What You Need To Know About The Newly Revised Permanent Regulations

On December 7, the Bureau of Cannabis Control (“BCC”) published a newly revised set of permanent regulations which it submitted to the Office of Administrative Law (“OAL”) earlier last week. The OAL is currently reviewing the draft permanent regulations and will complete their review on or by January 16, 2018 (30 working days from the BCC’s submission). At that time, we will know whether the OAL has struck or revised any of the draft permanent regulations.

Key Differences And Changes From the October Draft Permanent Regulations

Most of the draft permanent regulations the BCC published last week are identical to the prior version issued in October, which was the subject of a 15 day public comment period. However, there are some key differences and changes worth noting, including changes regarding the definitions of ownership, financial interest and commercial cannabis activity.

Ownership

Section 5003 defines which individuals meet the definition of owner according to the Business and Professions Code. The October version of the regulations included a category of owner which encompassed “any individual who assumes responsibility for the license,” including: “(i) an individual who is managing or directing the commercial cannabis business in exchange for a portion of the profits; (ii) an individual who assumes responsibility for the debts of the commercial cannabis business; (iii) an individual who is determining how a portion of the cannabis business is run, including non-plant touching portions of the commercial cannabis business such as branding or marketing; and (iv) an individual who is determining what cannabis goods the commercial cannabis business will cultivate, manufacture, distribute, purchase or sale[sic]. ” Section 5003(b)(6)(D).

The widely expansive language of “any individual who assumes responsibility for the license” was deleted in the newly revised set of regulations, including the different examples quoted above. In the Final Statement of Reasons (“FSOR”) which accompanied the newly revised regulations, the Bureau provided the following explanation for eliminating the new category of ownership: “The Bureau proposed to expand this subsection by adding parts (D)(i)-(D)(iv) to provide examples of which individuals fall under the owner category of an “individual who assumes responsibility for a license. However, after reviewing comments regarding the section and receiving feedback from stakeholders, the Bureau determined that subsection (b)(6)(D) had created more confusion than clarity. Thus, the Bureau has withdrawn subsection (b)(6)(D).” (FSOR, p. 9).

While it appears that the Bureau has now backed away from expanding the definition of ownership, the Bureau did clarify that brand-owners could be construed as an owner of the license if properly disclosed. FSOR, p. 658. This distinction is critical as this means that brand-owners who are properly disclosed would not be considered unlicensed parties for the purposes of commercial cannabis activity. In other words, brand owners, if disclosed, could license their IP to a licensee without violating section 5302(b) (unlicensed cannabis activity).

Financial Interest

Section 5004 defines which individuals and entities must be disclosed as financial interest holders in licensed commercial cannabis businesses. In the October version of the regulations, the Bureau provided included several new categories of financial interest holders, including: “(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”; and “(6) A sales person who earns a commission”. These key additions remained in the newly revised set of permanent regulations.

The Bureau received numerous public comments criticizing the inclusion of these new definitions of financial interest holders. However, in the FSOR, the Bureau clarified that IP licensors are among the various individuals now to be included as financial interest holders. FSOR p. 663. Thus, it appears that many of the third parties implicated in section 5302(b) (commercial cannabis activity), could be considered financial interest holders who, as long as they are disclosed in the annual application, would be permissible parties to conduct licensed commercial cannabis activity.

Commercial Cannabis Activity and Section 5032(b)

In the October set of regulations, the BCC included a list of examples of what would be considered prohibited commercial cannabis activity between licensees and non-licensees. More specifically, section 5032(b) included the following examples of prohibited activity:

(1) Procuring and purchasing cannabis goods from a licensed cultivator or licensed manufacturer;
(2) Manufacturing cannabis goods according to the specifications of a non-licensee;
(3) Packaging and labelling cannabis goods under a non-licensee’s brand or according to the specifications of a non-licensee;
(4) Distributing cannabis goods for a non-licensee.

Section 5032(b)

These new examples prompted a strong response from industry stakeholders, lawyers, and related third-parties. Among the chief criticisms of this section, public commenters pointed out that the revisions seemed to prohibit white labeling altogether. Many commenters raised concerns about whether IP licensing agreements with non-licensees would be permitted and what, if any, white labeling practices would be permissible.

The Bureau responded by deleting the examples included in the previous version of section 5032(b) in the December version it submitted to OAL and explained: “the Bureau has determined that inclusion of the clarifying example transactions is causing more confusion. Accordingly, the Bureau has decided not to move forward with the proposed changes which identify examples of specific commercial cannabis transactions. “ FSOR, p. 19-20. Thus, the Bureau has not formally invalidated the examples it previously provided.

However, the Bureau did provide some additional guidance in its summary of the public comments it received regarding section 5302(b). Namely, the Bureau clarified that licensees can conduct commercial cannabis activities with IP licensors or brand-owners so long as they are disclosed as financial interest holders or owners.

Take-Aways and Conclusion

It is difficult to predict which, if any, of the draft permanent regulations may be struck or revised by the OAL. However, for now, it appears that white-labeling, and several other commercial cannabis activities remain limited to licensees, owners and those who are financial interest holders of the license in question. If you have specific questions or concerns about section 5032, or some of the other regulations discussed here, please contact us to set up an appointment to discuss your concerns and to determine how to best proceed in light of the newly revised permanent regulations.