Cannabis Business Law

Posted by Margolin & Lawrence on October 19, 2018

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.

What Should I Know for My Cannabis Business?

Posted by Margolin & Lawrence on September 18, 2018

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.

Why You Should Consider Hiring an Attorney for Your Cannabis Business

Posted by Jenna Rompel on August 27, 2018

California is well underway in the business of commercial cannabis, and now the state has
opened its golden doors to licensing. The state is actively reviewing applications for annual state
licenses. Those who have successfully triumphed over their local jurisdiction are quickly
realizing that was only half the battle and are in process of applying for a state license. The
industry is experiencing some growing pains as it continues to transition into a regulated market,
and if you’ve felt the hurt, here are some things to consider on whether it’s time to hire a law firm
to represent your cannabis business.

Depending upon the activity applied for, the relevant agency regulating commercial cannabis at
the state level – the Bureau of Cannabis Control (BCC), California Department of Public Health
(CDPH), or California Department of Food and Agriculture (CDFA) – will contact the city or
county to verify the validity of the local license and that the business is in compliance with or exempt from the California Environmental Quality Act (CEQA), as required by state law. This should be an easy
tick off the checklist. However, we are finding the state is returning responsibility to the applicant
to provide evidence of CEQA. The language in the local ordinances, particularly in the smaller,
rural jurisdictions, can be vague and up to interpretation. Failure to provide evidence of
compliance with the CEQA, or with any of the regulations under state law and associated
governmental bodies, is subject to denial of the state license. As a result, all operations will be
forced to cease. Any operations occurring without a valid local and state license are subject to
heavy fines, as recently seen in Humboldt County, and could result in criminal prosecution. An
attorney will advise in navigating through all local and state requirements to protect your
business from shutting down.

A common issue aggravating many are problems arising due to incorrect zoning that can lead to
costly consequences. Before you sign a lease or purchase a property, verify the zoning. For
example, for those in the market for the City of Los Angeles during its second phase of
licensing, you may have noticed the maps to check zoning against sensitive use areas in each
of the 15 districts are no longer available. At the request of the Department of Cannabis
Regulation (DCR), the maps have been removed due to numerous issues arising from incorrect
zoning. Applicants were relying on the maps not realizing there may have been a school, EMMD,
or other sensitive use within the area. The city is allowing applicants the opportunity to find
another location that is in the correct zoning until at least September 13th , when this phase of
licensing closes. Finding a location in the correct zoning is no easy feat. Have the property
professionally mapped and consider hiring an attorney to negotiate the terms of the lease or
purchase contract, ensuring the property complies with all zoning and land use requirements
under the ordinance, and reducing the chance your license is denied.

If you are an investor looking to buy an existing license, beware of fraudulent deals and false
licenses. Does the license comply with CEQA? Is it in the correct zoning? What is the licensing
authority’s policy on transferring of cannabis licenses? Having an attorney do the due diligence
will help reduce the risk of your investment.

As the industry evolves, there is going to be more need for legal protection for entrepreneurs and
investors, so consider a business investment into a law firm well educated in the field of
cannabis law and protect your success.

Do you Want Your Security Guard to Kill or Injure Someone to Protect Your Product or Cash?

Posted by Terry Blevins on July 25, 2018

by Terry Blevins, President/CEO of Armaplex Security

Many businesses are willing to put a security guard in their cannabis business, but don’t often think about the possible consequences (implications) of that decision.


I often ask business owners: Would you want your security guard to kill or injure an intruder in order to prevent him from taking your cannabis product or cash? The answer should be “no,” because the use of force to protect property is not allowed by security officers and would put you and your business in a precarious position from a liability perspective, not to mention causing a potential reputational issue. If the answer is “no,” then I ask: “Have you had that discussion with your security company and/or the guards that work in your business?” The use of physical force is a serious responsibility, especially if it is done by one of your employees or contractors, and at your request, and should not be taken lightly.

Even more serious is the use of a firearm by security guards, which can bring on a series of additional liabilities and concerns. How would you feel personally if one of your security guards killed or injured someone while trying to protect a small amount of product? How would you feel if an innocent bystander was killed during the incident? If you tell your guard not to draw his weapon in case of an attack, then you are defeating the purpose of having an armed guard and may be creating other liabilities with these instructions.

Are you aware that a security guard is the last measure you should put in place and only after you have secured the site with robust physical barriers, employee procedures and security technology? 

You should be suspicious of security companies whose first line of defense is always a security guard. Most shrinkage or loss in the cannabis industry is due to factors that can be controlled by measures other than hiring a security guard. Every cannabis business will suffer some loss of product or cash on a monthly basis and most of the time there is some insider (employee, contractor or partner) involvement in this.

Some examples of measures that can prevent insider theft:

  • Employees should not be allowed to have bags or baggy clothing in areas where product or cash is kept. Employee and contractor lockers should be used.
  • Employee policies and procedures that require two individuals to be present when accessing large amounts of cash and/or product
  • Alarm devices and access control systems that only allow certain employees, into certain areas, during certain hours
  • A requirement that all transactions take place on camera can help to prevent theft and may also serve as verification if someone is wrongfully accused

Are you 100% sure that if one of your security guards injured or killed someone, your insurance would cover you? How about if they just touch someone and that person claims assault? 


All insurance policies have exclusions, and many have “Assault and Battery” or other exclusions that mean the insurance company would not pay a claim if your security guard used physical force (any bodily contact) on a person, even in the course of his duties. Even if you contract with a licensed security company, its policy may have these same exclusions that place you, and them, at risk of not being properly covered. This exclusion may be as subtle as no coverage for providing security for a business that is involved in illegal activity (cannabis is still a Federal offense).


These are steps you can take to protect yourself and your business:


  1. If you hire guards directly, your insurance company must know that you are doing this in order for you to be covered in the case of an incident.
  2. If you contract with a security provider, you should ask this security company to list you as a co-insured on its insurance policy
  3. Have your attorney review both your policy, and the security company policy, to make sure that cannabis businesses are not excluded and insure that there are no other exclusions, such as “Assault and Battery,” that put you at risk.

Are you 100% sure that your security guards are fully licensed and compliant to perform their duties under local and state laws that regulate security companies, as well as cannabis companies?


All security companies are heavily regulated due to the need for trust and accountability as they are entrusted with our most valuable assets, and sometimes with our lives. Cannabis security companies and guards are even more heavily regulated and scrutinized than other security companies. State and local cannabis regulations require that security companies and/or guards that are used by cannabis companies must be properly licensed and insured.


Things you should do:


  1. Have your attorney review the contract with the security company and make sure that it meets the BCC and/or local requirements
  2. Visit, or call, the state and/or city agency that licenses security guard companies to make sure the company is licensed. (In California this site is:  https://search.dca.ca.gov )
  3. Make sure that you have these documents on hand during any compliance check:
    1. A copy of the security company’s license
    2. The security guard’s personal card (city of L.A. also requires first aid card)
    3. Your contract with the security company
    4. The insurance binder from the insurance company that lists you as a co-insured
    5. Any other documents required by law or regulation

Were you aware that in most states you cannot hire security guards directly (even if they have guard cards) without your business being licensed as a Proprietary Private Security Employer?


Out of all the cannabis businesses that hire their guards directly, most have no idea that this is required. The supervision of security guards cannot be performed by someone who is not an expert in security. Any company that hires security guards must have a license to do so and must have a manager on staff who has proven experience in security management and completed a written test and background check (California requires this license). Your insurance company will also want to look at the manager’s qualifications in order to ensure the manager is experienced and doesn’t present a risk to the policy.


This is only a partial list: There are many other things that you should consider when hiring security personnel at your cannabis site, and you should do everything you can to be informed and to protect you and your business.


There are many misconceptions regarding security in the cannabis industry regarding what is required under state and local laws and even some security companies don’t fully understand these. The only way for you to protect your company is to be proactive, to work closely with your attorney and to use a reputable security company.


About Terry Blevins:

Terry Blevins has over 30 years of experience in Law Enforcement and Security and has worked as an Industrial Site Security Subject Matter Expert for the U.S. Department of State. With a master’s degree in Security Management and extensive training in conducting threat and risk assessments from private industry as well as the Federal government, Blevins is considered a qualified physical security expert. 

Additionally, Blevins is considered one of the foremost cannabis security experts in the U.S. He has studied many cannabis businesses in California and other states, learning what works and doesn’t work, including industry better and next practices and has drawn from those to develop the security strategies that he includes in the numerous cannabis security plans he has completed. He has also studied local and state regulations and understand what must be provided with applications in order to successfully compete for a license.


Bureau of Security and Investigative Services

http://www.bsis.ca.gov/about_us/laws/pssact.shtml

Don't Be Intimidated by LA's Social Equity Program - All are welcome to Apply

Posted by Margolin & Lawrence on July 9, 2018

Through the Social Equity Program, Drug War Victims Will Help Build LA’s Green Economy

LA Phase II – July 2nd Update

Posted by Margolin & Lawrence on July 2, 2018

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.

July 1st Deadline Update

Posted by Margolin & Lawrence on June 29, 2018
Sixth months have almost passed under the transition regime and the July 1st deadline for the Emergency Regulations approaches soon. Many dispensaries are in a state of crisis because there has not been enough time for businesses to come into compliance given the very few licensed testing facilities - only 19 active of the 30 licenses granted as of May. Compare that number with the over 3,800 cultivation licenses and the 800 manufacturing licenses. The United Cannabis Business Association has done the math, and the math does not add up: a testing facility can handle 100-120 samples per day, which works out to only about 4 cultivation batches per day on average.  With problematic and confusing rule changes on packaging requirements, including labels and child-resistant rules, the supply of compliant packaging is too low. And, as a result of these issues as well as various other regulatory delays and obstacles, there's an enormous backstock of product that is out of compliance with Section 5029(b)(5). 

LA Phase II Update

Posted by Margolin & Lawrence on June 20, 2018

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.

Final Release of California Cannabis Regulations

Posted by Margolin & Lawrence on June 7, 2018

After numerous iterations, the final regulations officially went into effect on June 6, 2018 and are set to expire on December 4, 2018. These amended emergency regulations were initially released to the public on May 18, and then filed with the Office of Administrative Law on May 25, 2018. The state’s regulatory agencies proposed changes to certain provisions in order to provide greater clarity to licensees and address issues that have arisen since the emergency regulations went into effect. The re-adoption of the emergency regulations have extended the effective period for an additional 180 days. After the California Office of Administrative Law (OAL) posted the proposed emergency regulations on their website, there was a five-day public comment period on the finding of emergency.

Do Free Samples get Taxed?

Posted by Margolin & Lawrence on May 1, 2018

 

Update: This blog post does not apply to Los Angeles, as the distribution of free samples is non-compliant under the LA Ordinance 185344 Rules and Regulations for Cannabis Procedures, Regulation No. 10. Operational Requirements and Violations. Section D.

 

Since the pot-prohibition era has ended, there has been much ambiguity around the transition from an illegal market to one that is becoming strongly regulated. The cannabis tax rates for California were definitely met with much opposition, with both merchants and customers appalled by the exorbitant tariffs on California’s favorite vice (read more here).

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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.