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California DCC Engages in New Cannabis Rulemaking

the California Department of Cannabis Control (“DCC”) undertakes a new cannabis project rule making under the Regulation and Safety of Cannabis for Medical and Adult Purposes Act. Unlike other states, California has not implemented drastic changes to its cannabis regulations with immense impacts on the industry. Instead, it adopted a series of emergency rules with substantial changes here and there since 2018.

The DCC changes appear to be technical fixes and more consolidation rather than huge regulatory changes. The CDC states in its Initial statement of reasons that the need for these rules is to “consolidate, clarify, and make consistent” the licensing and enforcement regulations for all types of cannabis licenses in California.

Here are some of the highlights of the DCC proposed rules:

  1. Personal cultivation cannot take place in approved premises;
  2. Any Approved Premises that currently does not comply with certain provisions of the CCR 15000.3 Premises-Specific Regulations (e.g. having living spaces in your Approved Premises (unless otherwise specified to obtain local approval) are granted a time limit six-month grace period to become effective compliance;
  3. Shipping containers and modular buildings will now be considered “permanent structures” fixed to the ground. This is good news for licensees who use these structures as licensed premises;
  4. Regarding the current ban on subletting, the DCC is tightening the regulations to also prohibit to authorize”. . . another person to conduct operations in any area designated as the licensed premises for the license holder’s cannabis business activity. This rule will spoil a multitude of situations in which a licensee is engaged in an IP licensing and/or third party manufacturing agreement where that IP licensor or third party operates on the licensed premises.
  5. Licensees will now be free to use shipping containers as “temporary storage space” if their storage capacity is not adequate.
  6. We will now have more detailed rules and compliance regarding the use of a “designation of origin“.
  7. Some annual license application requirements are changing. For example, applicants no longer have to disclose prior military service, and disclosure of other types of company-issued licenses is no longer required. On the other hand, the company’s registered agent must now be disclosed and certain governance documents may be requested by the DCC that are not available online from the California Secretary of State (such as Articles of Incorporation and operating agreements). Premises diagrams won’t be so painful in the neck either where DCC waives some technical requirements for them (like only having to be black and white etc.). And the submission of all SOPs will now be consolidated into a single form to be provided to the DCC.
  8. As for submitting proof of local approval with an annual license application, applicants will now simply be able to certify that they are in compliance with local laws. Don’t get too excited about it, though: the DCC will still check with locals to make sure the attestation is true. Applicants simply won’t have to provide physical proof of local approval (unless requested by the DCC).
  9. While the definition of an “owner” does not change, the definition of a “financial interest holder” (“FIH”) does. Now included in the definition of an FIH is “. . . a person who has entered into an agreement to license intellectual property for a share of the profits”. Additionally, if you own less than 10% of the “total shares” in listed companies Where private company, you are not FIH (previous threshold there was 5%). These changes are quite ambiguous given that “a profit share” is not further defined (it seems that any profit share, net or gross, with no exception threshold counts). Certain other business structures such as LLCs and LPs are not specifically called for this updated FIH exception.
  10. Laboratory regulations are undergoing a major overhaul. Now, a laboratory must be “independent of persons who hold a license or an interest in a commercial cannabis enterprise authorized for any activity other than testing”. Owners and FIHs of other license types cannot be owners and FIHs of a lab (nor can these individuals be employees of the lab). A laboratory may also not rent or sublet any of its licensed premises to other license types. Laboratories also cannot give special treatment to one licensee over another, including extending discounts for testing.
  11. The list of prohibited additives and products is evolving as the DCC removes caffeine, which is ideal for coffee makers and sodas. At the same time, the following products are now expressly prohibited: any inhalable cannabis product delivered into the lungs by a metered dose inhaler or dry powder inhaler; any cannabis merchandise administered through the eyes or nasal passages; and any cannabis merchandise injected into the body by piercing the skin.
  12. We have a new section on prohibited commercial promotions. Specifically, a license holder “shall not give away any amount of cannabis or cannabis products, or any cannabis accessory, in connection with a commercial promotion”, and “a license holder shall not arrange raffle or draw as part of a commercial promotion.
  13. Cannabis returns between licensees are now kosher for “any lawful business purpose” as long as the regulations new return protocols are followed. Previously, we had no guidelines or regulations regarding returns between licensees.
  14. Distributors benefit from a respite insofar as, among other things, they no longer have to be the sole tenants or owners of their transport vehicles. They just need to make sure that any other owner or lessor uses the vehicle for non-cannabis activities.
  15. Retailers are also getting a boost as delivery workers can now transport up to $10,000 worth of product and the limit on the amount of unordered product they can transport in transit is removed. Curbside delivery will also be permitted (except for retailers that deliver only).

In addition to the changes made by the DCC, if this version of the rule is adopted, the DCC will also permanently adopt the emergency rule starting September 27, 2021. The DCC is currently seeking public comment on the proposed rule until to April 19. 2022. We’ll definitely be watching and plan to keep you posted on what makes the cut this time around.

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