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California Releases Draft Medicinal and Adult-Use Regulations

On Thursday, November 16, the three (3) California cannabis-licensing agencies released draft emergency regulations implementing the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA). The agencies – the Bureau of Cannabis Control (within the Department of Consumer Affairs), the Department of Food and Agriculture, and the Department of Public Health – are legally obligated to begin issuing state licenses to cannabis businesses starting January 1, 2018. They issued these proposed regulations pursuant to an expedited, emergency rulemaking procedure in order to meet that statutory deadline.

The full text of the proposed regulations spans nearly 300 pages and details the agencies’ proposed plans to implement state licensure and regulation of the industry. Here are a few of the highlights.

Additional License Types

In the proposed regulations, the Bureau of Cannabis Control (BCC), which regulates retailers, microbusinesses, distributors, and testing labs, added four (4) license types to the list established by MAUCRSA: Type 9 (delivery-only retailer); Type 13 (transport-only distributor), essentially reviving the Transporter license from the now-defunct Medical Cannabis Regulation and Safety Act (MCRSA); Type 14 (cannabis-event organizer); and temporary event licenses.

The Department of Food and Agriculture (DFA), which regulates cultivation and the statewide track-and-trace program, added a processor license for trimming, drying, curing, grading, storing, packaging, and labeling cannabis. A licensed processor that does not also hold a cultivation license may not commercially cultivate cannabis.

The Department of Public Health (DPH), which regulates manufacturing, added two (2) license types: Type N (infusion – non-extraction manufacturer, such as for topicals and edibles) and Type P (packaging and labeling). The resulting total of four (4) DPH licenses are hierarchical – a Type 7 (volatile manufacturer) licensee may conduct all manufacturing activities; a Type 6 (nonvolatile manufacturer) may conduct all but volatile manufacturing; a Type N may infuse, package, and label; and a Type P may only package and label cannabis products.[i] DPH also announced a fifth license type in development: Type S (shared manufacturing facility), for manufacturers to share facility space.[ii]

No acreage cap for cultivation sites

Under MAUCRSA, licenses for unlimited-size cultivators (Type 5) are theoretically prohibited until 2023, and those for medium-size cultivators (Type 3)[iii] are to be limited in number. In its proposed regulations, DFA limits each licensee to a single Type 3 license but does not cap the size of cultivation sites.[iv] The result is that a single licensee may apply for multiple “small” cultivation licenses (Type 2) and combine them to create one large cultivation site that exceeds an acre.[v]

Transition Period

From January 1 to July 1, 2018, licensees may conduct business with any other licensee, regardless of their license designation as adult-use (A-license) or medicinal (M-license).[vi] After July 1, licensees may only do businesses with other licensees with the same A- or M- designation, although each licensee may hold both types of licenses.

During the transition period, retailers may also sell items in inventory that do not meet new requirements, subject to some additional labeling and packaging requirements for certain products.

CO2 and Ethanol are Nonvolatile

DPH’s proposed rules define carbon dioxide and ethanol as nonvolatile solvents for the purposes of manufacturing licensure, despite the definition of volatile solvent (which remains unchanged) as “any solvent that is or produces a flammable gas or vapor that, when present in the air in sufficient quantities, will create explosive or ignitable mixtures.”

Once these proposed emergency regulations are filed with the Office of Administrative Law (OAL), there will be a 5-calendar-day public comment period and OAL will have 10 calendar days to approve or disapprove the regulations. The promulgating agencies (BCC, DPH, and DFA) are not required to respond to public comment in the emergency rulemaking process, but they may do so within 8 calendar days of submitting the regulations to OAL.

Since these emergency rules are being promulgated on an expedited timeline,[vii] we can expect the licensing authorities to follow this emergency rulemaking with a standard rulemaking process (likely in early 2018) to clean up, modify, or add to the emergency regulations.

[i] The difference between a DPH Type P manufacturer and a DFA processor is the type of product being packaged and labeled.

[ii] This would seem to contravene MAUCRSA’s definition of “premises,” which expressly prohibits a single premises from being occupied by multiple licensees.

[iii] “Medium” cultivators can cultivate up to an acre outdoors or up to 22,000 indoors or with mixed light.

[iv] This omission has already met with significant opposition and may change.

[v] Type 1 “specialty cottage” licensees are prohibited by definition in MAUCRSA from cultivating more than 5,000 square feet on one premises or on contiguous plots.

[vi] This does not change the prohibition on business transactions between licensees and unlicensed entities, including collectives currently exempt from the state-licensure requirement, starting January 1, 2018.

[vii] MAUCRSA was just passed in late June and amended in early September of 2017, and the licensing authorities are under mandate to begin licensure on January 1, 2018.

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Yesterday, the California legislature passed Senate Bill 94, known as the “2017-18 Budget Trailer Bill” (BTB). The BTB reconciles the Medical Cannabis Regulation and Safety Act (MCRSA), which regulates medical cannabis, with the Control, Regulate and Tax Adult Use of Marijuana Act (AUMA), which legalizes and regulates adult-use (a.k.a. “recreational”) cannabis. Although MRCSA largely supplied the framework for AUMA, the laws contain significant differences that many anticipated would cause complications in the licensing and regulatory process, both for industry and state regulators.

BTB repeals the bulk of MCRSA, though certain provisions survive in the resultant combined medical (now termed “medicinal”) and adult-use regulatory scheme – the cumbersomely named Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA). Through this reconciliation, the laws governing adult-use cannabis also received a slight makeover.

Here are some of the key changes the BTB will make once it takes effect:

No Residency.  There will no longer be a residency requirement to own or operate an adult-use cannabis business. AUMA had required that adult-use license-holders and owners demonstrate continuous California residency since January 1, 2015. BTB lifted this restriction, meaning that out-of-staters will now be able to participate in both the medicinal and adult-use markets.

Vertical Integration.  “Vertical integration” will be permitted, except for testing laboratories and, to a narrower extent, for large cultivators. Thus, both medicinal and adult-use licensees will be able to hold multiple license types. Licenses for large cultivation operations (larger than ½ acre indoors or 1 acre outdoors) will still be unavailable until 2023.

License Types. License types will be the same for medicinal and adult-use cannabis. The BTB eliminates the “producing dispensary” (MCRSA Type 10A) and transporter (MCRSA Type 12) license categories but retains all others, including specialty cottage cultivation and microbusinesses (small retailers with farms not exceeding 10,000 sq. ft.).

Separation of Medicinal and Adult-Use.  Medicinal and adult-use cannabis activity must be separate. With some exceptions, including for testing labs, medicinal and adult-use cannabis businesses may not operate on the same premises.

Advertising Rules.  The advertising, marketing, adulteration, and misbranding restrictions and prohibitions from MCRSA and AUMA will apply to both medicinal and adult-use activity.

Industrial Hemp.  Industrial hemp will be regulated solely by the Department of Food and Agriculture, per the California Industrial Hemp Farming Act. This regulatory authority was formerly shared with the Bureau of Cannabis Control under the AUMA.

The BTB currently awaits the governor’s signature to take effect. Although the state is still taking public comment on the draft regulations implementing MCRSA, these regulations will likely be substantially rewritten to incorporate the BTB’s changes.  Stay tuned to our blog for more information on changes to California marijuana laws.

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Yesterday’s election was historic in many ways.  The imminent change in federal administration may have repercussions for state-run legal marijuana regimes.  Until now, states with legal marijuana regimes have been functioning under the protection of what’s called the “Cole Memo” – a document issued by the US Department of Justice, which directs federal prosecutors to use discretion in prosecuting marijuana-related crimes per eight enforcement priorities.  While many believe that Hillary Clinton would have most likely maintained the status quo regarding the Cole Memo, President-Elect Donald Trump’s position is less clear.  Look for future blog posts for more comprehensive analyses on this issue.

Yesterday’s election was a watershed moment for marijuana legalization among the states.  Please see our summary of the results of marijuana initiatives.

Adult-Use Marijuana

Four states have legalized marijuana for adult-use, joining Alaska, Colorado, Oregon and Washington.

  • Arizona (Failed) – The state electorate defeated Proposition 205 with a 52.1 percent “no” vote.  It would have allowed adults to carry up to one ounce, grow up to six plants (12 total per household), and consume marijuana in private spaces.  Retail marijuana sales were set to have a 15 percent tax imposed.  Some Arizona residents expressed concern that decriminalization would not keep up with the new law.  They pointed out that any possession of plants in excess of the limit could still have been charged as a felony.
  • California (Passed) – Proposition 64 makes recreational marijuana legal all along the West Coast and many people argue will mark a path to federal legalization.  Also known as the Adult Use of Marijuana Act, the law allows for adults to possess up to an ounce of cannabis and purchase dried flower and cannabis products from licensed retailers as well as grow six plants for personal use.  Initial taxes imposed include a 15 percent excise tax on retail sales plus a cultivation tax per volume.  Proponents estimate that the Act could result in $1 billion annually in state tax revenue.  One major concern, however, is that large, well-funded investors will swallow up smaller family farmers formerly engaged in the state’s medical marijuana program.  One LA-based private equity fund plans to deploy $75 -$100 million over the next few years to acquire property and build out cultivation centers and dispensaries in Southern California.
  • Massachusetts (Passed) – Question 4 provides for adults to possess up to one ounce of marijuana, keep up to 10 ounces at home, and grow up to six plants.  Marijuana sold by licensed retailers is subject to an excise tax of 3.75 percent in addition to the state’s 6.25 percent state sales tax.  Some concern exists regarding the timetable to get the legal regime up and running.  It took about 3 years for the first medical marijuana dispensary to open after passage of Massachusetts’ medical marijuana law.  Some have also expressed worries that the 3.75 percent tax will fall short of the funds necessary to launch the state’s regulatory scheme which includes the creation of a cannabis control commission.
  • Maine (Passed) –  Question 1 allows people 21 years of age and older to use marijuana recreationally.  The measure would permit each adult to grow up to six plants for personal use and would levy a 10 percent sales tax on retail marijuana and marijuana products while restricting use to private residences.  Under the measure, municipalities could regulate the number of retail stores or ban them entirely.  One concern voiced by legalization proponents is the state-wide cap on canopy space and language which designates 60 percent of licenses for large growers and only 40 percent for small growers.
  • Nevada (Passed) – Question 2, also known as The Regulation and Taxation of Marijuana Act, expands moves already made by some Nevada counties to adopt medical marijuana regulations.  The Act makes it legal for adults age 21 and over to purchase marijuana for recreational use, possess up to an ounce of marijuana, and grow up to six plants at home (if that residence is more than 25 miles from a licensed dispensary).  Wholesale marijuana is subject to a 15 percent excise tax.  Unlike Oregon, the Act limits the number of retail licenses by each county’s population.  Counties with fewer than 55,000 residents could only have 2 retail establishments.

Medical Marijuana

Four states have joined the ranks of 25 states and the District of Columbia in passing or expanding some form of medical marijuana law (not including CBD-only laws):

  • Arkansas  (Passed)  – Issue 6, also known as the Arkansas Medical Marijuana Amendment, is a constitutional amendment that allows an independent commission to grant licenses for up to eight grow facilities and 40 for-profit dispensaries statewide.  It does not provide for home growing.  A second measure, Issue 7, was disqualified by the Arkansas Supreme Court due to lack of compliance with registration and reporting laws for paid canvassers.  This measure would have allowed for some home growing for patients who live more than 20 miles from a cannabis care center.
  • Florida  (Passed) – Amendment 2 provides for the state Department of Health to register and regulate dispensaries and issue ID cards to marijuana patients and caregivers.  Individuals with medical conditions such as HIV/AIDS, epilepsy, multiple sclerosis, PTSD, and Crohn’s disease would be eligible for a card with approval from a licensed Florida physician.  Because Florida’s demographics include 20 million residents, many of whom are seniors, baby boomers, and veterans, many see the passage of Amendment 2 as a lucrative business opportunity.  One newly-formed venture capital firm is currently raising $15 million to fund various medical marijuana-related ventures.
  •  Montana  (Passed) – Ballot Issue 14, also known as I-182, expands legal access to medical marijuana.  It repeals the three-patient limit and other requirements like unannounced inspections and review for physicians who provide certifications.  Newly added qualifying conditions include chronic pain and PTSD.  The implementation of the law could be delayed for months because of an error written into the measure.  The initiative aims to immediately repeal the three-patient limit, but the measure’s language indicates that the limit would not be lifted until June 30, 2017.
  • North Dakota  (Passed) – Initiated Statutory Measure No. 5 or The North Dakota Compassionate Care Act allows for the possession of up to 3 ounces of marijuana for conditions such as HIV/AIDS, cancer, epilepsy, and glaucoma.  It also provides for patients who live more than 40 miles from a licensed dispensary to grow up to eight plants.  The most vocal opponent to this measure was the North Dakota Medical Association.  It claimed that the petition “would be very difficult to implement in a safe and cost-effective manner.”

While these results undeniably illustrate a broad movement by states across the nation to legalize marijuana use in some form, our experience in watching what it takes for an initiative to go from “passed” to fully-implemented suggests that there is a lot that can happen, and there may be more uncertainty regarding what will be required of the industry in each of the states (at least in the short term).  We look forward to assisting our existing clients (as well as new ones) as they navigate the waters in these new markets.

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