California DCC Engages in New Cannabis Rulemaking

The California Department of Cannabis Control (“DCC”) is undertaking new cannabis rulemaking pursuant to the Medicinal and Adult-Use Cannabis Regulation and Safety Act. Unlike other states, California hasn’t implemented sweeping changes to its cannabis regulations with immense impacts on the industry. Instead, it has adopted a series of emergency rules with substantive changes here and there since 2018.

The DCC’s changes appear to be technical fixes and more consolidation rather than huge regulatory shifts. The DCC states in its Initial Statement of Reasons that the need for these rules is to “consolidate, clarify, and make consistent” licensing and enforcement regulations across all of California’s cannabis license types.

Here are some of the highlights from the DCC’s proposed rules:

  1. Personal cultivation cannot take place on a licensed premises;
  2. Any licensed premises that is currently out of compliance with certain provisions of the premises-specific regulations at CCR 15000.3 (for example, having living spaces in your licensed premises (unless otherwise required to secure local approval) gets a six month grace period to come into compliance;
  3. Shipping containers and modular buildings will now be considered “permanent structures” affixed to the land. This is good news for licensees utilizing those structures as licensed premises;
  4. Regarding the current prohibition on subletting, the DCC is tightening the regulation to also prohibit allowing “. . . another person to conduct operations in any area designated as the licensed premises for the licensee’s commercial cannabis activity.” This regulation is going to muck up a multitude of situations where a licensee is engaged in an IP licensing and/or third party manufacturing agreement where that IP licensor or third party is operating at the licensed premises.
  5. Licensees will now be free to use shipping containers as “temporary storage space” if their storage capacity isn’t otherwise adequate.
  6. We will now have more detailed rules and compliance about the use of an “appellation of origin“.
  7. Certain annual license application requirements are changing. For instance, applicants no longer have disclose prior military service and disclosure of other license types issued to the business aren’t required. On the flip side, the business’s registered agent now needs to be disclosed and certain governance documents may be requested by the DCC that aren’t available online with the California Secretary of State (like bylaws and operating agreements). Premises diagrams also won’t be such a pain in the neck where the DCC is rolling back certain technical requirements for them (like having to only be in black and white, etc.). And the submission of any SOPs will now be consolidated into a single form to be provided to the DCC.
  8. Regarding submission of proof of local approval with an annual license application, applicants will now be able to just attest that they’re in compliance with local laws. Don’t get too excited about that, though: the DCC will still check with the locals to make sure that attestation is true. Applicants just won’t have to provide physical proof of local approval (unless the DCC asks for that).
  9. While the definition of an “owner” isn’t changing, the definition of a “financial interest holder” (“FIH”) is. Now, included in the definition of an FIH is “. . . a person that has entered into an intellectual property licensing agreement for a share of the profits.” Also, if you hold less than 10% of the “total shares” in publicly traded or privately held company, you’re not an FIH (previous threshold there was 5%). These changes are pretty ambiguous though given that “a share of the profits” isn’t further defined (seems like any share of profits, net or gross, with no threshold exception counts). Certain other business structures like LLCs and LPs aren’t specifically called out for this updated FIH exception.
  10. The lab regulations are getting a more significant make-over. Now, a lab has to have “independence from persons that hold a license or an interest in a commercial cannabis business licensed for any activity other than testing.” Owners and FIHs of other license types cannot be owners and FIHs of a lab (and these folks cannot be employees of the lab either). A lab also can’t lease or sublease any of its licensed premises to other license types. Labs also can’t give special treatment to one licensee over another, including the extension of discounts for testing.
  11. The prohibited additives and products list is changing as the DCC is removing caffeine, which is great for coffee and soda makers. At the same time, the following products are now expressly prohibited: any inhalable cannabis good delivered into the lungs through a metered-dose inhaler or dry-powder inhaler; any cannabis good administered through the eye or the nasal passages; and any cannabis good injected into the body by piercing the skin.
  12. We have a new section about prohibited business promotions. Specifically, a licensee “shall not give away any amount of cannabis or cannabis products, or any cannabis accessory, as part of a business promotion”, and “a licensee shall not hold a raffle or sweepstakes as part of a business promotion.
  13. Cannabis returns between licensees are now kosher for “any lawful business purpose” as long as the new returns protocols in the regulations are followed. Previously, we didn’t have any guidance or regulation regarding returns between licensees.
  14. Distributors are getting a break in that, among other things, they no longer have to be the only lessors or owners of their transport vehicles. They just need to make sure that any other owner or lessor is using the vehicle for non-cannabis activities.
  15. Retailers are also getting a boost in that delivery employees can now carry up to $10,000 worth of product and the limit on the amount of unordered product they can carry while in transit is removed. Curbside delivery is also going to be allowed (except for delivery-only retailers).

In addition to the changes being made by the DCC, if this version of the regulations is adopted, the DCC will also permanently adopt the emergency regulations from September 27, 2021. The DCC is currently taking public comment on the proposed regulations until April 19, 2022. We’ll definitely be watching and plan to keep you updated on what makes the cut this time around.