POINTS TO CONSIDER FROM THE BCC’S EMERGENCY REGULATIONS
The Bureau of Cannabis Control released its Emergency Regulations on November 16, 2017, right at the mid-November timeframe we were promised. The Emergency Regulations include seven chapters, spanning 115 pages. The Law Office of Eric J. Proos, P.C., has saved you time over the Thanksgiving weekend, and has included five points to consider from the Emergency Regulations. In addition to the points to consider, there is an in-depth analysis for each point provided in this article.
POINTS TO CONSIDER
- Fees: With the issuing of the Emergency Regulations we were finally provided with the application fee and the annual license fee amounts. Unless you are applying for a physical modification of the premises, the Application Fee will be $1,000 per application. The BCC also included an Annual Fee Schedule which is dependent on the dollar amount of operations per year for a business. This will be discussed in detail below.
- Annual License Application Requirements: SB 94 gave us an idea of what we can expect each annual license application to entail. The Emergency Regulations made it clear that there are 33 different requirements, excluding subparts, that must be fulfilled for an application to be considered complete.
- Additional Application Requirements: Even though there are 33 requirements for all annual applications, there are additional requirements if you are applying for a cultivation, microbusiness, or distribution license. Depending on what type of business you are applying for, you are looking at an additional 20 or so requirements to have a completed application.
- Transition to Commercial Cannabis: What regulations apply to commercial cannabis companies once January 1 2018, hits? The BCC has issued some leeway for companies in order to give some time to become compliant under the new regulations. The specific transition requirements will be discussed below
- Still Local: The Emergency Regulations did not change the fact that your local municipality still controls regulating and enforcing on the local level. Additionally, nothing in the Emergency Regulations change the fact that you need a local permit before receiving a temporary or annual license.
DETAILED LOOK AT THE POINTS TO CONSIDER
This is the first time we have been exposed to an application fee amount. SB 94 alluded to an application and license fees, but no concrete numbers were presented. The BCC had a decision to make; make the application fee high and exclude businesses that may provide needed products to underserved communities, or make the application fee reasonable and allow almost everyone to apply for a cannabis license without the fear of losing a large amount of money.
As we saw in the BCC’s interview with the California Weed Blog, the BCC wanted to keep the application fee on the low end and accessible to most people. The BCC did not disappoint. All annual licenses, including cannabis event organizer licenses and temporary cannabis event licenses, are capped at $1,000.
The low application fee keeps the accessibility to the cannabis industry within reach to almost all interested, instead of requiring a huge application fee which would only allow businesses with large pockets or investors to apply. The $1,000 application fee, in my opinion, is in accordance with the Regulations overall goal of social and cultural equality.
In addition to the application fee, the Emergency Regulations provided an Annual License Fee Schedule. The annual license fee is based on the estimated maximum dollar value of the business’s “planned operation in terms of the value of the produced expected to be tested, distributed, transported, retailed, cultivated and/or manufactured as determined in assessing the 15% excise tax.” Basically, this means a cannabis business will pay a fee for its annual license based on the value of the product with the 15% excise tax being applied.
For example, if a retailer is applying for its annual license and expected to do up to $1.5 million dollars in operations, the retailer will pay a $12,000 annual license fee. For each type of cannabis business there are different amounts for the annual licenses based on different valuations of the business’ operations. For example, let’s continue with retailers, there are four different annual license amounts. Below are the fee amounts and the corresponding value of operation:
- A retailer valuing its operations at a maximum of $500,000 will pay a $4,000 annual license fee;
- A retailer valuing its operations at a more than $500,000 and a maximum of $1.5 million will pay $12,000;
- A retailer valuing its operations at more than $1.5 million and a maximum of $4.5 million will pay $36,000; and
- A retailer valuing its operations at more than $4.5 million will pay $72,000.
Even though the example strictly addresses only retailers, there is an increasing ladder for all cannabis business annual license fees. Once again, I believe the application fee increasing with the valuation of the business is the BCC’s attempt to accomplish social equality in the cannabis community, and allow the lower income businesses to pay less yearly.
I am sure at this point you are asking, “Why not value my business at the lowest end to save money on the annual application fee?” Well, the BCC has a provision dealing with exactly this type of situation. If a licensee has been found to have paid less than the appropriate licensing fee, the licensee will have to pay the remainder of the fee. Your response may be, “That’s not bad, I’ll take the risk to save the money upfront because once my business is bringing money in I can afford the additional fee.” However, if the Bureau determines you did not pay the appropriate amount, the licensee will have to pay a penalty of 50% of the appropriate licensing fee in addition to the remainder of the appropriate fee. Additionally, the licensee may face disciplinary action.
Overall, no matter what business you are starting you will pay a $1,000 application fee and your annual license fee will depend on the valuation of your operations, so make sure you have a grasp on the potential operations.
- Annual License Application Requirements
By reading SB 94 we had a pretty good idea of the annual license application requirements. However, the Emergency Regulations ended the guessing game. With every application there are 33 requirements, but fear not, this section is not going to list all 33 requirements. In fact, this section will only discuss four parts of the application. For a list of all 33 requirements please see the Emergency Regulations found at www.bcc.ca.gov.
According to the Regulations, an applicant may apply online or via hardcopy. If the applicant decides to apply online the applicant will need to register a new account with the Bureau’s website at www.bcc.ca.gov. On the other hand, if an applicant would like to apply via hardcopy the application, and its accompanying documents, must be delivered to the Bureau’s office. This is nothing substantial, but a vital part of any application process is knowing how to submit a completed application.
One part of the requirements for the application, which the Regulations state is voluntary, is disclosing if the applicant has served in the military. The Regulations provide that if an applicant has served in the military, was honorably discharged, and can provide evidence of the honorable discharge, then the applicant “shall” have his/her application expedited. Once again, the Bureau has done a great job with cultural and social equality in its Regulations, especially including an incentive for former military to get involved.
Another requirement of the application, which is not new and was a topic of a previous post of mine, is that all business formation documents must be submitted as a part of the application. Most people write off business formation and the documents which accompany such formation as something small. However, making sure you have your business formed under the proper entity can be the difference in being personally liable and being shielded from personal liability by your company. It can also make the difference between paying a lot of taxes or paying a smaller amount. Therefore, PLEASE PLEASE PLEASE do not think business formation is something small. In fact, more goes in to properly forming a business than just the articles of incorporation that must be filed with the state. A properly formed business will have the documents, such as but not limited to, an operating agreement dictating what the company does specifically (among other topics), a buy-sell agreement amongst the owners, shareholder agreements (if applicable), and if there are 20 or more employees a labor peace agreement. The Emergency Regulations dictate that each of the above documents, if applicable to your business, must be filed with an application to be considered complete.
We all knew from the BCC’s requirements for a temporary license that financial information would be involved in an application. The Emergency Regulations laid out a complete list of financial information needed. Each application must include the following (if applicable):
- Financial account information. This a list of funds belonging to the applicant in savings, checking, or other accounts maintained by a financial institution. The financial institutions information must be disclosed along with, the type of account, account number, and the amount in the account.
- I’m sure you are saying, “yea right, my business couldn’t get an account at a bank, so I don’t have disclose any information regarding loans or investors.” Well, you would be wrong. If you have secured any loans, you need to disclose just about the same information. You need to provide the amount of the loan, date the loan was made, terms of the loan, security provided for the loan, and the name, address, and phone number of the lender.
- Ok, so you only have investments. You must provide a list of all investments made into the applicant’s commercial cannabis company, and you must provide the amount of the investment, the date the investment was made, terms of the investment, and contact information of the investor. This information must be provided for all gifts made to the company, and all individuals who have a financial interest in the business.
There is no doubt the application process will be time consuming and costly. Make sure you have the right people working for your cannabis company.
- Additional Application Requirements
Along with the 33 requirements discussed above which apply to any cannabis business application, there are additional requirements depending on the type of business. For example, if you are applying for a microbusiness including cultivation be prepared to provide the following (not an exhaustive list):
- Evidence of enrollment with the applicable Regional Water Quality Control Board or State Water Resource Control Board;
- All roads and water crossings;
- Proposed cultivation plan; and
- You must identify all water sources.
This is not even close to the entire list of requirements for a microbusiness including cultivation, but it gives you an idea of the additional requirements. Make sure that whoever is responsible for applying for your annual license is knowledgeable on the Emergency Regulations as a whole. Missing a requirement for the application may be costly, not just monetarily but also in time.
- Transition to Regulated Commercial Cannabis
Prior to the Emergency Regulations being issued, a lot of people were asking me about the January 1, 2018, date and how it will affect their businesses immediately. I would state we aren’t exactly sure how it will be regulated, but that SB 94 gave some guidance. Now, there is no guessing, the Emergency Regulations provide for a transition period into the regulated commercial cannabis market. Once again this is not the full list, but from January 1, 2018, to July 1, 2018, businesses may do the following:
- Licensees may conduct business with other licensees not matter if it is Adult use or Medical use.
- Inventory not in child proof packaging may be sold, as long as it is placed in child proof packaging before it leaves the facility.
- Non-edible cannabis product that do not meet the THC limits per package may be transported and sold.
- Products that were not tested may be sold, but a particular label/warning must be affixed to the packing (this was also discussed in a previous post of mine).
By allowing some leeway until July 1, 2017, the BCC recognized that the market has already been functioning under a different set of rules for some time, and a drastic change would negatively impact a lot of businesses and personal lives. Therefore, I believe, the BCC gave leeway so businesses are not losing money, customers, and incurring a huge expense to become compliant in a short amount of time. Once again, I believe the BCC did a great job here.
- Still Local
There are some changes from SB 94 to the Emergency Regulations, and in my opinion, I think there are good and bad changes. However, one thing that has not changed is that your local municipality still has the final say if recreational and/or medical cannabis is allowed to be sold, produced, manufactured, or distributed. This means, that you MUST have a local permit before being granted an annual or temporary license by the State.
This article provided a broad discussion of what I believe are some points to consider from the Emergency Regulations. This in no way is legal advice, and should not be construed as legal advice, or construed to establish any attorney-client relationship. If you would like to discuss your business specifically, please contact Eric J. Proos (@calicannabisattorney) to set up a phone call or in person meeting.