California’s Final Cannabis Regulations: What Businesses Need to Know

Last Updated on Dec 20, 2018

With 2019 just around the corner, the California cannabis regulators have released what they hope will be the new permanent regulations for the State of California. At present, the regulations are awaiting approval from the Office of Administrative Law, which is likely to approve the regulations within the next month. There are some major changes due to a large number of public comments received by the Bureau of Cannabis Control from business owners and consumers alike. The State has lost billions of dollars in potential tax revenue due to poorly managed licensing systems, unclear regulations, and slow bureaucracy. Despite urgent calls for reform, the State still faces a plethora of challenges and hurdles from various entities that will likely further delay the development of the California market. Below are some of the major changes to the State law.

The State has asked for much more information on those employed by and profiting from a cannabis business. As is written in the new ordinances, all cannabis businesses must:

… include the name, birthdate, and government-issued identification type and number for all individuals who have a financial interest in a commercial cannabis business but are not owners as defined in Business and Professions Code section 5003(b) of this division. 26001(al). These individuals shall not be required to submit the information required of owners under section 5002(c)(20) of this division.

It is imperative to understand that the State now requires licensees to disclose all individuals who have a financial interest. This is later defined as:

Financial interest means an agreement to receive a portion of the profits of a commercial cannabis business, an investment into a commercial cannabis business, a loan provided to a commercial cannabis business, or any other equity interest in a commercial cannabis business except as provided in subsection (d)(c) .

It then gives further examples:

(1) An employee who has entered into a profit share plan with the commercial cannabis business.

(2) A landlord who has entered into a lease agreement with the commercial cannabis business for a share of the profits.

(3) A consultant who is providing services to the commercial cannabis business for a share of the profits.

(4) A person acting as an agent, such as an accountant or attorney, for the commercial cannabis business for a share of the profits.

(5) A broker who is engaging in activities for the commercial cannabis business for a share of the profits.

(6) A salesperson who earns a commission.  

In short, any equity owner, investor or employee earning a sales commission must be listed with the BCC. This is new and interesting since it tracks anyone and everyone who has a financial stake in a cannabis business. Previously, any owner under 20% and without controlling interest did not have to be disclosed. However, with these new regulations, it will become much harder to invest in cannabis without it being public record. Remember, any and all license applications filed with the BCC are public.

Some of the biggest winners with the new regulations are manufacturers and cultivators. Due to shifting regulations, many products had to be destroyed or recalled because of improper packaging. Indeed, many of the BCC public comment sections were full of complaints about the amount of plastic waste the cannabis industry produces. The State heard these comments and now has been more lenient with packaging. Here’s what the regulation says:

The package shall be child-resistant until the package is first opened.

All the manufacturers, cultivators, or distributors must do is include a sticker that says:

“This package is not child-resistant after opening.”

Once that statement has been added to the product’s first package, there is no need to engulf the product in mountains of plastic child-proof containers. Moreover, retailers can use their exit packages as the child-proof packaging. As such, manufacturers, cultivators, and distributors may be able to use normal packaging and still comply with State law as long as the retailer uses the proper exit packaging and the packages are labeled correctly.

One of the most interesting changes in the delivery process is that now all vendors must follow certain rules when engaging with online platforms:

The licensed retailer or licensed microbusiness does not share in the profits of the sale of cannabis goods with the technology platform service provider, or otherwise provide for a percentage or portion of the cannabis goods sales to the technology platform service provider.

This means that online platforms can no longer take a cut of sales from licensees, which has often been common practice. Therefore, popular online platforms may need to restructure their business plans.

Another important factor is that now licensees cannot co-promote with web platforms outside of that particular website.

The licensed retailer or licensed microbusiness shall not advertise or market cannabis goods in conjunction with the technology platform service provider, outside of the technology platform, and shall ensure that the technology platform service provider does not use the licensed retailer’s or licensed microbusiness’s license number or legal business name on any advertisement or marketing that primarily promotes the services of the technology platform.

This is a clear delineation between online platforms and non-storefront retailers. The State wants to make it clear that online platforms cannot share in cannabis business profits nor can they even promote businesses together.

As California’s final regulations take effect businesses will need to ensure that their current and future operations are in compliance with all regulatory changes. For some businesses, this will be minor, while others will need to restructure their business models to remain compliant. Whether you operate an established cannabis business in California or are currently working on business formation and licensure, having a trusted guide to assess your operations and business plans (to ensure compliance with all regulations) is invaluable. The 3C team remains on the cutting edge of regulatory change and we have the industry experience to provide tailored strategies specifically for your business. Contact 3C today for an initial assessment or to discuss ways in which we can help guide your operations.