Over the next few months, California’s three cannabis agencies are going to consolidate their authority over the entire state’s industry into one new mega-agency: the Department of Cannabis Control. This is undoubtedly a good idea as having three agencies overseeing the same industry has been cumbersome, ineffective, and inefficient for many licensees. many other states consolidate cannabis regulatory authority into one agency, and this is a welcome change for California.
That said, consolidation is going to have a lot of hiccups. Every aspect of licensees’ relation to the agencies will probably undergo some kind of transition: license numbers and certificates will change so they are uniform across all license types, information and documents will need to get transitioned over which will probably not be easy, and it’s unclear which of the agencies current web portals will be usable with the new agency.
We also don’t know a ton about what will happen from a regulatory point of view. Currently, there are three sets of regulations (other than tax regs) that were promulgated by the agencies. It’s likely that the regulations will get combined to some extent as there are a lot of places where there are no conflict. But there are a good deal of areas where the current sets of regulations do conflict, and it will be interesting to see what happens.
While we don’t know much about what will go down in the next few months, we can safely say that whatever happens will affect a lot of commercial contracts within the industry if for no other reason than the potential for changes in the definitions of “owners” and “financial interest holders” (FIHs). Currently, the agencies define these terms somewhat differently, which can have pretty big impacts in the long run.
Breaking this down a bit, a person is an “owner” of a cannabis business when they own 20% or more of the business, hold certain positions in the business (officer, director, manager of an LLC, etc.), or manage, direct, or control the business. Financial interest holders are generally people who own less than 20% or provide loans or investments to the business. The Bureau of Cannabis Control (BCC) adds to this list and defines people as owners if they expect 20% of the profits of the business, and expressly requires looking “up the corporate ladder” in the event that an entity is an owner or FIH until you get to actual people (where the Department of Food and Agriculture (CDFA) doesn’t have such an explicit rule and the Department of Public Health’s (CDPH) rule is much slimmer).
This is a lot to unpack so the best way to see this in action is with an example. Let’s say a company licensed IP to a CDPH licensed manufacturer and as compensation was entitled to more than 20% of the profits of the business. It’s possible that under the CDPH rules, that company would only be considered a FIH. But under the BCC rules in the same circumstances, that company could be considered an owner. The impact of this is that the level of disclosures for owners (across all agencies) is orders of magnitude more intense than for FIHs. There are lots of companies who have entered into contracts with only CDFA or CDPH licensees where they may be considered FIHs. Many of these contracts would turn the same companies into owners under the BCC rules.
Problematically, no matter how the DCC decides to move forward, it will be forced to addressed overlap and contradictions in the regulations right off the bat. This is just one example, and there are many other potential issues that the agency will need to figure out, because it cannot plausibly adopt regulations that conflict (we’ll probably do a post soon about some areas in which things will need to be addressed).
The import of all of this is that licensees or companies that contract with licensees should be getting ready to go back through every contract they have inked that is still in effect and figuring out whether they stack with the new regs. A lot of this by definition can’t be done yet given that we don’t know what the future will hold here, but companies should be prepared for this and at least cognizant of the prospect of big picture changes like this.
We will continue to report on agency consolidation as we get closer to the real thing. So stay tuned to the Canna Law Blog.
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