California’s Licensing Authorities Propose Emergency Regulations for Medicinal and Adult-Use Cannabis Businesses

OVERVIEW OF CALIFORNIA’S PROPOSED EMERGENCY LICENSING REGULATIONS FOR COMMERCIAL CANNABIS BUSINESSES: RETAIL, DISTRIBUTION, TESTING, MICROBUSINESSES, CULTIVATION & MANUFACTURING

On November 16, 2017, California’s three cannabis licensing authorities announced proposed emergency licensing regulations for medicinal and adult-use commercial cannabis businesses. The new regulations for each licensing authority reflect the laws contained within the regulatory system under California’s Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA), which was signed into law by the Governor on June 27, 2017. MAUCRSA creates one regulatory system for both medicinal and adult-use cannabis business operations in California. 

The three cannabis licensing authorities (California Department of Consumer Affairs, Bureau of Cannabis Control; California Department of Food and Agriculture; and California Department of Public Health) expect the proposed regulations to become effective in December 2017. The issuance of state commercial cannabis licenses will commence on January 1, 2018, and the State will require evidence that applicants are in compliance with local laws. 

The following is a brief overview of the proposed emergency regulations set forth by each of the three cannabis licensing authorities. This information is not intended to be a complete reproduction of the regulations, and additional analysis of the regulations will be required to ensure an applicant’s compliance with California’s licensing framework and requirements. 

                                        I.           Retail, Distribution, Testing & Microbusiness Licenses

California Department of Consumer Affairs,  Bureau of Cannabis Control

The California Department of Consumer Affairs, Bureau of Cannabis Control (Bureau) has issued regulations that set forth the requirements for obtaining licensing for cannabis business operations involving retail sale, distribution, transportation, testing, event organization and operation of a microbusiness. The regulations will be codified in the California Code of Regulations, Title 16, Division 42, Bureau of Cannabis Control, § 5000 et seq.

Under MAUCRSA, state-level licenses will fall into one of two license categories: 

• A-License: enabling operations related to adult-use commercial cannabis activity and products
• M-License: enabling operations related to medicinal commercial cannabis activity and products

Licensed testing laboratories may perform tests on cannabis goods for both license categories.

License Types

§  Distributor

§  Distributor Transport Only

§  Self-Distribution

§  Retailer

§  Microbusiness

§  Testing Laboratory

§  Event Organizer

Temporary Licenses

A temporary license may be obtained to allow for the continuation of existing operations for 120 days pending the submission and issuance of an annual license beginning January 1, 2018. A temporary license may be extended for additional 90-day periods if a complete application for an annual license has been submitted to the Bureau prior to the initial expiration of the temporary license. A temporary license is only available to applicants with a valid license, permit or other authorization issued by the local jurisdiction in which the applicant is operating. 

Temporary license applications may be (1) completed and submitted online at www.bcc.ca.gov by first registering a user account online or (2) completed in hard copy and submitted by delivering a printed copy to the Bureau’s office(s). 

Basic Application Requirements 

All license applications must be completed by an owner of the applicant entity, as defined by § 5003 of this division.^[1] An application for a temporary license must include (among other things) the legal business name of the applicant, contact email address and telephone number, federal employer identification number, description of the organization’s business structure (e.g., LLC/corporation), license type being requested, license designation requested other than testing laboratories, physical address of the premises to be licensed, evidence of legal right to occupy and use the proposed location, premises diagram, copy of a valid permit or license issued by a local jurisdiction enabling the applicant to conduct commercial cannabis activity at the location requested for the temporary license, and attestation under penalty of perjury that the application is complete, true, and accurate. 

Annual license applications may be completed and submitted online at www.bcc.ca.gov or completed in hard copy and submitted by delivering a printed copy to the Bureau’s offices. In addition to the requirements for a temporary license, an applicant for an annual license must include, among other things, payment of an application fee, disclosure of all business trade names of the applicant entity (DBAs), disclosure of whether the applicant has been denied a license or had a license suspended or revoked by the Bureau or any other state cannabis licensing authority, a copy of business formation documents, a list of every fictitious name the applicant is operating under, relevant financial information, and a list of every owner of the applicant with any convictions he/she may have ever had, including a description of any suspension or revocation of a commercial cannabis license or any sanctions for unlicensed commercial cannabis activity. 

The applicant also must provide evidence that the proposed premises is in compliance with Business and Professions Code § 26054(b), satisfy requirements related to labor and peace agreements for applicants with 20 or more employees, provide proof of a valid seller’s permit number issued by the California Department of Tax and Fee Administration, provide proof that the applicant entity has obtained a bond as required by § 5008, provide proof that the applicant entity has obtained certificates of accreditation for testing laboratory applications, evidence of exemption from or compliance with the California Environmental Quality Act (CEQA), and a detailed description of the applicant’s operating procedures for transportation, inventory, quality control and security. 

The owner may voluntarily disclose if he/she is serving or previously served in the military. If the applicant has served as an active duty member of the Armed Forces and was honorably discharged, his or her application will be expedited. 

License Application Processing Fee

All license applications will be subject to a one-time per application processing fee as follows:

§  All Annual Licenses for Operations: $1,000 

§  Cannabis Event Organizer License: $1,000

§  Temporary Cannabis Event License: $1,000

§  Physical Modification of Premises: $500. 

Annual Fee for Licensees 

In determining the appropriate annual license fee to be charged, each applicant or licensee must estimate the maximum dollar value of its planned operation in terms of the value of the product expected to be tested, distributed, transported, retailed, cultivated and/or manufactured as determined in assessing 15% excise tax. 

§  Testing Laboratory

• Up to $50 million in operations volume: Fee of $20,000 o $50 million to $500 million in operations volume: Fee of $45,000 o Greater than $50 million in operations volume: Fee of $90,000

§  Distributor

• Up to $2 million in operations volume: Fee of $1,000 o $2 million to $8 million in operations volume: Fee of $5,000 o $8 million to $800 million in operations volume: Fee of $36,000 o Greater than $800 million in operations volume: Fee of $125,000

§  Distributor Transport Only

• Up to $2 million in operations volume: Fee of $500

§  Self-Distribution 

• $2 million to $8 million in operations volume: Fee of $2,000

§  Distributor Transport Only

• Up to $2 million in operations volume: Fee of $800 o $2 million to $8 million in operations volume: Fee of $2,500 

§  Retailer

• Up to $0.5 million in operations volume: Fee of $4,000 o $0.5 million to $1.5 million in operations volume: Fee of $12,000 o $1.5 million to$ 4.5 million in operations volume: Fee of $36,000 o Greater than $4.5 million in operations volume: Fee of $72,000

§  Microbusiness

• Up to $0.5 million in operations volume: Fee of $5,000 o $0.5 million to $1.5 million in operations volume: Fee of $15,000 o $1.5 million to $4.5 million in operations volume: Fee of $42,000 o Greater than $4.5 million in operations volume: Fee of $120,000 § Event Organizer
• Holding 1−10 events annually: Fee of $5,000 o Holding 11+ events annually: Fee of $10,000

Surety Bond Requirements

All applicants are required to obtain a surety bond of at least $5,000 payable to California to ensure payment of the cost incurred for the destruction of cannabis goods necessitated by a violation of MAUCRSA, or the regulations adopted thereunder. The bond must be issued by a corporate surety licensed to transact surety business in California. 

Priority Licensing

• Priority licensing is available for annual licenses. To be eligible, the applicant entity must show that it has remained in compliance with the Compassionate Use Act of 1996 prior to September 1, 2016.
• Any person holding office or employed by the State of California having duties to do with enforcement of MAUCRSA or penal provisions of the law regarding the cannabis industry may not hold a license. 

Insurance Requirements

• A distributor must maintain commercial general liability insurance in the aggregate in an amount not less than $2 million and in an amount not less than $1 million for each loss.
• The insurance company must be either (1) a non-admitted insurer that meets the requirements of Insurance Code § 1765.1 or § 1765.2; (2) an insurer qualified to do business in California and authorized by the Insurance Commissioner to write liability and property classes of insurance; or (3) a registered risk retention group compliant with the California Risk Retention Act of 1991. 
• Admitted insurers and risk retention groups must show proof of capitalization in the amount of at least $10 million. 
• An applicant for a distributor license must provide the Bureau with a certificate of insurance that shows the types of insurance coverage and minimum amounts that have been secured

Operations Requirements Relating to Security

Security measures include requiring employee badges, designated limited-access areas, security personnel, alarm systems, commercial-grade locks, secure storage areas, and 24-hour surveillance for areas containing cannabis and cannabis products as well as all entryways and exits. Retailers also must have video surveillance in point-of-sale areas.

Operations Requirements Relating to Labor/Employment

• All employees of the licensee must be at least 21 years old. 
• Applicants for a license with more than 20 employees must (1) have entered into a labor peace agreement or (2) submit a notarized statement to the Bureau agreeing to enter into a labor peace agreement.

Restrictions on Products & Packaging

• A licensee must create and maintain an active and functional account within the track-and-trace system prior to engaging in any commercial cannabis activity, including the purchase, sale, testing, packaging, transfer, transport, return, destruction or disposal of any cannabis good. The track-and-trace system must record all commercial cannabis activity. 
• Cannabis waste must be contained in a secure waste receptacle or other secured area on the licensed premises. This waste cannot be sold and must comply with all waste management laws.

                                                                   II.      Manufacturing

California Department of Public Health

The California Department of Public Health, Manufactured Cannabis Safety Branch, has issued regulations that set forth the requirements for obtaining licensing for cannabis business operations involving manufacturing and packaging of cannabis goods. The regulations will be codified in the California Code of Regulations, Title 17, Division 1, Chapter 13. Manufactured Cannabis Safety, § 40100 et seq.

Under MAUCRSA, state-level licenses will fall into one of two license categories: 

• A-License: enabling operations related to adult-use commercial cannabis activity and products
• M-License: enabling operations related to medicinal commercial cannabis activity and products

License Types

• Type 7: extraction using volatile solvents (butane, hexane, pentane)
• Type 6: extraction using a mechanical method or non-volatile solvents (butter, oil, ethanol, carbon dioxide)
• Type N: infusions using pre-extracted oils (edibles, beverages, capsules, vape cartridges, tinctures, topicals) 
• Type P: packaging and labeling only
• Type S: shared manufacturing facility space (not available until early 2018)

A holder of a Type 7 license may perform the operations enabled by a Type 6, Type N and Type P license; similarly, a holder of a Type 6 license may perform the operations enabled by a Type N and Type P license; and a holder of a Type N license may perform the operations enabled by a Type P license. 

Temporary Licenses

A temporary license may be obtained to allow for the continuation of existing operations for 120 days pending the submission and issuance of an annual license. The temporary license application is a onepage form (CDPH-9041) that requires the inclusion of a local license or permit and basic declaratory information. 

Annual Licenses 

An annual license may be obtained by submitting a full application that requires numerous disclosures about owners, operations and business financials. Among other things, applicants will be required to submit a list of owners and financial interest holders, disclosures about the owners’ past criminal history, information about anticipated manufacturing activity, employees, anticipated annual gross revenue (used in the calculation of the annual license fee), inventory control procedures, security procedures and a diagram of the premises. The foregoing is only a partial list of the requisite components of an application package.

License Fees

All license applications will be subject to a one-time processing fee of $1,000. Annual license fees will be based on annual gross revenue, ranging from $2,000 (Tier I) to $75,000 (Tier VII) as follows: 

• For a licensed premises with an annual gross revenue of up to $100,000 (Tier I), the fee shall be $2,000
• For a licensed premises with annual gross revenue of $100,001 to $500,000 (Tier II), the fee shall be $7,500
• For a licensed premises with annual gross revenue of $500,001 to $1,500,000 (Tier III), the fee shall be $15,000
• For a licensed premises with annual gross revenue of $1,500,001 to $3,000,000 (Tier IV), the fee shall be $25,000
• For a licensed premises with annual gross revenue of $3,000,001 to $5,000,000 (Tier V), the fee shall be $35,000
• For a licensed premises with an annual gross revenue of $5,000,001 to $10,000,000 (Tier VI), the fee shall be $50,000
• For a licensed premises with an annual gross revenue of more than $10,000,000 (Tier VII), the fee shall be $75,000

Priority License Issuance

Priority in issuance will be given to qualified applicants who can demonstrate that their commercial cannabis business was in operation under the Compassionate Use Act as of September 1, 2016. 

General Restrictions on Licensing:

No owner of a manufacturer licensee shall hold or have an ownership interest in a Type 8 license. A license cannot be held by a person holding office in a State of California agency, a district attorney’s office, city attorney’s office, sheriff’s office or local police department. 

Facility Operations & Security Requirements 

• Licensees must have written procedures for inventory control, quality control, sanitation, transportation, security and cannabis waste disposal. These procedures must address, among other things, personnel hygiene controls, storage of equipment on grounds and facilities maintenance, sanitation practices, quality of raw materials and ingredients, manufacturing operations procedures, hazard analysis procedures, equipment and machinery qualification, master manufacturing protocol, batch production records, review of product complaints, protocol for recalls, and standard operating procedures.
• Extractions using CO₂ or a volatile solvent must be conducted using a closed-loop system and certified by a California-licensed engineer. Volatile hydrocarbon-based solvents must have at least 99% purity. Volatile solvents, CO₂, and ethanol extractions must be certified by the local fire code official. Further detail about the requirements for preforming volatile solvent extractions, ethanol extractions and closed-loop extractions may be found within the regulations codified in the California Code of Regulations, Title 17, Division 1, Chapter 13. Manufactured Cannabis Safety, § 40100 et seq.
• Moreover, each licensee must develop a security plan that includes a description of the security measures taken to, among other things, prevent access to the premises by unauthorized individuals and establish a security alarm system, an inventory tracking system and a video surveillance system. The foregoing is only a partial list of the requisite elements to be included in an applicant or licensee’s security plan and related protocols. 

Restrictions on Products & Packaging

• Edible products are limited to a maximum of 10 mg of THC per serving and 100 mg of TCH per package. Other cannabis products, such as tinctures, capsules and topicals, are subject to different restrictions, and have a maximum content of 1,000 mg of THC per package for adult-use market products and a 2,000 mg ceiling for medicinal-use market products. 
• Products cannot be infused with nicotine, alcohol or caffeine. The appearance of the product and packaging cannot resemble a human, animal, or fruit, and cannot be attractive to children or be advertised as candy. All manufactured products must be packaged before they are transferred to a distributor. Packaging labels must include an ingredient list and nutritional facts. 
• Licensees must enter all commercial cannabis activities into the track-and-trace system within 24 hours of their occurrence. A licensee shall designate at least one owner to be the track-and-trace system account manager who will maintain compliance with the further reporting and record keeping requirements of the system.

                                                                         III.      Cultivation

California Department of Food and Agriculture,  Cannabis Cultivation Program

The California Department of Food and Agriculture has issued regulations that set forth the requirements for obtaining licensing for cannabis business operations involving cultivation. The regulations will be codified in the California Code of Regulations, Title 3 Food and Agriculture, Division 8 Cannabis Cultivation, § 8000 et seq.

Under MAUCRSA, state-level licenses will fall into one of two license categories: 

• A-License: enabling operations related to adult-use commercial cannabis activity and products
• M-License: enabling operations related to medicinal commercial cannabis activity and products

Temporary Licenses

An applicant must show proof of a valid license or permit in the local jurisdiction where the licensed premises will be or is located. The temporary license will be valid for 120 days from the date of issuance and may be renewed for additional 90-day periods if a completed application for an annual license has been submitted. There is no application or license fee for a temporary license.

License Types

There are 14 available license types for cultivation operations:

§  Specialty Cottage

• “Specialty Cottage Outdoor” is an outdoor cultivation site with up to 25 mature plants.
• “Specialty Cottage Indoor” is an indoor cultivation site with 500 square feet or less of total canopy.
• “Specialty Cottage Mixed-Light Tier 1 and 2” is a mixed-light cultivation site with 2,500 square feet or less of total canopy. 

§  Specialty

• “Specialty Outdoor” is an outdoor cultivation site with less than or equal to 5,000 square feet of total canopy, or up to 50 mature plants on noncontiguous plots.

• “Specialty Indoor” is an indoor cultivation site between 501 and 5,000 square feet of total canopy.
• “Specialty Mixed-Light Tier 1 and 2” is a mixed-light cultivation site between 2,501 and 5,000 square feet of total canopy. 

§  Small

• “Small Outdoor” is an outdoor cultivation site between 5,001 and 10,000 square feet of total canopy. 
• “Small Indoor” is an indoor cultivation site between 5,001 and 10,000 square feet of total canopy. 
• “Small Mixed-Light Tier 1 and 2” is a mixed-light cultivation site between 5,001 and 10,000 square feet of total canopy. 

§  Medium

• “Medium Outdoor” is an outdoor cultivation site between 10,001 square feet and one acre of total canopy. 
• “Medium Indoor” is an indoor cultivation site between 10,001 and 22,000 square feet of total canopy. 
• “Medium Mixed-Light Tier 1 and 2” is a mixed-light cultivation site between 10,001 and 22,000 square feet of total canopy. 

§  Nursery 

• Used for a cultivation site that conducts the cultivation of cannabis solely as a nursery. 

§  Processor

• Used for a cultivation site that conducts only trimming, drying, curing, grading, packaging or labeling of cannabis and nonmanufactured cannabis products.

Overview of Application Requirements

The following is a non-exhaustive list of items required in all cultivation license applications:

• A list of all financial interest holders and all owners of the applicant entity, including disclosure of their percentage ownership
• A detailed description of all owners’ criminal convictions, dates of incarceration and a statement of rehabilitation for each conviction
• Copies of all documents filed with the California Secretary of State on behalf of the applicant entity
• Evidence that the applicant entity has obtained a surety bond in an amount no less than $5,000
• Evidence of enrollment with the applicable regional Water Quality Control Board or State Water Resources Control Board
• Evidence that the applicant has conducted a hazardous materials record search
• Evidence of compliance with or exemption from Division 13 of the California Environmental Quality Act 
• Identification of all power sources for cultivation activities (specific to license type), including illumination, heating, cooling and ventilation
• Identification of the water sources and related supplemental information
• Proof that the applicant has a legal right to occupy the property on which the premises is located
• A property diagram depicting the boundaries of the property, natural developments in and around the property, and the assessor’s parcel number
• A cultivation plan must be included in the application that depicts or describes particular factors (specific to each license type), including boundaries and dimensions of the cultivation space, location of lighting and strength of wattage, pest management control plan, chemical storage zones, processing areas, packaging areas, composting areas, harvested cannabis storage areas, etc.
• A waste management plan must be included in the application, and must identify the licensee’s intended method for managing waste on the premises by composting, collection by a local agency or self-hauling

Track-and-Trace Requirements

Applicants approved for an annual license shall not have access to the track-and-trace system until the licensee’s designated account manager has completed and provided proof of completion of the track-andtrace training prescribed by the department. The specific requirements of this section detail the duties of the designated track-and-trace account managers, required training, registration, plant tagging and inventory tracking. The system will record the transfer of cannabis products through the State of

California’s supply chain. A licensee must complete a relevant training session within 10 days of receiving notice of approval of its application by the department. 

Proof of Local License or Permit

An applicant must submit proof of a license or permit in the local jurisdiction where the licensed premises will be or is located. If the local jurisdiction does not respond to the department’s notification within 10 calendar days, the department may issue a license to the applicant. 

Priority Application Review

Priority review of annual license applications shall be given to applicants that can demonstrate the commercial cannabis business was in compliance with the Compassionate Use Act of 1996 before September 1, 2016.

Substantially Related Offenses Review

Specific prior felonies by individuals involved in the licensee’s commercial operations may be a basis for denying the license application. The department shall conduct a full review of the nature of the crime, conviction, circumstances and any evidence of rehabilitation. Conviction for any controlled substance felony subsequent to licensure shall be grounds for revocation of a license or denial of the renewal of the license. 

Appeal of Denial of a License

Within 30 days of service of the denial of an application, the applicant may file a written petition. Upon receipt of a timely filed petition, the department shall set a date for a hearing to be conducted pursuant to California law.

General License Requirements:

• Every business must obtain a separate license for each premises where it engages in commercial cannabis cultivation. Cultivation licenses are not transferrable or assignable.
• All transportation of any cultivated or nonmanufactured cannabis products from the premises must be conducted by a licensed distributor. 
• A licensee may hold both an A and an M category license on the same premises, provided that the inventory for each license type is kept separate and distinct. 
• Material changes to the premises or modification of the licensee’s cultivation plan must be approved by the department.
• All weighing devices used by a licensee must be approved, tested, sealed and registered according to applicable laws.

General Restrictions on Licensing

• Until January 1, 2023, a person shall be limited to holding only one Medium Outdoor, or one Medium Indoor, or one Medium Mixed-Light A-License or M-License. 
• Licensees are prohibited from accepting returns of cannabis plants or nonmanufactured cannabis products after transferring possession to another licensee. 
• A label may specify a county of origin only if 100% of the cannabis product contained in the package was produced within the designated county. 
• Pursuant to an initial transition period, until July 1, 2018, a licensee may conduct commercial cannabis activities with any other licensee, regardless of the A or M designation of the license.
• A license may not be held by any person holding office or employed in any agency of the State of California or any political subdivisions related to enforcement of State law regulating commercialor medicinal cannabis operations.

Application Processing Fee

Each application will be subject to a nonrefundable application fee for the specified annual license type and shall be paid by the applicant at the time the complete application is submitted to the department: 

• Specialty Cottage Outdoor $135 
• Specialty Cottage Indoor $205 
• Specialty Cottage Mixed-Light Tier 1 $340 
• Specialty Cottage Mixed-Light Tier 2 $580 
• Specialty Outdoor $270 
• Specialty Indoor $2,170 
• Specialty Mixed-Light Tier 1 $655 
• Specialty Mixed-Light Tier 2 $1,125 
• Small Outdoor $535 
• Small Indoor $3,935 
• Small Mixed-Light Tier 1 $1,310 
• Small Mixed-Light Tier 2 $2,250 
• Medium Outdoor $1,555 
• Medium Indoor $8,655 
• Medium Mixed-Light Tier 1 $2,885 
• Medium Mixed-Light Tier 2 $4,945 
• Nursery $520 
• Processor $1,040 

Annual License Fee

An annual license fee shall be paid to the department prior to issuance of a license or renewal license. The fee schedule is as follows: 

• Specialty Cottage Outdoor $1,205 
• Specialty Cottage Indoor $1,830 
• Specialty Cottage Mixed-Light Tier 1 $3,035  
• Specialty Cottage Mixed-Light Tier 2 $5,200 
• Specialty Outdoor $2,410 
• Specialty Indoor $19,540 
• Specialty Mixed-Light Tier 1 $5,900 
• Specialty Mixed-Light Tier 2 $10,120 
• Small Outdoor $4,820 
• Small Indoor $35,410 
• Small Mixed-Light Tier 1 $11,800 
• Small Mixed-Light Tier 2 $20,235 
• Medium Outdoor $13,990 
• Medium Indoor $77,905 
• Medium Mixed-Light Tier 1 $25,970 
• Medium Mixed-Light Tier 2 $44,517 
• Nursery $4,685 
• Processor $9,370