California, Marijuana

ICYMI: California Merges Medical And Recreational Marijuana Licensing

California is taking a business-friendly approach to cannabis commercial activity.

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Remember those 200-plus pages of medical cannabis regulation the State of California issued at the end of April? You can pretty much toss those out the door for cannabis cultivators, manufacturers, distributors, and retailers. Last week, in a huge step forward for marijuana law reform, the California Legislature passed Senate Bill 94, which effectively repeals the Medical Cannabis Regulation and Safety Act (“MCRSA”) and incorporates certain provisions of the MCRSA in the licensing provisions of the Control, Regulate, and Tax Adult Use of Marijuana Act (“AUMA” aka California’s recreational marijuana law).

After passage of AUMA, speculation ran rampant that California would eventually integrate the rules for medical and adult use marijuana into one hybrid regulatory structure. SB 94, by adopting the Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”), sets up a new hybrid regulatory structure and creates more operator-friendly standards than under the MCRSA.

SB 94 makes some pretty significant changes to the MCRSA, and the following are some of its more notable highlights:

  1. The main governing regulatory agency will now be the Bureau of Cannabis Control (the “Bureau”).
  2. The types of licenses available for commercial adult-use cannabis activity and commercial medicinal cannabis activity, from cultivation to retail (Type 1-12), will still be the same on both sides of the aisle — medical operators will apply for “M-Licenses” and adult-use operators will apply for “A-Licenses.” In addition, specialty cottage cultivation licenses, microbusiness licenses, and large outdoor, indoor, and mixed-light cultivation licenses (which will become available January 1, 2023) will be available for both medical and recreational marijuana operators.
  3. The prohibitions on vertical integration in the MCRSA are now gone. With the exception of a ban on large-scale cultivators (i.e., those growing more than an acre outdoor or more than 22,000 square feet of plant canopy under mixed-lighting or indoor) having microbusiness and distributor licenses and on labs owning marijuana operator licenses, folks can apply for and receive multiple licenses in multiple different licensing categories (including acting as their own distributors), though the state must take into account the “excessive concentration” of licenses in a given area when determining whether to issue them.
  4. Producing dispensary (i.e., the only license under which you could formerly vertically integrate under the MCRSA) and transporter licenses will not be available under the MAUCRSA.
  5. Retailers can now have a brick-and-mortar “store” that’s closed to the public to sell cannabis exclusively through delivery.
  6. For manufacturers, where the MCRSA manufacturing rules included an enumerated list of chemicals and compounds, including ethanol, for the definition of “volatile solvent,” the MAUCRSA defines “volatile solvent” as “a 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.”
  7. The MCRSA required all license applicants show proof of compliance with local laws as a condition to receiving their state licenses. All that has changed with the MAUCRSA, where applicants may show prior compliance with local laws prior to state licensure, but it’s up to the city or county to alert the state within 60 business days if the license applicant isn’t in compliance with local laws.
  8. Quality assurance, inspection, and testing requirements of cannabis and cannabis products prior to retail sale are going to change. Now, among other requirements, distributors will be required to store cannabis batches on their premises during testing, testing lab employees will be required to obtain samples for testing and transport those samples to testing labs, and distributors will be required to conduct a quality assurance review to ensure compliance with labeling and packing requirements.
  9. The AUMA contained a residency requirement that’s now been repealed by the MAUCRSA. The MCRSA never had a residency requirement, but this is still a significant development since it means out-of-staters and even foreign companies can set up shop in California for medical and recreational marijuana. However, don’t put it past some California cities and counties to implement their own “locals only” standards.
  10. By certain deadlines, cultivators must provide in their state applications their water sources. If your water source stems from any kind of diversion, you’re staring at a July 1, 2017, deadline by which you must file all requisite paperwork with the Water Resources Control Board.
  11. The MAUCRSA requires the Department of Food and Agriculture (rather than the Bureau) begin establishing standards to designate a county of origin for cannabis no later than January 1, 2018. And by no later than January 1, 2021, the Department must establish a process by which licensed cultivators may “establish appellations of standards, practices, and varietals applicable to cannabis grown in a certain geographical area in California.”
  12. The definition of “Owner” has changed, and it no longer includes any distinction for publicly traded companies like in the MCRSA. “Owner” now means any of the following:
    1. A person with an aggregate ownership interest of 20 percent or more in the person applying for a license or a licensee, unless the interest is solely a security, lien, or encumbrance.
    2.  The chief executive officer of a nonprofit or other entity.
    3. A member of the board of directors of a nonprofit.
    4. An individual who will be participating in the direction, control, or management of the person applying for a license.
  13. Additional advertising requirements, including regulation of online advertising and the creation of a universal symbol for edible cannabis products, will be implemented.
  14. The cannabis excise tax will be measured by the “average market price” of the retail sale, instead of by the gross receipts of the retail sale.

Though various California regulatory agencies must go back to the drawing board on creating rules stemming from the MAUCRSA, we expect future rules will be similar to the ones released at the end of April, at least for operational standards and disclosures to the state. Nonetheless, the passage of SB 94 signifies California is taking a business-friendly approach to cannabis commercial activity, which is only going to boost California’s ability to be the number one state for cannabis commerce in the U.S.

Hilary Bricken bio photoHilary Bricken is an attorney at Harris Bricken in Los Angeles, and she chairs the firm’s Canna Law Group. Her practice consists of representing marijuana businesses of all sizes in multiple states on matters relating to licensing, corporate formation and contracts, commercial litigation, and intellectual property. Named one of the 100 most influential people in the cannabis industry in 2014, Hilary is also lead editor of the Canna Law Blog. You can reach her by email at [email protected].

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