Decoding the BCC’s Guidance on Commercial Cannabis Activity.

Since the release of the final regulations from the Bureau of Cannabis Control (“BCC”), the California cannabis industry has been waiting with bated breath for guidance on many issues, but perhaps none more than BCC §5032, which mandates that commercial cannabis activity must occur between licensees. One might think it would be obvious what commercial cannabis activity is and who can do it in the highly regulated California cannabis industry.  And yet, despite having final laws and regulations, the industry has been more confused than ever about who can do what.  We’ve been spending much of our billable time in 2019 answering questions and crafting strategies and structures for our clients to operate in the wake of January’s final regulations, which we wrote about here.   Yesterday, the BCC released its “Guidance on Commercial Cannabis Activity.” Although BCC §5032 was widely opposed by the industry during the public comment period and is not without flaws, BCC’s guidance confirms an approach parallel to the regulation of alcoholic beverages that informed our guidance on this topic for some time. 

Specifically, the hallmark of a regulated industry is restricting licenses for regulated commercial activities to those who qualify for them (okay, and pay for them!). Qualifying for a license requires background checks to prove good moral character (no cartels here) and establishing complicated protocols to ensure the safety of the product from seed to sale.  If you don’t follow the laws and regulations, you could lose your license, which is essential to conducting your business, so, you have a strong incentive to follow the laws.[1]  If non-licensees were permitted to conduct regulated commercial activity, borrow the licenses of others, or participate in the profits from commercial activity, then they should also experience the losses and be disclosed to the regulators  along with the license holders.  But if these unlicensed beneficiaries of a regulated industry don’t have a license to take away, then the regulators have a tough time regulating.  

The difficulty with the BCC’s cannabis regulations, including BCC §5032, is that there are categories of ownership and control within this licensed system, and it hasn’t been clear who may do what, and what needs to be disclosed to the BCC. Before we get to the summary of BCC’s new guidance, it’s helpful to review these categories and what each can do:  

“Licensees” are the people (which includes entities) who hold the license and can hire employees to conduct the commercial cannabis activity permitted by the license. 

“Owners” are the people who must be qualified by the agencies (i.e. background checked, fingerprinted), who are responsible for managing, controlling and operating the license. (Note that they are also defined as people who own 20% or more of the license whether or not they are actively involved). 

“Financial Interest Holders” are the people who are receiving a financial interest from the business, through a loan, lease, profits or a percentage of sales who are not otherwise owners. 

Stay with us! Now that we have that background, what’s the actual guidance from the BCC? 

They start with a more succinct summary of the laws than our background above and then provide examples of what are allowable activities (we’ll try to describe more succinctly than they did this time):  

-          IP licensing agreements: Permitted between unlicensed entities and licensees, provided the IP holder does not exert control over the licensee’s operations (i.e. no acting like an “Owner”).  

-          Consultants and brokers: 

o    May procure non-cannabis needs like real estate, packaging, leasing equipment or real estate, or refer distributors.  

o   May procure cannabis or do any of the activities above tied to profits or revenue, but in that case they should be financial interest holders or owners on the license for which they are providing these services (or conduct these activities under their own licenses). 

-          Technology Platforms: Licensed retailers can work with them to facilitate delivery of cannabis if the service doesn’t share in the profits and the retailer uses its own employees to deliver.  

-          Marketing Companies: Licensees may hire them to promote their brand, purchase a license for a patent, or purchase packaging equipment, but should add any of these folks as owners or financial interest holders if they are sharing in the profits or revenue. 

-          Event Organizers: Licensed cannabis event organizers (and every other kind of license that has specific privileges for that matter) are only authorized for certain commercial cannabis activities and cannot exercise privileges not associated with their licenses. 

Have it all figured out?  Not so fast! Here are our additional FAQs not covered by the BCC’s guidance in case you still have questions: 

-          IP licensing agreements: Be careful structuring royalties and quality control provisions in IP Agreements. Standard commercial terms might stray into the realm of commercial cannabis activity.  

-          Consultants and brokers: Just because these folks might be listed as owners or financial interest holders on a license (either individually or through an otherwise unlicensed business), they are not licensees and cannot operate independently of the license that had to disclose their relationship. 

-          Technology Platforms: In our opinion, this guidance is a little fuzzy. What if the technology platform’s designees share profits? What if they don’t share profits, but otherwise exert control over the decision making of the licensee? What if the platform takes a percentage of the sale (like most e-commerce platforms working with alcoholic beverages)? 

-          Marketing Companies: Licensees are still responsible for everything conducted by advertising and marketing companies, and they are responsible for compliance with regulations and laws governing cannabis advertising. Service providers would be wise to note this responsibility in agreements and statements of work.  

-          Event Organizers: Becoming licensed as an Event Organizer is not a cure-all to engage in commercial cannabis activity, but we all suspected that was too good to be true.  

The BCC did a great job with this guidance, and we hope to see more like it in the future.It goes a long way in helping industry members and those working with the industry to understand their do’s and don’ts. As always, talk to your lawyers if you need legal advice about a specific issue! 

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[1] Note: There are often exceptions in regulated industries for people to conduct certain regulated activities non-commercially and usually in smaller quantities (e.g. home cannabis grows for personal consumption or home brewing and winemaking).