California Cannabis FAQ

23 Mar California Cannabis FAQ

Even though California has been issuing cannabis licenses since January 2018, I still get the same questions around cannabis regulatory, corporate and transactional items even from seasoned California cannabis licensees. This post constitutes a California cannabis FAQ list for readers with common California cannabis questions.

Who can own a California cannabis business?

Literally anyone at this point can own a California cannabis license, as long as you don’t work for the State of California. We don’t have a lot of barriers to entry when it comes to state licensing. Unlike other states, California doesn’t automatically knock people out for a criminal record. Regulators of course take that into account and make the call at the time of licensing, but it’s not an automatic out. We also don’t have a state-mandated residency requirement and foreigners (as well as foreign entities) are also free to participate.

Can I transfer my California cannabis license?

No. State licenses are not transferable. If you want to “acquire a license”, you must do so through a change of ownership of the licensed business. California has a pretty strict protocol on how this is done under its regulations.

As a licensee can I lease or sublease my licensed premises?

No. California’s rules are clear that any leasing or subleasing of the licensed cannabis premises is prohibited. Same as many other states.

Can multiple licensees share a licensed premises?

No. The rules mandate one licensee per premises (with the “premises” being the space in which the licensed commercial cannabis activity takes place). The only exception is for an S-type manufacturing licensee, which is the commercial kitchen model for very small manufacturers. Multiple licensees can be located at multiple premises located on the same parcel of land though and they can share common areas like hallways, bathrooms and lobbies.

What are the disclosure rules for intellectual property (IP) licensing agreements?

Currently, thanks to the confusion caused by the BCC while in control, IP licensing agreements are, in our opinion, technically disclosable to the Department of Cannabis Control at least as financial interests. That’s even clearer if the IP licensor is taking a royalty (i.e., a percentage of the profits of the business).

What’s the difference between an “owner” and a “financial interest holder”?

Under current California cannabis regulations, an “owner” owns at least 20% or more, in aggregate, of the equity of the cannabis licensee. It is also anyone or any entity that directs, controls, or manages the licensee including but not limited to the board of directors, managers, and officers. The DCC also examines entity owners to determine at the entity level who constitutes an “owner”.

Owners must submit certain personal information to the DCC as part of the license application, and be fingerprinted for background checks. Financial interest holders (FIHs): (i) own 19% or less of the equity of the cannabis business; (ii) provide loans to the cannabis business; and/or (iii) are entitled to receive 10% or more of the profits of a cannabis business. There are exceptions to the FIH list in the regulations. FIHs only provide limited personal information to the DCC and they do not undergo background checks.

Is California a local control state?

Yes. You need “local approval” before receipt of a state license. Local approval varies widely across the state, and the majority of cities and counties still ban commercial cannabis activity. Local approval is where California’s barriers to entry really come in.

Does California allow delivery?

Yes.

Do distributors have to take title to product like in the alcohol industry?

No. Manufacturers and cultivators are free to sell their products directly to retailers. However, they must still utilize distributors to transport product, to coordinate testing, to undertake quality assurance checks before the products hit the marketplace, and to collect and remit taxes to the California Department of Tax and Fee Administration.

Do M- and A-license designations matter?

Not really. Medical and adult-use California cannabis licensees are free to do business with each other so long as local law doesn’t prohibit it. The main exception is that a medical-only dispensary can only sell to patients, and and an adult-use only dispensary cannot sell to patients.

Does California regulate cannabis advertising?

Yes, but the main controls are actually in the California cannabis statute and not really in the regulations.

Can I re-locate my California cannabis license?

No. If you want to move locations, your license will not follow. You will need to apply for a new one (even if local law allows relocation of the local entitlement).

Can I allow an unlicensed business to operate within my licensed premises?

No. Commercial cannabis activity can only be conducted by and between licensees. Many licensees try to allow unlicensed business to operate within their licensed premises through sham management agreements or via IP licensing agreements, but this is a dead bang regulatory violation in California.