Licensing Cannabis Cooperative Association

Licensing a Cannabis Cooperative Association

Licensing a Cannabis Cooperative Association  [“CCA”] with CalCannabis and CDTFA is a complicated multi-step process. We have invested substantial time and effort in nailing down the answers to how this works. Our efforts

included a direct conversation with the Director of Licensing with CalCannabis, and senior analysts with CDTFA responsible for Sales and Cannabis Excise Tax [“CET”].

Author: aBIZinaBOX Inc, CPA’s – Jordan S Zoot, CPA

A Cannabis Cooperative Association (“CCA”)[1] is a special type of corporation created by the California legislature for the benefit of small cannabis cultivators.  It is an organization that is owned and controlled by licensed cultivators to grow, harvest and move cannabis products into the marketplace.  Cannabis cooperatives share in the common purpose of supporting growers to meet their objectives of having thriving and sustainable businesses that are resilient and can adapt to the changing needs of the members.  Self-reliance and self-help are the features of cooperatives

We have written at length about SB 94 which stated

“Existing law permits 3 or more natural persons, a majority of whom are residents of this state, who are engaged in the production of certain products, including agricultural and farm products, to form a nonprofit cooperative Association for specified purposes. Existing law imposes various requirements on the formation, reorganization, operation, and dissolution on the Associations. This bill would authorize 3 or more natural persons, who are engaged in the cultivation of any cannabis product, to form an Association, defined as a cannabis cooperative for specified purposes. The bill would impose similar requirements on the formation, reorganization, operation, and dissolution on these Associations”

The three Incorporators of a CCA are required to hold cultivation licenses[2] which have been issued prior to the formation of the CCA. There are specific requirements for the content of the Certificate of Incorporation[3] and the By-Laws[4] of a CCA.  A CCA is established as a corporation by filing Articles of Incorporation with the California Secretary of State [“CASOS”].  CASOS has created a form[5] of Articles of Incorporation for a CCA.  The Incorporators of the CCA may prepare their own form of Articles of Incorporation.  The Incorporators of a CCA must prepare their own Articles if provisions are required that are not included in the form provided by the CASOS. The link to the California Secretary of State’s Form ARTS-CCA can be found here.

Once Articles of Incorporation have been filed with the CASOS, the next step is to obtain a Federal Employer Identification Number [“FEIN”] from the Internal Revenue Service [“IRS”].  Once a FEIN has been obtained, the CCA will need to apply for registration as a licensee with the CalCannabis unit of the California Dept. of Agriculture [“CDFA”].  The CCA also must obtain a Seller’s Permit for Sales Tax and a Cannabis Permit from the California Dept. of Tax and Fee Administration [“CDTFA”] is it is engaged in distribution activities.

A CCA must complete a regular application[6] with CalCannabis[7] in order to register with the CDFA as a CCA.  The CDFA has not yet modified its application form sufficiently to readily accommodate all applications by CCAs for registration.  The CDFA added a Box to Section C to identify CCA applicants.  However, there is no Application Fee in Section B.  We believe the identification of an applicant as a CCA should be in Section A.  The existing CDFA form can be used by identifying the applicant as a medical or adult-use cultivator in Section A and as a CCA in Section C if the CDFA then set an application fee.  The CDFA could establish an application fee through a press release.  The CDFA could then process the applications of most CCAs using its existing form.

It is our understanding many CCA will select “Processor” as the license choice in Section B – License Types and Application Fees, although there is no requirement that a CCA engages in Processing.  A CCA will then select Corporation for Business Entity Structure in Section C, although this information is redundant.  All CCAs are corporations.  All CCAs are subject to the general provisions of the Corporations Code except in instances in which specific provisions for CCAs are set forth in Chapter 22, Division 10.

The CCA must answer the question “Is the applicant business entity a cannabis cooperative association as defined in Chapter 22 of the Business and Professions Code?” in the affirmative.  The CCA is also going to have to attach a list of members of the CCA which must include the member’s name, address, and cultivation license.  In most instances, the members will be the Incorporators plus any additional members who have joined the CCA.  The CCA will also be required to identify: all cannabis licenses owned by the CCA; a designated responsible party; an agent for service of process; owner information relating to the CCA and any associated businesses; and owner and financial interests in licensed cannabis businesses.  Please carefully note that individuals may be treated as owners of a cannabis business who do not hold or own equity or financial interests, for example, a Chief Executive Officer of a corporation.

The balance of the license application is then completed in the same manner as any other cultivation license applicant, although in many instances the detailed information relating to the cultivation activities of the licensee will be inapplicable because all of the members of the CCA are licensed cultivators holding separate licenses from the CCA’s license.

A Processor[8] is required to include in its application the following: Property Diagram[9]; Premises[10] Diagram[11]; and Waste Management[12] Plan[13]

The CCA’s filing for a “Processor License” will permit the CCA to engage in

 “all activities associated with trimming, drying, curing, grading or packaging of cannabis and nonmanufactured cannabis products. No size or location limits”.

An application for a Processor license by a cultivator includes a detailed description of the “processing operation” as part of the cultivator’s Cultivation Plan.  A CCA may have a cultivator member that has a Processor license that the CCA will utilize.  A CCA may also utilize the services of a licensed third-party processor in lieu of securing a license as a Processor.

A CCA may separately apply for and hold a Manufacturing License from the Manufactured Cannabis Safety Board [“MCSB”] unit of the California Dept. of Public Health [“CDPH”], and/or a Distribution License from the Bureau of Cannabis Control [“BCC”].

Once the entity has completed and filed with CalCannabis, it will need to apply for a Seller’s Permit with CDTFA.  The Seller’s Permit Application should be completed first, then the CCA may apply for a Cannabis Permit if it is going to engage in distribution activity.  At this point, we discovered that if the CCA is going to apply for a Cannabis Permit for more than one type of cannabis license, they will need to submit separate application for each type of permit, as selecting more than one type of cannabis license causes the online application process to default to the Microbusiness license which is NOT what is required.

We have prepared this Post in order to provide a comprehensive road map for the formation and organization of a CCA. Questions remain, however, that need to be addressed by CalCannabis.  If you have questions or comments, we would certainly like to hear about them.

[1] SB 94 added Stats. 2017, Ch. 27, Sec. 107, (Effective June 27, 2017) – Sections 26220-26231.2 were added to the Business and Professions Code to enable the establishment of this special type of corporation.

[2] The cultivation licenses are required to be either Type 1A or Type 2A as the CCA statute specifies outdoor growers

Type 1A = Cultivation; Specialty outdoor; – Small. Outdoor cultivation using no artificial lighting of less than or equal to 5,000 square feet of total canopy size on one premise, or up to 50 mature plants on noncontiguous plots.

Type 1B = Cultivation; Specialty mixed-light; Small. Cultivation using a combination of natural and supplemental artificial lighting at a maximum threshold to be determined by the licensing authority, of less than or equal to 5,000 square feet of total canopy size on one premise

Type 2A = Cultivation; Outdoor; Small. Outdoor cultivation using no artificial lighting between 5,001 and 10,000 square feet, inclusive, of total canopy size on one premise.

Type 2B = Cultivation; Mixed – light; Small. Cultivation using a combination of natural and supplemental artificial lighting at a maximum threshold to be determined by the licensing authority, between 5,001 and 10,000 square feet, inclusive, of total canopy size on one premise.

[3] The Articles of Incorporation of a Cannabis Cooperative Association must be signed by individuals engaged in the cultivation of cannabis products, who are incorporating an Association pursuant to Chapter 22, and must state all of the following:

The name of the Association.

The purposes for which it is formed.

The city, county, or city and county where the principal office for the transaction of business of the Association is to be located. The number of Directors of the Association, which shall not be less than three, and the names and addresses of the persons who are to serve as first Directors. If it is desired that the first Directors shall serve for terms of different lengths, the term for which each person so named to serve shall also be stated.

If organized with shares of stock, the number of shares that may be issued and if the shares are to have a par value, the par value of each share, and the aggregate par value of all shares. If the shares are to be without par value, it shall be so stated.

If the shares of stock are to be classified, a description of the classes of shares and a statement of the number of shares of each kind or class and the nature and extent of the preferences, rights, privileges, and restrictions that are granted to or imposed upon the holders of the respective classes of stock. Except as to the matters and things so stated, no distinction shall exist between the classes of stock or the holders of them. One class of stock shall always be known as common stock and voting power may be restricted to holders of common stock.

[4] Each Association shall, within 30 days after its incorporation, adopt for its governance and management, a set of Bylaws.

The vote or written assent of Shareholders or Members that hold at least a majority of the voting power is necessary to adopt the Bylaws and is effectual to repeal or amend a Bylaw or to adopt an additional Bylaw. The power to repeal and amend the Bylaws, and adopt new Bylaws, may, by a similar vote, or similarly written assent, be delegated to the Board of Directors, which authority may, by a similar vote, or similarly written assent, be revoked.

The Bylaws may prescribe the time, place, and manner of calling and conducting its meetings. Meetings of Members or Stockholders shall be held at the place as provided in the Bylaws, or, if no provision is made, in the city, county, or city and county where the principal place of business is located at a place designated by the Board of Directors.

Can be a member of an Association without Capital Stock, or a Common Stockholder of an association organized with shares of stock.

Types of Permitted Shareholders – Minimum of three Founders

Meetings of the Board of Directors may be held at any place within or without the state that is fixed by a Quorum of the Board of Directors unless otherwise provided in the Articles of Incorporation or Bylaws. The Bylaws may prescribe the number of Stockholders, Directors, or Members that constitutes a quorum.

The Bylaws may prescribe the right of Members or Stockholders to vote by proxy or by mail or both, and the conditions, manner, form, and effects of those votes. The right of Members or Stockholders to cumulate their votes and the prohibition, if any, of cumulative voting.

The Bylaws may prescribe the qualifications, compensation, duties, and term of office of Directors and officers and the time of their election. The number of Directors set forth in the articles of incorporation shall be either a fixed number or a variable number. If a fixed number, it shall not be less than three, and if a variable number, the stated minimum shall not be less than three and the stated maximum shall not be greater than two times the stated minimum minus one.

The number of Directors may also be set forth in the Bylaws either as a fixed number or as a variable number subject to the same limitations. After shares have been issued or Members have been admitted, any adoption or amendment of the Bylaw provision shall be approved by the outstanding shares as provided in Section 152 of the Corporations Code. In the event of an inconsistency between an article provision and a Bylaw provision, the provision more recently adopted or amended shall prevail.

If a variable number of Directors is set forth in the articles of incorporation or the Bylaws, the exact number of Directors shall be fixed, within the limits specified, by approval of the Board of Directors or the shareholders as provided in Section 153 of the Corporations Code in the manner designated in the Bylaws.

The Bylaws may prescribe penalties for violations of the Bylaws. The Bylaws may prescribe the amount of entrance, organization, and Membership fees if any, the manner and method of collection of the fees, and the purposes for which they may be used.

The Bylaws may prescribe the amount that each member or stockholder shall be required to pay annually, or from time to time, if at all, to carry on the business of the Association, the charge, if any, to be paid by each member or stockholder for services that are rendered by the Association to him, the time of payment and the manner of collection, and the marketing contract between the Association and its Members or Stockholders that every member or stockholder may be required to sign.

The Bylaws may prescribe the number of dividends if any, that may be declared on the stock or Membership capital.

[5] The form for the incorporation of a CCA is ARTS-CCA. The form instructions are available here. There is information on changing the form of prior not-for-profit collectives into a CCA contained in the FAQ’s which follow. The CASOS has published a set of FAQs about Cannabis Business Entities that you can read here.

[6] Form CDFA- LIC-001

[7] The online application for an Annual License can be found here and the paper version can be found here.

[8] The Processing Area is the area designated to process cannabis on the licensed premises.  Processing includes drying, curing, grading, trimming, storing, packaging, and labeling of nonmanufactured cannabis products.

[9] The Property Diagram is a diagram of the whole property associated with the proposed premises. This is the “zoomed out” diagram of the proposed premises. If the proposed premises spans multiple parcels, all parcel numbers must be identified on the diagram. The property diagram requirements are the same for all license types and a complete diagram must feature the following:

Parcel boundaries

Premises boundaries

Perimeter dimensions of the parcel(s) and premises

Entrances to the parcel(s) and premises

Exits to the parcel(s) and premises

All roads

All water crossings (including seasonal streams)

If diverting from a waterbody, groundwater well, or rainwater-capture system, including locations of and coordinates (in latitude and longitude or in the California Coordinate System) for Water storage facilities (label the type and storage capacity of each facility);

Water sources; and

Water delivery systems (include pump and distribution systems)

Assessor’s Parcel Number(s) (APN)

Non-cannabis activities occurring on-site In addition to the items listed above, a property diagram must be to scale, all measurements must be in feet, and there may not be any highlighting

[10] The Premises is the designated structure (or structures) and land specified in the application that is owned, leased, or otherwise held under the control of the applicant or licensee where the commercial cannabis activity will be or is conducted. The premises shall be a contiguous area and only occupied by one licensee.

[11] The Premises Diagram is the zoomed in a diagram of the processing premises.  This diagram is must include Processing area; Packaging area; Composting area (as applicable); Secure cannabis waste-storage area (as applicable); and Harvest storage area.

[12] Waste Management describes how cannabis waste generated on the licensed premises is managed.

[13] Waste management plans must identify the method(s) for managing cannabis waste generated on the premises. Cannabis waste is organic waste, meaning food waste, green waste, landscape and pruning waste, nonhazardous-wood waste, and food-soiled paper waste that is mixed in with food waste. To meet the requirements of a waste management plan, simply refer to the list below and identify the method(s) for managing cannabis waste.

On-premises composting

Collection and processing by a local agency, a waste hauler franchised or contracted by a local agency, or a private waste hauler permitted by a local agency

Self-haul to one or more of the following:

a manned fully permitted solid-waste landfill or transformation facility

a manned fully permitted composting facility or manned composting operation

a manned fully permitted in-vessel digestion facility or manned in-vessel digestion operation

a manned fully permitted transfer/processing facility or manned transfer/processing operation

a manned fully permitted chip-and-grind operation or facility

Licensing Cannabis Cooperative Association

See our other CCA pieces