Lessons June 30, 2018

Lessons June 30, 2018

Lessons June 30, 2018 – The news is full of articles about $350 million worth of cannabis being “Destroyed by California” …as if the state

Lessons June 30, 2018

was responsible for the destruction. It’s time that all of us take two steps back and reflect on the reality of what has transpired over the past eighteen months. Our purpose in writing this article is not to be critical of any stakeholder in the California commercial cannabis industry, rather we believe that it is important to be able to review a rigorous outline of “how we got here” before ascribing blame or fault. It should also provide background for what everyone might strive to avoid in the future.

Lessons June 30, 2018

In order to fully understand the significance of today’s events, we need to revisit the history of the legalization of cannabis in California, starting with Proposition 215[1].

Governor Brown signed the Medical Marijuana Regulation and Safety Act into law on October 09, 2015, and it became effective on January 01, 2016. The Act, composed of 3 bills (AB 266, AB 243, and SB 643) established a licensing and regulatory framework for the cultivation, manufacture, transportation, storage, distribution, and sale of medical cannabis in the State of California[2].

Subsequently, California voters passed the Adult Use of Marijuana Act (Proposition 64) in 2016, both acts designated responsibilities for oversight of commercial cannabis to several state agencies[3].

On June 27, 2017, California Governor Jerry Brown signed the cannabis trailer bill (also known as California Senate Bill 94). A trailer bill is a legislation that implements specific changes to the law to enact the state budget. Generally, a separate trailer bill is needed for each major area of budget appropriation, such as transportation, human services, education, revenue, or, in this case, cannabis. These bills typically are negotiated as part of the entire budget package each fiscal year.

In this instance, the cannabis trailer bill effectively merged the two existing cannabis bills—the Medical Cannabis Regulation and Safety Act and the Adult Use of Marijuana Act—into one streamlined bill: The Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA). Having one comprehensive state law will provide for a more unified and efficient regulatory process governing both medicinal and adult-use (recreational) cannabis. 

The regulatory agencies were tasked with specific mandates within the new cannabis regulatory scheme. CDFA was charged with the creation of CalCannabis to regulate cultivation activity[4]. BCC was tasked to develop the regulations associated with activities undertaken by Retail[5] [“Dispensaries”] and Distributors[6]. The statute continued to provide guidelines under which BCC would establish the regulatory framework[7]. The framework included a directive for cannabis sold at retail between January 1, 2018, and June 30, 2018, which stated

“Beginning January 1, 2018, a licensee may sell cannabis or cannabis products that have not been tested for a limited and finite time as determined by the bureau. The cannabis or cannabis products must have a label affixed to each package containing the cannabis or cannabis products that clearly states “This product has not been tested as required by the Medicinal and Adult-Use Cannabis Regulation and Safety Act” and must comply with any other requirement as determined by the bureau.”

BCC issued Emergency Regulations in November 2017 which provided The statute contained provisions for Quality Assurance, Inspection and Testing[8] and Packaging and Labeling[9].

Thus, the overarching for the regulatory framework and the transition rules were outlined almost two years ago as of the date of the article. For the sake of brevity, there are numerous other resources wherein the details of the first set of Emergency Regulations[10] can be reviewed. The Emergency Regulations were readopted in May 2018 with some modifications and they can be accessed here.

BCC issued a summary of the transition rules[11] which were to take effect on July 1, 2018, in early June. We published an article entitled Charitable Contributions – Cannabis on June 21, 2018, where we outlined a number of techniques and strategies that retailers could use to avoid the adverse impact of the July 1 transition rules. We were gratified that over forty of our existing clients and new clients availed themselves of planning opportunities we had described

Lessons June 30, 2018

[1] California Proposition 215, also known as the Medical Use of Cannabis Initiative or the Compassionate Use Act, was on the November 5, 1996, general election ballot in California as an initiated state statute where it was approved.

The passage of Proposition 215 is considered a significant victory for medical cannabis. It exempts patients and defined caregivers who possess or cultivate cannabis for medical treatment recommended by a physician from criminal laws which otherwise prohibit possession or cultivation of cannabis.

In May 2009, the U.S. Supreme Court declined to hear an appeal of a California state appellate ruling from 2008 that upheld Proposition 215 and concluded that California can decide whether to eliminate its own criminal penalties for medical cannabis regardless of federal law. The appellate ruling came about because of a lawsuit against Proposition 215 filed by San Diego and San Bernardino counties.

These counties objected to Proposition 215 on the grounds that it requires them, in their view, to condone drug use that is illegal under federal law. They also challenged a law that requires counties to issue identification cards to medical cannabis patients, so these patients can identify themselves to law enforcement officials as legally entitled to possess small amounts of cannabis. [ San Francisco Chronicle, “Solano to allow medical cannabis ID cards,” June 24, 2009]

Proposition 215 also led to the lawsuit, People v. Kelly.  This case was decided in January 2010 by the California Supreme Court, which ruled that the state of California cannot, through the legislative process, impose a state limit on medical cannabis that is more restrictive than what is allowed under Proposition 215. People v Kelly helps define laws governing the initiative process in California especially as it relates to legislative tampering.

The language that appeared on the ballot stated:

  • Exempts patients and defined caregivers who possess or cultivate cannabis for medical treatment recommended by a physician from criminal laws which otherwise prohibit possession or cultivation of cannabis.
  • Provides physicians who recommend the use of cannabis for medical treatment shall not be punished or denied any right or privilege.
  • Declares that measure not is construed to supersede prohibitions of conduct endangering others or to condone the diversion of cannabis for non-medical purposes.
  • Contains severability clause.

In 2004, the California State Legislature passed the Medical Cannabis Program Act (MMPA). The MMPA was intended to clarify which specific practices with regard to medical cannabis were to be considered lawful in the state. The MMPA:

  • Established a voluntary statewide identification card system;
  • Set limits on the amount of medical cannabis each cardholder could possess;
  • Laid out rules for the cultivation of medical cannabis by collectives and cooperatives.

In 2007, the California Fourth Appellate District ruled against the City of Garden Grove, and in favor of a medical cannabis patient (Felix Kha), saying that “it is not the job of the local police to enforce the federal drug laws.”

The case resulted from the seizure of medical cannabis from Kha by the Garden Grove police force in June 2005.

Kha was pulled over by the Garden Grove Police Department on June 10, 2005, and cited for possession of cannabis, despite Kha showing the officers proper documentation of his status as a medical cannabis patient.

The charge against Kha was subsequently dismissed, with the Superior Court of Orange County issuing an order to Garden Grove that the city must return to Kha 8 grams of medical cannabis that was seized from him by the police. The police, backed by the city of Garden Grove, refused to return Kha’s medicine and the city appealed.

In the 2007 state court decision, the court ruled that the federal Controlled Substance Act of 1970, enacted to combat recreational drug abuse and trafficking, did not intend to regulate the practice of medicine, “a task that falls within the traditional powers of the states.”

Before the California Fourth District Court of Appeal issued its decision, California Attorney General Jerry Brown filed a “friend of the court” brief on behalf of Kha’s right to possess his medicine. The justices noted they were convinced by Brown’s arguments that local agencies are bound by state laws in approaching medical cannabis.

The California Supreme Court denied a case review in March 2008, and Garden Grove then went to the United States Supreme Court, which turned the case down in late November 2008.

Medical cannabis advocates called the decision a huge victory in clarifying law enforcement’s obligation to uphold state law – in this case, Proposition 215.

[2] The Medical Marijuana Regulation and Safety Act established the Medical Cannabis Cultivation Program within the California Department of Food and Agriculture to license cultivators, establish conditions under which indoor and outdoor cultivation may occur, establish a track and trace program for reporting the movement of medical cannabis items through the distribution chain, and assist other state agencies in protecting the environment and public health.

The MMRSA tasked the following California Departments with establishing regulations for the medical cannabis industry:

  • Department of Food & Agriculture “CDFA” – Responsible for licensing cultivators and establishing a track and trace program through the Medical Cannabis Cultivation Program. “CalCannabis”.
  • Department of Public Health “CDPH” – Responsible for licensing laboratories and manufacturers of products, such as edibles through the Office of Medical Cannabis Safety “MCSB”.
  • Department of Consumer Affairs “DCA” – Responsible for licensing transporters, distributors, and dispensaries through the Bureau of Medical Marijuana Regulations. Which became the Bureau of Cannabis Control “BCC”.

[3] The California Department of Food and Agriculture (CDFA) was granted the authority to

  • establish a cannabis cultivation licensing process for the state, and
  • develop a track-and-trace system to record the movement of cannabis and cannabis products through the state’s supply chain.

As a result, CDFA created a new division called CalCannabis Cultivation Licensing, which is tasked with overseeing these projects.

[4] Regulations issued by the Department of Food and Agriculture governing the licensing of indoor, outdoor, nursery, special cottage, and mixed-light cultivation sites shall apply to licensed cultivators under this division. The Department of Food and Agriculture shall have the authority necessary for the implementation of the regulations it adopts pursuant to this division, including regulations governing the licensing of indoor, outdoor, mixed-light cultivation site, nursery, and special cottage cultivation.

(b) The regulations shall do all of the following:

(1) Provide that weighing or measuring devices used in connection with the sale or distribution of cannabis are required to meet standards equivalent to Division 5 (commencing with Section 12001).

(2) Require that cannabis cultivation by licensees is conducted in accordance with state and local laws.

(3) Establish procedures for the issuance and revocation of unique identifiers for activities associated with a cannabis cultivation license, pursuant to Chapter 6.5 (commencing with Section 26067). All cannabis shall be labeled with the unique identifier issued by the Department of Food and Agriculture.

(4) Prescribe standards, in consultation with the bureau, for the reporting of information as necessary related to unique identifiers pursuant to Chapter 6.5 (commencing with Section 26067).

(c) The Department of Food and Agriculture shall serve as the lead agency for purposes of the California Environmental Quality Act (Division 13 (commencing with Section 21000) of the Public Resources Code) related to the licensing of cannabis cultivation.

(d) The Department of Pesticide Regulation shall develop guidelines for the use of pesticides in the cultivation of cannabis and residue in harvested cannabis.

(e) A cannabis cultivator shall not use any pesticide that has been banned for use in the state.

(f) The regulations promulgated by the Department of Food and Agriculture under this division shall implement the requirements of subdivision(b) of Section 26060.1.

(g) The Department of Pesticide Regulation shall require that the application of pesticides or other pest control in connection with the indoor, outdoor, nursery, specialty cottage, or mixed-light cultivation of cannabis complies with Division 6 (commencing with Section 11401) of the Food and Agricultural Code and its implementing regulations.

[5] (1) “Retailer,” for the retail sale and delivery of cannabis or cannabis products to customers. A retailer shall have a licensed premises which is a physical location from which commercial cannabis activities are conducted. A retailer’s premises may be closed to the public. A retailer may conduct sales exclusively by delivery.

[6] (2) “Distributor,” for the distribution of cannabis and cannabis products. A distributor licensee shall be bonded and insured at a minimum level established by the licensing authority.

[7] (b) The bureau shall establish minimum security and transportation safety requirements for the commercial distribution and delivery of cannabis and cannabis products. Except as provided in subdivision (d) of Section 26110, the transportation of cannabis and cannabis products shall only be conducted by persons holding a distributor license under this division or employees of those persons. Transportation safety standards established by the bureau shall include, but not be limited to, minimum standards governing the types of vehicles in which cannabis and cannabis products may be distributed and delivered and minimum qualifications for persons eligible to operate such vehicles.

(c) The driver of a vehicle transporting or transferring cannabis or cannabis products shall be directly employed by a licensee authorized to transport or transfer cannabis or cannabis products.

(d) Notwithstanding any other law, all vehicles transporting cannabis and cannabis products for hire shall be required to have a valid motor carrier permit pursuant to Chapter 2 (commencing with Section 34620) of Division 14.85 of the Vehicle Code. The Department of the California Highway Patrol shall have authority over the safe operation of these vehicles, including, but not limited to, requiring licensees engaged in the transportation of cannabis or cannabis products to participate in the Basic Inspection of Terminals (BIT) program pursuant to Section 34501.12 of the Vehicle Code.

(e) Prior to transporting cannabis or cannabis products, a licensed distributor shall do both of the following:

  • Complete an electronic shipping manifest as prescribed by the licensing authority. The shipping manifest shall include the unique identifier, pursuant to Section 26069, issued by the Department of Food and Agriculture for the original cannabis product.
  • Securely transmit the manifest to the bureau and the licensee that will receive the cannabis product. The bureau shall inform the Department of Food and Agriculture of information pertaining to commercial cannabis activity for the purpose of the track and trace program identified in Section 26067.

(f) During transportation, the licensed distributor shall maintain a physical copy of the shipping manifest and make it available upon request to agents of the Department of Consumer Affairs and law enforcement officers.

(g) The licensee receiving the shipment shall maintain each electronic shipping manifest and shall make it available upon request to the Department of Consumer Affairs and any law enforcement officers.

(h) Upon receipt of the transported shipment, the licensee receiving the shipment shall submit to the licensing authority a record verifying receipt of the shipment and the details of the shipment.

(i) Transporting, or arranging for or facilitating the transport of, cannabis or cannabis products in violation of this chapter is grounds for disciplinary action against the license.

(j) Licensed retailers and microbusinesses, and licensed nonprofits under Section 26070.5 shall implement security measures reasonably designed to prevent unauthorized entrance into areas containing cannabis or cannabis products and theft of cannabis or cannabis products from the premises. These security measures shall include, but not be limited to, all of the following:

  • Prohibiting individuals from remaining on the licensee’s premises if they are not engaging in activity expressly related to the operations of the retailer.
  • Establishing limited access areas accessible only to authorized personnel.
  • Other than limited amounts of cannabis used for display purposes, samples, or immediate sale, storing all finished cannabis and cannabis products in a secured and locked room, safe, or vault, and in a manner reasonably designed to prevent diversion, theft, and loss.

(k) A retailer shall notify the licensing authority and the appropriate law enforcement authorities within 24 hours after discovering any of the following:

  • Significant discrepancies identified during inventory. The level of significance shall be determined by the bureau.
  • Diversion, theft, loss, or any criminal activity pertaining to the operation of the retailer.

(3) Diversion, theft, loss, or any criminal activity by any agent or employee of the retailer pertaining to the operation of the retailer

(4) The loss or unauthorized alteration of records related to cannabis or cannabis products, registered qualifying patients, primary caregivers, or retailer employees or agents.

(5) Any other breach of security.

(l) Beginning January 1, 2018, a licensee may sell cannabis or cannabis products that have not been tested for a limited and finite time as determined by the bureau. The cannabis or cannabis products must have a label affixed to each package containing the cannabis or cannabis products that clearly states, “This product has not been tested as required by the Medicinal and Adult-Use Cannabis Regulation and Safety Act” and must comply with any other requirement as determined by the bureau.

[8] (a) Cannabis batches are subject to quality assurance and testing prior to sale at a retailer, microbusiness, or nonprofit licensed under Section 26070.5, except for immature cannabis plants and seeds, as provided for in this division.

(b) A licensee that holds a valid distributor license may act as the distributor for the licensee’s cannabis and cannabis products.

(c) The distributor shall store, as determined by the bureau, the cannabis batches on the premises of the distributor before testing and continues until either of the following occurs:

  • The cannabis batch passes the testing requirements pursuant to this division and is transported to a licensed retailer.
  • The cannabis batch fails the testing requirements pursuant to this division and is destroyed or transported to a manufacturer for remediation as allowed by the bureau or the Department of Public Health.

(d) The distributor shall arrange for a testing laboratory to obtain a representative sample of each cannabis batch at the distributor’s licensed premises. After obtaining the sample, the testing laboratory representative shall maintain custody of the sample and transport it to the testing laboratory.

(e) Upon issuance of a certificate of analysis by the testing laboratory that the cannabis batch has passed the testing requirements pursuant to this division, the distributor shall conduct a quality assurance review before distribution to ensure the labeling and packaging of the cannabis and cannabis products conform to the requirements of this division.

(f)

(1) There shall be a quality assurance compliance monitor who is an employee or contractor of the bureau and who shall not hold a license in any category or own or have an ownership interest in a licensee or the premises of a licensee.

(2)The quality assurance compliance monitor shall conduct random quality assurance reviews at a distributor’s licensed premises before distribution to ensure the labeling and packaging of the cannabis and cannabis products conform to the requirements of this division.

(3) The quality assurance compliance monitor shall have access to all records and test results required of a licensee by law in order to conduct quality assurance analysis and to confirm test results. All records of inspection and verification by the quality assurance compliance monitor shall be provided to the bureau. Failure to comply shall be noted by the quality assurance compliance monitor for further investigation. Violations shall be reported to the bureau. The quality assurance compliance monitor shall also verify the tax payments collected and paid under Sections 34011 and 34012 of the Revenue and Tax Code are accurate. The monitor shall also have access to the inputs and assumptions in the track and trace system and shall be able to verify the accuracy of those and that they are commensurate with the tax payments.

(g) After testing, all cannabis and cannabis products fit for sale may be transported only from the distributor’s premises to the premises of a licensed retailer, microbusiness, or nonprofit.

(h) A licensee is not required to sell cannabis or cannabis products to a distributor and may directly contract for sale with a licensee authorized to sell cannabis and cannabis products to purchasers.

(i) A distributor performing services pursuant to this section may collect a fee from the licensee for the services provided. The fee may include but is not limited to, the costs incurred for laboratory testing. A distributor may also collect applicable state or local taxes and fees.

(j) This section does not prohibit a licensee from performing testing on the licensee’s premises for the purposes of quality assurance of the product in conjunction with reasonable business operations. The testing conducted on the licensee’s premises by the licensee does not meet the testing requirements pursuant to this division.

[9] (a) Prior to delivery or sale at a retailer, cannabis and cannabis products shall be labeled and placed in a resealable, tamper-evident, child-resistant package and shall include a unique identifier for the purposes of identifying and tracking cannabis and cannabis products.

(b) Packages and labels shall not be made to be attractive to children.

(c) All cannabis and cannabis product labels and inserts shall include the following information prominently displayed in a clear and legible fashion in accordance with the requirements, including font size, prescribed by the bureau or the State Department of Public Health:

  • The following statements, in bold print:
  • For cannabis: “GOVERNMENT WARNING: THIS PACKAGE CONTAINS CANNABIS, A SCHEDULE I CONTROLLED SUBSTANCE. KEEP OUT OF REACH OF CHILDREN AND ANIMALS. CANNABIS MAY ONLY BE POSSESSED OR CONSUMED BY PERSONS 21 YEARS OF AGE OR OLDER UNLESS THE PERSON IS A QUALIFIED PATIENT. CANNABIS USE WHILE PREGNANT OR BREASTFEEDING MAY BE HARMFUL. CONSUMPTION OF CANNABIS IMPAIRS YOUR ABILITY TO DRIVE AND OPERATE MACHINERY. PLEASE USE EXTREME CAUTION.”
  • For cannabis products: “GOVERNMENT WARNING: THIS PRODUCT CONTAINS CANNABIS, A SCHEDULE I CONTROLLED SUBSTANCE. KEEP OUT OF REACH OF CHILDREN AND ANIMALS. CANNABIS PRODUCTS MAY ONLY BE POSSESSED OR CONSUMED BY PERSONS 21 YEARS OF AGE OR OLDER UNLESS THE PERSON IS A QUALIFIED PATIENT. THE INTOXICATING EFFECTS OF CANNABIS PRODUCTS MAY BE DELAYED UP TO TWO HOURS. CANNABIS USE WHILE PREGNANT OR BREASTFEEDING MAY BE HARMFUL. CONSUMPTION OF CANNABIS PRODUCTS IMPAIRS YOUR ABILITY TO DRIVE AND OPERATE MACHINERY. PLEASE USE EXTREME CAUTION.”
  • For packages containing only dried flower, the net weight of cannabis in the package.

Identification of the source and date of cultivation, the type of cannabis or cannabis product and the date of manufacturing and packaging.

The appellation of origin, if any.

  • List of pharmacologically active ingredients, including, but not limited to, tetrahydrocannabinol (THC), cannabidiol (CBD), and other cannabinoid content, the THC and another cannabinoid amount in milligrams per serving, servings per package, and the THC and another cannabinoid amount in milligrams for the package total.
  • A warning if nuts or other known allergens are used.
  1. Information associated with the unique identifier issued by the Department of Food and Agriculture.
  2. For a medicinal cannabis product sold at a retailer, the statement “FOR MEDICAL USE ONLY.”
  • Any other requirement set by the bureau or the State Department of Public Health.

(d) Only generic food names may be used to describe the ingredients in edible cannabis products.

(e) In the event the Attorney General determines that cannabis is no longer a Schedule I controlled substance under federal law, the label prescribed in subdivision (c) shall no longer require a statement that cannabis is a Schedule I controlled substance.

An additional section addresses misbranding

A cannabis product is misbranded if it is any of the following:

  • Manufactured, packed, or held in this state in manufacturing premises not duly licensed as provided in this division.
  • Its labeling is false or misleading in any particular.

Its labeling or packaging does not conform to the requirements of Section 26120 or any other labeling or packaging requirement established pursuant to this division.

  • (b) It is unlawful for any person to manufacture, sell, deliver, hold, or offer for sale a cannabis product that is misbranded. (c) It is unlawful for any person to misbrand a cannabis product.
  • (d) It is unlawful for any person to receive in commerce a cannabis product that is misbranded or to deliver or offer for delivery of any such cannabis product.

[10] Text of Emergency Regulations November 17. 2017

[11] BCC – End of Transition Rules

**INGREDIENTS AND APPEARANCE OF CANNABIS PRODUCTS:**

Beginning July 1, 2018, a retailer may only sell cannabis products that meet the requirements set by the California Department of Public Health for ingredients or appearance.

The requirements listed above can also be found in the transition period fact sheet located here on our website: http://www.bcc.ca.gov/about_us/documents/transition_period_fact_sheet.pdf

Those looking to get in touch with the Bureau of Cannabis Control can call our Call Center at (833) 768-5880, or send an email to [email protected]

Source: [BCC Transition Rules] (http://www.bcc.ca.gov/about_us/documents/transition_period_fact_sheet.pdf)

Lessons June 30, 2018

TRANSITION RULE CHANGES FROM CDPH MSCB

**Summary of Proposed Changes**

**“Adult Use” and “Medicinal Use” License Categories**
The transition period includes a provision that businesses can operate with each other regardless of the adult-use (A) or medicinal (M) designation on their license. CDPH proposes making this provision permanent. Applicants will be able to submit one license application to manufacture both “A” and “M” products on their manufacturing premises and pay one licensing fee.

Operations, processes and requirements for cannabis manufacturers are the same for both the adult-use and medicinal markets. For this reason, this package proposes that:

  • Businesses can conduct cannabis commercial business with other licensees regardless of the A or M designation.
  • Cannabis manufacturers will be required to label cannabis products that are over 1,000 mg for “Medical Use Only” prior to sending the product to the distributor.

**Incorporation of Shared-Use Facilities**
Emergency regulations for shared-use cannabis manufacturing facilities went into effect on April 13, 2018. CDPH references those regulations in this re-adoption package.

**Other Changes**
Minor technical and grammatical edits were made throughout the text to provide clarification about the requirements and to better align the regulations with the statutory language

Lessons June 30, 2018

BCC

Lessons June 30, 2018

Author: abizcannabis

Managing Director & CEO of integrated transactional financial advisory, tax, and technology consulting firm - aBIZinaBOX Inc New York, Chicago, and OaklandCPA.CITP.CISM.CGEIT.CGMAExpertise with: Alt. Investments/Private Equity, Real Estate, Professional Services, CA Cannabis, Tech Start-Ups and Distressed Assets/DebtTechnology Certifications including:Advanced & High Complexity Cloud Integrator AICPA PCPS, CAQ,, IMTA, CITP ISACA CGEIT, CISMState CPA Societies in California, Florida, Illinois, New York and TexasExpertise with Regulatory Compliance - US - HIPAA, FINRA, SEC Rule 17(a)(3)/(4), eDiscovery, FINCEN - EU- EBA, ESMA, EIOPA UK - BoE, PRA, FCA