Over the next few months, the three California cannabis agencies will consolidate their authority over the entire state industry in a new mega-agency: the Department of Cannabis Control. This is undoubtedly a good idea as it has been awkward, ineffective, and inefficient for many licensees to have three agencies overseeing the same industry. Many other states are consolidating the cannabis regulator into one agency, and this is a welcome change for California.
However, consolidation will have many problems. Every aspect of the licensees’ relationship with the agencies is likely to undergo a transition: license numbers and certificates will change so that they are consistent across all license types. Information and documents need to be exchanged, which will probably not be easy, and it is also unclear which of the agency’s current web portals can be used with the new agency.
We also don’t know much about what’s going to happen from a regulatory perspective. There are currently three regulations (other than tax regulations) that have been enacted by the agencies. It is likely that the regulations are combined to some extent as there are many places where there is no conflict. However, there are many areas where current regulations conflict and it will be interesting to see what happens.
While we don’t know much about what’s going to happen in the next few months, we can safely say that whatever happens will affect many commercial contracts in the industry, if for no other reason than the potential for changes in the definitions of “Owners” and “Financial Interested Parties” (FIHs). Currently, agencies define these terms a little differently, which can have a pretty big impact in the long run.
Broken down a bit, an individual is an “owner” of a cannabis business if they own 20% or more of the business, hold certain positions in the business (officer, director, manager of an LLC, etc.), or manage, manage or control the business. Those interested in finance tend to be people who own less than 20% or who grant loans or investments to the company. The Bureau of Cannabis Control (BCC) complements this list, defining people as owners when they expect 20% of the company’s profits. In the event that a company is owned or owned by FIH, it must be specifically looked up 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 (CDPH) rule a lot is slimmer).
This is a lot to unzip, so the best way to see this in action is with an example. Let’s say a company has licensed IP to a CDPH-licensed manufacturer and is entitled to more than 20% of the business profits as compensation. It is possible that under the CDPH rules this company is only considered an FIH. However, under the BCC rules, this company could be considered the owner in the same circumstances. As a result, the information for owners (across all agencies) is orders of magnitude more intensive than for FIHs. There are many companies that have only signed contracts with CDFA or CDPH licensees that can qualify them as FIHs. Many of these contracts would own the same companies under the BCC rules.
Regardless of how the DCC decides on further development, it will be problematic to deal immediately with overlaps and inconsistencies in the regulations. This is just one example and there are many other potential issues for the agency to figure out as it is implausible in adopting conflicting rules (we will likely post soon on some areas where things need to be addressed).
The most important thing here is that licensees, or companies that are entering into contracts with licensees, should prepare to go through each remaining valid contract that they have signed and see if they stack up with the new registrations. Much of this, by definition, cannot be done just yet, as we don’t know what the future will look like here, but companies should be prepared for it and at least be aware of the prospect of such big changes.
We will continue to report on agency consolidation as we get closer to reality. So stay tuned with the law Law Blog.