through an interest in a diversified mutual fund, blind trust, or similar instrument;
- Persons whose only financial interest is a security interest, lien, or encumbrance on property that will be used by the commercial cannabis business; and
- Persons who hold a share of stock that is less than 10 percent of the total shares in a publicly traded or privately held company.
The period for public comment on the DCC’s emergency regulations is now over, and cannabis owners should start taking steps to disclose any ‘owners’ who fall under this expansive definition.
Trade Samples Permitted under DCC Emergency Regulations
The DCC has lifted the restriction that banned cannabis companies from giving out trade samples, marking a major win for cannabis marketing. The emergency regulations permit licensees to provide other licensees with trade samples to ‘aid in making purchasing decisions about new or existing cannabis goods’. There are a host of accompanying regulations, including that the trade samples must be designated as such in the track and trace system, which licensees should become familiar with before providing any trade samples.
Enforcement To Begin
Attorneys have been predicting that the regulators will commence enforcement for more than two years. The pandemic, as well as the looming union of the agencies, hindered enforcement in 2020, while the teething pains that have come with the creation of the DCC has resulted in little enforcement in 2021. In fact, we’ve really only seen enforcement against illegal vendors thus far.
We do expect to start to see enforcement in 2022. It is likely that enforcement against ‘the worst of the worst’ in terms of licensed vendor non-compliance will be prioritized in the early stages. However, we strongly advise all licensed vendors to develop and strengthen their compliance habits early. It’s wise to consider that enforcement is coming, and it’s better to invest in good hygiene now.
We’ll keep you updated about any important developments from the DCC as they happen.
If you need any legal guidance for your California cannabis operations in the meantime, reach out. We’re here to help!
The materials available at this website are for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem. Use of and access to this website or any of the e-mail links contained within the site do not create an attorney-client relationship between CGL and the user or browser. The opinions expressed at or through this site are the opinions of the individual author and may not reflect the opinions of the firm or any individual attorney.