California’s Adopted Emergency Cannabis Regulations: What Made the Cut

By Hilary Bricken, Principle, Harris Bricken

We wrote a couple of times about the Department of Cannabis Control’s (DCC) proposed emergency regulations. See here and here. Under those regulations, some interesting changes were proposed around the definitions of owners and financial interest holders, alongside restrictions on license stacking on “contiguous” premises (among other things).

On September 15, 2021, the DCC submitted to the Office of Administrative Law (OAL) an action to adopt its emergency regulations that “consolidate, clarify, and make consistent licensing and enforcement criteria for commercial cannabis businesses, including cultivators, manufacturers, distributors, retailers, microbusinesses, testing laboratories, cannabis event organizers, and temporary cannabis events.” The OAL approved the emergency regulations and filed them with the Secretary of State on September 27, 2021. These adopted emergency regulations are now in effect.

In this adopted version of the emergency regulations here’s what made (and didn’t make) the cut:

We now have a definition of “non-volatile solvent” that actually includes examples. Previously, only “volatile solvent” contained examples in its definition. “Non-volatile solvent” includes carbon dioxide, ethanol, and nonhydrocarbon-based or other solvents such as water, vegetable glycerin, vegetable oil, animal fat, and glycerin. Cultivation licensees are allowed to have “licensed premises” within private residences (that doesn’t mean though that local law will permit that kind of set up, which is totally city and county dependent). The reason for this change is, according to the DCC, “. . . because current cultivation licensees have premises that are located within a private residence. Thus, the [DCC] determined that it would not be appropriate to implement this requirement at this time.” Regarding provisional cultivation licenses, the de-facto anti-stacking regulation is now in effect. Essentially, after January 1, 2022  until June 30, 2022, the DCC won’t issue or renew a provisional cultivation license if, among other things, “Issuance of the license would . . . cause the commercial cannabis business to hold multiple cultivation licenses on contiguous premises to exceed one acre of total canopy for outdoor cultivation, or 22,000 square feet for mixed-light or indoor cultivation . . . premises will be considered contiguous if they are connected, touching, or adjoining.” As we previously pointed out, the DCC will have to decide how they enforce this regulation given the number of ways it can likely be manipulated by cultivators. From July 1, 2022 and indefinitely onward (it appears), the same rule is still in effect. The curve ball will be when Type 5 cultivation licenses (larger than an acre outdoor or more than 22,000 SF indoor per statute) come alive in 2023. Having to execute a cannabis labor peace agreement within 60 days of a cannabis company securing its 20th employee also made the cut. The DCC ditched its wonky example for “aggregate ownership” in its definition of owner. The example is now “. . . a person who owns 10 percent of the stock in a commercial cannabis business as an individual shareholder and 100 percent of the stock in an entity that owns 10 percent of the stock in the same commercial cannabis business has a 20 percent aggregate ownership interest in the commercial cannabis business.” Regarding the overall “owner” definition, the DCC basically kept pace with the BCC definition of the word, expressly including trustees of a trust that owns a commercial cannabis business. In the previous set of emergency regulations, the DCC was contemplating defining owner to include “any individual with the authority to provide strategic direction and oversight for the overall operations of the commercial cannabis business . . . ” and “an individual with the authority to execute contracts on behalf of the commercial cannabis business.” Good call, DCC, to nix these two examples from the definition. Regarding financial interest holders (FIHs), folks or entities in receipt of, or entitled to receive, 10% of the “profits” of the cannabis business are still going to be FIHs. And the threshold for non-disclosure of individuals or entities in publicly traded or private companies at 10% or less also stuck. Very interestingly, the DCC removed as FIHs “A person that contracts with the cannabis business to cultivate, manufacture, package, or label cannabis or cannabis products under that person’s brand name.” So, on its face, cannabis IP licensing agreements may not necessarily be disclosable again unless there’s a percentage royalty involved or any of the other FIH or ownership disclosures are triggered by the deal. Regarding the submission of cultivation premises diagrams to the DCC, if you’re a cultivator, they must include canopy areas (which was always the case), but if you’re using a shelving system, that also needs to be detailed in the diagram now with ” . .  the surface area of each level shall be included in the total canopy calculation”. On a high note though, cultivators will no longer have to pay any fees for any premises modifications. The DCC was paying close attention to industry issues with branded merch. In the proposed emergency regs, “Branded merchandise” was defined as “non-consumable consumer goods utilized by a licensee for advertising and marketing purposes. Examples of branded merchandise include clothing, bags, pens, keychains, mugs, water bottles, lanyards, stickers, pins, and posters. “Branded merchandise” does not include items containing cannabis or any items that are considered food as defined by Health and Safety Code section 109935. That definition remains. The change is that after December 31, 2021 (which previously wasn’t the case as there was no grace period), “branded merchandise must have the license number of the responsible licensee permanently affixed to the outside of the merchandise, legible, and clearly visible from the outside of the merchandise”. According to the DCC, licensees now have more/sufficient time to adhere to these changes. Regarding trade samples, the adopted rule essentially amounts to licensees being able to transfer designated trade samples to each other prior to purchase of any retail products. These trade samples don’t need to be in retail “final form”, and the trade sample designation cannot be changed after-the-fact in METRC. In the adopted rule, the DCC clarified that “live plants and seeds cannot be designated or provided to licensees as trade samples”. The use of supplemental labeling to identify manufacturer name and contact information on manufactured products won’t be allowed after December 31, 2021. As of that date, that information must go on to the informational panel on the cannabis product label. There are also somewhat revised filing forms for the DCC, which can be found here.

A lot of the consolidated emergency regulations create some much needed technical fixes to the rules, but they also introduce new ambiguities in places– the biggest one probably being the anti-license stacking regulation. I’m glad to see the DCC acting so quickly to take the reins and address some immediate industry issue, but the real kicker will be around the DCC’s interpretations of these regulations as time goes on and licensees put them to the test.

Re-published with the permission of Harris Bricken and The Canna Law Blog