Eureka! Proposition 64 Passed; What It Really Means to Investors, Entrepreneurs and Consumers

On November 8th, 2016 California voters passed Proposition 64 "The Control, Regulate and Tax Adult Use of Marijuana Act" (aka "AUMA") by a margin of 53% to 47%. The most immediate effect has been to create a great deal of misinformation on exactly what was just passed. The confusion is understandable since the initiative spans 65 pages of legalese with relatively few people having the time or patience to read it in its entirety. Adding to the confusion is that the initiative has been consistently referred to as a marijuana legalization bill leading many to mistakenly believe that they could now do what they want with marijuana without legal repercussions. Of course this is not the case. Just because something is legal doesn't mean there aren't rules and regulations governing use. Beer is similarly legal, but you can't buy it unless you are over 21 (and can prove so), you can't drink and drive, you can't drink in public, and so forth. With the California legalization bill just passed there are now over 65 pages of such rules for recreational marijuana. The LA Times summarizes Prop 64 as follows:

Cannabis will be taxed more than tobacco, marketed like wine, funded like the riskiest of start-ups and grown under bank-like security.

For those of you with the inclination to read the entire bill, here is a link to it. For everyone else below is a summary of what it means to cannabis investors, people in the cannabis industry, medical marijuana patients, and people who are interested in marijuana for non-medical personal use (e.g., just getting high). (Unless otherwise noted, italicized parentheticals reference the applicable California Health and Safety Code Sections.

One final note, the state legislature is expected to begin process of adopting legislation amending and conforming MCRSA ("Medical Cannabis Regulation and Safety Act") and AUMA. Prop 64 provides the ability for the Legislature to amend it to "further the purposes and intent of the Act." One of the first questions that will have to be answered by the legislature is whether the two systems should run in parallel, such as in Colorado, or as a unitary system as in Washington. Regardless of which way it goes, expect ongoing changes and tweaks to both the medical and recreational laws and regulations. 

 

           7,134,587 Voted "Yes"

           7,134,587 Voted "Yes"

Changes Already in Effect (as of Wednesday, November 9, 2016)

  • Adults 21 and older are now allowed to possess, transport, purchase, and use up to an ounce of dried marijuana flower and 8 grams of cannabis concentrate (though parts of AUMA indicate that there are penalties for above 4 grams of concentrate so expect this to be addressed by the courts or legislators). (Note: There are still penalties, though lessened, for possession by individuals under 21 and greater penalties if under 18). (11362.1) 
  • Criminal penalties for non-serious marijuana-related offenses, such as possession of more than 1 ounce of marijuana, are reduced to misdemeanors ($500 fine and up to six months in jail). Punishment for possession of marijuana for sale are being dropped from mandatory felonies and up to two years in jail to the same misdemeanor penalties. (11360)
  • Adults 21 and older can grow up to 6 marijuana plants within a private residence (including houses, apartments, and mobile homes) as long as the area is locked and not visible from a public place. Outdoor cultivation is subject to local restrictions but municipalities can't restrict adults from growing up to six plants for personal use. (11362.2)
  • Persons with prior marijuana-related convictions can petition the court to have their records cleared or changed to reflect the new laws. (11361.8)
  • Personal information of medical marijuana patients disclosed to state and local health departments is now protected under the Confidentiality of Medical Information Act. (11362.713)
  • Medical marijuana patients cannot lose their custodial or parental rights solely based on status as medical marijuana patients. (11362.84)
  • The California Bureau of Medical Cannabis Regulation is renamed the Bureau of Marijuana Control and has responsibility for regulating both medical and adult use cannabis. (26010)
  • Powers and duties of the Department of Consumer Affairs, Department of Public Health, and Department of Food and Agriculture are expanded to include the regulation and control of the adult use marijuana industry. (26012)
  • The Department of Food and Agriculture is authorized to begin regulating the cultivation, manufacture, and sale of industrial hemp. (11018.5.)
  • Sales of medical marijuana to patients with valid medical marijuana ID cards are exempt from existing state sales and use tax (currently 7.5% state sales tax plus additional amounts depending on locality). (34011)
  • Regardless of medical or adult use, the prohibition against public consumption continues (and anywhere smoking tobacco is prohibited) (11362.3)
  • Despite there not being a standardized roadside sobriety test for cannabis, driving under the influence of marijuana remains illegal and open containers are prohibited while in a car, boat, etc. (11362.3)  (Note: With things like cannabis edibles, vape pens, etc., it isn't clear what constitutes an "open container" so the trunk is probably the best bet.)
  • Possession on the grounds of a school, day care center, or youth center while children are present remains illegal. (11362.3)
  • Crossing state lines, even to another adult use state, falls under federal prohibition and a bad idea for small, personal amounts and a very bad idea for commercial transportation.

Note that the changes in effect ("possess, transport, purchase and use...") do not include the ability to legally sell for adult (that is non-medical) use. To sell marijuana for recreational use, businesses will need to acquire a state license which will not start happening until 2018. Local governments can also require a local license and likely all local governments will do so. This means that no dispensary or delivery service in California can legally sell anything but medical cannabis to qualified medical cannabis patients until the 2018 licenses.

Dispensaries in business today are selling medical marijuana under Prop 215 / SB 420. However, as of 2018, they will begin to fall under a new state licensing scheme (called MCRSA) which is similar to Prop 64's recreational regulations.

Because there are differences between current medical law and those under Proposition 64, local authorities will have to determine which rules are applicable in each circumstance. Expect some confusion when we have the same plant being used by the same person but under potentially different rules based on the applicability of medical versus adult use.

Changes That Will Not Take Effect Until January 1, 2018 (or later)

Licensing for Recreational (Nonmedical) Businesses:

  • State agencies charged with licensing of nonmedical marijuana businesses must begin issuing licenses no later than January 1, 2018. (26012)
  • In addition to the medical cannabis licensing types created by the legislature and signed into law in 2015, there are now identical recreational licenses (which will be identified as "NM" or "Nonmedical") as well as a new nonmedical "Type 12: Microbusiness" license.  (26050)
  • The new Microbusiness license is analogous to a microbrewery and allows for small scale vertical integration: cultivation of less than 10,000 square feet, distribution, Level 1 manufacturing, and retailing. (26070)
  • Businesses can have both NM licenses and medical licenses. (26053)
  • Under Prop 64 the requirements for NM distribution licenses are as ill-defined as the requirements for medical marijuana distribution under MCRSA. Consequently, we know little more than applicants will require to be bonded at levels not yet set as well as meet minimum security and safety requirements, which are also not yet set. (26070)
  • Subject to the results of a feasibility study, the state may create a special classification of non-profit licenses that come along with various incentives including tax breaks. If they are created such entities will be prohibited from generating annual revenues in excess of $2m. Examples of such licenses would be entities that provide cannabis products to low income persons. (26070.5)
  • Given the likelihood that there will be significant demand for all 19 AUMA license types, it is reasonable to expect that the Department of Health, Department of Consumer Affairs and the Department of Food and Agriculture will be overwhelmed with applications. Consequently, while the state may begin issuing licenses by January 1, 2018, it could be a long line for those without priority status. Priority will be given to applicants that can demonstrate to the state's satisfaction that the applicant was operating in compliance with the Compassionate Use Act and its implementing laws before September 1, 2016, or currently operates in compliance with Chapter 3.5 of Division 8. (26054.2)
  • Cannabis licenses are good for one year and must be renewed annually (26050).
  • Until December 31, 2019, license applicants must prove continuous residency in California from January 1, 2015. (26054.1)
  • To protect existing (i.e., smaller) players, large growers are prohibited until 2023. Specifically, Prop. 64 limits commercial nonmedical outdoor grows to one acre and indoor canopy to 22,000 square feet. After Jan. 1, 2023, the state will begin issuing a new license category (Type 5 Large Cultivation license), which have no upper size limit. (26061)
  • Prop 64's vertical integration regulations are far less restrictive than MCRSA. With certain limitations, NM businesses are eligible to hold multiple license types. In theory, a single company could be a grower, concentrate manufacturer, distributor, retailer, and delivery service -- theoretically serving the nonmedical market from seed to final sale. The exception is the testing license (Type 8), which may not be held by companies holding other license types. (26053)
  • Prop 64 mandates that "No licensee shall... employ or retain persons under 21 years of age." (26140) There are no limitations to this wording so even employees who do not come in contact with cannabis in any way cannot be employed if they are under 21." It's a bit ironic that per 26140 (and MCRSA) 18 year old patients may legally purchase marijuana but they can't be employed by a dispensary to sweep out the parking lot. (26140)
  • Licensees with multiple locations will need to obtain a license for each location. (26055)
  • Licensees must keep accurate records of all commercial cannabis activity for at least seven years and have them ready for inspection by the appropriate licensing authority. (26160) These records must include detailed records of every sale from one licensee to another. (26161)
  • Operating a commercial marijuana business without a license will subject the owners to civil penalties of 3x the applicable license fee for each day of activity. (26038) [Note: This is on top of any criminal penalties levied.]

Other Changes:

  • Two new state commercial taxes will take effect in 2018. The first tax will be levied on marijuana cultivation ($9.25 per ounce for cannabis flower and $2.75 per ounce for trim and leaves). (34012) The second is a 15% excise tax on retail sales. The excise tax imposed by this section is in addition to any other sales and use tax imposed by the state and local governments. (34011)
  • There are exceptions on the taxation of certain medical marijuana transactions and cultivations as well as exceptions for cannabis grown for personal use and by caregivers under the Compassionate Use Act. (34012)  
  • Taxes are to be paid quarterly (34015) and taxes will be adjusted for inflation starting in 2020. (34012)
  • Local governments have the ability to levy their own taxes on cannabis businesses and almost all will. Revenue from the state taxes will be spent on drug research, treatment, enforcement, health and safety grants addressing marijuana, youth programs, as well as remediating environmental damage resulting from illegal marijuana production. (34019)
  • Prop 64 establishes packaging and labeling standards and restrictions for nonmedical marijuana products. Manufacturers must "list any solvents, nonorganic pesticides, herbicides, and fertilizers that were used in the cultivation, production, and manufacture of such marijuana or marijuana product."Even if such solvents, pesticides, etc. do not show up in subsequent testing, manufacturers are required to state what was used over the entire supply chain. There are some labeling differences between Prop 64 mandated wording and the requirements of MCRSA (AB 266). Unless the state accepts some form of unified wording that complies with the requirements of both Prop 64 and MCRSA, manufacturers will have to create separate packaging (or at least stickers or labels) for products in each market (even when they are the same product). (26120)
  • Solid edible products must be sold in standardized dosages of cannabinoids of ten (10) milligrams or less of tetrahydrocannabinol (THC). This may be accomplished either by separating the product into individual units or by delineating or scoring into standardized serving sizes if the marijuana product contains more than one serving. (26130)
  • Social consumption (including on the premises of a retailer or microbusiness) is at the discretion of local jurisdiction but establishments can't also sell alcohol or tobacco. (26200)
  • Marketing and advertising marijuana to minors is prohibited. Specifically, advertising “in broadcast, cable, radio, print and digital communications shall only be displayed where at least 71.6 percent of the audience is reasonably expected to be 21 years of age or older, as determined by reliable, up-to-date audience composition data.” This likely applies to social media as well and absolutely certainly applies when responding directly to individuals (for example, a direct message in Instagram or Twitter). (26151)
  • Speaking of marketing, “No licensee shall give away any amount of marijuana or marijuana products, or any accessories, as part of a business promotion or other commercial activity." (In the existing medical dispensary market, Patient Appreciation Days or "P.A.D.s" are used extensively by vendors trying to get exposure for their products so this will be a big change.) However, as noted above, Prop 64 does give local jurisdictions the ability to allow "for the smoking, vaporizing, and ingesting of marijuana or marijuana products on the premises of a retailer or microbusiness licensed under this division" so it's possible some retailers will be able to give samples as long as they are used on the premises. (26200)
  • Licensees shall not "publish or disseminate advertising or marketing containing any health-related statement that is untrue in any particular manner or tends to create a misleading impression as to the effects on health from marijuana consumption." (26154)
  • Cannabis-infused products that are easily confused with commercially sold candy or foods (e.g., infused gummy bears) are prohibited. (26130)
  • Medical marijuana recommendations must meet more stringent requirements. (11362.712)
  • Municipalities “shall not prevent delivery of marijuana or marijuana products on public roads,” which legalizes licensed companies to deliver into communities even where total cannabis bans are in effect. This is a major change and one of only a few places where the state is limiting the authority of local authorities to completely regulate or ban cannabis in their jurisdictions. (26090)
  • Prop 64 directs the state Department of Food and Agriculture to establish an organic certification program for marijuana and marijuana products (26062) as well as a program for establishing "appellations of origin" such that only cannabis grown in a specific region may use that name on labels, packaging, or marketing materials (think "Napa" on wine labels). (26063) Expect Humboldt and other traditional growing areas in the state to take advantage of this branding opportunity. 
  • The "Track and Trace"system (aka "Seed to Sale") being developed by the Department of Food and Agriculture for medical marijuana (MCRSA) will be expanded to include nonmedical cannabis. (26170)
  • Any peace officer, or board employee granted limited peace officer status, may enter any place at which marijuana or marijuana products are sold to purchasers, cultivated, or stored, or at any site where evidence of activities involving evasion of tax may be discovered. These inspections must be during normal business hours but do not require a warrant. (34016)
  • Finally, marijuana accessories (aka "paraphernalia") are legal for adult use and manufacture. (Marijuana activist group NORML notices that "in practice, paraphernalia offenses have rarely been prosecuted in California since passage of Prop 215"). (11362.1)

What it Means to Different Constituencies:

Existing Medical Cannabis Patients: 

Most importantly, medical marijuana patients will continue to have access to cannabis as a medicine -- whether via purchases from medical dispensaries or by growing their own plants at home. As long as the patients have a state Medical Marijuana ID card, their medical purchases will be exempted from sales tax (but it will still be subject to the new 15% state excise tax). The net effect should be lower prices and products that are better tested and labeled. Also new patient privacy protections are being put into place.

It is important for patients to note that Prop 64 does not create in any new workplace protections for medical cannabis use so employers can continue to enact and enforce drug free workplace policies.

Given Prop 64's legalization of adult use, patients might ask themselves is there even be a reason to get or keep a medical marijuana card now that adult use has been legalized in California? Yes (according to TheCannifornian) because:

  • Until 2018 there won't be legal sources for purchasing non-medical cannabis. After 2018, individuals will no longer have to spend time and money getting a doctor’s recommendation ($25 to $50 annually). But medical cannabis patients will possess some rights that recreational users won't have, including:
    • Patients who pay for a state-issued ID card (currently $150/year in LA Country but per Prop 64 the new maximum price will be $100) will be exempt from state sales tax (7.5% and up).
    • Medical marijuana patients can grow more marijuana at home than the six plant limit of Prop 64 and use it in more places than can recreational consumers.
    • Patients as young as 18 can get a medical marijuana card, whereas 21 will be the minimum age for non-medical consumption.
    • If legal states such as Colorado, Oregon and Washington are any indication, expect a number of cities to allow medical shops but not recreational, so consumers might have more access as patients. Also, recreational shops won’t open until 2018, while medical shops may continue to operate as they have. (Note: Within weeks of Prop 64's success several cities including San Jose have already enacted temporary against recreational marijuana.)

With the new taxes, some medical marijuana patient advocates have expressed concern about increasing prices for patients, however other than initial and temporary price bumps as suppliers and retailers conform to new regulations, every state that has legalized marijuana has experienced substantial prices decreases over time due to increased competition. (According to data analytics firm Cannabis Benchmarks, national wholesale prices have dropped 18% over the past 12 months, and the result is that "medical and recreational users can expect to pay less, eventually, even after new taxes are factored in.")

Recreational Marijuana Consumers:

As of 2018, and notwithstanding the above mentioned arguments for staying in the medical market, adults (21 and older) who simply wish to consume cannabis (or grow up to six plants) no longer have to go through the exercise of paying a "420 doctor" for an annual recommendation. Instead they will simply go to a licensed location as they would beer or wine.

Commercial Growers:

Marijuana growers will be subjected to a significant number of new and intrusive regulations including so-called "track and trace" database systems where plants are tagged with unique identifiers and then tracked as they move through the supply chain. (26067)

Growers will need to show their intended source of water as part of the application process -- meaning water issues could keep some applications from being accepted. (26056)

Detailed pesticide regulations will be set by the Department of Pesticide Regulation in conjunction with the Department of Food & Agriculture. (26060)

Prop 64 finally separates industrial hemp from cannabis so that hemp is seen as a useful agricultural product to be regulated by the Department of Food and Agriculture and a wholly different plant than its psychoactive cousin marijuana. (11018.5.)

Commercial grows, and all other state licensed cannabis businesses, may be inspected by law enforcement and other officials without warrant and without notice. (34016)

Some experts have warned that growers, even small farms operating legally, can expect regulatory and environmental expenses of $20,000 and up. These new costs, along with taxes and competition from new entrants, could put some long-time growers out of business or force them to merge or sell. In their favor, however, growers get a two year head start against non-residents (26054.1) and a five year head start against large commercial grow operations. (26061)

Because vertical integration, other than testing, is not prohibited in the nonmedical market, growers are not required to go through 3rd-party distributors and transporters as they are under MCRSA. However it is uncertain whether the regulatory requirements of transport and distribution will make this an economical alternative to using third-parties. (26053)

Infused-Product Manufacturers:

Manufacturing concentrated cannabis using volatile solvents (such as butane) without appropriate licensing remains illegal. Penalties include three to seven years' imprisonment. (11362.4)

Manufacturers will need to either eliminate or modify products that can be "confused with commercially sold candy or foods that do not contain marijuana." Presumably this means that consumers will need to say goodby to edibles such as Kiva's Mint Irish Creme chocolate bars, Flour Child's infused granola, Venice Cookie Company's chocolate bars, Flower Child Strawberry Jam, Kaneth Co's Red Velvet Cookies, to name a few. This language is not included in MCRSA so it's possible that some or all of these products could continue in the medical market but not in Prop 64 shops. It's also possible that it isn't the intention of the bill to wipe out so many products and that subsequent interpretations of the bill in fact allow for them to remain -- albeit with proper packaging. That said, it's hard to imagine that THC-laden gummy bears are long for this world.

Manufacturers will need to delineate standardized THC dosages of 10 mg or less (this can be accomplished by scoring). The implications for products such as pre-filled vape cartridges, dabs, etc. are uncertain.

Manufacturers will need to comply with the different labeling requirements of AB 266 (MCRSA) and Prop 64 meaning that selling even the same product into the different markets could require different labels. Manufacturers will also need to comply with any additional requirements placed on them by jurisdictions (e.g., Berkeley) who have implemented their own packaging requirements in advance of MCRSA. 

Manufacturers are also best not to "publish or disseminate advertising or marketing containing any health-related statement" because the burden of proof would be on them to ensure that such health-related statements are not "untrue in any particular manner or tend to create a misleading impression as to the effects on health of marijuana consumption." (26154)  

Another Prop 64 requirement concerns the mandate for marijuana products to list "any solvents, nonorganic pesticides, herbicides, and fertilizers that were used in the cultivation, production, and manufacture of such marijuana or marijuana product." This is a non-trivial requirement, particularly for manufactured products using cannabis oil. Cannabis oil is typically extracted from marijuana "trim". Since trim is typically purchased in bulk from multiple sources -- each with their own growing methodologies and use of pesticides, managing all of these variances will require extensive supply chain management. One possibility will be a generic "catch all" label stating something along the lines of "The following pesticides may have been used in this product..." and then list every possible pesticide in use. Whether this type of label will be acceptable to the Department of Health is unclear. If not, manufacturers will need to place high level supply chain management into their organizations.

Manufacturers will need to adhere to Prop 64's extensive marketing requirements especially as they relate to under 21 audiences, including but not limited to those involving "direct, individualized communication or dialogue controlled by the licensee" which must "utilize a method of age affirmation to verify that the recipient is 21 years of age or older prior to engaging in such communication or dialogue controlled by the licensee." (26151) Prop 64 also limits use of language, music or other content elements in advertising and marketing known to appeal primarily to persons below the legal age of consumption. (26152) In other words, don't expect to see Justin Bieber branded cannabis products -- at least until his fan demographic ages up significantly.

Manufacturers should prepare themselves (and their budgets) for regular third-party certified testing of their products along the supply chain. Prop 64 notes that all legal cannabis products must be sampled by an independent laboratory and tested for cannabinoids THC, THCA, CBD, CBDA, CBG, CBN, and terpenes (and verify that contaminants including residual solvents, foreign material such as hair & insects, and microbiological impurities are all under mandated levels). (26101) 

Giving away samples is also prohibited whether to dispensaries, their customers, or at special marketing events. (26153)

Distributors:

Businesses interested in becoming licensed distributors should hire themselves a lobbyist. As the case with MCRSA, many of the key rules are not yet set (or at least not publicly). Major players (such as Ted Simpkins, the CCIA and others) are all talking to state regulators pushing for rules that favor their interests.  It is clear that strict safety, security and bonding requirements will be part of the application process.

Dispensaries:

Retailers will need to adhere to the new child-resistant packaging and other packaging & labeling requirements. If Colorado's enforcement of these requirements is any indication what might happen in California, dispensaries won't be able to push labeling liability on to manufacturers or distributors. If a licensing authority finds improperly labeled products on the shelves of dispensaries, they will be held accountable even if they are selling a pre-packaged product that was labeled by a third-party manufacturer.

Retailers will also need to insure that their marketing requirements adhere to Prop 64's limitations. This includes prohibitions against giving away samples (for example at vendor sponsored customer appreciation events or "Buy One Get One" promotions). Even free rolling papers with purchase of cannabis products is prohibited. (26153)

If a dispensary is located in an area where nearby jurisdictions have banned dispensaries, Prop 64 offers a wonderful opportunity to legally deliver to those areas -- irrespective of the ban. This is because, per Prop 64, jurisdictions are not allowed to bar delivery services in their areas. For example, Newport Beach may ban dispensaries from locating in their city but they can't stop delivery services from selling to Newport Beach residences.  (26090)

Investors:

"Owners" in regard to state licensing are defined as having a 20% interest. Consequently, if an individual's (or company's) investment grants them equity greater than this threshold as well as certain rights of control (specifically "the power to direct or cause to be directed, the management or control of the licensee") then they will be subject to whatever licensing or other limitations & regulations placed on such owners. (26001) Expect investment documents to be drafted so as to minimized the possibility of minority investors being considered owners.

Cannabis Collectives, Cooperatives, Mutual Benefit Corporations...

Since 1996, cannabis businesses in California have been forced to operate under a variety of unusual (if not outright odd) business forms to conform to the requirements of Prop 215, SB 420, and the Attorney General Guidelines and avoid criminal prosecution. Last year, MCRSA put in place the regulatory framework to replace these structures with MCRSA state medical licenses starting in 2018. Prop 64 continues this effort by making it clear that nonmedical businesses will be governed by the same regulatory framework and the same licensing as medical marijuana businesses. Hopefully within two years we will no longer have to witness businesses forming collectives, cooperatives, mutual benefit corporations and the like to comply with the law.

Businesses dealing with Banking and IRS 280e

Prop 64 does nothing to help with the vexing problems of taxation and banking plaguing cannabis-related businesses as these are problems that only Congress can fix. But the passage of Prop 64 does mean that California's enormous delegation of congressmen and its two senators now go to Washington representing a cannabis legal state (along with other newly legal states Massachusetts, Nevada and Maine and joining the existing four legal states of Colorado, Oregon, Washington and Alaska). Hopefully this proves the tipping point to address these and the other vestiges of national prohibition.

Individual with Cannabis Arrest Records (or in jail for marijuana offenses):

Prop 64 authorizes the courts to resentence persons who are currently serving a sentence for offenses for which the penalty has been reduced by Prop 64 and to redesignate or dismiss such offenses from the criminal records of persons who have completed their sentences. If this is you, contact a lawyer to better understand your options. (11361.8)

Everyone Else (aka the Majority of Californians):

Individuals who don't consume cannabis in any form will still enjoy largely positive benefits from Prop 64 including new tax revenues for state & municipalities, overall improved regulations, and monies to fund public health programs, restorative efforts for the environmental damage from decades of illegal growing, and so forth. 

Article contributed by Wesley

Sources: Bill TextYes on Proposition 64, The Cannabist, Cannalawblog, other sources cited inline