Category: Uncategorized


Nevada County Strong: An Open Letter To Nevada County Farmers

My intuition is telling me they’ll be better days,
I sit in silence and and find whenever I meditate
My fears alleviate, my tears evaporate
,
My faith don’t deviate, ideas don’t have a date.

J Cole. “Change.” 4 Your Eyez Only.

***

Community, 

In October of 2015, I wrote a blog about the pressures farmers endure during trim season, and I recommended farmers take extra care to be kind to each other and to themselves in order to stay true to the honorable work of caring for this plant. During this last mad dash of local and state licensing applications these past few weeks, those words regularly come to mind. Since they are just as meaningful in this strange new season of regulation, I decided to share them again: 

“This is “Game On” time for your entire year’s work.  It is instead the time to be at your highest energetic level, and to put your best energy into this medicine that is about to be released to [consumers] around the state. So take this opportunity to abstain from alcohol or other unnecessary intoxicants if possible, increase your physical activity such as yoga or running, and take that extra moment to love on your partner who has to take care of the house and kids in your absence.”

These considerations ring true once again here in Nevada County, where application-fatigue has set in HARD and folks are visibly wilting under the pressure of looming deadlines, massive data gathering requirements, and what feels like never-ending costs. 

For those who are struggling, please take some level of comfort in the fact this too shall pass, and many of us will look back on this as a time in history where we endured, and overcame the impossible together. Farmers are the genesis. Farmers are the origin. Nevada County NEEDS our local farmers to be economically successful and to produce the products we consume, to the benefit of the entire community. 

So please stay focused on the higher meaning of your work these next few stressful weeks. Keep the reason we were all drawn to cannabis in the first place in the front of your mind. Hug your family, fellowship with friends, listen to good music, and then push this f**king paper though. We’re almost there. Heart up.

Finally, while we can’t do anything to halt the insanity, we can have a PARTY! And since Sarah and I are both hella Irish, it makes sense to host the First Annual OG Law Green Party next Sunday, March 17th, a.k.a. St. Patrick’s Day, at the office. Come out!

OG Law’s First Annual Green Party
431 Uren Street, Suite C
Nevada City, CA 95959
DJ Redlocks will be DJ’ing from 4-7 p.m.!!!
WEAR GREEN
*Family friendly, kids welcome
**Celtic Red from Old Republic on tap (first come/first serve).
***Heather will be manning the bar herself and will be serving green drinks of some fabulous sort.

***Please do not park on the opposite side of the street.  We will have a parking attendant to help point you in the right direction from 4-7 p.m.

What’s On Deck
Our next blog will be a technical analysis of the latest version of the Nevada County draft ordinance with some suggestions for upcoming public comment. Stay tuned.

Much respect,

Heather and Sarah
#protectourfarmers #madrespect 

ALERT! Immediate Need for Letters in Support of SB 67 (Temp License Bill)

Community,

Huge thanks from The International Cannabis Farmers Association (icfa.farm) for drafting a sample letter in support for SB 67, the Temporary License bill that would extend temporary licenses if (1) a local authorization was taking more time to be returned to the CDFA, (2) if the Department of Fish and Wildlife LSA is taking a long time, or (3) if the CDFA needs more information from the licensee.

Considering Nevada County’s unique permitting status, it is imperative our licensees don’t experience a disruption in their licences as we move through the local permitting process.   SB 67 will be heard in the Senate Business, Professions and Economic Development Committee on Wednesday, February 27th @ 11:00 a.m.

Senator McGuire’s office has requested support letters be sent to the committee, which means they are due TODAY (Feb 22nd) by 5 p.m.  We know that is not a lot of time, so AS A FREE SERVICE TO THE COMMUNITY, Origin Group Law LLP will help ANY AND ALL licensees prepare and submit their letters today between 1 p.m. to 5 p.m.

You are welcome to stop by, call the office, email us, or send a carrier pigeon and we will get your letter of support out. Here’s our contact info:

Origin Group Law LLP
431 Uren Street, Suite C
Nevada City, CA 95959 
530-955-3184 (office)
hburkelegal@gmail.com

Please find attached a sample letter (thanks to the ICFA) and a fact sheet about SB 67. Thank you!

(1) SB 67 Support Letter Stakeholder

(2) SB 67 Cannabis Licenses Fact Sheet

Nevada County: Consider Outdoor Licenses This Season

Nevada County staff recently reminded us what farmers in other areas have known for a couple years: land use issues are the most expensive piece of coming into the regulated system. While many requirements apply across the board, outdoor farmers generally have lower permitting and operational startup costs than greenhouse farmers, sometimes by hundreds of thousands of dollars. As such, farmers who want to ease into regulation may want to consider outdoor  licenses this season (and scaling up to mixed-light later if desired). Here’s a nonexclusive list of the cost differences between the license types:

  1. Commercial Greenhouses are Structures Which Require Permits.  

In addition to permitting the greenhouses (a process which requires engineered plans for the greenhouse and a site plan), the pads for the greenhouses themselves may need to be graded, requiring yet another permit.

Additionally, fire trucks must be able to access all structures, meaning fire-safe roads must go all the way to the GH and allow a fire truck can turn around. Since outdoor gardens are not structures, roads are not needed to the same degree.

2.  Commercial Greenhouses Have Greater Disability Access Requirements.

Greenhouses are structures which must be compliant with the Americans for Disabilities Act [“ADA”], so the greenhouses themselves need to be wheelchair accessible, as do the pathways pathways to the greenhouses.

Farmers expecting multiple runs per year will also likely require more employees than an outdoor farm of the same size, which means they’re more likely to need an ADA compliant bathroom on the farm. As bathrooms can’t be in a private residence, they may require a new septic and yet another permit.

3.  Commercial Greenhouses Require Additional Operational Costs.

A greenhouse can be expensive to purchase and install, so some mixed light farmers expect to incur an additional $100,000 in operational startup costs per greenhouse, an expense not incurred by outdoor. Of course, greenhouses also have monthly energy bills, which ain’t cheap.

4.  Commercial Greenhouses Need Power.

In addition to the power requirements to run the greenhouse (and btw, generators are NOT allowed as the primary power source for greenhouses), farms may need a power upgrade for the type of power that will be required to run the greenhouse. Considering that PG&E just declared bankruptcy, and that they are taking months longer than expected to get power installed or upgraded, power upgrades are a potential holdup for the 2019 season.

Importantly, state regulations require Mixed-Light 2 (i.e. 7-25 watts per square foot of canopy) meet certain energy requirements by January 1st, 2023, or purchase carbon offsets. I have no idea how much the “offsets” cost, but keep in mind it is another steep cost in addition to power not applicable to outdoor (or Mixed Light-1, which is light deprivation/light-assist up to 6 watts per square foot of canopy).

Finally, I just heard the County’s draft Environmental Impact Report may not adequately address the power-source impacts of converting outdoor to mixed-light, which means there could be additional environmental requirements (and more uncertainty) for mixed-light farmers in the future.

5.  Awesome Policy Organizations are Working to Support Sungrowers in the Marketplace.

Organizations like the Mendocino Appellations Project [MAP], the International Cannabis Farmers Association [ICFA], and the California Growers Association are dedicating insane hours to programs devoted to help sungrowers be successful in the marketplace, such as cannabis appellations, the Sungrown Agricultural Commissions, moving light-deprivation back into the outdoor tier, and consumer education campaigns. So stay tuned for that very exciting news.

6.  State Regulatory Fees Can Vary up to $17,000.

In addition to the engineering, permitting, and power cost differences, here are the state’s regulatory fees for the 3 different license types:

Outdoor (10k): $535 (application fee) + $4,820 (license fee) = $5,355 to CDFA
Mixed-Light 1 (10k): $1,310 (application fee) + $11,800 (license fee) = $13,110 to CDFA
Mixed-Light 2 (10k): $2,250 (application fee) + $20,235 (license fee) = $22,485 to CDFA

That’s more than a $17,000 difference in state regulatory fees for the 2019 season alone!

*Those fees need to be paid in full before cultivation can begin, with the exception of provisional licensees who will likely be paying those fees sometime in the early to mid-summer.

Conclusion

While the numbers will surely make sense for some folks based on their estimated yield, their relationships with buyers, and their emergency reserves, the numbers may be impossible for the average small farm. Rather than mimic what happened in Humboldt and Mendo (where the land use struggles proved to be an extinction event for many farms), I’m suggesting folks think critically about the cost differences between outdoor and mixed-light before jumping in this season, even if the ultimate goal is to scale up later this year or next.

We support all cannabis operators of every license type and we are hyper aware that everyone in the industry needs protection from over-regulation. However, it is particularly critical to our region’s success that mom-and-pop farms survive the onslaught of land use costs. Reducing those costs by starting with outdoor is just one of several ways farmers can do that. Whatever you choose, we support you!

Much respect,
Heather and Sarah

#protectourfarmers

Hemp in CA: A Post-Farm Bill Update

After the new Farm Bill was signed into law last month, I keep hearing folks declaring that hemp is legal now. And it is, kinda. While the 2018 Farm Bill did not create a hemp free-for-all, it did create a legal pathway for the production and interstate distribution of legally produced hemp. Here’s a high-level overview for California farmers:

1. What’s the Difference between the 2014 Farm Bill and the 2018 Farm Bill?

The 2014 Farm Bill allowed the cultivation of industrial hemp in a “pilot program” for research. Importantly, the pilot programs can only be conducted by (1) the state’s departments of agriculture, or (2) universities.

In Oregon and Colorado, the state worked with registered cultivators to grow hemp under that state’s pilot program, which was a brilliant workaround to the 2014 Farm Bill restrictions. However, it remained risky for the farmers because that approach arguably left farmers without federal protection for the distribution of their products.

Just last month, however, Congress flipped the script by enacting full tilt legalization ofregulated hemp production and interstate distribution of hemp that is produced in compliance with the 2018 Farm Bill. By its express terms, the 2018 Farm Bill allows the interstate shipment or transport of hemp and hemp products (which includes hemp-derived CBD, as well as hemp seeds). Individual states can’t even prohibit the shipments through their borders This is a notable difference from the 2014 Farm Bill, which does not protect hemp shipments or transport through unfriendly states.

Two HUGE side notes:

  • Folks with drug felonies in the past 10 years are not allowed to participate in the new hemp program.
  • Cultivation outside the regulated program is reported directly to federal prosecutors.

2. When Can California Farmers Cultivate Hemp?

Last fall, California appeared to be headed for a pilot program that would pair the state with registered growers, similar to Oregon and Colorado, when our Legislature enacted SB 1409 in October. However, Congress passed the 2018 Farm Bill only two months later, which widened the allowable scope for hemp cultivation in California. As such, I hope the state is considering legislation to broaden SB 1409’s allowances in accordance with the new federal scope.

In any event, in order to cultivate hemp legally in California, the grower will not need to get a license from the state. Instead, they will “register” with the Ag Commissioner in the County they want to grow in. Registration is currently unavailable until the state finishes its hemp regulations, which it is working on now.

The state won’t give specific ETAs for the program, but I’m optimistic this amazing plant will be under cultivation in our beautiful state by the 2020 season. For the most current hemp regulations updates from the state, you can sign up here:

https://www.cdfa.ca.gov/subscriptions/.

Since the hemp programs in Oregon and elsewhere were successful even before the passage of the 2018 Farm Bill, many farmers who want to transition into hemp are preparing now.

If folks are interested in farming hemp in California, there is definitely work that can be done now, so talk to your legal advisers sooner rather than later.  

Much respect,
heather b. 

#protectourfarmers #madrespect 

Temporary Local Permits Update

As you likely know, temporary permits for the 2018 cultivation season were finalized this week and it’s not great. Some of the provisions are purposefully restrictive. The language is unclear, contradictory, and messy. The ordinance, at its best, evidences a lack of familiarity with basic provisions of state law and regulations. However, this is the only pathway to the regulated market for farmers this season. Here’s a breakdown:

  • The former rule prohibiting commercial cultivation was stricken and replaced with about 50 new provisions relating to the short-term cultivation for legal sale in the regulated market until our permanent ordinance is enacted next year. They did not touch the sections relating to (1) parcel size, (2) plant count and square footage, (3) setbacks, and (4) zoning, except to delete RA and TPZ. Since those are the same as before and have been subject to much debate, I won’t go into them further here.
  • All existing Code violations must be corrected within 60 days. However, any violations related to commercial cultivation (like unpermitted greenhouses for cannabis cultivation) must be permitted before receiving a temp permit. No exceptions. If farmers are intending to enroll in this program, they may want to file that greenhouse permit like yesterday.
  • The temp permits will be for medical production only. ***The updated emergency regulations allow a medical-only cultivator to sell their flower to an adult-use manufacturer, distributor, or retailer, so the M-only designation is not as detrimental, thanks to the state agencies.
  • Sean Powers, the Director of the Nevada County’s Community Development Agency, or his “designee” will be in charge of issuing the permits. Farmers should expect the rules to be interpreted strictly and for violations to be enforced to the fullest, so please know this program has the power to ruin permitees who divert cannabis outside the program with fines, fees, preclusion from permits for 2 years, and discretionary reporting to the state and even the feds.
  • Self-distribution is allowed, but not mandated, so farmers can drive their cannabis (flower, leaf, pre-rolls) off site to a distribution center, but they will have to get a self-distribution license from the Bureau of Cannabis Control (in addition to a cultivation license from the CDFA) to do so. That may be a costly decision with another set of stringent state regulatory requirements, so please talk to your counsel about the implications of self-distribution this season.
  • Mixed light is allowed, so farmers who time their runs strategically may be able to have two light deprivation harvests in compliance with the program this season.
  • The County will not give an additional 6 or 12 plants for personal use this season (although cultivators will be able to have personal in addition to commercial next season). However, the state does not let cultivators divert from their commercial grow for personal use, even though the County says commercial growers can’t have a personal garden this season.  If a farmer plans on consuming the cannabis she or he produces, please talk to your counsel about how that can be done legally.
  • Cultivators must have a state license before the County will authorize them to conduct commercial cannabis activities, but they are also allowed to have a personal or collective garden of the exact same size until they obtain a state license.  It is a complicated concept, but in essence the requirement to obtain a state license prior to flipping the intent and purpose of a garden from personal/collective to commercial should not hold anything up.
  • In light of the state’s recent update to their emergency regulations, cultivators will need  (1) to submit a cultivation plan, and (2) to have already filed with the state water board, as well as a few other things, in order to even file for a temporary license. If a farmer intends to enroll in the County’s temporary permit program, they may want to start these now or risk delaying state license.
  • Folks with a prior marijuana felony best be getting their Prop 64 re-sentencing petition filed ASAP.

The program looks like it will generally go down like this:

  1. A cultivator can turn in an application on or around June 20th.
  2. There will be a brief review period and then she or he will be conditionally approved.
  3. The farmer will upload the County’s conditional approval into the state’s online permitting system. (My clients will have this ready to go well in advance of getting their hands on the conditional approval.)
  4. The farmer will then receive a temporary permit from the state after 10+ days.
  5. Once that state temp permit is issued, the cultivator is authorized to conduct commercial cannabis activity on site.
  6. Within 30 days, and hopefully after a state license is issued, Sean Powers’ office will come do an inspection to confirm compliance with Nevada County Code, and state law to some degree.
  7. Prior to his inspection, our office will have already performed internal (and confidential attorney-client privileged) inspections of our clients’ site to confirm strict compliance with state and local law, so our clients should not have any surprises at their inspection and can feel good about being in strict compliance.

After all that, cultivators will be good to go for 120 days, although they should expect either or both local and state regulatory bumps to arise immediately.  Our office calls it the “hamster wheel,” and permittees will be officially on it.[1]
Is This Program Right For You?
As attorneys, we’re required to advise our clients to enter the regulated market, but I personally believe that is the wiser choice even if I wasn’t required to. Farmers who enroll and strictly comply will be the first in the County to obtain coveted contracts with retailers or distributors, will be able to legally brand and trademark their products, and–most importantly–will likely develop the relationships with the County and state regulators that will put them in the front of the line for expansion to 10,000 square foot of outdoor, mixed-light, or possibly indoor next year.

Remember Conditional Use Permits (“CUP”) can take 6 months. While farmers who aren’t in the front of the line may be able to apply early next year, but they won’t be able to commence their commercial activities until BOTH the CUP and the state annual license are granted some 6 months later. That could easily take until the end of next summer, and those farmers will not be allowed to have current cultivation on site next year (because both the local and state temporary licenses will be unavailable to them by then). However, those who do enroll and comply in this program will likely be able to continue to engage in limited commercial cannabis activity during the pendency of their CUP next year.

I know this is a personal decision and I don’t pretend it is an easy one, but I strongly encourage folks to think about how not getting in this program will affect their 2019 season, as well as the overwhelming protection from state and federal law enforcement that only strict compliance with the local law will afford.

In any event, my office will continue to work with the County to amend this frustrating temporary permit program, as well as the coming permanent ordinance. For example, it is important we get Res-Ag allotments back, as well as additional license types such as manufacturing and micro-businesses, among other issues.

We appreciate hearing from the community about how we can better help, so please feel free to reach out. We’re in this with you.

Much Respect, Heather Burke and Sarah Smale
#protectourfarmers

Nevada County’s Commercial Cultivation Ordinance and CEQA: What every Nevada County Farmer Needs to Know

As most of you know, Nevada County staff prepared a draft commercial cultivation ordinance that was released yesterday. While I’ll leave the specifics of the ordinance for another day, the County must now figure out how to get farmers permitted as soon as possible. The California Environmental Quality Act (“CEQA”), however, requires that any ordinance that would have a “direct impact” on the environment to be vetted through an Environmental Impact Report, or “EIR.”  These EIRs can take months or years to complete, and waiting to issue cultivation permits in Nevada County until a full EIR is completed would likely delay commercial permits until 2019.

My brilliant associate attorney Sarah Smale and myself emailed other options to the Board of Supervisors today and, while none of the other options will be easy for our local farmers, the Board does have other options. You can see our Letter to my Supervisor, Heidi Hall, BY CLICKING HERE. (You should read it. It’s pretty cool.) 🙂  Here’s a very brief explanation:

OPTION 1: Temp Permits
The Board could immediately issue “temporary permits” to local cultivators who DO NOT EXPAND operations beyond the plant count and/or square footage of the current ordinance. This pathway would mean farmers may be able to get state licenses this year, but they could not exceed the current allotment of 25 plants and/or 1,000 square feet of the existing interim ordinance, limiting them to Type 1(c) “cottage” state license for the 2018 growing season.  The garden could expand, depending on the new commercial ordinance, once the EIR is completed.

While this option is not ideal for larger farms because the commercial permits would be limited in size this season, it is by far the easiest option, particularly for smaller farms that can survive off 1,000 square feet or 25 plants.  Another HUGE downside is that the County staff suggested capping the number of these permits at 100, and would decide who gets them by a lottery.

OPTION 2: Discretionary Review
The Board could enact the new commercial cultivation ordinance in the coming months if-and-only-if each and every farm went through “discretionary review.” In other words, this would require the County to make an individualized determination of environmental compliance for each farm.

This option is ideal for larger farms who are able to quickly coordinate site-specific environmental analyses and are ready to engage in the discretionary review process. However, “discretionary review” means by-its-own-terms that you’ll have to prepare reports and plans to submit to the County and then the County gets to review it and decide whether to permit it or to deny it. That process could take months, and the reports could be expensive. I would hope that discretionary review of smaller farms might be able to be streamlined in some manner, but that is not clear.

What Can You Do About It?

There is NO EASY ANSWER here. Each one of these pathways involves a weighing of the benefits and burdens, and then choosing the path that works best for the greatest number of our local farmers. To be sure, not everyone will be happy with either option.

However, PLEASE KNOW the County staff is advising the Board not to issue any licenses at all this year and to wait until the full EIR is completed, effectively pushing commercial permits off until 2019. That’s not legally required under CEQA and it just is not right. So please make your voice heard on Tuesday, May 1st, at 9:00 a.m. in the Board’s chambers at 950 Maidu in Nevada City.

I will be there making my voice heard.  Will you?

Much love and respect, hb
#protectourfarmers #nevadacounty

The Small Farmer Program: A Worksheet for Farmers Headed Into the Regulated Era

Flash Update: The Small Farmer Program Worksheet 

Hey team,

We know there are a lot of questions about how regulations affect our small farmer clients, and the answers are undoubtedly complicated and ever-changing.  In an effort to organize the various categories of issues that farmers can start thinking about now, I wrote up a simple checklist of issues to go through with my clients.

The checklist evolved over the past few months into what I now call the “Small Farmer Program,” and I’ve sought input on the program from a County Ag Commissioner, a successful Bay Area consultant, my attorney colleagues, and dozens of small farmers and other cannabis business women and men.  With their additional insight, the Small Farmer Program has become a helpful rule of thumb for our office to gauge where a farmer is on their path into the regulated era.  Rather than keep this information internal, however, I want to share it with the community so folks can start looking over some of the categories of issues they may need to start thinking about if and when Nevada County issues permits.

I formatted this so you can answer a lot of these questions by yourself, although we are here if you need us.

Keep it confidential!

Remember that we keep this document in our confidential files for our clients because it contains sensitive information. If you do use the worksheet, please take all precautions to ensure your information remains confidential.

Here it is:  The Small Farmer Program Worksheet

Much love and respect,

hb

#protectourfarmers

Summary of our Comments to the Emergency Regulations: Owners, Priority, and Terpenes

Well the time for comments to the emergency regulations has come and gone. The California Greenspoon Marder attorneys, spearheaded by Senior Counsel David Frankel, prepared and submitted our comments.  I think its important to briefly share the three we felt were the most relevant to our clients: (1) ownership rules, (2) the definition of priority, and (3) the regulation of terpenes (aka “terps”).

Some ownership rules apply only to LLCs. Why?

First and foremost, our corporate guru David Frankel correctly spotted the odd regulation that all members of LLC (limited liability companies) are considered “owners,” and require the full panoply of disclosures, background checks, and so on, even if they are not participating in the management of the company and receiving less than 20% of the company’s profits.  Consider, however, that shareholders in a stock corporation are not considered owners if they receive less than 20% of the company’s profits, and are thus subject to less stringent rules.  Although our office is finding the stock corporation with an “S corp” designation to be the most workable company for small cannabis businesses, many if not most, of the newly emerging small businesses are converting to LLCs. As such, LLCs should not have more burdensome requirements than other types of companies, so we asked the agencies to limit the “ownership” rules only to those LLC members who are participating in the membership and control of the business.

Who gets priority if an MBC or Cooperative merges with a for-profit entity?

Secondly, the agencies will give “priority” licensing if an applicant operated in compliance with the Compassionate Use Act of 1996 and its implementing laws before September 1, 2016. There are many applicants who were operating in the form of nonprofit mutual benefit corporations or cooperatives as of September 1, 2016, but who now want to convert to a for profit corporation or LLC. Under the MBC merger statute in CA Corp. Code Section 8010, an MBC can merge with a domestic corporation or other business entity. Under the corporate rules, the new for-profit company is supposed to get “all rights and property” of the old company, so we asked the agencies to make it clear that these new for-profits enjoy the priority status earned by the old company. That seems fair to me!

What’s up with terpenes?

Our final note relates to the regulation of terpenes, as the new regulations barely mention this type of activity, which is a pretty big deal right now.  Terpene businesses would usually fall into the category of Type 6 or Type N, depending on whether the terpenes are considered cannabinoids for purposes of the definition of “Extraction” in Section 40100. Most terpene manufacturers use steam distillation, which is a nonvolatile mechanical process. The distillation equipment can be installed permanently in a licensed premises but can also be installed on a vehicle so that the terpene manufacturer is able to distill terpenes from fresh cannabis plant material at or near the cultivation site. The regulations are silent concerning mobile terpene distillation equipment and operations. In addition, the regulations have been developed to address public health and safety issues related to cannabis products that are intoxicating or which involve potentially dangerous manufacturing processes.  We respectfully suggest that the department develop regulations that are better suited for terpene manufacturers and also that permit mobile terpene operations at licensed cultivation sites.

Conclusion

As a concluding note, we want to acknowledge that the shift into these regulations may be difficult.  Unlike most law firms, our little office has been serving the California cannabis industry for over three decades between David and myself.  We are in this with you.

Much love and respect, hb and the Nevada City Greenspoon Marder team

#protectourfarmers #cali4life #greenspoonmarder

CDFA Comment Letter to Emergency Regs final 1 12042017 pdf

BCC Comment Letter to Emergency Regs final 12042017 pdf

DPH Comment Letter to Emergency Regs final 12042017 pdf

From Zero to Sixty: Cannabis Corporations in the Last Days of the Collective/Cooperative

As most farmers are aware, the shift out of SB 420 (i.e. the collective/cooperative model) into MCRSA (i.e. the local permit/state license model) is in part intended to bring cannabis cultivation into the light, primarily the taxable light. In light of these changes, my farmer clients commonly ask if they should start a corporation in preparation for the future, or if they should continue on as they have in the past.

This article is intended to flesh some of the issues out regarding starting a lawful California cannabis corporation now.

I.  Who Should Not Start a California Cannabis Corporation

1.  Do not start a shell corporation to establish priority.

A shell corporation is a business that is formed, but ignored in any meaningful manner. It is generally unwise to form a “shell” corporation to gain “priority” status under MCRSA or Prop 64, a tactic some attorneys and even our local policy organization advised in the past.

The statutes do not mandate local Cities or Counties give “priority” to prior-existing corporations, but instead order the State agencies issuing the state licenses. (Cal. B.P. Section 19321, 260554.2.)  While the issues are related, the buying and selling of pre-existing corporations may prove to be a fruitless exercise that serves only to generate more money for the attorney who set the shell corporation up in the first place.

Local jurisdictions (Calaveras/Mendo/Humboldt) have thus far cared more about the pre-existence of the farm in light of CEQA than any “priority” offered by a shell corporation, so don’t get played.

2.  If you aren’t ready to learn how to run a legitimate corporation, don’t start one. 

Those who are not ready to operate in strict compliance with the collective/cooperative rules should refrain from starting a corporation now, as they could expose themselves to criminal liability for financial and tax crimes instead of the simple cannabis crimes. Financial crimes are far worse, as they are often felonies and may be considered “moral turpitude,” forever precluding any type of licensing.

If you ain’t ready, you ain’t ready.

II. Why Does Corporate Status Matter?

For those who are ready to move into the next phase of California’s lawful system of cannabis production, the remainder of this article is for you. The first thing to know is MCRSA and Prop 64 authorize commercial activity, which will operate within the U.S.’s hyper-capitalistic economy. Thus, in order to best protect yourself and your assets, a smart farmer should have a working knowledge of basic business, and of those corporate rules that come along with it. Here’s a few issues to be aware of:

1.  Taxes

Taxes on California cannabis are wild, and they appear to have no end in sight with the allowance given to locals to tax even further. This massive taxation will likely put some mom-and-pops out of business, but by thinking strategically about taxing now, you can take the right steps to avoid unnecessary taxes.

By my account, cannabis taxes thus far are:

  • $148 per flower pound (due at harvest);
  • $44 per leaf pound (due at harvest);
  • 8% sales tax (which would be negated for wholesales from grower to dispensary/retailer if the growers can obtain a resale certificate, but growers who direct sale would be liable);
  • 15% excise tax (applies only to purchases of cannabis products, so this is a bigger issue for retailers);
  • Local cultivation and/or sales tax (TBD depending on your City/County);
  • Absolutely no write-offs for cannabis-only related expenses, per 26 U.S.C. § 280E.

By making sure you’re not paying extra self-employment taxes and ensuring your small business can obtain “pass-through” taxing when you move out of the collective/cooperative model, you can eliminate or greatly reduce the possibility of double taxation (i.e. where your corporation gets taxed and then your salary from the corporation gets taxed again).

2.   The Reputation and Goodwill of Your Business May Prove to Be Critical in an Industry Where Your History Matters.

I cannot understate the value of building your corporate personality and the “goodwill” of your business now, as the age of your corporation and its existing reputation matters, both for “priority” status under MCRSA and Prop. 64, and also for competitive local permits. Mostly, however, consumers care!

3.  Allows Strategic Business Decisions in Quick Turn-Around Permits.

In addition to the obvious issue of taxation, growers may not get a lot of time to ponder these issues before having to make a quick decision about permitting in light of the quick ebb and flow of the local cannabis rules in each City and County. (Hello, Mendo!)

4.  Allows Strategic Business Decisions in Non-Transferable Permits.

Many of local permits are non-transferrable, which means you may be stuck in the same corporate formation for several years if the County permits go on hold during a CEQA analysis. Taxes may prove to be unbearable if you don’t have corporate protection once taxes kick in in earnest in about 2019-2020 (once the collective/cooperative model dies).

5.  Protects You From Personal Liability if Your Business Gets Sued or Goes Under.

With a functioning corporation, you get the added benefit of a corporate “veil,” meaning your personal assets would likely be protected if your business got sued. Considering there will be tons of lawsuits as these issues get worked out, protect yourself by making sure you and your business are distinct entities. 

III.  Overview of California Cannabis Corporations

1. Current Law Continues to Demand Not-for-Profit Status.

Current law still requires non-profit status, but allows for profit making in the future. This odd conundrum leads to the common question: “How can we protect ourselves now but prepare for the future of California cannabis?”  

There are three primary choices: (1) do nothing, which essentially means you are a sole proprietor, (2) incorporate as a not-for-profit Mutual Benefit Corporation that can be transitioned to a for-profit company in the future, (3) organize a for-profit corporation that chooses to operate on a not-for-profit basis, or as a “management” or “holding” company for a distinct not-for-profit collective or cooperative. 

2.  Sole Proprietorships

California law continues to require a cannabis farmer be organized as (1) a collective or a cooperative, which (2) must be operated in a not-for-profit manner. Thus, operating as a sole proprietor of a commercial cannabis operation is arguably illegal at this time.  

There is the rare case where a grower provides cannabis to a dispensary of which they are a member.  If your garden is organized as a producer for a dispensary, however, your hard work is actually building someone else’s business. 

Additionally, once you begin to file taxes on your commercial cannabis business, sole proprietors will be subject to self-employment taxes, which essentially doubles your standard taxes. This self employment tax is in addition to the other taxes described in the previous section.  

3.  Cooperatives and Not-for-Profit Mutual Benefit Corporations

In 2008, Jerry Brown declared medical cannabis cooperatives must be formed as “Consumer Cooperatives” or “Agricultural Cooperatives,” which are specific types of businesses where members are united in common purpose and generally get an equal vote on the corporation’s major decisions. Cooperatives have stringent voting requirements that greatly limit their flexibility as an entity.  

At some point, dispensaries wisely began utilizing Mutual Benefit Corporations [“MBC”], another type of corporation that allows the Board and governing members greater flexibility in building the dispensary’s business.   The MBC can have members with voting rights similar to a cooperative, or members who do not get to vote, or even members who can vote on only some things, and this pliability makes it a desirable form.

The downside, however, is a MBC may not make the best business sense once the corporation gets big enough to own assets (such as real property or personal property like a greenhouse or a tractor).  An MBC cannot distribute assets or “dividends” to its members like a profit corporation can do for its shareholders, as the only time a MBC can distribute assets to members is at dissolution, unless the governing documents such as the Articles of Incorporation (AOI) or bylaws state otherwise. (Corp. Code Section 8717.)  

California law thankfully allows a MBC to merge with or transition into a for-profit company (C.C. 8010), which cannabis-related MBCs should not do until:

  • Collectives/cooperatives may legally operate on a for-profit basis (watch out for AB 64); or
  • You’re governed by the rules of MCRSA/Prop. 64, i.e. where you have a local permit and a state license.

          4.  LLCs, Partnerships, and Other Traditionally For-Profit Corporations

An LLC is a common entity type for small businesses, as LLCs offer traditional corporate protection, but don’t have the same rigmarole as traditional corporations that issue stocks to shareholders.  Most folks who have cannabis-related LLCs traditionally operate them in addition to their MBC and, in those cases, the LLC “manages” or acts as a “holding company” for the non-profit MBC’s assets or Intellectual Property, such as the company’s logo, the secret nutrient formula, or special growing techniques.  

In such cases, appropriate contracts/leases would need to be drafted setting forth how the LLC interacts with the MBC to ensure the transactions between the two corporations are sufficiently “arms-length” to be unquestionably legitimate.

Technically, you can run an LLC in a not-for-profit manner by declaring so in the Operating Agreement (CC 17701.10), which is a common structure in areas where the local jurisdiction is more friendly to creative cannabis businesses. In Nevada County and the surrounding Counties, you will likely be prosecuted if you tell an officer your cannabis business is an LLC, even if you can prove your financials are managed in a not–for-profit manner.  Thus, while a not-for-profit LLC is a legitimate possibility, its wisdom in practice largely depends on your jurisdiction.

If your cannabis business has a creative corporate structure involving an LLC or other type of for-profit, it is critical that Sierra Foothills farmers do not discuss their business model with law enforcement, and you should be wary of obtaining a permit in the name of the LLC. 

          5.  What Corporate Structure is Best for the Small Farmer?

For the aggressively professional and forward-thinking Sierra Foothill farmers, the most strategic method is to maintain (and operate) two corporations (i.e., a not-for-profit to manage the cannabis and a for-profit to manage the assets), as growers may not get lengthy notice when the Sierra Foothill Counties finally do issue cultivation licenses. Thus, having one of each type of corporation allows you to make a strategic decision about which corporation to get the permit under, if and when they are issued. For example:

  1. If not-for-profit status is still required by the State when your County issues a permit, or if the County grades applicants on the length of their previously existing corporate status, then having a longstanding not-for-profit corporation would be extremely helpful; or
  2. If the County issues licenses after for-profit becomes legal, then it would be needlessly cumbersome to get the permit as a non-profit unless you desire to remain a non-profit in the future (which a lot of folks do) or unless you don’t get time for a lengthy transition before your application is due.  If you’re in the latter category, you should ensure your governing documents allow for flexible transition now, or you could screw yourself in the future.

However, for the majority of small farmers just trying to make it through the day, a Mutual Benefit Corporation which allows easy transition to an LLC or stock corporation is perfectly workable, as it the safest option for now and can be converted to a for-profit in the future. 

If you are in a friendly jurisdiction, you could skip the MBC and go right to the LLC, but that’s dangerous ground in hostile Counties and may hurt you if your jurisdiction requires proof of not-for-profit status when permits are available.

IV.  CONCLUSION

In sum, I am aware the corporate stuff is unfamiliar and daunting. But, while the massive taxes are my least favorite part of the end of prohibition, I strongly believe wise steps to protect yourself from over-taxation and the lack of any risk of arrest will make this transition worth it someday.   

For now, just continue to hold on tight, start to ponder these concepts, and then take initial steps if and when you’re ready. Above all, please stay safe this coming season.

<3, hb

Written by Heather L. Burke, Criminal/Administrative/Corporate/Litigation

In consultation with attorney Fran Cole, Diamond Baker Mitchell, L.L.P, Corporate/Civil Litigation

***This blog is excerpted from a larger chapter in the The Farmer’s Corporate Handbook, due in May, 2017.  Additional chapters include (2) How to Run a Legal Cannabis Corporation, and (3) What Legal Cannabis Producers, Manufacturers and Distributors Need to Know About Contracts, and more!  Stay tuned!  

#protectourfarmers #cali4life

The Tortoise, the Hare, and the Ostrich: Legal Compliance in the 2017 Growing Season

I used to joke that many farmers act like ostriches by burying their heads in the sand when it comes to staying on top of the sweeping new laws relating to cannabis cultivation.  That approach is understandable in light of the volume and complexity of the new laws, but I recently realized the age-old story of “the tortoise and the hare” may provide significant insight for those trying to find a path forward, particularly here in Nevada County. That story taught us—as we all remember— that slow and steady wins the race.   This principle is applicable to growers in Nevada County’s current cannabis realm for three primary reasons:

1. Protect What You’ve Built in the Industry Thus Far.

Before thinking about the future, farmers should start by protecting what they’ve built so far.  For most, this means perfecting their legal compliance now, as one’s compliance with state law matters this season more than ever, especially in the ban counties such as Nevada County (yes, we are still under a ban).  It is critical to protect yourself from arrest this season, and from felony arrest in particular, as we are expecting the Sheriff’s Office to mount an aggressive anti-cultivation campaign. The County will get $100 per plant out of compliance, per day, which adds a unique financial incentive not previously in play.  Moreover, thanks to our “interim” ordinance, law enforcement can “summarily abate” (i.e. slash-and-burn) without a hearing wherever there is any violation of state law! Thus, even a misdemeanor violation of Prop 215 and/or the Collective/Cooperative rules could possibly get you immediately chopped, fined $100 per plant, perhaps arrested, and having to “lawyer up” for a criminal case.  Talk about insult to injury!

Additionally, although Prop. 64 (aka “AUMA”) downgraded illegal cultivation to a misdemeanor in most situations, it is still a felony where the plants are grown in a way that harms the environment.  Law enforcement will likely interpret the environmental crimes broadly, so unpermitted clear-cutting in an area close to the watersheds or irresponsible use of pesticides might get you arrested for harming the environment. Since you can be denied a state license under MCRSA for a felony conviction based on purposeful injury to our Mother Earth, you should not half-ass your legal or environmental compliance this year.

Finally, as Congress defunded the DEA and fed DOJ from investigating and prosecuting conduct that is in “strict compliance” with California’s medical cannabis laws, a half-assed informal Collective or a defunct Not-for-Profit Mutual Benefit Corporation [“MBC”] is probably not enough to protect you from the Feds if they come in. (P.S., #fdt.)

While our County’s ordinance status is imperfect, I am choosing to be grateful for this momentarily lull after a barrage of sweeping changes over the past 2 years, both locally and state-wide. Instead of acting like the braggadocios hare (who has a popular Instagram page, so he must be legal, right?) or the purposely ignorant ostrich, I am encouraging my clients to follow the wise tortoise’s lead and take this precious time to perfect their legal compliance, particularly as we are only beginning to methodically digest the deluge of new laws.  I strongly advocate a “safety first” approach, focusing on protecting what you built in this industry thus far as we inch towards the future with wisdom.

This simply is not the year to risk everything because we’re ticked off the County did not give us grow permits after Measure W. Complaining is self-defeating. Get over it, and bring your legal status into line while there is time to do so thoughtfully.

2. Prepare for the Future, But Do So Wisely.

You can be proactive during this short respite by taking small but significant steps to prepare for permitting, if and when it is available.  Should Nevada County allow you a mere few days to turn in your permit (recall what happened in Mendocino County), you may regret burying your head in your expensive pile of fancy dirt. There is much to do, now.

Firstly, we can look to the cultivation ordinances in Calaveras, Mendocino, and Humboldt, make educated guesses about the requirements of a future permitting ordinance here, and get working on it.

Secondly, as we move from collectives/cooperatives to small businesses, there are a LOT of corporate and tax rules that now may apply.  You could, for instance, get answers to the following questions now, instead of making critical decisions under a stressful timeframe:

  • Should you start a MBC? (Hint: beware of anyone selling you a MBC without assessing the cons as well as the pros.)
  • Was your MBC created in haste to get you “priority,” but you don’t really use it or have any idea what to do with it? How do you breathe life into an existing non-profit corporation?
  • Does your defunct MBC get you “priority” under MCRSA? (Hint: no.) If not, what does?
  • Does an MBC and a popular Instagram page equate to legal compliance?  (Hint: yikes!)
  • If you have a MBC, do you know if you will need to dissolve it or whether it can be morphed into a for-profit entity in the near future (should AB 64 pass or you get state licensing)? Should your bylaws be updated now, before you bind yourself to a non-transferable permit?
  • What Water Board tier are you? What can be done today to prepare if you may a higher tier? Does compliance with the Water Board BMPs even matter now, before you can submit a Notice of Intent?
  • Have you met with a CPA and started thinking about the process of tax compliance, even if you’re not ready to commit to paying taxes just yet? Is your CPA subject to the attorney-client privilege, or are you telling your most critical secrets to someone who is not bound by statutory confidentiality?

While the questions can go on ad infinitum, a knowledgeable lawyer can give you a fairly good overview of these issues so you that can take your first step at developing an Action Plan.  Don’t wait to make a game plan until the game is on.  While we have precious time to prepare and plan, prepare and plan for Goddess sake!

3. Intent Matters. A Lot.

An intention to operate lawfully actually has cognizable significance in the legal realm. I find that developing an intent to be lawful is often matter of self-perception, as cops and prosecutors told growers they were illegal for decades, even when the growers were trying to do it right. This unfortunate self-perception of illegitimacy is a result of that conditioning, and the time has come to stop playing into their narrative and to create your own story about your intention and understanding of your own legitimacy.

No, you still cannot talk to law enforcement about your new self-realization, but it is a hugely significant step forward if the only change you make this season is to alter your intention surrounding the lawfulness of your canna-business.  Like everything else in life, intent matters.

***

In closing, I note that the work of the tortoise is undoubtedly tedious and perhaps lacking in glamour, but it is methodical and wise. You will be better prepared than the ostrich who refuses to look up from his pile of dirt, and you will likely outlast the rabbit, who gained a reputation for folly.  As we alter our perception of our County’s currently undesirable status from an affront to a respite, we can change our perception of ourselves along the way, and create our own story.  Then we trod on slowly, but wisely, to the finish line.

#strongertogether #protectourfarmers #cali4life #setmypeoplefree ~hb

My musical meditation for this post is a live version of Bad Brains, The Meek Shall Inherit the Earth. You’re welcome.