Federal Hemp & CBD Update – What’s Legal and What’s Not?

Posted by Margolin & Lawrence on January 24, 2019

CBD products are everywhere – including tinctures, creams, gummies, pills, and drinks. But is it legal to buy, sell, and produce them?  The answer may depend on where you are. In the December 2018 Farm Bill, the federal government removed CBD (and industrial hemp and all cannabis derivatives with less than 0.3% THC) from the Controlled Substances Act altogether.  But that is not the end of the story, as the FDA continues to regulate CBD products through enforcement of the Food, Drug & Cosmetic Act, and state governments also have restrictions. Federal and state laws are changing quickly in this area, so anyone involved with these products is encouraged to consult with a lawyer and stay informed on recent developments.

Federal Farm Bill Removes Hemp and CBD from the Controlled Substances Act

In September 2018, the federal Drug Enforcement Administration (part of the Department of Justice) issued a memorandum announcing that drugs including CBD with THC content below 0.1% would be taken off of Schedule 1 of the controlled substances schedules, and moved to Schedule 5, which allows CBD products to be sold through traditional pharmacies with a doctor’s prescription so long as the particular product is first approved by the FDA. The order also disallowed any importing or exporting of CBD products without a permit.  

On December 20, 2018, the federal government took a further step, removing industrial hemp and all derivatives of cannabis with less than 0.3% THC – including CBD products – from the Controlled Substances Act.  This means that CBD products are no longer an inherently illegal substance under federal law, so long as they contain less than 0.3 percent THC. They are not Schedule 1, Schedule 5, or any Schedule – they have been de-scheduled. CBD products with THC content above 0.3% remain classified as a Schedule 1 controlled substance, subject to severe criminal sanctions. The Rohrbacher-Farr amendment creates a limited exception, preventing the DOJ from prosecuting anyone in strict compliance with state medical marijuana laws (adult-use or recreational uses of CBD products may still be prosecuted).

Does this mean that people nationwide now have free reign to buy, sell, and produce products with CBD as long as they don’t have too much THC?  Not quite.

Federal Law Still Restricts CBD

In June 2018, several months before the federal government removed CBD and industrial hemp from the Controlled Substances Act, the FDA announced that it had approved Epidiolax, the first drug comprised of an active ingredient derived from marijuana – CBD – to treat rare, severe forms of epilepsy.

Due to CBD’s new status as the active ingredient in a federally-approved drug, federal laws continue to restrict the use of CBD in specific circumstances, including in the use of food and non-approved drugs.  The federal Food, Drug, and Cosmetic Act is enforced by the federal Food and Drug Administration, which released a statement on the day the Farm Bill was passed, clarifying the federal status of CBD.  

It Remains Illegal Under Federal Law to Market CBD Products with Certain Health Claims Without FDA Approval

As explained by the FDA, it remains illegal under federal law to “introduce[ ] into interstate commerce” any CBD product  “that is marketed with a claim of therapeutic benefit, or with any other disease claim,” without the product first having been “approved by the FDA for its intended use.”  This same rule applies to any other product marketed as a drug for human or animal use. This means that “[c]annabis and cannabis-derived products claiming in their marketing and promotional materials that they’re intended for use in the diagnosis, cure, mitigation, treatment, or prevention of diseases (such as cancer, Alzheimer’s disease, psychiatric disorders and diabetes) are considered new drugs or new animal drugs and must go through the FDA drug approval process for human or animal use before they are marketed in the U.S.”

It Remains Illegal Under Federal Law to Add CBD to Food

The FDA also explained in its latest statement that it remains illegal under federal law to add either THC or CBD to any food products.  

“Additionally, it’s unlawful under the FD&C Act to introduce food containing added CBD or THC into interstate commerce, or to market CBD or THC products as, or in, dietary supplements, regardless of whether the substances are hemp-derived. This is because both CBD and THC are active ingredients in FDA-approved drugs and were the subject of substantial clinical investigations before they were marketed as foods or dietary supplements. Under the FD&C Act, it’s illegal to introduce drug ingredients like these into the food supply, or to market them as dietary supplements. This is a requirement that we apply across the board to food products that contain substances that are active ingredients in any drug.”

Under federal law, then, CBD products may now be produced, bought, and sold, so long as they are not marketed with any claims of therapeutic benefit, and so long as CBD is not added to food or marketed as a dietary supplement. That is not the end of the story, however, as state laws may create additional restrictions. 

Many States Allow CBD and Other Hemp-Based Products to be Produced and Sold

According to the National Conference of State Legislatures, 39 states had some kind of industrial hemp cultivation or production program as of August 2018.

As of 2018, the states with existing commercial hemp programs are:

  • Arizona

  • California

  • Colorado

  • Indiana

  • Kentucky

  • Maine

  • Massachusetts

  • Minnesota

  • Montana

  • North Dakota

  • Oregon

  • Rhode Island

  • South Carolina

  • Tennessee

  • Vermont

  • Virginia

  • West Virginia

Now that the farm bill has legalized hemp, some states are updating their regulations on hemp and hemp-derived CBD, with more expected to follow suit in the near future. For instance, Alabama has reportedly authorized the production of hemp-derived CBD, Pennsylvania plans to allow the full commercial production of industrial hemp, Michigan no longer counts hemp-derived products as marijuana, Colorado has loosened funding restrictions on commercial hemp farming, and Utah has begun registering businesses to legally sell hemp and CBD.

In order to determine whether any CBD-based business is allowed, it is important to look at current state and local laws, to set up production operations in an area that is friendly to these products, and to make sure the business is only selling products in areas that allow them. Since the status of industrial hemp programs, as well as various laws allowing CBD-based products for medical or other purposes, are subject to change, businesses should stay in contact with local authorities to ensure they’re in compliance with the existing law.

California is one of the states that has laws in place authorizing the production of industrial hemp. However, California has not yet fully set up its industrial hemp registration and licensing system – once it does so, there will likely be more legal guidance and clarity on the sales of hemp and CBD-based products.  According to the California state Department of Food and Agriculture:  “All growers of industrial hemp for commercial purposes must register with the county agricultural commissioner prior to cultivation. Registration is not yet available. The fees and process for registration will be developed by CDFA, which will consider recommendations from the Industrial Hemp Advisory Board.”

For more information on California’s laws, check this space next week for a blog post on the current state of California’s hemp and CBD laws.

North San Diego County Cannabis Update

Posted by Margolin & Lawrence on January 18, 2019
While most of the attention on cannabis business in San Diego County has focused on the area in and around the City of San Diego, there are also a few jurisdictions in the northern half of the county with open cannabis license applications. Here's a breakdown of the licensing application processes in the cities of Vista and Oceanside.
 
City of Vista
 
The City of Vista is offering business licenses for medical dispensaries only, limited to one business per 10,000 residents of Vista (so the limit is currently 10).
 
Applications will open on January 22nd and remain open for 7 days. During this period, applicants must submit complete applications (including site plans, security plans, etc.) and a $100,000 deposit to be held by the city during the application process. Applications are limited to pre-existing registered collectives/cooperatives. If fewer than 6 businesses are granted licenses, another application period will be opened at a later time. 
 
The application form can be found online here.
 
Additionally, the city has released a list of potentially eligible locations where cannabis businesses may be located.
 
City of Oceanside
 
The city of Oceanside is  currently accepting applications for cultivation, distribution, manufacturing, testing, and non-storefront retail. From the city website:
 
The City has a limit of 5 licenses for Cultivation. There are currently 16 applications under review for cultivation.
The City has a limit of 2 local licenses for Non-Storefront Retail. There are currently 4 applications under review for Non-Storefront Retail.
There are currently 7 applications for Manufacturing and 6 for Distribution under review. There is no limit to the number of local licenses that will be issued for these types. 
The City has received no applications for Testing Labs.
 
To apply, businesses must obtain a zoning verification letter confirming their property's eligibility, and submit an application (including a business plan, security plan, etc.) along with an initial $3,471 application fee (not including the background check fees). Additional fees will be charged for each phase of the licensing application process.
 
The application form can be found online here.
 
Oceanside has also released a map of eligible zones, which can be found online here.
 
For more information on cannabis l icensing requirements in San Diego County or elsewhere in California, check our   guide to California's cannabis laws   or reach out to our cannabis attorneys directly at  info@margolinlawrence.com .
 

Mergers & Acquisitions in the Cannabis Industry

Posted by Tiffany Carrari on January 18, 2019

As the cannabis industry grows, businesses at every level are participating in mergers and acquisitions, despite regulatory hurdles. Some of the biggest players in cannabis are continuing to consolidate their holdings, while smaller operations and entrepreneurs are also seeking a way forward.

2018 saw massive expansion in the cannabis industry, led by both U.S. and Canadian industry frontrunners such as Cronos Group, MedMen, and Aurora Cannabis.

  • Aurora Cannabis

Canada’s Aurora Cannabis is now the largest producer of cannabis following its acquisitions of CanniMed and MedReleaf in 2018, as well as funding construction projects to expand production facilities. Aurora is one of many companies funding consolidation and infrastructure development projects by raising funds from investors through publicly traded securities  and bought-deal offerings.

Aurora became one of the first cannabis companies listed on a stock exchange after completing a reverse takeover to join the Canadian Securities Exchange (CSE) in 2014 and started trading on the Toronto Stock Exchange (TSX) in 2017 before having its shares listed on the New York Stock Exchange (NYSE) in October 2018. Canadian firms like Aurora Cannabis that do not have cannabis assets within the U.S. are able to list on the TSX and NYSE – both of which have restrictions against listing cannabis companies operating in the U.S. for as long marijuana remains federally illegal. Meanwhile, cannabis companies with U.S. operations such as MedMen have been listing on the more receptive CSE which does not restrict firms with U.S. operations.

In a world where traditional financing methods remain scarce, the reverse takeover model (RTO) has been a popular vehicle for both Canadian and U.S. cannabis companies looking to tap into public markets to raise capital. A reverse takeover is an attractive alternative to an initial public offering (IPO) because it allows a private company to bypass the lengthy and complex process of going public by taking control of and merging with a dormant company that is already publicly traded.

  • MedMen 

MedMen is one of several U.S. based companies now listed on the CSE following a reverse takeover last May. MedMen’s CSE listing was the company’s quickest route to access liquid capital– a move that has inspired droves of U.S. firms to seek out reverse takeover deals as a way to raise money. MedMen was steady in its efforts to raise money and consolidate throughout 2018, entering into a $120 million bought-deal financing and making the largest ever U.S. cannabis acquisition when it purchased medical-marijuana retailer PharmaCann in a $682 million all-stock transaction  that gave the firm access to 79 retail and cultivation licenses in 12 states. The acquisition of PharmaCann effectively doubled MedMen’s footprint, now the largest U.S. cannabis company.

Bought-deal financings occur when a company sells common stock, convertible debt, stock options, and/or warrants to an investor or group of investors to raise cash. Stock options, warrants and convertible debt allow an investor to purchase shares for a certain price at a later date. For instance, MedMen’s $120 million bought-deal financing deal saw the Company sell Units comprised of Class B Shares and Class B Share Purchase Warrants. Each warrant entitles the holder of such warrant to purchase one Class B Share for $10.00 for a period of three (3) years following the deal’s closing.

MedMen’s expansion sees no signs of stopping in 2019. Just this month, the company announced a new plan to raise capital by spinning its real estate out into a newly formed Real Estate Investment Trust (REIT) created in partnership with Venice, CA investment firm Stable Road Capital. The REIT has raised $133 million dollars to purchase cannabis real estate owned by MedMen and others. The REIT will then lease back retail stores, production and cultivation facilities to MedMen who will use sale proceeds for funding the company’s continued growth.

  • Cronos Group

In addition to mergers and acquisitions, we are seeing partnerships and joint ventures between companies such as Canadian cannabis producer Cronos Group, Inc. (Cronos) and MedMen. The two companies intend to form a jointly-owned third company (MedMen Canada Inc.) to bring Cronos cannabis to Canada’s retail market via MedMen branded stores.

Last month, Cronos announced that it has entered into a subscription agreement with Altria Group, Inc. pursuant to which Altria will make a $2.4 billion equity investment in exchange for common shares and warrants, resulting in Altria holding a 45% ownership interest and a total potential ownership position of 55% dependent on exercise of the warrants. Marlboro maker parent Altria’s investment in Cronos marks the dawn of big business entering the cannabis space in 2018.

Growing Pains

With so many mergers and acquisitions, both at home and abroad, there is much conjecture about which “pot stocks,” if any, are an investor’s best bet going into 2019. U.S. federal illegality has created an interesting situation where cannabis companies with U.S. based operations cannot list on NASDAQ so instead list on the CSE. Conversely, Cannabis companies with Canada based operations are able to list on the TSX and NASDAQ. Therefore, companies like MedMen have the advantage of developing operations in both countries and still list on the CSE, despite not having access to mainstream securities exchanges. While companies like Cronos and Aurora have the advantage of listing on the TSX and NASDAQ, they cannot expand operations into the U.S. – where consumer spending on legal cannabis  is expected to climb to nearly $21 billion by 2021 as compared to only $4.5 billion in Canada.

A general criticism applicable to pot stocks using bought-deal financing to fuel growth is that the continued issuance of new stock, convertible debt, stock options and warrants can result in long-lasting share dilution. Shares are diluted when outstanding share counts balloon leading to a substantial reduction in  per-share profit. The impact of dilution isn’t always immediate since convertible debt, stock options and warrants can build up for years, leading to unanticipated increases in share counts down the road. However, until access to non-dilutive forms of financing and basic banking services for cannabis companies becomes readily available, bought-deal offerings will continue as the preferred method for raising capital.

M&A Locally

Meanwhile, smaller industry players and hopeful investors are jockeying for position at the local level, focused on securing licenses, building out facilities, expanding operations and developing brands - presumably in a bid to position themselves as acquisition or partner targets for larger groups like MedMen.

Like most jurisdictions throughout California, the City of Los Angeles is still in the process of reviewing commercial cannabis license applications for cultivation, manufacturing, distribution and retail operations within the City. Many of the applicants are persons and pre-existing businesses already in operation, having been “grandfathered” in and protected as part of LA’s Social Equity Program which also mandates priority consideration in favor of applicants who meet certain criteria.

Investors are chomping at the bit to acquire existing cannabis businesses and take advantage of the priority consideration afforded to social equity applicants in Los Angeles. Likewise, applicant-operators and social equity applicants are enthusiastic about the prospect of cashing in on their advantageous position. However, investors and applicants face challenging regulatory hurdles because applicants (even those already in operation) are just that – applicants.

So long as an application for licensure is pending at the local or state level, there is no “asset” to transfer because no license has issued. The local authorizations and state temporary licenses issued by licensing authorities are not “transferable” and neither is any pending application or the right to pursue licensure as a social equity candidate. Despite these roadblocks, investors, applicant operators and social equity candidates are looking to negotiate pre-licensing agreements to bring investor capital and management support to ‘authorized’ operations, as well as financial and business development support while applicants await final licensure and until those licenses become transferable.

Furthermore, LA’s Social Equity Program mandates that some social equity candidates are required to retain certain ownership percentages in a licensee business. While these regulations are intended to protect the interests of social equity candidates, practical business considerations related to capital contributions and operating capital are more likely to dictate profit distributions among investors and social equity owners in a licensee business. Further, such regulations could inhibit social equity candidates from selling their ownership stake in a business license. Until permanent licenses are issued and become transferable, investors and applicants negotiating pre-licensing deals will need to exercise high-risk tolerance and accept that all parties will be obligated to participate in the business and license application process until the licenses become transferable assets.

Peculiarities associated with license transferability issues are giving rise to various work-around solutions and complex deal structures emphasizing the rights and obligations of investors and applicants during the period of non-transferability. For instance, in the case of an investor who desires to purchase the assets and pending license of an applicant-operator’s business, a deal may involve an initial ‘closing’ and the parties’ execution of ancillary agreements setting forth terms associated with transferring the license at a later date. Such ancillary agreements generally require an applicant to continue directing business operations, as well as remain engaged in prosecution of license applications. The applicant is then required to cooperate in transferring permanent license(s) once they become transferable. Obligations of the investor(s) include financial and management obligations during the interim period between the closing and ultimate transfer of the license. One tricky issue to deal with is how payments are made to managing parties. Such payments must be reasonably related to the work being performed and any payments based on a percentage of profits must be disclosed to both local and state authorities. Furthermore, only an applicant/licensee can direct or control the licensed activity and therefore must remain in charge of business operations pending transfer of the license(s).

Not only is the enforceability of these agreements questionable, but they also require investors and applicants to perform obligations and remain “in bed” with one another for an indeterminable amount of time. Despite inherent risks, investors are more than willing to engage in pre-licensing deals as a way to get in at the ground floor in California – the world’s largest cannabis market.

Guest Blog: Los Angeles Teachers' Strike

Posted by ELR on January 15, 2019

Yesterday, teachers in 900 schools across the Los Angeles Unified School District went on strike, forming picket lines in the rain to protest unfair working conditions. For more context on the situation, we're presenting a guest blog post by an individual with experience working as a teacher in the LA school system. 

"If all the raindrops were lemon drops and gumdrops, oh, what a rain that would be!  Standing outside with my mouth open wide…ah, ah, ah, ah, ah, ah, ah, ah, ah, ah!"

A perfect children’s song for such a rainy day, but not for today in the city of LA.  If I had to re-write the lyrics, it would sound like: the sky is crying today, as thousands of teachers are marching throughout LA. Oh, what a shame this is.

The Los Angeles education system is in crisis! Humpty Dumpty has fallen off the wall! The bough has been broken and the cradle has fallen!

Did we not see the writing on the wall this day was coming? Politicians have turned their heads, with fingers in their ears for 30 years, while our teachers have tried to manage over crowded classrooms.

The “Old Lady in the Shoe…” Sound familiar? Why do teachers have to beg for additional staff support, as well as a few extra dollars to replace out of pocket expenses?

The Los Angeles Unified School District teachers have bent over backwards! We have witnessed many accounts of disrespect from top administration, parents, and sadly from the very ones that we are expected to educate.

How did we get here?

During my primary years of education in the Los Angeles school system, there was no way that the thought to sass an adult, never the less a teacher, entered my mind.  A teacher was guarded in the same way as a parent. They were a step below your mother. You listened, you obeyed and you honored them!

The teachers of yesteryear gained support from parents, top administration and the community.  The classrooms were well-managed, with aides rotating to reinforce the day’s lesson. The administration provided opportunities for exposure with electives such as sewing, cooking, automotive, electronics and typesetting – just to name a few – that helped shape me!

Education was important! Children were important!  Again, how did we get here?

Did it start with the misuse of standardized testing? I’m just saying! Maybe? Perhaps?

I pray that Humpty Dumpty can be put back together again!

To the teachers of the Los Angeles Unified School District, thank you for wanting more than “curds and whey!”

Strike on!

- "ELR," LA supporter and mother

California Jurisdictions Open for Cannabis Retail

Posted by Margolin & Lawrence on January 8, 2019

Despite all the talk about cannabis retail in the news, it can be difficult to tell exactly when and where it's possible for businesses to apply for a cannabis retail license. Here are a few jurisdictions where applications for cannabis retail are either currently open or planned to open in the near future. 

Riverside County

Per the county planning department, Riverside is planning to give out a maximum of 19 retail licenses. While no date is currently set, the proposal process is scheduled to begin later this year.


Santa Barbara County

County is currently accepting cannabis permit applications. Storefront retail permits are limited to eight countywide, with no more than two in any supervisorial district.


Cathedral City

Applications for retail businesses are currently open, with an application form available on the city website.


City of Chula Vista

The city’s application for cannabis businesses will open on January 14th and remain open until the 18th (for Storefront Retail, Non-Storefront Retail, and Cultivation businesses) and the 25th (for Manufacturing, Distribution, and Testing Laboratory businesses.)


City of Desert Hot Springs

Conditional use permits for cannabis activities, including Cannabis Sale Facilities, are available on the city’s website.


City of Goleta

Goleta is currently accepting applications for up to 15 total storefront retail businesses.


City of Jurupa Valley

Jurupa Valley will accept priority applications for cannabis retail from January 22nd to February 6th, with non-priority applications opening on April 1st. The number of retail businesses permitted will be linked to the city's population, with 1 license given for every 15,000 residents. This currently means that the number of licenses given will be capped at 7. 

 

City of Lompoc

Lompoc is currently accepting cannabis retail license applications.


City of Moreno Valley

In December, the city raised its cap on dispensary licenses from 8 to 23. In addition to admitting qualified applicants from the last round of applications, the city will make proposal forms for new applicants available online.


City of Pasadena

The city will license up to 6 retail establishments. The permit application process is open on the city website through January 31st.


City of San Diego

The city is currently accepting applications for cannabis outlets with retail sales, up to a limit of four businesses per council district.


City of San Luis Obispo

Applications for 3 storefront retail businesses and an indefinite number of delivery-only retail businesses are open on the city website through January 29th.


City of Vista

Per the ordinance released in December, the city will be granting 3 delivery-only (non-storefront) retail licenses this year.

Asylum Seekers' Stories From the DHS "Ice Box"

Posted by Margolin & Lawrence on January 4, 2019

Last week, Senator Dianne Feinstein called for a Senate Judiciary Committee hearing on the Department of Homeland Security’s detention practices. In December, two children who were detained for attempting to cross the US border died while in government custody. As the department overseeing the Border Patrol and Customs and Border Protection, the DHS has faced intense scrutiny for its role in these deaths, as well as for the practice of child detention in general. In particular, United Nations human rights experts are investigating whether the children were being held in a type of cell known as a hielera, or “ice box.” These cells are notorious for poor conditions that reportedly include low temperatures, overcrowding, and little access to food or water. The following are accounts from other individuals who have been detained while seeking asylum, as told to attorney Jennie Stepanian.

Contra Costa Cannabis Update

Posted by Margolin & Lawrence on January 2, 2019

In November, a measure to tax and regulate cannabis businesses in Contra Costa County was approved by more than 72 percent of the county’s voters. Given that the election indicated overwhelming local approval for legal cannabis, the county has been moving toward finalizing its cannabis regulations, focusing on the county’s land use restrictions for cannabis businesses and its application process for potential cannabis operators. In December, the county’s Board of Supervisors met to discuss these issues in an open hearing. As of January, here’s where the county stands on the two matters.

Land Use Restrictions

Contra Costa currently plans to limit the number of permits granted for certain commercial cannabis activities. The proposed restrictions are as follows:

  • 4 Permits for Storefront Retail

  • 10 Permits for Cultivation

  • 2 Permits for Manufacturing in Agricultural Zoning Districts

The county has provided an interactive online map allowing prospective applicants to look up a property in order to determine its eligibility for a given cannabis activity, as well as which permits will be required to do business.

A complete list of permits that may be required for a specific property/activity, including health and water use requirements, can be found on the county’s Commercial Cannabis Permitting website.

Application Process

The Contra Costa Board of Supervisors released a preliminary draft of the county’s Request for Proposals (RFP) form. Designed as an invitation for cannabis business applicants, the RFP lays out the Contra Costa cannabis licensing process for the numerically-limited activities listed above.

First, applicants will submit a Letter of Intent (LOI) containing the basic information about their proposed business. The LOIs will be reviewed by the county, which will invite some businesses to submit full proposals. These proposals will make up the main part of the application, including complete descriptions of the prospective operation and the applicant’s qualifications.

Once an applicant’s proposal has been reviewed and selected by the county, the business will be eligible for a Land Use Permit for their commercial cannabis activity. Permits for non-numerically-limited commercial cannabis activities, on the other hand, can be applied through directly through the county’s Land Use Permit process, without the added LOI/RFP requirement.

The county currently plans to release its final RFP form on January 24, with LOIs due by February 14, proposals due by April 18, and permit eligibility granted in June/July. However, the terms of the RFP, including these estimated dates, are still subject to change. The application process, including the RFP, will be revised and brought before the Board of Supervisors again on January 22.

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This blog is not intended as legal advice and should not be taken as such. The possession, use, and/or sale of marijuana is illegal under federal law.