CCA’s Good or Better
CCA’s Good or Better – We were prompted to write this article by a note published June 19, 2019, in Canna Law Blog, Brothers (and Sisters) in Farms: The Pros and Cons of Joining a California Cannabis Cultivation Cooperative. The title caught our eye. We have been fans of Cannabis Cooperative Associations (“CCAs”) since the enabling legislation for this powerful vehicle was enacted as part of SB 94. See Cannabis Cooperative Associations Intro, California: Licensing Cannabis Cooperative Associations and CalCannabis Harming CCA’s.
Unfortunately, the June 19th note doesn’t live up to its catchy title. Some of the obvious benefits of CCAs are stated, but note provides no analysis beyond stating the obvious. The real strength of CCAs lies in the indirect financial and tax benefits, particularly in connection with cannabis excise taxes, that can be achieved through the operation of cannabis businesses in such structures. CCAs also have operational advantages that arise from the manner in which they can conduct business in California’s cannabis industry.
This note reminded us of another recent note with an eye-catching title: Six Ways California Can Combat the Cannabis Illicit Market, published last week by Canna Law Blog. Both articles have great titles, but lack of substance or utility. Both pieces reflect a distinct paucity of thoughtful legal analysis.
CCA’s Good or Better
We must be truthful. We were turned off by the June 19th note before we reached the discussion of Advantages and Disadvantages of CCAs. The introductory paragraph to what we thought would be the substantive analysis in the note states,
“But now the farmers are starting to explore a new tactic: joining forces as cannabis cultivation cooperatives to better compete with the bigger players. But didn’t cooperatives get phased out by the new regulations? The short answer is that yes, the traditional cooperative model that existed under the Compassionate Use Act is now gone, but a new model exists under current law, the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA). . . .” [Bold in original.]
We were turned off by the misleading reference to a phase-out of cooperatives in the note’s introduction of CCAs. The article repeats a misconception engendered by the Legislature’s “sunset” of Proposition 215 cooperatives and collectives. The reference in the quote is, “But didn’t cooperatives get phased out by the new regulations?”
Proposition 215 established the foundation for medical cooperatives and collectives in 1996 through an amendment to the California Constitution. Both the Legislature and the cannabis regulatory agencies lack the authority to prohibit the operation of Proposition 215 cooperatives and collectives. The Legislature made a continuation of the operation Proposition 215 organizations more burdensome by imposing licensing and other restrictions. The Legislature also added a largely overlooked provision to the enabling legislation for CCAs to facilitate the transition of Proposition 215 cooperatives into a regulated market.
Article 11 of Chapter 22 of the California Business, and Professions Code (B&P) was included in SB 94 for the express purpose of facilitating the conversion of existing Proposition 215 cooperatives and collectives into CCAs. This statute expressly allows pre-MAUCRSA cooperatives and collectives to convert into CCAs without the necessity of organizing a new corporation as a CCA.
It is the discussion of Disadvantages of CCAs in the June 19th note that completely misses the boat. The author treats the limitations on the cannabis cultivators who are authorized to organize a CCA as a disadvantage. The note states,
“To be a member or stockholder in a cannabis cooperative association, a person or entity must be a licensed cannabis cultivator, meaning that opportunities for outside investment in the cooperative itself are lacking. Members also cannot hold cannabis licenses in any other state or country, and their operations are limited to 4 acres in total.”
The author did not read far enough or carefully enough. Three small growers can organize a CCA. Three larger growers, each holding one-acre of canopy, can join the CCA. The CCA will hold 150,000 square feet of canopy in an organizational structure that can be operated in a manner that is more financially efficient than a conventional vertically integrated structure Contrary to the statement in the note, the enabling legislation for CCAs expressly permits third-party investment in such structures. A third-party investor can finance the development of a distributor and an extraction operation within the umbrella of the CCA. Somewhat surprisingly, the legislation explicitly exempts CCAs from being subject to California securities laws.
The enabling legislation for CCAs also expressly allows one CCA to be a member of another CCA and allows a grower to be a member of more than one CCA. These provisions were included in the legislation to allow multiple growers and CCAs to utilize the facilities or services of one CCA. For example, if a CCA has an efficient oil extraction facility, the facility could be used by growers who are members of other CCAs without the transfers of cannabis material among the CCAs being taxable as transfers outside of a CCA structure.
The June 19th note describes the imposition of the prohibition against predatory business practices as a limitation on the usefulness of CCAs. The author of the note misapprehends. The enabling legislation for CCAs expressly makes the prohibitions against engaging in predatory business practices applicable to CCAs, just like every other business.
CCAs provide an opportunity for growers to establish a vertically integrated business structure that runs all the way through the supply chain to the consumer. A CCA and its fully integrated entities are deemed a single business organization for financial and tax-reporting purposes. The financial benefits of such a structure can be extraordinary for the well-advised.
CCA’s Good or Better?
Currently, the most significant disadvantage for CCAs is a problem we discussed in our article Not Close To Ok. California’s cannabis regulators failed to establish a licensing process for CCAs. The regulators overlooked the fact this new form of a corporate entity must be licensed in order to engage in commercial cannabis activity. We are confident this error will eventually be corrected, although when is problematic. California’s cannabis regulatory agencies are not known for acting expeditiously except when saying no and when requesting more resources.
We want to close this article by mentioning a couple of opportunities based on CCAs that have been overlooked.
We were surprised to discover the California Department of Food and Agriculture (“CDFA”) had not recognized the usefulness of CCAs as a vehicle for the dissemination of regulatory information to growers. The use of grower organizations for information dissemination is a more efficient method of communication than communication to individual growers. We were surprised to learn CDFA had not actively supported the utilization of CCAs to make the implementation of cannabis regulation more efficient. CDFA missed an opportunity that it should have been obvious. Grower organizations are integral participants in the regulation of every other agricultural commodity in California. CDFA has a long history of working with growers organizations.
The second opportunity we want to mention is one we have not seen publically discussed. It is an opportunity we believe is incredibly important for California’s cannabis industry. We have never seen a discussion of the use of a CCA as the successor to a Proposition 215 Medical Cooperative. The enabling legislation for CCAs creates an opportunity to establish a successor organization to a Proposition 215 cooperative in which cultivators and consumers are members of the same legally recognized corporate organization. We can find no language in Title 10, or any other part of MAUCRSA, that prohibits the establishment of such an organization. Article 11 of Chapter 22 expressly allows the conversion of a Proposition 215 Medical Cooperative into a CCA.