The California Department of Cannabis Control has finalized its Consolidated Regulations, which can be found here. This blog post takes a look at Sections 15003 (Owners), 15004 (Financial Interest), 15023(c) (Changes in Ownership), and 17408 (Labeling Restrictions), how these regulations compare with their predecessor regulations, and considers the impacts of these regulatory changes.
SECTIONS 15003 AND 15004
Owners and Financial Interest Holders of Commercial Cannabis Businesses
Part of the previous issue with the BCC (predecessor to DCC) regulations was identifying “owners” versus “financial interest holders” at the outset. The previous definitions of both terms were vague, and now the DCC has promulgated the following:
SECTION 15003 OWNER
(a) (1) A person with 20% or more aggregate ownership
(a) (2) An individual who manages, directs, or controls the operations, including:
- Nonprofit Board Member
- GP of partnership
- Manager of LLC
- Trustee of trust
- CEO, President, Directors, Officers, VP, General Manager
(b) If the commercial cannabis business is owned in whole or in part by an entity and the entity includes individuals who manage, direct, or control the operations of the commercial cannabis business as described in subsection (a)2(E) above, then those individuals shall also be disclosed as owners.
(c) If available evidence indicates that an individual qualifies as an owner, the DCC may notify the applicant or licensee that they must either disclose the individual as an owner and submit the information required by section 15002 or demonstrate that the individual does not qualify as an owner
SECTION 15004 FINANCIAL INTEREST HOLDER
(a) (1) A person with an aggregate ownership interest of less than 20 percent
(a) (2) A person providing a loan to the commercial cannabis business
(a) (3) A person entitled to receive 10 percent or more of the profits of the commercial cannabis business, including:
- Employee profit share
- Landlord profit share
- Consultant profit share
- Agent/Attorney profit share
- Broker profit share
- Salesperson commission
(b) A Financial Interest Holder (FIH) does not include:
- a bank or financial institution whose interest constitutes a loan;
- a holder of an interest in a diversified mutual fund, blind trust;
- a holder of a security interest, lien, or encumbrance on property;
- or a holder of stock that is less than 10 percent of the total outstanding and issued shares.
The biggest specific changes are that the definition of owner is expanded to include as “owners” those individuals who:
- manage, direct, or control the operations of a commercial cannabis business, regardless of whether the control, direction, or management of the operation passes through an entity owner of the licensee; and
- the DCC decides “available evidence indicates” qualify as owners, unless the licensee demonstrates “that the individual does not qualify as an owner.”
DCC §15003(b) and (c). This expansion could require individuals to be listed as “owners,” despite having no authority to direct or oversee operations of the business itself, simply because the DCC decides that “available evidence indicates” the individual qualifies as an owner (unless the licensee demonstrates the individual is not an owner).
And for FIHs, where the draft emergency regulations left no doubt that IP licensing and white labeling arrangements with unlicensed parties must be disclosed to the DCC as FIHs (as opposed to “owners” under the regulations), the final regulations have removed that proposed subsection, suggesting a reversion to the posture that the BCC historically has taken on this question (i.e., disclosure of white label agreement unlicensed parties as regulatory “owners” under the management, direction, or control standard). Individuals and businesses holding 10% or less (rather than the previous 5% threshold) in publicly traded or privately held companies don’t need to be disclosed at all, which will likely incentivize more investors to participate in cannabis investing since they may not have to deal with the arduous disclosure requirements.
Changes in Ownership
Notably, the proposed change of ownership regulations eliminated CDFA §8204, which stated that a licensee needed to file a new application and fee if there is a change in ownership that affects the business entity type, but if the change in ownership did not affect the business entity type, then just a written notification of the change would be adequate. Under the now-eliminated CDFA §8204, a business holding a cannabis license could be bought out by another cannabis business and still not require a new application and fee so long as the license holder is still the original company.
The consolidated DCC regulations at §15023(c)(1) eliminate CDFA §8204 and now require cultivators, in order to continue to operate, to keep previously verified owners as owners after the closing of the change of ownership transaction. Now, without CDFA §8204, for changes of ownership in cultivation licensees, if none of the old owners remain post-closing, the cannabis business will have to cease operations until the new owners complete an application and are background-checked. Under DCC §15023, all California cannabis companies have 14 days from the effective date of the ownership change to report the transaction and get the new owners vetted. If all owners are departing the business, the business has to get a new license.
There has also been new clarity with regards to “organic” labeling of ingredients on cannabis products. Because “organic” labeling is a federal certification and cannabis is illegal under the federal Controlled Substances Act, cannabis can not be identified as “organic.” In response to this, California created the OCal program allowing cannabis products to be labeled as “OCal” which is pretty much the California state equivalent of “organic” under the USDA. Previously, it was unclear as to whether cannabis products can have organic ingredients labeled as “organic” on the ingredients list. For example, if a manufacturer uses “organic cane sugar” to make an edible, can the ingredients list include the “organic” certification of the cane sugar or does “organic” need to be removed despite the ingredient actually being organic? Now, the DCC Section 17408(a)(5) regulation refers to the OCal program, and the OCal program authorizes organic ingredients to be labeled as such under 17 Cal. Code Reg. § 22055.