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Planning to Conduct Commercial Cannabis Activity in 2018? You Will Need a State License.

Within California’s cannabis community, there is a lot of anxiety over what will happen on January 1, 2018, the date when the the initial temporary licenses for commercial cannabis businesses issued by the State of California become effective. Under the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA), California’s governing cannabis law which was created in 2017 as a result of a “merger” between the state’s medical and adult-use cannabis laws (by repealing the legislatively-created MCRSA and amending the voter-approved AUMA), it is unlawful to conduct commercial cannabis activity without a state-issued license on or after January 1, 2018.

What exactly is commercial cannabis activity?  Section 26001 of the Business and Professions Code provides an expansive definition which encompasses almost every conceivable cannabis-related activity:

“Commercial cannabis activity” includes the cultivation, possession, manufacture, distribution, processing, storing, laboratory testing, packaging, labeling, transportation, delivery or sale of cannabis and cannabis products as provided for in this division.

The reference to “this division” is a reference to Division 10 of the Business and Professions Code, which pertains to “Cannabis” and contains the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA).

Section 26038 of the Business and Professions Code, which was originally in AUMA and was amended in MAUCRSA, states:

(a) A person engaging in commercial cannabis activity without a license required by this division shall be subject to civil penalties of up to three times the amount of the license fee for each violation, and the court may order the destruction of cannabis associated with that violation in accordance with Section 11479 of the Health and Safety Code. Each day of operation shall constitute a separate violation of this section. All civil penalties imposed and collected pursuant to this section by a licensing authority shall be deposited into the General Fund except as provided in subdivision (b). A violator shall be responsible for the cost of the destruction of cannabis associated with his or her violation.

(b) If an action for civil penalties is brought against a person pursuant to this division by the Attorney General on behalf of the people, the penalty collected shall be deposited into the General Fund. If the action is brought by a district attorney or county counsel, the penalty shall first be used to reimburse the district attorney or county counsel for the costs of bringing the action for civil penalties, with the remainder, if any, to be deposited into the General Fund. If the action is brought by a city attorney or city prosecutor, the penalty collected shall first be used to reimburse the city attorney or city prosecutor for the costs of bringing the action for civil penalties, with the remainder, if any, to be deposited into the General Fund.

(c) Notwithstanding subdivision (a), criminal penalties shall continue to apply to an unlicensed person engaging in commercial cannabis activity in violation of this division.

Business and Professions Code §26038 (Emphasis added).

Subsection (a) says that any person – defined by MAUCRSA as including “any individual, firm, partnership, joint venture, association, corporation, limited liability company, estate, trust, business trust, receiver, syndicate, or any other group or combination acting as a unit, and the plural as well as the singular,” – who engages in unlicensed commercial cannabis activity shall be subject to civil penalties up to three times the amount of the license fee for each violation, and that each day equals a separate violation. These license fees can range from $500 to $125,000 depending on the type of unlicensed activity the person is engaging in. Subsection (b) describes the ways in which the civil penalties can be brought: by the Attorney General, a district attorney or county counsel, or a city attorney or city prosecutor. Subsection (c) makes clear that criminal penalties shall apply in addition to the civil penalties imposed on persons engaging in unlicensed commercial cannabis activity.

What criminal penalties is this referring to, you may ask? The standard criminal penalties that apply to illegal cannabis activities, of course. Proposition 64 did not completely legalize marijuana; instead, it reduced the penalties for many, but not all, marijuana-related offenses. For example, possession of cannabis for sale is a misdemeanor (and in some circumstances, a “wobbler” – meaning it could be charged as a misdemeanor or a felony) under Health and Safety Code § 11359, “except as otherwise provided by law.” Selling cannabis is also a misdemeanor or a “wobbler” under Health and Safety Code §11360, “except as otherwise provided by law.” Penalties for violating these statutes could include imprisonment of up to four years. The phrase “except as otherwise provided by law” was added to these provisions when state licensing became a possibility, to exempt state-licensed businesses from being penalized for activity which they have been authorized by the state to do. However, this is not so broad as to cover cannabis businesses operating with only a local permit and no state license.

You might be wondering what happened to the collective/cooperative defense. That defense is still contained in Section 11362.775 of the Health and Safety Code, though it is only in effect until one year after the Bureau of Cannabis Control starts issuing cannabis licenses (i.e., until January 2019). That provision reads, in relevant part:

(a) Subject to subdivision (d), qualified patients, persons with valid identification cards, and the designated primary caregivers of qualified patients and persons with identification cards, who associate within the State of California in order collectively or cooperatively to cultivate cannabis for medicinal purposes, shall not solely on the basis of that fact be subject to state criminal sanctions under Section 11357, 11358, 11359, 11360, 11366, 11366.5, or 11570.

(d) This section shall remain in effect only until one year after the Bureau of Cannabis Control posts a notice on its Internet Web site that the licensing authorities have commenced issuing licenses pursuant to the Medicinal and Adult-Use Cannabis Regulation and Safety Act (Division 10 (commencing with Section 26000) of the Business and Professions Code).

(e) This section is repealed one year after the date upon which the notice is posted pursuant to subdivision (d).

Health and Safety Code §11362.775 (Emphasis added).

 This Section offers protection for qualified patients and primary caregivers who collectively associate to cultivate medical cannabis and/or manufacture medicinal cannabis products–however (and this is a BIG however), the protection is only against criminal penalties, not civil penalties such as the ones mentioned above for violating Business and Professions Code §26038.

In order to benefit from this protection under MAUCRSA, a primary caregiver or collective without a state license must abide by the following restrictions:

  • Cannabis may not be cultivated, possessed, stored, manufactured, transported, or donated for more than five (5) qualified patients by their primary caregiver. (Business and Professions Code § 26033)
  • No remuneration may be received by the caregiver for these activities other than compensation for actual expenses, including reasonable compensation incurred for services provided to an eligible qualified patient or person with an identification card to enable that person to use cannabis under this article, or for payment for out-of-pocket expenses incurred in providing those services. (Health and Safety Code § 11362.765; Business and Professions Code § 26033)
  • Qualified patients and primary caregivers may not possess more than eight ounces of dried cannabis per qualified patient. In addition, a qualified patient or primary caregiver may also maintain no more than six mature or 12 immature cannabis plants per qualified patient. However, if a qualified patient or primary caregiver has a physician’s recommendation that this quantity does not meet the qualified patient’s medical needs, the qualified patient or primary caregiver may possess an amount of cannabis consistent with the patient’s needs. (Health and Safety Code §11362.77).  These numerical limitations on how much medical cannabis could be cultivated and possessed were held to violate the California Constitution by the California Supreme Court in People v. Kelly (2010) when the numerical limitations burden the defense; however, the Kelly court recognized that staying within the numerical limitations provided a safe harbor.
  • Collectives, patients, and caregivers must also comply with local cannabis laws as applicable. (Health and Safety Code § 11362.83)

MAUCRSA’s limitation that caregivers are limited to 5 qualified patients is subject to legal challenge under the California Supreme Court’s decision in People v. Kelly (2010), which held that the state legislature could not amend Prop. 215, a voter initiative, without voter approval, which is essentially what the legislature attempted to do by placing limits on the number of qualified patients for whom a caregiver may cultivate.  (As a practical matter, there may not be enough time in the day for a caregiver to provide for multiple patients given the stringent level of caregiving set forth in the California Supreme Court’s 2008 Mentch opinion.)

In order to obtain a state license, you must first obtain a local permit or other authorization, and cannot be violating any local ordinances. (Technically, if your jurisdiction is silent and has neither a ban on commercial cannabis activity or a regulatory scheme in place, you could apply for a state license and may be able to get one if your local jurisdiction approves of it, though this scenario will be rare.) When you apply for a state license, the state licensing agency will contact your jurisdiction to ask whether you are in compliance with local laws, and if not you will not be able to get a state license.

Additionally, Applicants for state cannabis licenses should figure out how they want their entity structured before they apply for a state license. This is because applicants must notify the Bureau in writing of any changes to an application within 10 days, and if one or more owners of the applicant entity change, a new license application and application fee is required. A change in ownership occurs when a new person meets the definition of “ownership,” which is as follows:

(b) “Owner” means any of the following:

(1) A person with an aggregate ownership interest of 20 percent or more in the person applying for a license or a licensee, unless the interest is solely a security, lien, encumbrance.

(2) The chief executive officer of a nonprofit or other entity.

(3) A member of the board of directors of a nonprofit.

(4) An individual who will be participating in the direction, control, or management of the person applying for a license. An owner who is an individual participating in the direction, control, or management of the commercial cannabis business includes any of the following:

(A) A partner of a commercial cannabis business that is organized as a partnership.

(B) A member of a limited liability company of a commercial cannabis business that is organized as a limited liability company.

(C) An officer or director of a commercial cannabis business that is organized as a corporation.

California Code of Regulations §5003.

Additionally, when using the online application system, it’s critical that you fill out the application correctly. For example, you don’t want to accidentally put the name of your old Mutual Benefit Corp as the applicant instead of your new C-Corp, or to write your personal name as the applicant instead of your entity name. There is nothing prohibiting someone from applying for a cannabis license in their individual capacity, however there are reasons why it is not wise to do so, the biggest of which being that having a corporate entity acts as a “shield” to protect your personal assets in the event that there is an enforcement action or lawsuit against the license holder.

For more information about California’s cannabis laws, and links to the online licensing application systems, visit www.cannabis.ca.gov.

 

The above information is provided as a public service. It is not intended as legal advice.

 For answers to your legal questions or for legal assistance, including with entity formation and applying for local permits and state licenses for cannabis activity, please contact the Law Offices of Omar Figueroa at (707) 829-0215 or info@omarfigueroa.com to schedule a confidential legal consultation.