Top Seven Deadly “Don’t Knows” for California Cannabis Businesses

We’re still in the early days of the complete roll out of the Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”) in California. Currently, the only rules in play are the readopted emergency rules that are still full of ambiguities and unknowns, which will hopefully be addressed in the final permanent rules, which the state will likely release in coming months. We detailed the initial proposed permanent rules from back in July, the public comment period for which concluded at the end of last month. We assume the state is going to take into account a lot of that public comment before it pulls the trigger on adopting any permanent rules, which will likely happen by the end of the year.

While we’re in this interim emergency rules period, there are still a lot of unanswered questions for California cannabis businesses as they try to navigate an emerging, newly regulated industry. And some unknowns keep coming back again and again. I cover the top ones below.

1. Cannabis banking–when, when when. We’re all familiar with the cannabis banking epidemic. As a result of current federal laws, in certain states securing a bank account is nearly impossible (though in some states, banking is readily available because of the 2014 FinCEN guidelines). Unfortunately, California is still one of those “banking no-no” states because we don’t have a robust licensing scheme yet (that will certainly come though as regulators get down to business on permanent rules and enforcement). As a result of a lack of banking, there’s a lot of bad behavior out there, so beware of cannabis banking scams and fraudsters. And don’t count on any form of a public bank saving the day. However, if you’re lucky enough to find a financial institution in California that’s following the FinCEN guidelines, here are some useful tips on how to secure an account.

2.  Provisional licenses. There’s a sinister deadline looming for all temporary licensees. Namely, after December 31, 2018, no more temporary licenses will issue to any cannabis businesses. In addition, if you secure a temporary license on or around December 31 of this year, it will run its 120-day course and the governing state agencies will not renew it after that. To date, the agencies implementing MAUCRSA have renewed temporary licenses for 90-day stints (so long as a licensee is in pursuit of their annual license) to allow licensees to continue to operate once they secure local approval but before they get their full-blown annual license. Temporary licensure is without a doubt a big deal since it’s the only way to legal operate prior to receiving annual licensure, which is taking months at the state level to nail down. The silver lining is that the state legislature is contemplating creating provisional licenses under MAUCRSA to ensure that the industry doesn’t come to a screeching halt after December 31, but that bill is still pending.

3. Local control. Before you can receive a state temporary license, you must first show the state that you have the local approval of your city or county to operate within their borders. Once in pursuit of the state annual license, you can voluntarily provide evidence of your local approval, but the state will follow up with your local government regardless to make sure that you’re in compliance with local laws. The debate over local control and the fact that most California cities and counties ban commercial cannabis activity continues to rage in Sacramento. And the debate will ultimately play out in the permanent MAUCRSA regulations. For example, in the initial proposed permanent rules, state agencies, specifically the Bureau of Cannabis Control, proposed that retail delivery be borderless–meaning, licensees wouldn’t have to get local approval to delivery into/complete delivery in a given city or county. We are positive that such a decision made cities and counties cringe, but that likely won’t be the last time that the state and local governments butt heads over control over licensees.

4. CBD. CBD derived from industrial hemp in California is nothing short of a complete enigma. Why? Because, unless you’ve been living under a rock, you know that the California Department of Public Health Food and Drug Branch (CDPH-FDB) via an FAQ recently prohibited using hemp-derived CBD in food for pets and humans. Essentially, California is following the FDA lock-step on its treatment of hemp-CBD under federal laws. Other states have decided not to kowtow to the FDA in this area, but California surprised everyone by attacking hemp-CBD in this way. How enforcement will go and what it looks like remains a mystery. And since you’ll be hard-pressed to find a ton of juice bars, health food stores, breweries, coffee makers, and pet stores across the state not carrying hemp-CBD products meant for human or pet consumption, enforcement from CDPH-FDB could take a while.

5. Corporate versus cottage interests. The express intent of Prop. 64 was to hoist up and protect cottage interests in the cannabis industry. One of the biggest points of contention in Sacramento over MAUCRSA regulations has been the refusal of regulators to limit the number of cultivation licenses available to licensees. Namely, even though Type 3 medium sized cultivation licenses (I.e., 10,001-22,000 square feet of plant canopy) has been limited to one person/entity, anyone can still secure multiple and endless Type 1 and Type 2 cultivation licenses thereby getting around the limitation on medium sized grows. Combined with other regulatory barriers to entry and reporting and tax requirements, a lot of smaller cultivators and smaller business licensees are crying foul on MAUCRSA regulations being too corporatized. Whether regulators will really listen to this camp will be revealed in the permanent rules, and only time will tell.

6. DOJ and Jeff Sessions rescinded all DOJ marijuana guidance in January. As we all know, Jeff Sessions personally loathes cannabis. Sessions and whether you believe he’ll make good on his personal hatred or not, you cannot argue with the fact that the rescinding of the 2013 Cole Memo is unsettling if you’re a state-licensed cannabis business. Now that Sessions has take the position that U.S. Attorneys should prosecute cannabis crimes within their districts essentially according to the resources and priorities of the individual district, no one really knows what exactly enforcement will look like in each of the four federal California districts. So far though, to the best of our knowledge, the DOJ in California hasn’t been busting people for securing licenses under MAUCRSA.

7. Enforcement of rule violations. Temporary cannabis licenses began issuing in California on January 1, 2018. The program has been up and running for about a year and a half, and enforcement of rule violations against licensees has been varied at best. The state is mostly in the mode of getting people into the system and licensed in the first place. I’m confident that enforcement will finally begin to increase into next year as the dust settles on permanent licensing. And cities and counties are beginning to take the lead on enforcement anyway (see, for example, the latest from the City Attorney in Los Angeles). Still, exactly when the state will kick into higher enforcement mode is genuinely unknown.