Implementation of the MMRSA and the impending vote on the AUMA, are causing big changes to Californias cannabis industry and creating all sorts of new regulatory and business pitfalls for cannabis businesses. And just as we have seen in other states withnew and changing cannabis laws, we are seeing a panoply ofred flags and nightmare scenarios.
I set forth below the top eight California cannabis industry pitfalls, in an effort to prevent you from becoming a victim of any of them.
- Investing in or buying and selling a nonprofit.It drives me crazy when I hear both industry participants and even attorneys talking about investing in a nonprofit or, worse, buying or selling nonprofit entities in California. Though California laws forbid selling cannabis (including medical marijuana), it was actually the California State Attorney Generalwho, in a 2008 memo, interpreted those laws to mean that qualified patients could form collectives (e.g., nonprofit mutual benefit corporations) or statutory nonprofit cooperatives to collectively or cooperatively cultivate and/or distribute medical marijuana to each other. For-profit entities are not allowed under Proposition 215, SB 420, or the California Health and Safety Code (though they will likely be allowed under the MMRSA through AB 1575). When dealing with nonprofits, there is no concept of equity, period. Nonprofits do not have owners, partners, or shareholders. They can though have directors, officers, and salaried employees. This means thatit simply is not possible toinvest in or buy or sell a nonprofit entity. Butbecause of shoddy legal advice or straight up shady dealings, we have seen (and we are continuing to see) all sorts of deals involving the buying and selling of California nonprofits.
- Ignoring the importance of local approvals.Any cannabis consultant who tells you that local control doesnt matter or suggests you just open your cannabis business regardless of local law is giving horrible advice. Unfortunately many do. In 2013, in the case City of Riverside v. Inland Empire Patients Health and Wellness Center, the California State Supreme Court unanimously decided that local governments are free to ban MMJ distribution. Nothing in current California MMJ laws or regulations prevents local governments from banning MMJ entities from operating within their borders. This means that California cities and counties are free to regulate MMJ operations in addition to (but not in conflict with) state laws and regulations. Ignoring local laws and regulations can (and does) lead to civil lawsuits, fines, penalties, and even criminal charges. Moreover, sincethe MMRSA requires local approval as a condition for receiving a license to operate, if you defy or ignore local laws youre probably not going to net that invaluable approval. For more on current local laws, check out Tiffany Wusterrific series,The California Cannabis Countdown.
- Cannabis delivery may not be legal in your area.The legality of cannabis deliveries depends entirely on local laws because Californiastate MMJ laws and regulations do not explicitly prohibit it. However, certain cities and counties definitely do not allow cannabis delivery services. For example, pursuant to Proposition D, the City of Los Angeles completely banned delivery, and the city attorney hassuccessfully litigated this issue. Los Angeles even gets a pass under the MMRSA (which will also stand under the AUMA) by being allowed to keep its current local cannabis delivery laws.
- You probably cannot get a state-registered trademark in California.Its commonly known that the U.S. Patent and Trademark Officegenerally will not issue a trademark for any marijuana goods or services (though it will for marijuana related goods and services like t-shirts, hats, etc.). Consequently, many marijuana businesses file for trademark protection with their state governments. However, since the State of California follows federal standards for goods classifications and registration, the California Secretary of State has routinely denied state trademark protection for MMJ operators. Unfortunately, it appears that common law trademark protections are all that can be had right now in the Golden State.
- Management companies forbanking, investment, and taxation purposes can be very risky.Because California MMJ nonprofits are so hamstrung by current state and federal laws, they oftenuse management companies as vehicles for investment, to secure abank account, and to cut corners with federal income taxes. Using management companies for these sort of thingsis very risky.The main problem with these sort of structures is that they can easily be viewed as constitutingmoney laundering and/or tax evasion under federal law. Thesesorts of structures can open your cannabis businessnot only to criminal liability, but also to civil liability from the companies with which you dobusiness. To avoid potential liability, management companies should be used only for legitimate business purposesand any dealings with the nonprofit should be structured as arms-lengthtransactions with appropriate,market-rate fees. It also bears mentioning that California nonprofit regulators aggressively pursuenon-profit cannabis entities that distribute profits on the sly. Though amanagement company structure is legally feasible, it must be done correctlyto avoid dire legal consequences.
- Not all medical marijuana extraction is legal in California.Not all forms of MMJ extraction are lawful in California. Forexample,California Health and Safety Code section 11379.6, makes manufacturing a controlled substance by chemical extraction punishable by imprisonment of up to seven years and a fine of up to $50,000. Though the general public usuallyassociates this law with illegal meth labs, its language also applies to manufacturers of marijuana productsusing certaintypes of extraction methods. Marijuana is a controlled substance under both federal and California law, and section 11379.6 applies tomethods of creating marijuana products usingvolatilechemicals whichpose a danger to the public, such as butane. Just last year, Governor Jerry Brown signed a new law increasingpunishments for producing hash oilwithin 300 feet of a residential building. It may belegal in California to possess and distribute medical marijuana extracts produced under any method, but it is still illegal to manufacturecannabis extracts using butane and other volatile solvents.
- California cannabis businesses need to be aware of ...
