JANUARY 2019 - Capitol Corner

Statewide Working Group Nixes Hope for Cannabis Banking Fix

At a public hearing at the California State Capitol on December 27th , the Cannabis Banking Working Group (CBWG), chaired by California State Treasurer John Chiang, was presented with the results of an independent study that found that establishment of a public cannabis bank would pose too great of a legal and financial risk to the State of California.

The 151-page feasibility report detailed virtually insurmountable “legal, schedule, mission and financial” risks the State of California would face if it were to move forward to create a public cannabis bank.

Instead, the study recommended the state establish a state project office to work towards improving access to banking by the cannabis industry through greater facilitation, communication, and coordination.

The cannabis bank feasibility study also examined alternative approaches to creating a state-backed bank to handle the billions in annual revenues California’s year-old recreational cannabis industry is expected to generate.

The alternatives included versions of a public bank that would provide services:

  • Exclusively to the industry,

  • Primarily to the industry, but also to other individuals and businesses, and

  • To other commercial banks through a state-run “correspondent bank.”

The feasibility report noted that there is “a high probability” federal regulators will not issue the necessary master account for a public bank to operate, and if that happens after the state begins spending an anticipated $35 million on start-up costs for any of the three alternatives examined, all taxpayer funds expended to that date “would be wasted.” Similarly, the report finds that a public cannabis bank would require approximately $1 billion in initial capital investment, and that the bank could lose money for 12 years before it is able to begin repaying that capital. Furthermore, the State of California may not be able to begin receiving net dividends for 25 to 30 years after the bank opens, meaning the initial investment may go decades without producing any kind of return on investment.

The report also found that the ambiguous path the cannabis industry faces only adds to the numerous issues at hand, noting “If federal regulations change during this time and cannabis banking becomes legal, the bank would most likely be closed at that point due to a decreased business demand for the bank and thereby incur a significant loss. If federal regulators begin to aggressively enforce federal laws the bank would be closed and deposits subject to confiscation…Even if federal regulators maintain the current ambiguous situation, commercial banks will offer competing services to the industry by the time a public bank could open.”

The feasibility study’s findings were echoed by a separate analysis produced for Treasurer Chiang by California Attorney General Xavier Becerra and the California Department of Justice, which looked into the legal hurdles such an institution would face.

The Attorney General’s office concluded that a state-run financial institution “designed to provide financial services to cannabis-related businesses…would violate several federal criminal statutes…[that] carry severe potential penalties. The state is not immune under federal law.”

While there may be ways to reduce risks to a public cannabis bank, there is no way to eliminate them, the report concludes.

Treasurer Chiang concluded, “In the two years since the passage of Prop 64, I have been proud to lead this fight and will continue to look for alternate ways to support our legal businesses, the will of our citizens, and stakeholders across this state. But today’s news makes it clearer than ever that the path forward must include action by the federal government.”

Regulations

With the permanent regulations in place, here are the most significant changes:

1. Labeling and Packaging – There are substantial changes to the labelling and packaging requirements for both distributors and retailers. As to retailers, the proposed new regulations state that until January 1, 2020 all packaging containing cannabis goods must be tamper-evident, but does not have to be child resistant.  However, all products must be placed in a resealable, child resistant, and opaque “exit package.”   After January 1, 2020, all product packaging must be child-resistant, and the exit package will no longer need to be child resistant or resealable.

2. Marijuana Deliveries – The new regulations prohibit marijuana deliveries by companies that do not have state-issued licenses. The regulations do allow for “technology platforms,” like the apps Eaze and Weedmaps, to facilitate sales between licensed dealers and customers, but prohibits profit- sharing based on sales.  This prohibition on profit-sharing could impact Eaze and Weedmaps’ business model going-forward.  The new proposed regulations also make changes to the prior set of proposed regulations relating to marijuana delivery drivers, vehicles, and limit to $5,000 the value of cannabis goods that can be carried by a delivery vehicle at any one time. (Expect a possible legal battle, as the League of Cities and the CA Police Associations strongly oppose this allowance and contend that it conflicts with Proposition 64).

3. Ownership Disclosures – Marijuana businesses operating in compliance with California’s regulatory scheme would be required to disclose substantial information about all parties who have an ownership stake in the business. Under the proposed regulations “all entities and individuals with a financial interest” in the marijuana business shall be disclosed to the BCC, and the proposed regulations include specific definitions of what it means to have a financial interest in a cannabis business.

4. Licensed Events – The original set of proposed regulations limited temporary cannabis events (where cannabis can be sold and consumed on-site) to county fairgrounds. The new proposed regulations allow such events at other venues that are approved by the local jurisdiction.  This means that, if the regulations are adopted, local authorities will have discretion to determine where cannabis events can be held, which could lead to a higher number of such events.

5. White Labeling - Another significant win for the marijuana industry is that contract manufacturing, also known as white labeling, may be allowed. Contract manufacturing allows a licensed maker of edibles or concentrates to produce and package products on behalf of an unlicensed business, such as a celebrity brand or out-of-state company. However, the process can be tricky to navigate. What would be allowed is for unlicensed brands to contract out their intellectual property to licensed firms, as long as they’re not directly involved in production or other day-to-day logistics. The BCC removed previous examples from the regulations on what was prohibited to avoid confusion. But it appears that such licensing agreements will be allowed, provided that the unlicensed brands aren’t calling the shots for license-holding California manufacturers.

With wins, such as allowing delivery and white labeling, there are still many ambiguous and problematic regulations, such as ownership, loss of business if the track-and-trace systems, Metrc goes down and car ownership for testing labs that we will need to monitor.

Legislation

The 2019-20 Legislature convened and began introducing bills on December 3rd and have until February 22nd to introduce all legislative measures. Thus far, these are the bills relating to cannabis:

  • AB 3 (Cooper) – A spot bill pertaining to sale of cannabis products to minors.

  • AB 141 (Cooper) - Would authorize retailers, cultivators, and manufacturers that are licensed under MAUCRSA to participate in, and not be required to obtain a temporary cannabis event license or other temporary license for, a cannabis informational, educational, or training event held for state and local government officials and their employees, including, but not limited to, legislators, city council members, law enforcement organizations, emergency medical services staff, firefighters, child protective services, and social workers; employees of health care facilities; and employees of public and private schools, if specified conditions are met.

  • SB 34 (Wiener) - This bill would similarly authorize specified licensees to provide free cannabis or cannabis products to a medicinal cannabis patient if specified requirements are met, including that the cannabis or cannabis products otherwise meet specified requirements of MAUCRSA.

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