Use the Lexology Getting the Deal Through tool to compare the answers in this article with those from other jurisdictions.

Market snapshot

Trends and prospects

How would you describe the current state of the cannabis industry in your jurisdiction, including areas of growth, market prospects and trends, and M&A activity?

Beginning in 1996 with Proposition 215, better known as the Compassionate Use Act, California has developed into the largest commercial cannabis market in the world. The state’s cannabis market saw a revenue of approximately $2 billion in 2018 and is projected to exceed $5 billion by 2025.

California’s three cannabis regulators began issuing adult use and medical cannabis licenses under the state’s new licensing structure on January 1, 2018. The state cannabis regulations are characterized by a fully vertical licensing structure (with the exception of licenses for testing laboratories, which may not be vertically integrated with other license types). There is also a two-tiered licensing system whereby all licensed entities must obtain a local permit as well as a state license. Currently, approximately 30% of California municipalities allow for cannabis licensing. This has resulted in a slower than expected growth rate for the industry within the state and has resulted in supply and distribution bottlenecks. There nevertheless remains an inadequate number of testing laboratories to meet growing demand. 

Certain larger metropolitan areas, most notably Los Angeles, have experienced a slow and difficult permitting process. Cannabis retail storefronts in California have a low concentration based on population statewide compared with other adult-use states, such that demand can support significant retail growth in the next few years. State regulations allow for home deliveries on a statewide basis, even in local jurisdictions that do not permit cannabis businesses to operate.

M&A activity within the California cannabis commercial market remains strong. Mergers and acquisitions entail diversification through the vertical integration of licenses, geographical expansion and consolidation, especially when it involves rolling up competing businesses in an attempt to realize economies of scale. This could be a powerful driver in the next 12 months, especially as some current market participants show signs of weakness. The current market in some respects resembles the pre-crash dotcom bubble—many businesses may fail because cannabis “experts” lack business skills. Further, technology or know-how alone will not save a company. A lack of banking facilities has also hampered M&A efforts, such that much of the financing of mergers and acquisitions comes from private sources.

While 2018 saw many startups and new market entrants, as well as large infusions of capital primarily through private capital raises, 2019 will likely be characterized by consolidation of the market through acquisitions of licenses and brands.

 

Legal framework

Legislation

What primary and secondary legislation governs the use, cultivation and retail of cannabis in your jurisdiction?

Senate Bill 94, the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA), signed into law in 2017, creates the general framework for the regulation of commercial medicinal and adult-use cannabis in California.

The commercial cannabis licensing regulations, proffered by the three California cannabis licensing agencies, are:

  • Sections 5000 et seq., Title 16 of the California Code of Regulations (January 2019) (Bureau of Cannabis Control);
  • Sections 40100 et seq., Title 17 of the California Code of Regulations (January 2019) (CDPH Manufactured Cannabis Safety); and
  • Sections 8000 et seq., Title 3 of the California Code of Regulations (January 2019) (CDFA CalCannabis Cultivation Licensing). 

Secondary laws pertaining to the use, cultivation and retail of cannabis in California include:

  • Sections 11000 to 11651 of the Health and Safety Code, (California’s Uniform Controlled Substances Act);
  • Sections 2525 to 2525.5 of the Business and Professions Code (regulating medical cannabis recommendations by a physician);
  • Section 12029 of the Fish and Game Code (environmental damage, fines and penalties);
  • Sections 8100 to 81010 of the Food and Agriculture Code (eff. January 1, 2017) (regulating California’s industrial hemp program);
  • Section 147.6 of the Labor Code (study on second-hand smoke exposure by employees);
  • Sections 34010 to 34021.5 of the Revenue and Tax Code (cannabis taxes);
  • Sections 23152 et seq. of the Vehicle Code, Sections 23152 et seq. (cannabis and vehicles); and
  • Section 13276 of the Water Code (water discharge requirements).

California’s two-tiered cannabis legal regime permits local governments to impose additional requirements or limitations on cannabis use and operations within their jurisdictional boundaries, subject to a “reasonable” regulation standard.

Regulators

What bodies regulate the use, cultivation and retail of cannabis, and what is the extent of their powers?

The Bureau of Cannabis Control is the lead agency regulating commercial cannabis licenses for medical and adult-use cannabis in California. The bureau is responsible for licensing retailers, distributors, testing labs, microbusinesses, and temporary cannabis events and is part of the California Department of Consumer Affairs.

The Manufactured Cannabis Safety Branch, a division of the California Department of Public Health, is responsible for regulating and licensing manufacturers of cannabis-infused edibles for both medical and nonmedical use. 

CalCannabis Cultivation Licensing, a division of the California Department of Food and Agriculture, is responsible for regulating and licensing cultivators of medical and adult-use cannabis and managing the state’s track-and-trace system, which tracks all commercial cannabis and cannabis products through the distribution chain.

Other state agencies involved in drafting, implementing, or enforcing California’s cannabis regulations include:

 

  • the State Water Resources Control Board;
  • the Department of Fish and Wildlife;
  • the Department of Tax and Fee Administration;
  • the Secretary of State’s Office;
  • the State of California Employment Development Department;
  • the California Governor’s Office of Business and Economic Development;
  • the Division of Occupational Safety and Health;
  • the California Department of Insurance;
  • the California Highway Patrol;
  • the Cannabis Control Appeals Panel;
  • the State of California Franchise Tax Board;
  • the Medical Board of California; and
  • the Department of Pesticide Regulation.

 

Personal use and cultivation

Possession and consumption

What rules and restrictions govern the personal possession and consumption of cannabis in your jurisdiction?

On January 1, 2018, recreational marijuana possession and use became legal in California, allowing adults aged 21 years old and over to possess, purchase, or give away up to one ounce of dried marijuana or eight grams of concentrated cannabis and to smoke or ingest cannabis or cannabis products (Section 11363.1(a) of the California Health and Safety Code). Cannabis consumption is not permitted in public, locations where smoking tobacco is prohibited, within 1,000 feet of a school, nursery, or youth center while children are present, or while driving or riding in a motor vehicle, or other vehicle used for transportation, except as permitted on the premises of a licensed retailer per local regulations. (See id. and Section 26200(d) of the Business and Professions Code.)

Qualified medical cannabis patients or their designated primary caregiver may possess no more than eight ounces of dried marijuana per qualified patient and maintain no more than six mature or 12 immature marijuana plants (Section 11362.77 of the Health and Safety Code).

Cultivation

What rules and restrictions govern cultivation of cannabis for personal use?

Section 11362.1(a)(3) of the California Health and Safety Code authorizes individuals to possess, cultivate, or process not more than six living cannabis plants within any private residence, and possess the cannabis produced therefrom. A medical marijuana patient or their designated primary caregiver may maintain up to six mature or 12 immature plants. A city or county may enact and enforce “reasonable regulations” on personal cultivation within its jurisdictional boundaries but shall not completely prohibit personal cultivation conducted inside a private residence (Section 11362.2 (b) of the California Health and Safety Code).

Use in and outside the workplace

What statutory and case law (if any) governs employers’ ability to restrict cannabis use both in and outside the workplace? Can cannabis use (even medical use) serve as legal grounds for termination?

In California, employers continue to be able to restrict employees’ use of cannabis both inside and outside work. The influential decision here is Ross v. Ragingwire Telecommunications (70 Cal.Rptr.3d 382 (January 24, 2008)), which held California’s cannabis legalization framework did not address employers’ obligations to accommodate cannabis use, such that employers could continue to rely on federal illegality to screen cannabis users from employment. AB 2069 would have sought to legislate around this decision and provide cannabis users certain job protections; however, the bill died in committee in 2018.

Commercial cultivation, retail and marketing

Business licensing requirements

What licensing requirements apply to businesses seeking to cultivate, distribute, produce and sell cannabis products in your jurisdiction? What procedures, timeframes and fees apply in this regard, and on what grounds can a licence be revoked?

The Bureau of Cannabis Control is responsible for licensing retailers, distributors, testing labs, microbusinesses, and temporary cannabis events, while the Manufactured Cannabis Safety Branch of the Department of Public Health is responsible for licensing cannabis manufacturers and CalCannabis Cultivation Licensing, a division of the Department of Food and Agriculture, is responsible for licensing cultivators. Each licensing type is available for adult (A-License) or medicinal (M-License) use or both.

Before applicants can apply for commercial cannabis licensure with the applicable state agency, they must have authorization from the local jurisdiction in which the proposed commercial cannabis business will operate. Operators may hold multiple license types, with the exception of licensed testing laboratories, which must remain independent of all other license types.

In general, all commercial cannabis licensees must:

  • be 21 years of age or older;
  • submit fingerprints and authorization for a criminal background check for all owners and financial interest holders;
  • prove that they have obtained a $5,000 surety bond payable to the state;
  • obtain landowner approval for the proposed premises; and
  • obtain attestation that the applicant has entered, or will enter, into a labor peace agreement and will abide by its terms if and/or when the applicant has 20 or more employees.

Complete annual licensee application requirements can be found in Section 5002, Title 16 (for license types issued by the Bureau of Cannabis Control), Sections 40128 to 40131, Title 17 (for manufacturers), and Section 8000, Title 3 (for cultivation) of the California Code of Regulations.

Annual license fees for operators licensed by the Bureau of Cannabis Control are determined according to their estimated gross revenue for the 12-month license period and range from $1,500 to $300,000.

CalCannabis Cultivation Licensing sets fees based on license type, ranging from $1,205 to $77,905.

The California Department of Public Health’s Manufactured Cannabis Safety Branch calculates annual commercial cannabis manufacturing license fees based on the licensed premise’s annual gross revenue, ranging from $2,000 to $75,000.

A license may be revoked if:

  • an owner or interest holder is convicted of a controlled substance felony subsequent to licensure;
  • the licensee abandons, quits or closes the licensed premises for a period exceeding 30 consecutive calendar days (except if in compliance with regulations); or
  • the licensed business violates any of the regulations governing commercial cannabis operations.

 

Are any businesses specifically prohibited from selling cannabis products?

Yes. Only businesses holding a valid Type 9 (non-storefront delivery) or 10 (storefront) retailer license from the Bureau of Cannabis Control may sell cannabis products to consumers.

Businesses where any of the following individuals have a direct or indirect ownership interest may not hold a commercial cannabis license of any type:

  • Persons who hold office in, or are employed by, an agency of the State of California or any of its political subdivisions when the duties of such persons have to do with enforcement of the commercial cannabis regulations or any other penal provisions of law of California regulating cannabis goods (Section 5005, Title 16 of the California Code of Regulations).
  • Persons with convictions that are substantially related to the qualifications, functions, or duties of the business for which the application is made, including:
    • “violent” or “serious” felonies;
    • felony conviction involving fraud, deceit, or embezzlement;
    • felony conviction for hiring, employing or using a minor related to controlled substances; or
    • felony convictions for drug trafficking with enhancements (Section 5017, Title 16 of the California Code of Regulations).

Zoning and real estate considerations

Are there any zoning restrictions on where businesses can cultivate, produce and sell cannabis products?

Premises must not be located:

  • within a 600-foot radius of a school for kindergarten to 12th grade, a nursery, or youth center;
  • where persons must pass through a business selling alcohol or tobacco or a private residence to access the licensed premises or in order to access any of the above;
  • in a private residence; or
  • in any structure that is not permanently affixed to the land (Section 5026, Title 16 of the California Code of Regulations).

Local jurisdictions often have additional zoning regulations that must be taken into consideration.

Are there any other notable real estate issues pertinent to cannabis businesses, including with regard to landlord/tenant relationships and real estate market activity?

In California, and most local jurisdictions, both the local permit and state commercial cannabis license are tied to the property and are non-transferable. In general, California prohibits commercial cannabis operator tenants from subleasing all or part of a licensed premises with the exception of a Type S manufacturing license.

As with any contract involving cannabis, the current illegality under federal law means that the federal government could seize property being used for commercial cannabis operations in a federal civil asset forfeiture action.

In California, land is typically transferred by means of a grant deed with title insurance. At present, where there is even a hypothetical possibility of federal expropriation, title insurance companies are reluctant to offer meaningful policies. In addition, because title insurance companies typically operate escrow companies as an ancillary service, they are particularly sensitive to source of funds and know-your-customer rules. The end result is that many title companies will not insure conveyances if they learn that the subject property is to be used for any business that touches cannabis products.

Finally, lease agreements present a novel range of issues. A negative covenant not to use a premises for unlawful acts should be replaced with a positive covenant to use the property for “a lawful purpose.” Tenants who are selling cannabis products can anticipate complaints from both landlords and neighboring tenants, ranging from unpleasant odors to unruly customers to risk of robbery due to the lack of access to banking.

Product restrictions and specifications

Are any cannabis products and accessories prohibited from sale? Do any product specifications apply?

Licensed commercial cannabis retailers may only sell cannabis products that:

  • have been received from a licensed distributor;
  • have a verified expiration or sell-by date, if any;
  • have undergone laboratory testing;
  • are appropriately and accurately labeled; and
  • comply with all applicable requirements found in the pertinent regulations (Section 5406, Title 16 of the California Code of Regulations). 

Live, immature cannabis plants and seeds may be sold only if:

  • the plant is not flowering;
  • the plant originated from a licensed nursery or microbusiness authorized to engage in cultivation;
  • the following label is affixed to the plant or package containing seeds: “This product has not been tested pursuant to the Medicinal and Adult-Use Cannabis Regulation and Safety Act” (Section 5408, Title 16 of the California Code of Regulations).

Manufactured cannabis productsEdible cannabis products must not be attractive to children or shaped like a human being, animal, insect or fruit. Section 23004 of the California Business and Professions Code further specifies product types that must not be sold as edible cannabis products. 

Edible cannabis products must not contain more than 10 milligrams of tetrahydrocannabinol (THC) per serving and no more than 100 milligrams of THC per package. 

Inedible cannabis products must not contain more than 1,000 mg of THC per package, unless the product is only available to medicinal-use customers and bears a label stating “FOR MEDICAL USE ONLY,” in which case it may contain more than 1,000 mg of THC but not more than 2,000 mg of THC per package. 

Packaging and labelling

What packaging and labelling requirements apply to the sale and distribution of cannabis products and accessories?

Labelling requirements applicable to manufactured cannabis productsAll manufactured cannabis products must include a label that is unobstructed and conspicuously located on the outside of the wrapper or container of a finished product so that it can be read by consumers. The label must contain a primary panel and an informational panel with certain information as specified. Content designed to be attractive to individuals under 21 years old and information that is false or misleading, including any health-related statements that are untrue or misleading, must not be included on any cannabis product label.

Primary panelA primary panel label must be located on the part of a label that is most likely to be examined under customary conditions of display for retail sale. A primary panel label must include:

  • the product’s identity in a font size reasonably in proportion to the most prominent printed matter on the panel;
  • the net weight or volume of the package’s contents;
  • the THC and cannabidiol (CBD) content for the package in its entirety, expressed in milligrams per package; and
  • the California universal symbol for cannabis no smaller in size than half an inch by half an inch, printed legibly and conspicuously, in black ink.

Text must be in six point font or larger.  The primary panel of edible cannabis products must also contain:

  • the words “cannabis-infused” immediately above the identity of the product in bold type and a text size larger than that used to identity the product; and
  • the THC and CBD content expressed in milligrams per serving.

Informational panelAn informational panel label should be placed on any part of the “label” that is not the primary panel, such as on the container, wrapper, or inserted material that accompanies the final product.

The informational panel must include:

  • the name of the licensed manufacturer and its contact number or website address;
  • the date of the product’s manufacture and packaging; and
  • the following statement in bold print:

GOVERNMENT WARNING: THIS PRODUCT CONTAINS CANNABIS, A SCHEDULE I CONTROLLED SUBSTANCE. KEEP OUT OF REACH OF CHILDREN AND ANIMALS. CANNABIS PRODUCTS MAY ONLY BE POSSESSED OR CONSUMED BY PERSONS 21 YEARS OF AGE OR OLDER UNLESS THE PERSON IS A QUALIFIED PATIENT. THE INTOXICATING EFFECTS OF CANNABIS PRODUCTS MAY BE DELAYED UP TO TWO HOURS. CANNABIS USE WHILE PREGNANT OR BREASTFEEDING MAY BE HARMFUL. CONSUMPTION OF CANNABIS PRODUCTS IMPAIRS YOUR ABILITY TO DRIVE AND OPERATE MACHINERY. PLEASE USE EXTREME CAUTION.

  • the statement “FOR MEDICAL USE ONLY” if the cannabis product is intended only for sale to medicinal-use customers or contains more than 1,000 mg of THC per package,
  • a list of all product ingredients;
  • instructions for use;
  • the product expiration, “use by,” or “best by” date, if any; and
  • the product’s unique identifier and batch number, if used.

Text must be at least six point font and in proportion to the size of the primary panel and container, unless there is insufficient area available on the container to print all of the required information in this text size. In such a case, the label must include all warning statements required above in bold (i.e., “GOVERNMENT WARNING…”) and be accompanied by supplemental labeling that includes the other required information in no less than eight point font. 

The informational panel of edible cannabis products must also contain:

  • any major food allergens;
  • any artificial food colorings contained in the product; and
  • the amount of sodium, sugar, carbohydrates, and total fat per serving contained therein (Sections 40403 to 40412, Title 17 of the California Code of Regulations and Sections 26120 and 26121 of the Business and Professions Code).

Packaging requirements applicable to manufactured cannabis productsA package used for a cannabis product must:

  • be tamper-evident; and
  • not be attractive to children.

As of January 1, 2020, cannabis products must also be child resistant (Section 40415, Title 17 of the California Code of Regulations; Sections 26120 and 26121 of the Business and Professions Code).

All packaging and labels must also comply with the California Fair Packaging and Labeling Act (Sections 12601 et seq. of the Business and Professions Code). As of January 1, 2020, cannabis goods must comply with all packaging requirements and not leave a licensed retailer unless placed in an opaque exit package. 

Advertising and marketing

What rules and restrictions govern the advertising and marketing of cannabis products and accessories (including online)?

The rules and restrictions governing advertising and marketing are defined in the commercial cannabis regulations under Section 26150 of the Business and Professions Code. 

Advertising placed in broadcast, cable, radio, print, and digital communications must only be displayed after the licensee has obtained reliable up-to-date audience composition data demonstrating that at least 71.6% of the audience is reasonably expected to be 21 years old or older. Before engaging in any direct, individualized advertising communication or dialogue, including but not limited to having a potential customer added to a mailing list, or otherwise subscribe to communications, the licensee must use age affirmation to confirm the recipient is 21 years of age or older.

All advertising and marketing of manufactured cannabis products must accurately and legibly include the name and license number of the licensee and meet the requirements of Section 26150, Chapter 15, Division 10 of the California Business and Professions Code (Section 40525, Title 17 of the California Code of Regulations and Section 26150 of the California Business and Professions Code).

There are advertising and marketing prohibitions on:

  • depictions or images of minors or anyone under 21 years of age;
  • objects, such as toys, inflatables, movie or cartoon characters, or any other display likely to appeal to minors;
  • ads for free cannabis goods or any type of giveaways, including giveaways of non-cannabis products; and
  • ads or marketing within a 15-mile radius of the Californian border on an interstate highway or state highway which crosses the border of another state.

Outdoor advertising must be affixed to a building or permanent structure and comply with the Outdoor Advertising Act (Section 5040, Title 16 of the California Code of Regulations).

Branding

What rules and restrictions govern the branding and trademarking of cannabis products and accessories? Are there any other special branding considerations for cannabis businesses?

Generally speaking, businesses whose products or services involve the manufacture, distribution or consumption of cannabis—also known as “plant-touching” businesses—face an uphill battle to build and protect their brands through federal trademark registrations, which cover all 50 states. This is due to the fact that the US Patent and Trademark Office (USPTO) is vigilant about rejecting such businesses’ trademark applications, as all “plant-touching” products and services are still considered illegal at the federal level under the Controlled Substances Act. Accordingly, in order to maximize the opportunity for obtaining a brand-strengthening federal trademark registration, the mark itself must not suggest a connection to the cannabis industry, nor should the required proof of use of the trademark submitted to the USPTO contain any evidence that such goods or services are illegal under federal law. However, even then an applicant is not out of the woods, because the USPTO may independently investigate the mark and ask questions, which must be answered under oath, regarding whether the mark is used in relation to any federally illegal products or services. However, if a “plant touching” business engages in the sale of federally lawful goods and services, seeking federal trademark protection through the USPTO should always be strongly considered. In addition, CBD-related marks have been more successful in obtaining federal registrations than other cannabis-related marks. 

The only alternatives to the above-described gauntlet of federal trademark registration are state-based registration and common law trademark protection. Common law trademark protection applies as soon as a mark is used on goods or services and extends as widely as such use of the mark is made. Under common law, the first party to use a mark in a particular area has superior rights over later users of similar marks in that area. State registrations are based on common law rights and may be obtained in states where common law use exists. Sometimes state registrations grant statewide rights regardless of the geographic scope of common law use in that state. A key benefit of state-based registration is placing other parties on constructive notice of the mark, as state registration databases are easily searchable and show up in most professionally commissioned trademark searches. Many states allow for the registration of cannabis related trademarks in all states where cannabis is legal recreationally, and in most states where medical use is permitted. In such sates, trademark owners may sue for infringement (but not in federal court and only under state law). Laws restricting the branding of cannabis products in such states typically include not allowing marks that are confusingly similar to brands known for non-cannabis products. Minnesota (which currently allows medicinal use only) also bans marks that refers to an “unlawful” substance (e.g., weed or pot).  

When considering the adoption of a cannabis-related trademark, the more commonly associated the term is with the cannabis industry (e.g., weed), the less likely it is that any one user will be afforded exclusive rights over the term. Logos or trade dress (i.e., the “look and feel” of a product) can be as important to branding as a trademark composed of words (e.g., the Nike swoosh, the shape of a Coke bottle or Tiffany’s blue box). In the rapidly growing cannabis industry, it is recommended that businesses seek the advice of attorneys regarding these evolving brand protection strategies. 

Financing

Private

What private financing options are available for cannabis businesses in your jurisdiction, and what are their respective advantages and disadvantages?

While traditional banks have generally not been willing to finance cannabis enterprises, there are a growing number of private equity funds dedicated to the cannabis industry. If interested, these funds may able to provide equity or debt funding to bring a cannabis operation to the next level as well as furnish certain management expertise. However, some entrepreneurs are wary of ceding the amount of management control that such funds may require. However, with the assistance of qualified counsel it may be possible to raise funds from “friends and family” in a securities offering exempt from federal securities requirements under various “safe harbors” provided by Regulation D of the Securities Act. As discussed below, state securities laws in the states of the offerees should be consulted, but should not pose a serious impediment. For example, the applicable securities laws of California are briefly discussed below.

Section 25102(f) of the California Corporations Code provides an exemption from registration requirements for any offering where the following criteria are met:

  • sales are made to no more than 35 persons;
  • all purchasers have a pre-existing relationship with the issuer;
  • each purchaser is purchasing for their own account and not for resale; and
  • the offering is accomplished without any advertisement or publication.

This is typically characterized as a “friends and family” offering.

In addition, many California issuers have made interstate offerings under Regulation D of the Federal Securities Act 1933, with particular emphasis on Rule 506 of that exemption. 

Rule 506(b) provides a safe harbor from securities registration for offerings of any dollar amount, as long as the following requirements are met with respect to the offering and sale:

  • there is no general solicitation or advertising;
  • there are no more than 35 non-accredited investors, plus an unlimited number of accredited investors;
  • there is no false or misleading information, and any information made available to accredited investors must also be made available to non-accredited investors; and
  • the company must make itself available to answer questions from prospective investors.

Rule 506(c) allows the offering to be made with broad solicitation and general advertising, as long as:

  • all investors are accredited; and
  • the company takes reasonable measures to verify that all investors are accredited.

Offerings are usually described in a document called a ‘private placement memorandum’, which is structured according to Securities and Exchange Commission regulations.  The “Risk Factors” section, where the issuer is required to describe risks that are specific to the particular offering, presents some novel issues for companies in the cannabis business. In addition to the obvious, if remote, risk of federal criminal prosecution and seizure of assets, the issuer should consider mentioning a range of lesser but perhaps more probable risks, such as those associated with large volumes of cash, landlord or tenant issues, and interstate commerce and transportation.

Public

What rules and restrictions govern cannabis businesses’ listing and admission to trading on recognised equity securities exchanges? What are the advantages and disadvantages of public listing?

At present, no cannabis company with U.S. operations has gone public in the United States by means of an initial public offering of securities. Therefore, while other federal agencies have indicated clear opposition (e.g., the Drug Enforcement Administration and the United States Citizenship and Immigration Services), the Securities Exchange Commission’s position on cannabis is unclear. One company reached the S-1 submission stage, and cleared the comment period without objection by the commission, but later withdrew its offering for other reasons.

Until another company decides to undertake the investment in money and effort necessary to stage an initial public offering, cannabis companies may explore reverse mergers or go public in Canada where cannabis is legal nationwide.

Medical cannabis

Medical use

Which medical conditions qualify for treatment with cannabis products? What other rules and restrictions govern medical use of cannabis (eg, dosage limits)?

Under the Medical Marijuana Program, “serious medical conditions” qualify for treatment with cannabis products. A complete list can be found at Section 11362.7 of the California Health and Safety Code. There are no explicit limits on the dosage of medical marijuana that may be recommended.

Physician licensing

What licensing requirements apply for physicians seeking to prescribe cannabis products to patients?

There are no specific licensing requirements applicable to physicians in order to prescribe cannabis products to patients. However, physicians may not be directly or indirectly employed by a licensed cannabis retailer to provide cannabis recommendations and must be wary of physician conflicts of interest.

Pharmacy licensing

What licensing requirements apply for pharmacies seeking to dispense cannabis products?

Pharmacies may not hold commercial cannabis business licenses.

Health insurance

How are cannabis products covered by health insurers (both public and private)? Are there any rules or restrictions in this regard?

There are no state-specific rules or restrictions regarding health insurers’ coverage of cannabis products; however, neither public nor private health insurers currently cover cannabis products in California.

Product development

What opportunities are available for cannabis businesses to cooperate with healthcare providers, pharmaceutical companies and research institutes in the development of new medical cannabis products? Are there any notable regulatory considerations in this regard?

The California Marijuana Research Program, codified by the Section 11362.9 of the Health and Safety Code, proscribes that the state commission objective scientific research regarding the efficacy and safety of administering cannabis as part of medical treatment by the University of California. In order to maximize the scope and size of its cannabis studies, the program may solicit, apply for, and accept funds from foundations and private individuals, include within the scope of the cannabis studies other independently funded cannabis research projects which meet the requirements set out in Section 11362.9.

Taxes

Sales tax

How are sales of cannabis products taxed?

Cannabis and cannabis products are subject to a sales and use tax that must be paid by the customer at the time of purchase. Additional sales tax obligations may be imposed based on local jurisdictional regulations. Retailers must also collect a 15% excise tax which is added to the gross purchase price and included for purposes of calculating the sales tax amount.

As of November 9, 2016, qualified medical cannabis patients and their primary caregivers that present a valid Medical Marijuana Identification Card issued by the California Department of Public Health at the time of purchase are exempted from retail sales tax on medical cannabis. 

Business taxes

What tax liabilities arise for cannabis businesses, and what best practices are advised for efficient tax planning?

Anyone selling cannabis or cannabis products must register with the California Department of Tax and Fee Administration (CDTFA) for a seller’s permit. Cannabis cultivators, processors, manufacturers, retailers, microbusinesses, and distributors making sales must obtain and maintain a seller’s permit as a prerequisite for applying for a commercial cannabis license with:

  • the California Department of Food and Agriculture;
  • the California Department of Consumer Affairs; or
  • the California Department of Public Health.

Depending on the type of business, there are different tax deadlines that must be met.

Distributors of cannabis and cannabis products must also register with the CDTFA for a cannabis tax permit, in addition to their seller’s permit, to report and pay the cannabis excise and cultivation taxes. 

There are three types of cannabis tax in the California cannabis industry:

  • cultivation tax;
  • excise tax; and
  • sales and use tax.

Excise taxRetailers must collect a 15% excise tax that is imposed on purchasers of cannabis and cannabis products and paid to the cannabis distributor for remittance to the CDTFA.

If cannabis or cannabis products are sold or transferred between more than one licensed distributor, the distributor that sells or transfers the cannabis or cannabis products to the retailer is responsible for collecting the cannabis excise tax from the retailer, reporting and paying it to the CDTFA. 

Cultivation taxCultivators are taxed on the cultivation of cannabis that enters the commercial market, and shall pay the cultivation tax to either a distributor or manufacturer depending on the nature of the transaction. In general, the cultivation tax does not apply to immature plants, clones, and seeds, but the cannabis excise tax and the sales and use tax do.

Beginning January 1, 2020, the CDTFA must annually adjust the cultivation tax rates to account for inflation.

Sales and use taxThe last “seller” of cannabis or cannabis products must collect and pay a sales and use tax, along with any sales and use tax that may be imposed by local jurisdiction. The 15% cannabis excise tax amount must be included in the calculation of the gross purchase amount subject to sales tax.  Some local jurisdictions have enacted measures requiring that cannabis businesses located in their jurisdictions pay a cannabis business tax. If a retailer adds a separate amount to a customers’ invoices or receipts to cover the cannabis business tax, the sales tax also applies to the business tax amount.

The retail sale of cannabis accessories (i.e., pipes, rolling papers, vape pens (without cannabis), shirts and lighters) are subject to sales tax, but not the 15% excise tax.

Cross-border issues

Import and export

What rules and restrictions govern the import and export of cannabis products and accessories to and from your jurisdiction?

It is illegal to transport state-legal cannabis or cannabis products across state lines for any reason.

Immigration considerations

What immigration rules and restrictions are noteworthy for stakeholders in a cannabis business, including with regard to the movement of employees and the cross-border carriage of cannabis for personal use?

Individuals who are involved (directly or in an ancillary manner) with the cannabis industry in other nations face uncertain risks when attempting to cross the border into the United States.  Throughout 2018, there have been reports of individuals working or investing in the Canadian cannabis sector being turned back at the U.S. border—or worse, being handed a lifetime ban from entering the United States.

U.S. Customs and Border Protection (CBP) clarified on October 9, 2018, that Canadians who work in Canada’s legal cannabis industry may enter the United States for non-work-related reasons without negative consequences. The CBP’s clarification states as follows:

A Canadian citizen working in or facilitating the proliferation of the legal marijuana industry in Canada, coming to the U.S. for reasons unrelated to the marijuana industry will generally be admissible to the U.S. however, if a traveler is found to be coming to the U.S. for reason related to the marijuana industry, they may be deemed inadmissible.

CBP agents retain discretion to reject any applicant seeking entry for reasons “related to the marijuana industry.” Border crossers are explicitly warned as follows:

Generally, any arriving alien who is determined to be a drug abuser or addict, or who is convicted of, admits having committed, or admits committing, acts which constitute the essential elements of a violation of (or an attempt or conspiracy to violate) any law or regulation of a State, the United States, or a foreign country relating to a controlled substance, is inadmissible to the United States.

The CBP look for evidence that supports the essential elements of a violation of U.S. laws relating to controlled substances. There are a number of relevant statutes and regulations in this regard.