The Regulatory Twilight Zone: California Cannabis Transactions


2019-09-12 09:01:46 cannalawblog


For years now, I’ve seen and analyzed many different cannabis business relationships across the industry spectrum. Specifically, many proposed and draft agreements have come across my desk detailing the contractual relationships between a variety of parties in the cannabis industry for various purposes–from investors, ancillary services providers, and licensees to intellectual property holding companies, equipment lessors, and lenders (and more). Altogether, I’ve seen lots of different contractual and corporate set ups within a variety of cannabis-friendly states. California, though. takes the cake on the most bizarre and legally questionable cannabis business relationships and contract structures; and that makes sense as California cannabis continues to emerge (sort of slowly) from a gray medical market. Ultimately, when you think of California’s cannabis marketplace at this point, you can harken back to Rod Serling saying: You’re moving into a land of both shadow and substance, of things and ideas. You’ve just crossed over into … the Twilight Zone.” I recently wrote about all the bad behavior that still occurs in California (even with licensing in play) and also about the top 5 most dangerous cannabis contracts in this state, but this post is dedicated to those contractual and corporate relationships and structures I’ve seen most recently in the Golden State that keep coming up again and again. These arrangements either skirt the cannabis rules completely, or make zero sense from a contract and/or corporate governance standpoint. So, if you’re seeing these agreements and structures in the marketplace and scratching your head, you’re not alone. 1.     Unlicensed companies operating under another company’s license. The number of times I’ve seen a licensee allow an unlicensed business to operate within its premises is increasing rapidly in California. In most other states, the regulations make abundantly clear that any company engaged in commercial cannabis activity, no matter what, would require a cannabis license and that you cannot operate an unlicensed cannabis business within the licensed premises of another company. Not so here in California. Whether it meant to do so or not, the Bureau of Cannabis Control (BCC) created a fairly confusing situation with the adoption of Rule 5032 where it mandates that all commercial cannabis activity can only occur between licensees but at the same time. In its Final Statement of Reasons, the BCC also states that unlicensed parties can have white label and/or intellectual property (IP) licensing relationships with licensees so long as those unlicensed parties are disclosed to the BCC as a financial interest holder. Some parties have taken this a step further to interpret this rule to mean that an unlicensed company, so long as it’s disclosed to the BCC in some capacity, can literally operate its own business within/under/through a licensed company, conducting commercial cannabis activity as if the unlicensed company owns the license. (And things become very confusing from a performance obligation perspective when one of these unlicensed companies is an equity owner in the licensed business, but is also acting as, let’s say, a management company of that licensed business at the same time). These arrangements, of course, aggressively push boundaries and are untested with the BCC (let alone with local governments). Still, I’m seeing these proposed agreements between licensed and unlicensed parties more and more: unlicensed parties simply do not want to or cannot secure their own licenses, despite conducting all the regulated commercial cannabis activity. I have no doubt that once the BCC finally flips into enforcement mode that it will start really analyzing these relationships to determine who is actually conducting commercial cannabis activity in violation of the rules (probably lots of folks). 2.     Licensee contracts with unlicensed parties that operate at a licensed facility.   These kinds of contracts become increasingly tricky because of number 1 above. If you’re a licensee and you’re being presented with a contract from an unlicensed party that’s operating within another company’s licensed premises, you need to proceed with extreme caution.  Even if an unlicensed company is disclosed under another licensee as an “owner” or a “financial interest holder,” that doesn’t mean that that company can start undertaking its own commercial cannabis activity carte blanche. Recall, commercial cannabis activity can only be conducted between licensees. That’s not to say that an unlicensed company cannot assist a licensee with its commercial cannabis activity, but if that unlicensed company is inking its own contracts without any mention of the actual licensee under which it operates, you’re going to have significant regulatory issues in the future (not to mention murky issues around representations and warranties around compliance with the rules, fitness of product, recalls, etc.). The common relationship I’m now seeing most often is where an unlicensed company is utilizing a cultivation or manufacturing facility and trying to directly contract with licensed distributors or retailers to get their own product to market (where that product, at the same time, will contain the cultivator’s or manufacturer’s information to satisfy the packaging and labeling rules, but will be co-branded with the unlicensed company’s information and intellectual property). Without more guidance from the BCC, it’s not difficult to determine that such a contract violates Rule 5032. 3.     IP licensing and white labeling.  Thanks again to the BCC, IP licensing with cannabis licensees in California is not at all straightforward. While unlicensed companies can license their IP to cannabis licensees as long as those unlicensed companies are disclosed as financial interest holders, if they exercise too much direction, control, and/or management over the licensee relative to the IP, the unlicensed company may be considered an “owner” under BCC regulations; and that means disclosure of the unlicensed party and maximum scrutiny from the state. Anyone who’s done an IP licensing agreement knows that the licensor typically gets substantial control over the use of the IP relative to the licensee, so already we potentially have a problem in California where preserving the integrity of the mark “too much” may make the licensor an “owner” of the cannabis licensee. The same issue may occur with white labeling, where too much control over formulations and product compilation could amount to unlawful “ownership” over the cannabis licensee. I am positive that there are IP licensing and white label and supply agreements in California that have created secret owners all over the place because of the level of control in those agreements given to unlicensed parties. The BCC has very little guidance out about these relationships, so its scrutiny of these agreements will probably be on a case-by-case basis if and when such relationships are discovered. 4.     Disclosure issues. Near as I can tell when talking to folks, most people still don’t understand or know the extent of owner and financial interest holder disclosures required by the State of California. What’s for sure, though, is that certain investors and financiers want to avoid these issues altogether if they can help it (which is easier said than done). In particular with the BCC, if you’re an owner that’s an entity, you are disclosing every single owner in that entity, even if they own under 20% of the entity.  This means you will disclose not only your equity owners at 20% or more AND all individuals in a control, direction, or management positions, but you’ll also disclose all of your financial interest holders (with very few exceptions) that are at 19% or less in equity. (And, yes, this includes disclosure of any investment funds or limited partners in a general partnership, and every person or entity within those structures, too, if you ask the BCC). All of this is obviously extremely problematic for fundraising and M&A and many licensees do not realize that they’ll violate the rules if they fail to timely make these disclosures. Despite that fact, I see lots of transactions and cap tables from licensees where they realize only when it’s too late that they must make these robust owner and financial interest holder disclosures or face major rule violations. And many of those investment agreements and/or M&A transactions don’t even mention any kind of default or obligation around these disclosures — which is a massive drafting mistake. 5.     Operating without a provisional license. For some reason, some stakeholders are under the impression that they can continue to operate if they have local authorization but no state license. This is just dead wrong. And even if you have local authorization and have applied for an annual license in order to get a provisional license, you still cannot operate. Just standing in line for a provisional does not make you a legal operator. You have to have both local authorization and either a provisional or annual license. In doing diligence on certain operators, I’m continuing to see expired temporary licensees that don’t yet have provisional or annual licenses. To buyers and/or investors of cannabis companies in California, make sure that your target has both local authorization and a state license before pulling the trigger. California cannabis has certain pitfalls that are unlike any other state due to the nascent nature of the licensed industry and ambiguities created by the regulators. Unfortunately, these pitfalls and ambiguities aren’t being addressed with additional guidance or even consistent BCC enforcement. In any event, proceed with caution out there and be sure to read the fine print in your proposed agreements and in the rules.
多年来,我看到并分析了行业范围内许多不同的大麻业务关系。具体地说,我的办公桌上有许多拟议的和草拟的协议,其中详细说明了大麻行业各方之间出于各种目的的合同关系——从投资者、辅助服务提供商和被许可方到知识产权控股公司,equi设备出租人和贷款人(等等)。总之,我在不同的大麻友好州看到了很多不同的合同和公司设置。不过,加州。在最奇怪和法律上有问题的大麻商业关系和合同结构上拿蛋糕;这是有意义的,因为加州大麻继续从灰色的医疗市场(有点缓慢)出现。 最终,当你想到加州的大麻市场时,你会回想起罗德·瑟林说: 你正在进入一个既有阴影又有物质,既有事物又有思想的国度。你刚刚跨进了……暮色地带。” 我最近写了一些关于在加州仍然存在的所有不良行为(即使是在有许可证的情况下)以及该州最危险的5个大麻合同的文章,但是这篇文章是关于那些我最近在不断出现的金州。这些安排要么完全绕开大麻规则,要么从合同和/或公司治理的角度来看毫无意义。所以,如果你在市场上看到这些协议和结构并挠头,你并不是唯一一个。 1.根据另一家公司的许可证经营的无执照公司。 在加利福尼亚州,我见过被许可人允许未经许可的企业在其经营场所内经营的次数正在迅速增加。在大多数其他国家,条例非常明确地规定,任何从事商业大麻活动的公司,无论怎样,都需要获得大麻许可证,而且你不能在另一家公司的许可场所内经营未经许可的大麻业务。在加州可不是这样。 无论是否打算这样做,大麻管制局通过了第5032条,规定所有商业大麻活动只能在被许可人之间同时进行,造成了相当混乱的局面。密件抄送委员会在其最后一份理由陈述中还指出,只要未经许可的当事方作为财务利益持有人向密件抄送委员会披露,则未经许可的当事方可以与被许可方建立白色标签和/或知识产权(IP)许可关系。一些缔约方进一步解释了这一规则,认为无照公司只要以某种身份向BCC披露,就可以在有照公司内/之下/通过有照公司经营自己的业务,进行商业大麻活动,就好像无照公司D公司拥有执照。(从履行义务的角度来看,当这些未经许可的公司中有一家是许可业务的股东,但同时又是许可业务的管理公司时,事情变得非常混乱)。 这些安排,当然,积极推动边界和未经考验的bcc(更不用说与地方政府)。尽管如此,我还是越来越多地看到许可方和未许可方之间的这些拟议协议:尽管进行了所有受管制的商业大麻活动,但未许可方根本不想或无法获得自己的许可证。我毫不怀疑,一旦密克罗尼西亚联邦最终转变为执法模式,它将开始真正分析这些关系,以确定谁在违反规则的情况下实际进行商业大麻活动(可能有很多人)。 2.被许可方与在许可设施内运营的未经许可方签订合同。 由于上面的数字1,这类合同变得越来越棘手。如果您是被许可人,并且您正收到在另一家公司的许可经营场所内运营的未经许可方的合同,您需要极其谨慎地进行操作。即使未经许可的公司被另一家被许可人披露为“所有人”或“财务人”。“社会利益持有人”,这并不意味着该公司可以开始自己的商业大麻活动全权委托。 回想一下,商业大麻活动只能在被许可人之间进行。这并不是说没有执照的公司不能帮助被许可人进行商业大麻活动,但是如果没有执照的公司签署自己的合同而没有提及其经营所依据的实际被许可人,你将会在F未来(更不用说关于遵守规则、产品适用性、召回等的陈述和保证的模糊问题了)。 我现在看到的最常见的关系是,一家未经许可的公司正在利用一个种植或制造设施,试图直接与获得许可的经销商或零售商签订合同,将自己的产品推向市场(同时,该产品将包含耕耘者或制造商的信息,以满足包装和标签规则,但将与未经许可的公司的信息和知识产权联名)。如果没有密件抄送委员会的更多指导,就不难确定这样的合同是否违反了规则5032。 3.知识产权许可和白色标签 再次感谢bcc,加州大麻被许可人的知识产权许可一点也不简单。尽管未经许可的公司可以将其知识产权许可给大麻被许可人,只要这些未经许可的公司被披露为财务利益持有人,但如果它们对被许可人行使了与知识产权相关的太多指导、控制和/或管理,则该未经许可的公司可以被视为根据密件抄送委员会的规定,“所有人”;这意味着对未经许可方的披露和国家的最大审查。 任何签订过知识产权许可协议的人都知道,相对于被许可方,许可方通常可以获得对知识产权使用的实质性控制权,因此我们在加利福尼亚州已经存在一个潜在的问题,即保持商标的完整性“太多”可能会使许可方成为“拥有者”。大麻持牌人的“R”。同样的问题也可能出现在白色标签上,对配方和产品汇编的过多控制可能构成对大麻持牌人的非法“所有权”。 我很肯定,加州有知识产权许可协议、白标签协议和供应协议,由于这些协议对未经许可方的控制程度,这些协议在各地都产生了秘密所有者。业务连续性委员会对这些关系的指导很少,因此,如果发现这些关系,它可能会逐案审查这些协议。 4.披露问题。 在与人们交谈时,我几乎可以说,大多数人仍然不理解或不知道加州要求的所有者和金融利益相关者披露的程度。不过,可以肯定的是,如果某些投资者和金融家能够帮助解决这些问题(说起来容易做起来难)。尤其是BCC,如果你是一个实体的所有人,你要披露该实体的每一个所有人,即使他们拥有该实体20%以下的股份。这意味着你不仅要披露20%以上的股权所有人,而且要披露控制权、指导权或管理层中的所有个人。位置,但你也会披露你所有的金融利益持有人(除了极少数例外)是在19%或更少的股本。(是的,这包括披露普通合伙企业中的任何投资基金或有限合伙人,以及这些结构中的每个人或实体,如果您要求BCC)。 所有这些显然都对融资和并购造成了极大的问题,许多被许可人没有意识到,如果他们不及时披露这些信息,他们将违反规则。尽管如此,我还是看到了许多来自被许可方的交易和上限表,他们只有在太晚的时候才意识到必须披露这些强有力的所有者和金融利益持有人信息,否则将面临重大违规行为。而且许多投资协议和/或并购交易甚至没有提及这些披露的任何违约或义务——这是一个巨大的起草错误。 5.无临时许可证经营。 出于某种原因,一些利益相关者的印象是,如果他们有地方授权,但没有国家许可,他们可以继续经营。这完全错了。即使你有当地的授权,并申请了一个年度许可证,以便获得一个临时许可证,你仍然不能操作。只是排队等候临时电话并不意味着你是合法的接线员。您必须同时拥有本地授权和临时或年度许可证。在对某些运营商进行尽职调查时,我会继续看到过期的临时许可证持有人,他们还没有临时或年度许可证。对于加利福尼亚州大麻公司的买家和/或投资者,确保目标公司同时拥有当地的