Collaborative research partnership advances the exploration of the cannabis plant

SAN DIEGO, CA and TORONTO, ON / ACCESSWIRE / March 8, 2023 / StateHouse Holdings Inc. (“StateHouse” or the “Company”) (CSE:STHZ)(OTCQX:STHZF), a California-focused, vertically integrated cannabis enterprise, today joined the Cannabis Research Coalition (“CRC”), a collaborative research partnership between The Hemp Mine and Clemson University. The partnership will address cannabis cultivation and postharvest challenges.

The CRC partners with cannabis industry stakeholders to advance the exploration of the cannabis plant and implement science-based research to develop the techniques required to create a sustainable, efficient and profitable industry. Using a cooperative research approach, the coalition is able to provide practical answers to the questions that limit the success of the cannabis industry.

StateHouse expects to benefit from the coalition’s cooperative research model because it will provide the Company’s cultivation teams with the tools needed to stay competitive while further enhancing quality. Additionally, StateHouse will have access to exclusive offers from allied trade members; obtain SOPs for production; and participate in monthly and annual conferences and virtual meetings regarding research updates.

“It thrills us to partner with StateHouse, a science-based, California-focused operator with an impressive commercial cultivation facility,” said Dr. Allison Justice, founder and CEO of the CRC. “This type of collaboration is exactly what the cannabis industry needs to improve in the areas of quality, efficiency, and sustainability. We look forward to working with Travis Higginbotham, StateHouse’s VP of Cultivation, and his team.”

“We are eager to support the efforts of both Clemson University and The Hemp Mine through participation in the CRC,” said Mr. Higginbotham. “The Clemson Flowering Physiology laboratory, led by Dr. Jim Faust, focuses on very relevant and applied research for multiple other plant-touching markets, and in collaboration with Dr. Justice and The Hemp Mine, will enhance its position as an innovative and science-based thought leader in cannabis research. To remain competitive as growers, we must partner with research institutions and companies who are focused on continuous improvement and constantly challenging what we think we know about this crop.”

About StateHouse Holdings Inc.

StateHouse, a vertically integrated enterprise with cannabis licenses covering retail, major brands, distribution, cultivation, nursery and manufacturing, is one of the oldest and most respected cannabis companies in California. Founded in 2006, its predecessor company Harborside was awarded one of the first six medical cannabis licenses granted in the United States. Today, the Company operates 14 dispensaries covering Northern and Southern California and one in Oregon, distribution facilities in San Jose and Los Angeles, California and integrated cultivation/production facilities in Salinas and Greenfield, California. StateHouse is a publicly listed company, currently trading on the Canadian Securities Exchange (“CSE”) under the ticker symbol “STHZ” and the OTCQX under the ticker symbol “STHZF”. The Company continues to play an instrumental role in making cannabis safe and accessible to a broad and diverse community of California and Oregon consumers.

About The Hemp Mine, LLC

The Hemp Mine (THM) is a vertically integrated, family-owned and operated hemp company headquartered in South Carolina. THM manages 30 acres of field production, a critical CO 2 extraction and THC remediation facility, and a head office combined with a 10,000 ft 2 manufacturing facility and state of the art R&D and breeding chambers. Since formation, THM has acted as a contract research operation helping many new products be trialed and introduced into the market. THM sales products across the South East and online stores, and has nationwide distribution of exclusive Type 1 & 2 genetics. THM has a breeding program that introduces top-performing genetics as clones in the form of stage III tissue culture, unrooted cuttings, and rooted cuttings (liners). These introductions are available through regional greenhouse production partners. The Hemp Mine prides

itself on delivering a science-based and data-driven perspective to the hemp industry. www.thehempmine.com

About the Flowering Physiology Laboratory at Clemson University

Dr. Jim Faust has conducted research for the floriculture industry for over 30 years. His research has always focused on identifying practical solutions for the most important production and postharvest challenges facing greenhouse growers. He is a founding member of the Floriculture Research Alliance, which is the prototype for the CRC and which has successfully generated cutting-edge research to greenhouse growers for the last 17 years. Dr. Faust’s research ranges from environmental (temperature, light, and humidity) management, plant nutrition, cultural practices, plant growth regulation, and postharvest performance. He has worked extensively with U.S. growers, unrooted-cutting suppliers in Central America, and cut-flower growers in South America. Two years ago, he initiated a cannabis research program at Clemson University focused on mother plant management, propagation methodology, flowering (photoperiod responses), and postharvest drying and curing. jfaust@clemson.edu

Cautionary Note Regarding Forward-Looking Information

This news release contains “forward-looking information” and “forward-looking statements” (collectively, “forward-looking statements”) within the meaning of the applicable Canadian and United States securities legislation. To the extent any forward-looking information in this news release constitutes “financial outlooks” or “future-oriented financial information” within the meaning of applicable Canadian securities laws, the reader is cautioned not to place undue reliance on such information. All statements, other than statements of historical fact, are forward-looking statements and are based on expectations, estimates, and projections as at the date of this news release. Any statement that involves discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, assumptions, future events or performance (often but not always using phrases such as “expects”, or “does not expect”, “is expected”, “anticipates” or “does not anticipate”, “plans”, “budget”, “scheduled”, “forecasts”, “estimates”, “believes” or “intends” or variations of such words and phrases or stating that certain actions, events or results “may” or “could”, “would”, “might” or “will” be taken to occur or be achieved) are not statements of historical fact and may be forward-looking statements. In this news release, forward-looking statements include, among other things, statements relating to the potential improved quality, efficiency, and sustainability of cultivation products and methods, and the potential benefits to StateHouse from the coalition’s cooperative research model.

These forward-looking statements are based on reasonable assumptions and estimates of management of the Company at the time such statements were made. Actual future results may differ materially as forward-looking statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of the Company to materially differ from any future results, performance, or achievements expressed or implied by such forward-looking statements. Such factors, among other things, include: implications of the COVID-19 pandemic on the Company’s operations; fluctuations in general macroeconomic conditions; fluctuations in securities markets; expectations regarding the size of the cannabis markets where the Company operates; changing consumer habits; the ability of the Company to successfully achieve its business objectives; plans for expansion and acquisitions; political and social uncertainties; inability to obtain adequate insurance to cover risks and hazards; employee relations; the presence of laws and regulations that may impose restrictions on cultivation, production, distribution, and sale of cannabis and cannabis-related products in the markets where the Company operates; and the risk factors set out in the Company’s management’s discussion and analysis for the period ended March 31, 2022 and the Company’s listing statement dated May 30, 2019, which are available under the Company’s profile on www.sedar.com. Although the forward-looking statements contained in this news release are based upon what management of the Company believes, or believed at the time, to be reasonable assumptions, the Company cannot assure shareholders that actual results will be consistent with such forward-looking statements, as there may be other factors that cause results not to be as anticipated, estimated or intended. Readers should not place undue reliance on the forward-looking statements and information contained in this news release. The Company assumes no obligation to update the forward-looking statements of beliefs, opinions, projections, or other factors, should they change, except as required by law.

The Company, through several of its subsidiaries, is directly involved in the manufacture, possession, use, sale, and distribution of cannabis in the recreational and medicinal cannabis marketplace in the United States. Local state laws where the Company operates permit such activities however, investors should note that there are significant legal restrictions and regulations that govern the cannabis industry in the United States. Cannabis remains a Schedule I drug under the United States Controlled Substances Act, making it illegal under federal law in the United States to, among other things, cultivate, distribute or possess cannabis in the United States. Financial transactions involving proceeds generated by, or intended to promote, cannabis-related business activities in the United States may form the basis for prosecution under applicable United States federal money laundering legislation.

While the approach to enforcement of such laws by the federal government in the United States has trended toward non-enforcement against individuals and businesses that comply with recreational and medicinal cannabis programs in states where such programs are legal, strict compliance with state laws with respect to cannabis will neither absolve the Company of liability under United States federal law, nor will it provide a defense to any federal proceeding which may be brought against the Company. The enforcement of federal laws in the United States is a significant risk to the business of the Company and any proceedings brought against the Company thereunder may adversely affect the Company’s operations and financial performance.

This news release does not constitute an offer to sell, or a solicitation of an offer to buy, any securities in the United States. The Company’s securities have not been and will not be registered under the United States Securities Act of 1933, as amended (the “U.S. Securities Act”) or any state securities laws and may not be offered or sold within the United States or to U.S. Persons unless registered under the U.S. Securities Act and applicable state securities laws or an exemption from such registration is available.

The CSE has neither approved nor disapproved the contents of this news release. Neither the CSE nor its Market Regulator (as that term is defined in the policies of the CSE) accepts responsibility for the adequacy or accuracy of this release.

For the latest news, activities, and media coverage, please visit https://www.statehouseholdings.com, https://shopharborside.com and https://urbnleaf.com and connect with us on LinkedIn and Twitter.

Media Contacts
StateHouse Holdings Inc.,
Angela Pih
Head of Marketing
800-892-4209

MATTIO Communications
Clare Redlick
statehouse@mattio.com

SOURCE: StateHouse Holdings Inc.

This article was published by CFN Enterprises Inc. (OTCQB: CNFN), owner and operator of CFN Media, the industry’s leading agency and digital financial media network dedicated to the burgeoning CBD and legal cannabis industries. Call +1 (833) 420-CNFN for more information.

About Ryan Allway

Mr. Allway has over a decade of experience in the financial markets as both a private investor and financial journalist. He has been actively involved in the cannabis industry since its inception, covering public and private companies.

Previously I wrote about insurance generally (see here) and products liability insurance specifically (see here). Today I want to look at some policy exclusions to point out potentially problematic terms that you may notice when reviewing your insurance contract during your annual insurance audit.

First, I need to mention some truths that I believe are accurate in the insurance context, based upon my many years of interacting with business clients:

Many business owners never read their policies. Insurance contracts are often dozens or hundreds of pages long. They are complicated, and they are not written like other contracts, which makes them worse to read than a normal business contract. This results in many business owners meaning to read the contract but rarely getting beyond the coverage jacket on the first page of the policy.

Many business owners never have anyone on their team read their policies. Business owners generally intend to (and do) delegate the insurance review and renewal to someone on their executive team, but that rarely results in anyone reading the contract beyond the first page of the policy. Many insurance owners do not want to pay their lawyer to review their policies, so they will often rely on their broker to assure them as to what coverage they have. Because insurance claims arise only intermittently, the importance of the insurance contract seemingly pales when compared to supply and customer contracts that are the lifeblood of the business, so these tend to fall by the wayside until the next annual renewal.

The right insurance broker or agent can be your ally. First, some terminology. An insurance broker represents an insurance buyer, and an insurance agent represents one or more insurance companies. If you are familiar with real estate, you can analogize to the commercial insurance context. An insurance broker is similar to a real estate buyer’s agent, while an insurance agent is similar to a real estate dual agent who represents both the buyer and the seller in a transaction. Each of these individuals can be helpful to you in the right context with the right motivation. An insurance broker will always be your ally because they work for you and can shop your needs around to various insurance companies. An insurance agent is generally “captive” to the company or companies they represent and has to sell you insurance products offered by those companies, but they are still motivated to sell you a good product to keep your recurring business year after year. In both scenarios, you will not know all of the types of policies that are available, even if you are familiar with the basic insurance policies: commercial general liability, employment practices, workers’ compensation, directors & officers, property casualty, product liability, commercial vehicle, business interruption, and key person insurance. It is better to rely on someone within the industry than try to decipher the purchasing process by yourself.

Insurance companies are not your friends. I know many insurance agents and brokers, and many are good people who are motivated to provide good service, but there is a reason why companies hire good, experienced law firms to help negotiate with insurance companies when they want to make a claim for a loss against their policy. I also know many lawyers who work for insurance companies doing “insurance defense work” where they fight hard to help their insurance company clients avoid paying out funds to their insured. It is not pretty to be on either side of the table. But you do not want to try to navigate the technical and complex morass by yourself.

Let’s shift from these general points to the topic of insurance riders:

Insurance riders explained. A cannabis company growing hemp or marijuana will typically obtain a commercial general liability policy in response to a statutory requirement to carry insurance, like this language from Washington:

The licensee shall at all times carry and maintain commercial general liability insurance or commercial umbrella insurance for bodily injury and property damage arising out of licensed activities. The limits of liability insurance shall not be less than one million dollars.

(a) This insurance shall cover such claims as may be caused by any act, omission, or negligence of the licensee or its officers, agents, representatives, assigns, or servants.

(b) The insurance shall also cover bodily injury, including disease, illness and death, and property damage arising out of the licensee’s premises/operations, products, and personal injury.

These broad categories above are, in theory, the items that will arise in the life of a cannabis company, but the ubiquitous insurance riders (contract amendments) chip away at this protection. Your policy will not cover every event on purpose, even if you try to buy the most comprehensive policy you can find. And if you do want to procure a policy that covers every potential event, it will almost always be too expensive for your budget. It is to your benefit to audit your policies and understand what events are and are not covered and know your business well enough to know what events are most likely to arise based upon your business plan.

When auditing your insurance coverage, pay close attention to the insurance riders that appear at the end of most sections of an insurance contract. After reviewing hundreds of pages of insurance policies as part of my due diligence for a recent M&A transaction, I point out the following language from actual insurance policies that may cause the typical cannabis business owner to pause:

1. This policy does not cover seeds, seedlings, vegetative plants, flowering plants, or harvested material that is not yet finished stock.
2. This insurance does not apply to bodily injury and property damage arising directly or indirectly from alcoholic beverages.
3. This [workers’ compensation] policy excludes volunteers and employment practices liability.
4. This [workers’ compensation] policy does not cover business owners.
5. This policy excludes nutraceutical substances such as essential oils.
6. This policy excludes vaporizing devices.
7. The insured must notify the company regarding a change of ownership. (This is not, strictly speaking, an exclusion like the others above, but it was significant enough that I wanted to include it here.) This clause becomes relevant in the M&A context and is different from the standard change of control language in other contracts (like bank financing agreements) that could impact whether you decide to do a stock deal or asset deal. A change of ownership impacts the covered company’s experience rating, and insurance companies love any excuse to reassess a company’s risk profile, find increased risk, and raise a premium as a result.

Attorneys get paid to deal in details. Often business owners believe they are covered by an event when they really are not, but you have to look beyond the insurance coverage jacket and diagram the effect of your insurance riders. This is why we always recommend a comprehensive insurance audit at least once per year.

For more information on the twists and turns of insurance policies, see the following posts:

On Friday, January 31, the Los Angeles Department of Cannabis Regulation (“DCR”) issued an updates bulletin to stakeholders via email that outlines some important highlights and reminders for licensees and would-be licensees in the City. Below are the key points, with analysis.

1. Round 1, Phase 3 license applicants move forward.

The initial 100 winners in Round 1, Phase 3 are moving forward in the licensing process with the DCR. On September 3, 2019 at 10 a.m., the DCR opened the flood gates to would-be Round 1 applicants. Prior to that date, the DCR verified over 800 social equity applicants (out of 1800 applicants that applied; folks had to be approved as social equity applicants by July 29, 2019). Those 800 social equity applicants vied for the first 100 coveted Type 10 retail licenses (75 of which went to Type 1 social equity applicants and 25 of which went to Type 2 social equity applicants).

Round 1 licensing was first come, first served with an online application via the City’s Accela licensing portal. One of the hallmark criteria for Round 1, in addition to meeting the social equity qualification, was proof of right to real property the intended license type. The real property had to meet all sensitive use buffers and zoning requirements, too. And applicants had to file a slew of other paperwork while racing against the clock (against other applicants) in the City’s online system.

There was immense scrutiny of the Round 1 application process by stakeholders. On October 28, 2019, Council member Herb Wesson alleged in a letter to DCR that:

Over the last couple of weeks, including at the Cannabis Regulation Commission meeting last Thursday, allegations have been made that multiple applicants had access to the application portal prior to the announced start time of 10 am on Tuesday September 3rd. Unfortunately these allegations have been substantiated by the Department at the Commission meeting and the Phase 3 Retail Round 1 process was compromised. While it was always understood that not every applicant would get a license, it is paramount that the application process have the utmost integrity, be transparent, and fair. There appears to be no scenario in which the Retail Round 1 process can meet those three principles currently.

Wesson went on to write that:

I am recommending that the Department: 1) suspend all Retail Round 1 applications; 2) refund all monies paid by Retail Round 1 applicants and cancel all invoices; and 3) prepare a full audit and report by an independent third party not involved in the process – unless there are other options like processing every application that would provide the necessary assurances that the process was not compromised. These are the only options that will provide the clarity and time we need to ensure that the Phase 3 Retail process is fair, transparent, and has integrity .

In the City’s update on January 31, the DCR let everyone know that the first 100 selected applicants are still moving forward and that “the Phase 3 Retail Round One application process is currently under review by an independent third-party auditor. That audit is being managed by the office of the City Administrative Officer (CAO). Once final, the audit will help to inform our approach to the application process.”

As far as when Round 2 of the Phase 3 licensing process will open, the DCR hasn’t said yet. ICYMI, the Round 2 window will be 30 calendar days for 150 licenses that will also go to pre-verified Tier 1 and 2 social equity applicants. In Round 2 though, at the time of filing, applicants only have to submit to the DCR “a financial information form; a labor peace agreement attestation form; and an indemnification agreement.” Those 150 applicants will then have 90 days to supplement their applications with the more robust information required by the DCR. There’s also no update regarding when the Phase 3 general public application window will open.

2. Phase 1s.

There are only 188 Phase 1 EMMDs in the City. Their license renewals are due by the end of March or they forfeit their EMMD status. Simple.

3. Phase 2 pre-licensing inspection has a new deadline.

There are currently 158 Phase 2 applications that received temporary approval from the DCR. However, in order to operate, Phase 2 applicants have to pass a pre-licensing inspection with the DCR and the L.A. Fire Department (and have a state license). The new deadline for Phase 2 applicants to pass pre-licensing inspections is extended to March 31, and Phase 2 applicants must request their pre-licensing inspection by or before March 1.

4. Undue concentration update.

There are currently 10 community plan areas that have reached undue concentration limits. Recall, undue concentration basically stands for soft licensing caps within the City. The areas affected by undue concentration now include Boyle Heights, Central City, Central City North, Harbor-Gateway, Hollywood, North Hollywood-Valley Village, Sherman Oaks – Studio City-Toluca Lake-Cahuenga Pass, Sun Valley – La Tuna Canyon, Venice, and West LA. Folks can still apply for licensure in these areas, but they have to request a finding for Public Convenience or Necessity (PCN) from the local City Council. To date, “the [DCR] has received 75 PCN applications since the opening of Retail Round 1 on September 3, 2019.” It’s important to note that the PCN process is only available right now to social equity applicants.

5. Amendments to applications are now available.

The DCR released some pretty helpful guidance on how to make amendments to your licensing application (including change of entity and/or ownership). See here for instructions on how to fill out the specific form.

We’ll be sure to give a full analysis of the City’s progress towards Round 2, Phase 3 licensing, which is the next big licensing milestone in L.A. So, stay tuned!

As I wrote in a prior blog post, Utah’s cannabis market has special characteristics that you are unlikely to find in other states. This is due in large part to Utah’s hardworking, predominantly conservative, and compassionate culture. Marry those qualities together and the parameters and developments of the Utah medical cannabis and hemp marketplaces make perfect sense. Overall, 2019 was a banner year for Utah’s cannabis marketplaces as it ramped up for 2020. Here’s the overview on 2019 and looking forward in 2020.

Medical Cannabis

Utah’s medical cannabis marketplace is slated to launch this year, with qualified patients receiving medical cards by March 1, 2020 or possibly sooner. After the voter approved initiative passed in November 2018 and was modified by the legislature in December 2018, Utah’s divided proponents of medical marijuana ended up with a medical program that is both patient-centric and internally seen as socially responsible.

Utah’s voters, with the intervening pen of its legislators, approved a non-smokable medical cannabis marketplace with significant government oversight and involvement instead of a full-scale adult-use/recreational market. Questions such as the following were central to the discussion: (a) What are the most efficient delivery systems for medical cannabis? and (b) Which of those delivery systems is most likely to provide health benefits to the consumer without producing negative externalities? (For instance, marijuana smoke can be noxious to those in the near vicinity to the consumer, but eating chocolates, softgels, or gummy bears or rubbing oil on your body is less likely to infringe on others’ comfort and health.)

On September 16, 2019, the Utah Senate passed SB1002, which amended the Utah Medical Cannabis Act. Among those changes were: (a) the number of available medical cannabis pharmacy licenses increased from seven to 14; (b) the division of the state into at least four geographic regions for license issuance purposes; (c) a mandate that Utah Department of Health (“UDOH”) issue pharmacy licenses by July 1, 2020; (d) the state central patient portal will allow patients to submit orders online for medical cannabis; (e) the UDOH may authorize home delivery by medical cannabis pharmacies, which may use medical cannabis couriers for delivery; (f) patients will be permitted to purchase a month’s supply of medical cannabis regardless of the distance they live from a medical cannabis pharmacy; and (g) cultivators are permitted to grow cannabis indoors and outdoors.

Utah cultivator licensing is currently closed at this stage, with only eight cultivators that received licenses out of 81 applications, although the legislature authorized 10 licenses. Seven of the cultivation sites are in rural areas and one is in an urban area. Licensees include both Utah companies and out-of-state companies with Utah ties. Processor licensing opened August 23, 2019 and remains open through August 2024, with an unlimited number of licenses available in two tiers. The application to become an independent cannabis testing laboratory remains open: the criteria can be found here. On January 3, 2020, the Utah Department of Health announced the companies that would receive the 14 medical cannabis pharmacy licenses. Eight of the locations may be open as early as March, with the remaining open as early as July. You can see the pharmacy map here.

Hemp

The Agricultural Improvement Act of 2018 (“2018 Farm Bill”) legalized industrial hemp, and Utah responded by amending its Hemp and Cannabinoid Act on May 14, 2019. Amendments included referring to cannabinoid products rather than only cannabidiol (“CBD”) products and requiring the Utah Department of Agriculture and Food to establish requirements for a license to cultivate, process, or market industrial hemp. Utah is currently drafting a state hemp plan to submit to the USDA in accordance with the 2018 Farm Bill. Currently Utah has approximately 175 licensed hemp growers, approximately 30 licensed hemp processors, and over 700 registered hemp products.

But You Can’t Smoke It

Utah has some unique twists to its cannabis marketplace. Smoking cannabis and hemp is not permitted, even with a doctor’s authorization to use cannabis, but diffusing is. Why? As I wrote in two prior blog posts (see here and here), two dominant global essential oil companies are headquartered in Utah: Young Living Essential Oils and doTERRA. Popular ways to use essential oils include ingesting, including in food and beverages, topical application, and diffusion into the air by use of a diffuser. And because Utah is also the epicenter of natural products, especially dietary supplements, ingestion of hemp products (like hemp-derived CBD) by tablet and capsule top the list of the definitions of approved “Medicinal Dosage Forms.”

What’s Turning Heads?

In 2019, Young Living Essential Oils acquired Colorado-based Nature’s Ultra, and now Nature’s Ultra’s ads are prevalent on the digital billboards on I-15 and I-215 in Salt Lake County. Recently, a self-proclaimed “Farmer & Chemist” company began advertising on the I-15 corridor. On December 30, 2019, Nevada’s West Wendover opened its first recreational marijuana dispensary just under two hours west of Salt Lake City. Looking ahead, UtahCann, the primary cannabis trade group in Utah, is preparing to hold its third annual Business Conference and Expo on April 25-26.

The Utah cannabis marketplace will continue to develop with uniquely Utah characteristics. We will keep you updated as the markets mature. I predict that Utah will begin to flex its unique international business connections before too long, especially on the back of its behemoth multi-level-marketing (direct sales) companies.

On October 31, the U.S. Department of Agriculture (USDA) published its interim final rules for the production of hemp under the 2018 Farm Bill. Our firm has provided a broad overview of the rules and written about the potential impact of the testing rules on the hemp industry. Today we address disqualifying criminal history for the purpose of participating in the hemp industry.

The interim rules outline the requirements for States and Indiana Tribes hemp production plans, which must be approved by the USDA.  Among these requirements is that if the producer is a business entity, the State or Tribe must collect and submit information that includes:

• The full name of the business,
• Address of the principal business,
• The location, full name and title of the “key participants”,
• An email address if available, and
• The EIN number of the business entity

Applications for a producer license – whether submitted to the USDA, a State, or a Tribe – must be accompanied by a completed criminal history report for each key participant. This is because the 2018 Farm Bill prohibits persons convicted of a felony related to a controlled substance under State or Federal law from producing hemp for 10-years following the date of conviction. An exception applies to persons who were lawfully growing hemp under the 2014 Farm Bill before December 20, 2018 (the date that the 2018 Farm Bill was signed into law), and whose conviction occurred before that date.

Who is a key participant? A key participant is:

1. A person or persons who have a direct or indirect financial interest in the entity producing hemp, such as an owner or partner in a partnership;
2. Persons in a corporate entity at executive levels, including chief executive officer, chief operating officer and chief financial officer.

The rules expressly state that “key participants” do not include other management positions like farm, field or shift managers.

USDA is requiring a criminal history records report for key participants because those persons are likely to have control over hemp production, whether production is owned by an individual, partnership, or a corporation. What does this mean? It means that the USDA considers those persons as responsible for ensuring compliance with the regulatory requirements. For a corporation, if a key participant has a disqualifying felony conviction, the corporation may remove that person from a key participant provision – failure to do so will result in a denied application or license revocation.

What is unclear from the interim rules is how far into a web of corporate relationships the requirement of identifying and providing criminal history reports for key participants’ extends.  Consider a scenario in which Company X is applying for a hemp production license. Company X is owned in equal parts by two individuals and Company Y. Company Y’s ownership is comprised of three individuals and a trust.  Read broadly, the requirement to identify key participants and submit criminal history reports would apply to C-level employees of Company X, five individuals and the beneficiaries of the trust and may include the trustee.  This is a basic example of the kinds of corporate structures that we often see and which can create burdensome headaches when it comes to identifying “key participants.”

Those of us operating in states that have legalized recreational marijuana are used to reading the identification as extending through the entire corporate family.  For example, here is a recent post on this issue California. And here is a post about considerations for foreign companies when investing in US cannabis. As these articles explain, financial interest disclosure requirements can be incredibly difficult to comply with and it may not always be clear who has an “indirect” interest.  The goal of such regulations is to ensure that the government knows the identity of every person who may profit from the recreational marijuana business.

It appears that may also be the case for hemp and there is much more to say on this and other topics. So stay tuned as we delve further into the interim rules governing hemp production in the coming weeks and please register for our webinar this afternoon at 12:00 PM.

If you follow state-by-state legal cannabis legalization, you’re aware that despite the federal illegality of cannabis, certain federal agencies police the cannabis industry like they do any other legal industry. For example, the NLRB has been known to go after cannabis companies engaged in hostile workplace conduct and the Department of Treasury contemplates banking services to the industry under the 2014 FinCEN guidance. At the same time, other federal agencies, like EPA, tend to ignore cannabis companies altogether.

If you follow cannabis, you’ll also know that the M&A market in various states has remained hot for sometime now, especially as cannabis licenses become harder to come by for one reason or another. You can now add the Department of Justice (DOJ) to the list of federal agencies participating in and around the cannabis industry, and no, it’s not for criminal prosecution reasons. Quite the contrary–the DOJ is taking a harder look at bigger cannabis mergers to ensure that federal antitrust competition laws are not being violated. Namely, it is checking to make sure the deal will neither create a monopoly nor reduce competition or innovation. Though this may sound troubling, it actually signals that the DOJ is taking cannabis mergers seriously in how they may or may not affect competition and consumers in the cannabis industry. For what it’s worth, the overwhelming majority of mergers usually pass the federal review process unscathed, though Second Requests sometimes issue if the Feds believe there’s serious potential for anti-competitive issues.

Under federal antitrust law, anticompetitive mergers and acquisitions are prohibited. An initial question though is whether these bigger cannabis transactions are even reportable to the federal government in the first place. Under the Hart-Scott-Rodino Antitrust Improvement Act, the Federal Trade Commission ((FTC) which has been routinely non-participatory on cannabis issues) and the DOJ review proposed deals “.[T]hat affect commerce in the United States and are over a certain size, and either agency can take legal action to block deals that it believes would ‘substantially lessen competition.” Though there are some exemptions, current law generally requires companies report any deal valued at more than $90 million (with a minimum number of parties) to the agencies so they can be reviewed.” Notably so far, only the DOJ has issued Second Requests, which makes sense as it probably has more and better knowledge of cannabis than the FTC.

After companies report a subject transaction (i.e., “premerger notification”), DOJ and FTC perform a preliminary review to see whether the transaction triggers antitrust issues that require a deeper dive into the details. The transaction is on hold until  the mandatory waiting period (usually 30 days after filing) has passed or the Feds permit early termination of the waiting period. Because the FTC and the DOJ share the merger review process, transactions requiring further review are assigned to one agency on a case-by-case basis in the “clearance process,” depending on which agency has more expertise with the industry involved. Based on what either the FTC or DOJ finds on initial review, the waiting period can either expire or be terminated early so the parties can close, or, if initial review raises competition issues, the agency can engage in a Request for Additional Information, commonly known as a “Second Request.” This Second Request means the deal review is extended and the parties go into mini-discovery mode, turning over more information about the deal and how it will affect competition if consummated.

In a Second Request, the Feds ask all parties for business documents and data that detail the company’s “products or services, market conditions where the company does business, and the likely competitive effects of the merger.” The Feds can also conduct interviews (including under oath) of the parties, including company personnel or others in the party companies that have knowledge about the subject industry. Additionally, a Second Request means another 30-day waiting period (or more) before the parties can close.

Now comes the interesting part. After the Second Request, the parties will see one of three outcomes: the investigation into the deal is over and the parties can close; there’s a finding of competitive issues and the Feds negotiate a consent agreement with the parties to ensure competition is preserved/restored post-deal; or the Feds will move in federal court to stop the transaction altogether.

So far, at least two major cannabis deals have cleared the DOJ where the waiting period after Second Requests expired. See here and here. Surmounting a Second Request and coming out on the other side is a huge win for cannabis multi-state operators (MSOs). However, MSOs can expect the DOJ to continue to scrutinize these large mergers as the cannabis industry continues to consolidate  and as the DOJ learns more about this already concentrated industry as prohibition is steadily repealed between state borders. As a result, MSOs need to prepare for more federal scrutiny of their transactions and expect the timeline for larger deals to get pushed back from time to time by this scrutiny. They’ll also need to learn how to quickly and effectively comply with federal requests for information and data and retain independent experts to help them develop and communicate to regulators a market definition that will increase their odds of getting through Second Requests and getting their deals closed. Cannabis market knowledge will hinge on a state-by-state analysis of licensing, regulatory oversight, and consumer base and market size and geography, which will differ greatly between medical and adult use and, in certain states,  by city or county.

Though MSOs may not have seen DOJ Second Requests on the horizon, now that they’re here, they need to prepare accordingly by engaging in antitrust due diligence at the outset of any deal.

Getting a cannabis license in Los Angeles has been notoriously difficult—and may be about to get worse as news dropped last week that a Los Angeles City Council member is recommending that the most recent phase of licensing applications essentially be suspended.

For some background on LA’s complicated licensing process, it has proceeded to date in multiple “phases” administered by the Los Angeles Department of Cannabis Regulation (“DCR”):

1. The first phase was limited to certain qualifying existing medical marijuana dispensaries (or “EMMDs”), and so far a little under 200 have been issued.
2. The second phase was open for only certain qualifying non-retail businesses with social equity requirements. It’s not clear yet how many phase 2 licenses have been issued.
3. The first round of the third phase (yes, there will be multiple rounds) opened for a 14-day period for only very small amount of social equity retail licenses on September 3, 2019.

For phase 3, round 1, the application window that opened at 10:00 AM and was on a first-come, first-served basis. In other words, those who submitted their applications first would receive priority review over all subsequent applications. This made applying at the opening window critical. Even though the phase 3, round 1 application window was open for 14 days, DCR received several hundred applications in the first few minutes. There were more than 700 applications submitted in the first few days.

Since the applications were submitted, the results and process have been scrutinized intesely. On October 28, 2019, Council member Herb Wesson alleged in a letter to DCR that:

Over the last couple of weeks, including at the Cannabis Regulation Commission meeting last Thursday, allegations have been made that multiple applicants had access to the application portal prior to the announced start time of 10 am on Tuesday September 3rd. Unfortunately these allegations have been substantiated by the Department at the Commission meeting and the Phase 3 Retail Round 1 process was compromised. While it was always understood that not every applicant would get a license, it is paramount that the application process have the utmost integrity, be transparent, and fair. There appears to be no scenario in which the Retail Round 1 process can meet those three principles currently.

If Wesson’s claims are correct, then this could present a major issue for phase 3, round 1 applicants. The results of any successful applicant could now be called into question. And that’s exactly what Wesson is calling for:

I am recommending that the Department: 1) suspend all Retail Round 1 applications; 2) refund all monies paid by Retail Round 1 applicants and cancel all invoices; and 3) prepare a full audit and report by an independent third party not involved in the process – unless there are other options like processing every application that would provide the necessary assurances that the process was not compromised. These are the only options that will provide the clarity and time we need to ensure that the Phase 3 Retail process is fair, transparent, and has integrity .

It’s unclear what the next step in this process will be, or whether anything will even happen. Even though Wesson is not a staff member of DCR, he is a City Council member, and DCR answers to the City Council. With sufficient support, it is possible that phase 3, round 1 results could be tested. Stay tuned to the Canna Law Blog for more updates on LA’s licensing process.

Now that we’re about two years into California cannabis licensing, our California cannabis attorneys are seeing a huge uptick in mergers and acquisitions in the cannabis space. It’s critical for potential M&A transactions to understand California cannabis laws and regulations and ensure that any M&A contracts are drafted with the regulations in mind. This is especially so for buyers who will have to live with the mistakes of the seller and any defects in the M&A contracts—some of which can be fatal to a cannabis license. For buyers especially, it is very easy to overlook key regulatory requirements in a complex M&A transaction and jeopardize a target business’ license. In this post, I’ll go over some of the biggest problems that our California cannabis attorneys routinely see with M&A transactions.

1. Not Considering the Regulations

The biggest M&A mistake that our California cannabis attorneys see, hands down, is not considering the California cannabis regulations and their requirements from day one. Parties routinely come to an agreement on the commercial terms of a deal, and in some cases even draft contracts without considering the impact of the regulations. We cannot underscore how problematic this can be. Failure to consider the rules from day one may require the parties to re-draft a 60-page contract on the eve of signing—or worse, after signing—because they forgot to address regulations that might result in the loss of a license. Especially for a buyer, who is left holding the bag for any regulatory problems caused by the seller, this can be disastrous.

2. Licenses Cannot be Sold

California cannabis law is very clear that licenses may not be sold or transferred in any way. Nevertheless, our California cannabis attorneys have seen transactions where parties have attempted to sell licenses, which would result in the automatic termination of the license. Most of the time, however, the issues we see are subtler. For example, it’s generally common in M&A for the buyer to offer something as security if the buyer is not paying the full purchase price up front. But because licenses cannot be transferred, they should not be pledged or offered as security. That too could result in loss of the license.

3.  Acquisitions of a Parent Company Can Still Trigger Owner Disclosures

Many cannabis businesses in California are owned by holding companies. Some of them even have three or four levels of corporate ownership before getting to the parent company. Most cannabis deals involve acquiring a parent (which almost always is not licensed), as opposed to the subsidiary licensee. Even though that parent isn’t licensed, the parties to the transaction must still comply with California cannabis regulations. Even in these deals, the buyer must consider that it will still be considered an owner. At least one California cannabis agency explicitly requires identification of equity and non-equity “owners” all the way up the chain to the parent company—no matter how far removed—and has the discretion to require those persons to make full owner disclosures. Failure to consider the requirements of ownership and disclosure timetables could be disastrous for the buyer who will have to scramble to make tight 10–14 day disclosures to the state and who may have missed the local-level pre-closing disclosure requirements.

4. Complete Changes of Ownership at Once are Forbidden

The California cannabis agencies (and most local jurisdictions) do not allow businesses to be sold or transferred entirely at one time. The Bureau of Cannabis Control, for example, requires that at least one original owner remain on the license while the incoming owners are evaluated. In the event of an M&A transaction that results in a complete change of ownership at once, the business could lose its license. Because of this, our California cannabis attorneys have seen a surge in phased deals where only portions of a business are transferred to the buyer at one time. This is probably the biggest area where failure to consider regulations at the outset could result in a lost license.

5. Foreign Buyers Have Even More Potential Problems

Over the last year, we’ve seen more and more foreign companies seeking to invest in any even acquire California cannabis companies. Notwithstanding legal ramifications in the purchaser’s home country (cannabis is still illegal in most countries), there are major impacts in U.S. laws for foreign purchasers. For example, owners of California cannabis businesses must have Social Security numbers (“SSNs”) or Individual Taxpayer Identification (“ITINs”), which foreign purchasers don’t have. ITINs can take months to obtain, so not having one prior to closing can interfere with regulatory disclosures. There are also immigration concerns for cannabis industry participants (see here, here, and here), so a new owner coming to the United States to close a transaction or obtain their required live scan could be barred from entry.  Failure to consider these issues from the outset could obviously result in tremendous problems for foreign investors who could be barred from entry into the US and may jeopardize a license if they can’t make timely disclosures.

Last week was a big one in terms of California’s social equity programs, with the Bureau of Cannabis Control (BCC) announcing its award of equity grant funding to a number of local jurisdictions “to be used for commercial cannabis equity programs that focus on inclusion and support of persons or communities that were negatively or disproportionately impacted by cannabis criminalization.” The funds are intended to be used by cities and counties to provide assistance and services to equity applicants and equity licensees.

On October 9^th, the BCC awarded $10 million in equity grant funding to the following jurisdictions:

• City of Los Angeles ($1,834,156.38)
• City of Oakland ($1,657,201.65)
• County of Humboldt ($1,338,683.13)
• City & County of San Francisco ($1,338,683.13)
• City of Sacramento ($1,197,119.34)
• City of Long Beach ($913,991.77)
• City of San Jose ($560,082.30)
• County of Santa Cruz ($560,082.30)
• City of Coachella ($500,000.00)
• City of Palm Springs ($100,000.00)

This funding was authorized by the California Cannabis Equity Act of 2018 (Senate Bill 1294) and the Budget Act of 2019. The hope is that these additional funds will help local jurisdictions with implementation of equity programs that have struggled due to lack of funding and under-staffing.

In addition to the BCC’s announcement of its financial support of these equity programs, companies Eaze and Vangst also announced their plans to implement equity initiatives. Eaze’s program, called Momentum, is a “cannabis business accelerator” that will select ten applicants to partake in a ten-week education program. Each selected applicant will receive a $50k grant toward their business. Eaze’s Director of Social Impact, Jen Lujan, has stated that the purpose of the program is to support underrepresented individuals, including people of color, women, the LGBTQ community, and anyone incarcerated or negatively impacted by cannabis prohibition, within the marijuana industry. Eaze will grant applicant’s access to their business resources, including HR, legal, and marketing, via more than 40 volunteer employees.

Recruiting company Vangst also recently began a social equity program in order to facilitate the hiring of qualified equity candidates in the cannabis industry. According to Vangst, its “Social Equity Initiative focuses on making employment opportunities more accessible. We work with the biggest and most well known cannabis brands in the country, and together, we will lower the barriers to entry in this burgeoning industry.”

For those unfamiliar with the social equity programs being implemented by some cities and counties not just in California, but across the nation, the concept is to encourage equitable participate in the cannabis industry and to foster business opportunities for individuals who have been negatively impacted by the War on Drugs. Here in San Francisco, for example, Equity Applicants do not have to pay the $5,000 permit fee required of other license applicants, and can benefit from incubator partnerships with established companies that provide rent-free space for three years, or other technical assistance in running their businesses.

In order to qualify as an Equity Applicant in San Francisco, an individual must:

• apply as a person, not a company.
• have net assets below established limits for each household. This means you will not qualify as an Equity Applicant if your 1-person household has net assets over $193,500. Asset limits for larger households can be found here: Equity verification requirements.
• be one of the following:
  • the business owner;
  • own at least 40% of the business and be the CEO;
  • own at least 51% of the business;
  • a board member of a non-profit cannabis business where most of the board also qualify as Equity Applicants; or
  • an individual with a membership interest in a cannabis business formed as a cooperative.

In many cases, partnering with or incubating an Equity Applicant is the only means by which companies can currently apply for and receive licenses in some jurisdictions. Most cities have given priority to equity participants, and many have not even indicated when they will begin accepting non-equity applications from the general public.

Given the struggles we’ve witnessed in many jurisdictions to effectively and efficiently implement their social equity programs, we’re hopeful that additional state funding will be beneficial, and we are pleased to see large companies stepping in to provide some assistance. In all, we hope this will be the small beginning of a growing trend to address some of the many social justice issues created by marijuana prohibition and the War on Drugs.

The 2019 Oregon legislative session resulted in the adoption of several new laws concerning cannabis. You can read our definitive list here, our preview of the session here and a mid-session update here. One notable change was the passage of Senate Bill 218, which authorizes the Oregon Liquor Control Commission (OLCC) to refuse to issue initial marijuana production licenses at its sole discretion, based on supply and demand in the state. Implementing this law and the need for other changes resulted in the OLCC conducting a state-wide listening tour and forming committees to consider changes to Division 25 – the administrative rules governing recreational marijuana in the State of Oregon.

I was fortunate enough to be invited to participate in the OLCC’s Rules Advisory Committee (RAC) that focused on administrative rules related to Licensing and Security issues.  The RAC met on September 17, 2019 and this post discusses a few of the changes to the regulation of marijuana that may be coming down the pike. If you’d like to listen to the nearly 3-hour RAC, you can find the audio recording here.

The RAC included participants from the OLCC, law enforcement, public health, and the recreational marijuana community

The RAC participants included a who’s who from the OLCC along with representatives from nearly every part of the Oregon marijuana industry. Attending from the government side were Jason Hanson, OLCC Director of Statewide Licensing; Steven Crowley, OLCC Hemp and Processing Technician; Kelly Rout, Director of Administrative Policy and Process; Emily Febles, Rules Coordinator a representative from the Department of Justice and several others. The Executive Director of the OLCC, Steve Marks, also was present.  From the industry were growers, processors, wholesalers, retailers, non-profits, as well as members of law enforcement and persons in public health.

Landlord Consent to the Production of Marijuana—OAR 845-025-1030(6)(g)

One change important to applications for producers’ licenses concerns landlord consent.  OAR 845-025-1030(6)(g) requires applicants for a production license to submit information about canopy size, water usage, and so forth.

The OLCC has proposed adding a new section (6)(g)(E) that would require an applicant who is not the owner of a premises proposing to be licensed to submit a signed consent from the owner of the premises showing that the production of marijuana is permitted on the premises.

The RAC was not generally opposed to this provision, though there were concerns about when and what form the consent should take. The most obvious solution is to include such a consent provision in your lease. We have long been of the view that an ordinary commercial lease should not be used for any marijuana business. We recommend you review your lease now as this provision is likely to be retroactive – meaning producers will have to submit such information at their next renewal.

Application Processing Deadlines for All License Types — OAR-845-025-1131

The OLCC adopted temporary rule OAR-845-025-1131 to effectuate SB 218.  The OLCC now proposes to extend portions of this rule to all other application types. The goal of doing so to allow the OLCC to process its backlog of applications (of all types) so that may begin to allocate additional resources toward the need for processing changes in location and ownership.

This proposed change was welcomed by the RAC. The basic notion is that once an application (of any type) has been assigned to an OLCC staff member, the applicant will have 60 days to complete the application process. If the process is not completed, the application will be unassigned and placed on hold. The application may then be reassigned to a new staff member, and the applicant has 60 days to complete their application or have it deemed incomplete. Incomplete applications with be placed into withdrawn status. The upshot here is that you should get your ducks in a row before applying for a license.

Changes to License Applications—OAR 845-025-1132

The present rules have inadvertently created a secondary market for the buying and selling of applications. This occurred because of a quirk in the rules that did not expressly disallow changes in ownership of an application (except for producers) after submission of an application for licensure.

The relevant rule, OAR 845-025-1132, would be changed in two ways. First by providing that the OLCC will not allow changes in ownership of any application after submission for licensure. Second by disallowing changes in license type of an application after submission for licensure.

This proposed change would affect all applications in the queue and not just new applications. So consider this fair warning that the secondary market for applications is on its way out.

Change of Location and Receipt of Notices—OAR 845-025-1160(5)

The OLCC has proposed substantial changes to the rules governing how and when a licensee may change its location. In the past, the licensee who wished to change to location of the licensed premises submitted an application for the new premises along with required forms and paid a fee. The request for a change went into a queue that the OLCC staff members addressed as time permitted.

The number and kind of change of location requests has inordinately consumed the OLCC’s limited resources. So it should come as no surprise that the OLCC seeks substantial revisions to those rules—which I’ve quoted here with proposed changes in italics:

(5) Change of Location.

(a) A licensee who wishes to change the location of the licensed premises must submit a completed application for the new premises including all required forms and documents and the fee specified in OAR 845-025-1060, but does not need to submit information and fingerprints required for a criminal background check if there are no changes to the individuals listed on the initial application.

(b) If a licensee loses access to the licensed premises, the Commission may allow the licensee to change location if:

(i) The licensee submits written notice, in a form and manner prescribed by the Commission, at least 15 days in advance of losing access;

(ii) The licensee removes all marijuana items from the licensed premises in accordance with Commission rules prior to losing access;

(iii) The licensee is not under investigation for suspected violations and does not have pending administrative violations; and

(iv) The licensee supplies documentation showing legal access to and a Land Use Compatibility Statement for a new location within 30 days of losing access to the licensed premises.

(c) Failure to comply with this subsection may result in suspension or revocation of the license, as described in OAR 845-025-8520(3)(c).

(d)(b) The Commission must approve any change of location prior to licensee beginning business operations in the new location.

. . .

(7) Except for notices sent in accordance with ORS Chapter 183, the Commission sends all written correspondence to the email address that the applicant, registrant, or licensee gave the Commission on its application. The Commission is not obligated to send correspondence to any other email address provided by the applicant, registrant or licensee.

The RAC generally was not opposed to the OLCC’s proposal. However, some members expressed concerns about situations where a licensee does not have 15 days’ advanced notice, the storage of marijuana items during changes of location, and the requirement of a LUCS within 30 days. These are real concerns and the OLCC took careful notes. I expect some version of this rule to be enacted and note that the OLCC reserved discretion for special circumstances by providing that failure to comply “may” result in a suspension. I hope the OLCC exercises that discretion when called for as I expect the rule as drafted to have some kinks early on.

Suspension, Cancellation, Civil Penalties, Sanction Schedule—OAR 845-025-8590

The proposed amendments include two important changes to the OLCC’s enforcement of the rules. The first is to the calculation of a civil penalties – from $165 per day of suspension that could be imposed to $330 per day. The second is to provide that the OLCC may, in its discretion, determine that a penalty be mitigated if a licensee self-reports a violation.

The RAC welcomed these two changes with the latter receiving most of the discussion. A persistent concern of licensees is receiving some punishment for conduct out of they view (often correctly) as out of their control. This may occur, for example, when a dispensary or grower hires an employee who violates the rules and regulations or when a theft occurs. In either case, the OLCC may hold the licensee responsible even if the licensee promptly fires the employee, reports the violation, implements a corrective action plan, and seeks guidance from the OLCC. The OLCC may even seek license cancellation – effectively putting the licensee out of business. Several industry participants expressed the fear this has created in the industry about reporting to the OLCC and explained that the OLCC’s approach has disincentivized licensees from reporting violations. Indeed, a few RAC participants called for the proposed rule to go further and provide that self-reporting “will” (not just “may”) be considered a mitigating circumstance. A few also expressed displeasure about the OLCC’s handling of self-reported violations in that oftentimes a licensee reports a violation and seeks guidance from the OLCC only to receive a Notice of Proposed License Cancellation.

The OLCC is listening

Oregonians ought to be proud of the work done by the OLCC. Those of us in the cannabis industry all too often focus on perceived deficiencies or inequities in the rules or in how the OLCC enforces the rules. There is room for improvement to be sure. But pellucid at the RAC was that the people at the OLCC care about providing Oregonians with a fair and efficient system of regulation and on establishing administrative rules that can serve as a model to other states. This was evident by the work OLCC staff had performed before the meeting in drafting the proposed regulations and in the seriousness with which OLCC staff listened to participants whether from law enforcement, public health, or in the private sector—growers, processors, retailers… and even the attorney.