New Jersey Governor Phil Murphy recently signed a bill renewing New Jersey’s medical marijuana program. Murphy signed the Jake Honig Compassionate Use Medical Cannabis Act into law.
On Tuesday, May 28, the Los Angeles City Attorney Michael Feuer filed a draft ordinance regarding retail cannabis licensing.
California cannabis entrepreneurs have to go through the often lengthy and cumbersome process of applying for local and state commercial cannabis licenses. But that is only the beginning of the journey to becoming a successful, fully-compliant business in this emerging industry.
Entrepreneurs interested in operating a cannabis business in California must decide how their business will operate and what business structure will work best for their specific business goals. They must consider the commercial, legal, and tax implications that come with deciding which business structure they want to operate under.
Once entrepreneurs have decided which business structure will best work for their specific business goals, the next step is to begin the entity formation process. This process consists of deciding what the Company name will be and drafting the entity formation documents that will determine how your cannabis business will operate.
As a full-service cannabis law firm, we represent many clients who have gone through this process already. Two of the most common business structures we have seen entrepreneurs decide to start their cannabis business as have been Limited Liability Companies (LLCs) and Corporations. Although there are some similarities between both business structures, there are some major differences that entrepreneurs need to understand prior to beginning the entity formation process.
At Margolin & Lawrence, our cannabis attorneys can help you with all the formation and governing documents for your LLC, such as the articles of organization, operating agreements, and statements of information. If you decide on structuring your cannabis business as a corporation, our cannabis attorneys can help you with your corporate formation documents such as bylaws and articles of incorporation.
Additionally, we understand how important it is for new businesses to raise capital to continue to grow their business. Given that cannabis is still illegal under federal law, entrepreneurs looking to raise capital for their cannabis business need to seek private investment capital. In order to do so, there are a series of important documents private investors want to examine before they decide to invest in your cannabis business.
For instance, companies looking to raise capital need private placement memoranda (PPMs) and subscription agreements. A PPM is a legal document that is given to prospective investors when selling stock or any other security interest in a business. The PPM provides prospective investors with an in-depth look at your business, including management, analysis of operations, risks factors, financial information, among other things. The goal of the PPM is for prospective investors to be fully informed about all aspects of your cannabis business.
A subscription agreement is an agreement between a corporation and the investor (the subscriber) in which the corporation promises to sell a certain number of shares at a specific price to the subscriber and, in return, the subscriber promises to buy the shares at the agreed upon price.
At Margolin & Lawrence, our cannabis attorneys can help you and your business with any capital-raising compliance and legal representation. Additionally, our cannabis attorneys can help you decide which business structure best meets your cannabis business goals. And we can help your cannabis business remain compliant with all the governing laws every step of the way, including ongoing compliance with state and local commercial cannabis regulations and employment laws, avoiding and minimizing the expenses of civil litigation, addressing the implications of federal illegality of cannabis, and helping to informally resolve any internal or external disputes that jeopardize the business operation.
Commercial cannabis is heating up on the central coast. Here’s a look at what’s green:
The City of Goleta began accepting cannabis planning applications on August 17th. Applicants will need to obtain either a Land Use Permit or Conditional Use Permit issued by the Planning & Environmental Review (PER) Department. A Cannabis Business License will only be issued upon approval by the PER Department. Applicants are required to submit an Odor Abatement Plan and Certification approved by a Professional Engineer or Certified Industrial Hygienist. In addition, cultivators will need to show proof of consultation with Southern California Edison (SCE) showing participating in SCE’s Savings by Design Program as well as participation in the Resource Innovation Institute’s Calculate Powerscore Tool. More information on Conditional Use Permits and Land Use Permits for cannabis operators in the City of Goleta can be found here.
Cannabis Business Licenses will be valid for one year from January 1 to December 31, regardless of when the license was issued. Something to consider as we approach the latter end of the year, as all businesses will need to renew their license prior to January 1 and pay the applicable renewal fee. The amount of retail licenses the city will issue has been limited to 15. The city will review applications on a first-come, first-serve basis and will implement a waitlist for potential retailers. More information on Cannabis Business Licenses for the City of Goleta can be found here.
The City of Lompoc is open for all cannabis operators with the exception of outdoor cultivators. Currently, there is no cap to the amount of licenses the city will issue and will allow for onsite consumption. Prospective operators will need to obtain a commercial cannabis use license issued by the City. Application materials and information on the city’s laws and regulations can be found here.
Santa Barbara County is expected to open by the end of the year for new businesses. Prospective applicants will first need to obtain either a Land Use Permit or Conditional Use Permit. Permit type is dependent on whether you are located inside or outside the Coastal Zone and distance to sensitive use receptors. Check here for information on land use and zoning in Santa Barbara County. A maximum of 8 licenses will be issued for retailers and all outdoor cultivation has been prohibited in the Coastal Zone. Once you have received the applicable land use or conditional use permit, you will then need to apply for a Cannabis Business License. Application materials for a Cannabis Business License will be made available here. Supplemental information may be required such as, environmental and energy conservation measures dependent on your zone. Be sure to check through the application requirements carefully and thoroughly or consider hiring an attorney to breakdown the process.
Getting a commercial cannabis license in California is complicated enough when coordinating your proposed business activities with a variety of government agencies. Depending on what activity (or activities) your business plans to conduct, every commercial cannabis license will ultimately be processed by one of three state agencies: the Bureau of Cannabis Control (BCC), the California Department of Food and Agriculture (CDFA) or the California Department of Public Health (CDPH). In addition to applying through these departments, your business may need permission from regulatory agencies that manage peripheral elements of the cannabis industry. This may include attaining water permits, landscaping protocols, motor carrier permits, and certification of processing equipment. This will, however, depend on what activities your business seeks to engage in, and will require due diligence and -in many cases - subcontract work. All license applications require the business to register for a seller’s permit with the California Department of Tax and Fee Administration (CDTFA). Every applicant must also comply with the Department of Toxic Substances Control’s database, known as EnviroStor, which tracks cleanup, permitting, enforcement, and investigation efforts at hazardous waste facilities and sites with known or suspected contamination issues. The other type of compliance required for all activities is through the California Environmental Quality Act (CEQA), which is primarily enforced by the Bureau of Cannabis Control. However, CEQA compliance was recently resolved for all licensees in an Environmental Impact Report.
By Raza Lawrence and Allison Margolin
On September 28, 2018, the DEA issued a rule announcing that drugs including CBD with THC content below 0.1% will 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 disallows any importing or exporting of CBD products without a permit.
It is important to note that the ruling is narrow in that it only applies to CBD products with less than 0.1% THC. However, products with higher THC content could continue to be sold under state law and without federal FDA or DOJ regulation under the Rohrabacher–Farr amendment. Ironically, the new federal policy is to tolerate sales of CBD products with high levels of THC, but to restrict sales of CBD products with low levels of THC by requiring FDA approval, a huge task in itself. Some sources indicate that it can cost more than $1 billion to bring one FDA-approved product to the market, including approximately $50-840 million to bring treatments through the stages of Basic Research/Drug Development and Pre-Clinical/Translational Research, and approximately $50-970 million to complete the Clinical Trials (Phases 1, 2, and 3).
The new ruling is bad news for anyone hoping to sell CBD with no or low levels of THC and without FDA approval. Already, in July 2018, the California Department of Public Health ruled that hemp-derived CBD would not be allowed in food or drinks for humans or pets in California.
CBD products could potentially be sold as edible cannabis products under California state law if the producers obtain commercial cannabis manufacturing licenses from the state and local government, and the products are distributed and sold through outlets with state and local commercial cannabis licenses. Even if everyone involved complied with California state cannabis laws, they would still be subject to enforcement, punishment and being shut down by the FDA, unless they contain over 0.1% THC, in which case they could be sold under state law with no federal interference.
The Rohrabacher–Farr Amendment would not protect any low- or no-THC CBD distributors, even those who strictly complied with state law, from enforcement actions from the FDA, as Rohrabacher–Farr only restricts the DOJ from interfering with state regulation of medical marijuana. The FDA is part of the Department of Health and Human Services, not the DOJ, and thus retains the ability to regulate CBD – its regulations trump any state laws relating to CBD under the supremacy clause of the US Constitution.
It is possible that today’s DEA ruling could later lead to reclassification of all cannabis from a Schedule 1 to Schedule 5 substance, which would mean that all cannabis could fall under the jurisdiction of the FDA and could only be sold through pharmacies with doctor’s prescriptions and must be produced by companies with FDA approval (i.e., large drug companies).
Since 2009, the FDA has had the authority to regulate tobacco products, which are now controlled by only a few large corporations, as are many other drugs regulated by the FDA. The same could happen to cannabis. Individuals and organizations in the cannabis community should lobby the government to prevent this monopolization by ensuring that cannabis is descheduled as a controlled substance.
Earlier this year, the FDA's parent agency stated that CBD has little potential for abuse – hopefully the government's future approach to CBD will follow this lead and remove CBD's schedule 1 classification.
The logistics of running a legal cannabis operation involve many questions that may seem surprising or daunting to both current and aspiring business owners. As a California cannabis law firm, here are a few of the issues that we’ve seen cannabis businesses need answers for. If you’ve found yourself asking any of these questions about your own operation, our lawyers may be able to help.
How much can I expect to spend?
At present, the capital requirements to start a cannabis business are very high; on top of the normal costs of starting a business, like buying real estate and hiring employees, the industry is very tightly regulated, and it’s not possible to get an outside loan. That means your business has to be privately fundraised, so it’s important to figure out exactly how much money you have and how much you’re willing to spend.
The application fees alone for cannabis licensing are often several thousand dollars, and many jurisdictions require both proof of funding and a detailed business plan before they consider a cannabis licensing application complete. A cannabis lawyer can help you find this information in order to start your licensed operation.
Is my property in an eligible location for cannabis business?
Zoning requirements vary widely based on your jurisdiction and which type of cannabis activity you’re interested in, so it’s not always easy to tell whether a given property or address is eligible for a particular activity. In addition to restrictions on which zones a given activity can be located in (for instance, cannabis cultivation might be banned in commercial zones but allowed in industrial ones), many municipalities have setback restrictions that prevent cannabis businesses from being located within a certain distance of schools, parks, residential areas, or other cannabis businesses.
Interpreting the local zoning regulations to determine for what activities your business is eligible is another service that cannabis lawyers can provide.
What information do I need to apply for a cannabis business license?
Applying for a cannabis business license isn’t just a matter of filling out an application form – most state and local licensing authorities will require a large amount of information about the business and its owners, including a complete operating plan describing how your establishment will meet all legal requirements for cannabis business activity.
On top of this information, you’ll also need to have business documents such as a seller’s permit, federal employer ID number, and certificate of good tax standing in order. On top of that, most applications will require you to provide accurate financial information, insurance documentation, and enough personal documentation for each member of your business to pass a full background check.
Finding these documents and preparing them for your final application is just one service that cannabis lawyers can provide for your business.
Should I get a license for medical-use or adult-use cannabis?
At the present moment, many states and municipalities have separate regulatory regimes for medical-use and adult-use cannabis, often with very different legal requirements. For your cannabis business to succeed, you’ll need to decide which license (or combination of licenses) is best for your business, then master the licensing and compliance processes for the type of cannabis business you choose. A cannabis lawyer can help guide you through this process, from choosing the right activity to applying for a license to remaining in compliance with the law once your business is operational.
What cannabis activity should I apply for?
In addition to medical-use and adult-use, cannabis business licenses are broken down into different activities, such as cultivation, manufacturing, and retail. Additionally, many of these categories are split into subcategories such as indoor and outdoor cultivation or storefront and non-storefront retail. As with medical and adult-use cannabis, these different types of cannabis activities often have very different requirements.
Some jurisdictions also offer boutique categories with special requirements such as Microbusiness, impose restrictions on how many licenses can be granted, or limit which types of licenses a single business can hold simultaneously. For your cannabis business to succeed, you’ll need to optimize which activities to apply for – another task that a cannabis lawyer can help with.
How can I ensure that my business is licensed as quickly as possible?
Given that legal cannabis licensing is a complex, highly regulated bureaucracy currently receiving a large number of applications, it can be difficult for a cannabis business owner to predict how long it will take their business license application to be approved, or to optimize their application in order to be licensed and operational as soon as possible.
Some areas offer a fast track to licensing under their Social Equity Program, in order to ensure that business owners who are disadvantaged or disproportionately affected by the War on Drugs have a quicker path to licensed operation than other applicants. Our cannabis lawyers can help you find out whether you qualify for one of these programs.
Whether or not you qualify for a Social Equity Program, the best way to ensure that you’re licensed as soon as possible is to choose the right license for your business and make sure that the information in your application is complete and correct.
What license should I apply for if I plan to expand my operation?
Especially for new cannabis businesses, the size of a cannabis business at the time of initial licensing might not be the same as the size of the business you hope to run in two or three year’s time. However, cannabis license application fees often vary based on the size of the operation in question, and applications often require businesses to provide details that depend on the size of their operation, including what types of equipment they plan to use, their planned hours of operation, and how many employees they’ll hire (including their labor practices and management structure).
Our cannabis lawyers can help you figure out how to reflect your long-term growth plans in your licensing application, including the multi-year pro forma budgeting and income documents that many municipalities require.
Will I need to apply for additional licenses or permits?
For many businesses, the cannabis license itself is only one of a number of licenses you’ll need for a fully licensed operation. To begin with, new cannabis businesses will need to apply for their tax registrations and seller’s permits. Additionally, depending on your activity, you may need to apply for Conditional Use Permit or Land Use Permit from your local planning department before you can apply for a cannabis business license.
For some activities, like outdoor cultivation, this may require further permits, such as for diversion of water, tree removal, or environmental review. On the other hand, businesses located in cities may be required to apply for enrollment in local Social Equity or community benefits programs. Our cannabis lawyers can help you find out what additional permits you need and help you apply for them.
As of July 2nd, here is the latest news on Phase 2 of cannabis licensing for the City of LA:
- Phase 2 will open August 1st and will be open for 30 business days. This phase is for existing cannabis cultivators, manufacturers, and distributors who were operating in the City of LA before 2016 and were suppliers to an EMMD (a pre-ICO medical marijuana collective in compliance with Proposition D) before 2017.
- Detailed instructions for Phase 2 applications will be released on July 18th, and the full Phase 2 application will be released on August 1st.
- Proof of participation in social equity program, and passing a pre-licensing inspection, will not be required for the provisional approval for Phase 2.
- The City will create a process where Phase 2 delinquent taxpayers can pay their taxes for past years at the same time as they are applying for licensing.
Among the other recent changes to the LA ordinance that take effect today and July 23rd:
- Both Tier 1 and Tier 2 social equity applicants will now receive priority processing for new retail applications on a 2:1 ratio with all non-social equity applicants (i.e., 2 out of 3 new retail licenses will go to Tier 1 and Tier 2 social equity applicants). Previously, only Tier 1 social equity applicants received this priority for new retail licenses.
- Eligibility for Tier 1 of the Social Equity Program is expanded to include applicants with a prior California cannabis arrest, but not a conviction. Previously, the ordinance appeared to require a conviction. The new definition makes anyone eligible for Tier 1 Social Equity who is both low income and has “an arrest or conviction in California for any crime under the laws of the State of California or the United States relating to the sale, possession, use, manufacture, or cultivation of Cannabis that occurred prior to November 8, 2016” (excluding arrests or convictions for violating Proposition D).
- Social equity program “incubators,” which will include everyone applying in Phase 2 who is not a Tier 1 or Tier 2 social equity applicant, will now be given the option to pay into a fund instead of providing 10% of their space to a social equity partner.
Today the Los Angeles City Council held a special meeting, where a passionate and energized public audience made it clear that they want to see the tax revenue collected from the commercial cannabis industry to be reinvested into social equity programs. The specific tax revenues being discussed were the proposed “Cannabis Reinvestment Act,” as well as a provision that would increase tax rates once the cannabis industry within LA reaches an aggregate of $1.5 Billion in total gross receipts.