Cannabis M&A: Will California Allow License Transfers?

Cannabis M&A (short for mergers and acquisitions) in California is much more complicated and problematic than in other states. The biggest reason for this is that licenses are not transferrable, which all but eliminates the possibility of asset sales. In turn, this means that deals are much more complicated for both buyer and seller, and probably kills a lot of potential deals before they start. That might change soon, as the state is considering a bill that would allow license transfers.

Why are asset sales so important in cannabis M&A?

I recently wrote a post for one of our firm’s sister blogs on the top 5 issues buyers face when buying businesses in regulated industries. Here is what I wrote about the difference between “asset sales” and “business sales” in the M&A context:

[W]hen people talk about M&A, they often think of buying the entity (a “business sale”). However, it’s usually better practice to simply buy the assets of a business with a brand new entity (an “asset sale”). In an asset sale, the buyer will generally get all the assets, and not just the physical ones – IP, name, leases, etc. The advantage to doing it this way is that the buyer gets to continue operating the business but doesn’t inherit liabilities associated with the actual entity that sold the assets.

Let me flesh this out a little bit more. A business – say a corporation or LLC – has liabilities. Those liabilities may include taxes, debt, litigation, accounts payable, and so on. Those liabilities are “personal” to the business, meaning they are obligations of the business. If the business itself is purchased, the prior owner (seller) does not magically retain those liabilities and hand over the business free and clear. Even if the seller would agree to that, the buyer would have to get the creditors of the business to agree. And good luck with that.

There are some tools that business sale buyers have, such as making the sellers represent that there are no liabilities, requiring the seller to indemnify the buyer against disclosed or undisclosed liabilities, or even holding back some of the purchase price for a period of time after closing to deal with potential liabilities. To be clear though, these are not perfect solutions and we’ve seen cases where six- or even seven-figure liabilities come to light after the closing, with the seller nowhere to be found.

In asset sales, on the other hand, the buyer will buy some or all of the assets of the original business, including the license (more on that below). This means that the liabilities that are “personal” to the original business won’t follow it and the seller will have to deal with those on their own. This is hugely advantageous for buyers for obvious reasons.

Ok, asset sales are important…why not use them as a default?

The answer is pretty simple – regulation. Here’s what I wrote in that post linked above:

When it comes to regulated businesses, asset sales may not be an option. Regulated businesses may have licenses, permits, or other assets that cannot be sold to an unregulated entity. For example, in California’s cannabis industry, licenses are “personal” to the licensed business and can’t be sold. And the products that business owns can’t be transferred to an unlicensed buyer. In these kinds of regulated industries, asset sales are off the table.

In states like Oregon, where our corporate team has closed countless M&A deals, sales tend to be structured as asset sales. That’s because those states have processes in place to allow licenses to essentially move to different businesses and even possibly different locations.

California, on the other hand, doesn’t do that. For whatever reason, drafters of the state’s cannabis laws chose not to create processes for the transfer of licenses. And neither did state regulators at the Department of Cannabis Control (DCC). In fact, DCC regulations don’t even create an easy pathway for business sales – regulations regarding changes of ownership mandate that an original owner stay with the business for a time post-closing.

This same regulation makes clear that “Licenses are not transferrable or assignable to another person or owner” and, except in one very specific instance, “licensees may not be transferred from one premises to another.” This means that assets sales are off the table.

I should also mention here that California is a dual-licensing jurisdiction, which means that licensees must also have local licenses. Some (not many) localities have provisions in place to allow for license or location transfers, but doing so is difficult if not impossible given the DCC’s rules.

Will license transfers be allowed?

Earlier this week, California Assembly Member Phillip Chen proposed AB 2540. The proposed bill is very short, and the substantive change is to add the blue and italicized phrase to the following existing law:

“It being a matter of statewide concern, except as otherwise authorized in this division, the department shall have the sole authority to create, issue, deny, renew, discipline, condition, suspend, transfer, assign, reassign, or revoke licenses for commercial cannabis activity.”

This is literally all the bill in its current form states, and if the bill progresses through the legislature it is almost certain to be supplemented. While we don’t have a ton of information on AB 2540 just yet, we do have some information about what the purpose is from a 2023 effort by Chen to propose a substantially identical bill, AB 351, which died in committee. A committee analysis of the substantially identical bill from April 18, 2023 states:

Under existing law, DCC does not have explicit authorization to transfer, assign, or reassign a state-issued license. Currently, in order to acquire a license, one would have to acquire the entire company that holds the license (e.g., an LLC) and assume all of its liability. Subsequently, the owner of the company being bought would have to add the purchaser to the license. Once approved and added to the license, the purchaser could then offload the seller from the license. The author and sponsor contend that this process is overly burdensome and having the ability to transfer a license would improve continuity of operations.

I will just assume that this is the same logic behind AB 2540. If so, it hits the nail on the head. Business sales are problematic both because (1) they require the assumption of liabilities (many of which may be undisclosed by the seller or even unknown to the seller), and (2) the DCC has an irrational and unnecessarily complicated ownership change process, which requires at least one original owner to remain associated with a business for a length of time after it is sold.

What the future may hold

Given that Chen’s attempt to pass a similar bill failed last year, I think AB 2450 has a relatively rough ride going forward. That said, if the bill passes, it could open the state up for a host of cannabis M&A transactions that could completely change the industry. Cannabis M&A transactions will probably increase substantially if asset sales are permitted. This would be a huge relief for smaller business owners looking to offload licenses, retire, or just exit the industry.

As mentioned, the bill is in its infancy and has a long road ahead of it, during which time it could be modified or supplemented to the point where it is nearly a different bill. Whether or not that happens, if the bill passes, there is still the issue of local law, which the bill currently does not address. Unless cities or counties decided to follow suit, the state’s changes would be of minimal utility.

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No matter what happens with AB 2450, it’s clear that the legislature is beginning to wake up to the fact that the industry is clearly broken and in need of major regulatory overhauls. For just one example, a few days ago, I published a post on an effort to allow integration of the hemp and cannabis industries, which would be an immense change to the status quo. Stay tuned to the Canna Law Blog for more updates on changes to California’s cannabis industry.

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President Biden’s Cannabis Pardons

Similarly to many career politicians who now support criminal justice reform after decades of supporting the most unjust policing and sentencing laws, President Joe Biden has been notably lacking in keeping the pro-cannabis and criminal justice reform promises he ran on in the contentious and chaotic election that was 2020. Along with still referencing the widely disproven “gateway drug” theories, even on the campaign trail, Biden promised that federal cannabis reform would become a reality under his presidency.

Certain notable legislators from both sides of the aisle of Congress and the Senate such as Ohio Rep. David Joyce and Oregon Rep. Jeff Merkley continue to file and sponsor cannabis reform legislation on the federal level, yet all attempts never approach anything that resembles fruition. Cannabis reform polls extremely well, yet Congress and the Senate remain tribally divided on most issues, unfortunately including cannabis. And despite any action to implement cannabis reforms on the federal level, Biden seems to be attempting to judicially atone for the millions of wrongs and injustices committed by the 1994 Crime Bill.

Biden’s first round of pardons: October of 2022

In October of 2022, Biden announced his presidential pardon of thousands of Americans convicted of “simple possession” under federal law and in the District of Columbia. With this pardon, these thousands of Americans were finally free from the many socioeconomic disadvantages that come with a criminal conviction, especially one on the federal level.

“There are thousands of people who have prior Federal convictions for marijuana possession, who may be denied employment, housing, or educational opportunities as a result, my action will help relieve the collateral consequences arising from these convictions.”

While this mass pardon is undoubtedly beneficial, it does depressingly little for the thousands of inmates who are serving several-decade sentences or life imprisonment due to victimless cannabis charges on the state level. For many of the unjustly incarcerated individuals that organizations such as The Buried Alive Project and Last Prisoner Project advocate for the release of, the October 2022 announcement didn’t provide much alleviation. Because unless a cannabis conviction of any kind is on the federal level, the President of the United States can’t provide much of a pardon beyond a vocal recommendation.

Biden’s second round of pardons: December of 2023

In December, the 46th President announced another expansive wave of cannabis pardons that build upon the initial October 2022 pardons. In a detailed announcement by the Office of the Pardon Attorney, the Department of Justice discussed exactly how these pardons are an extension of the previous pardons from 18 months ago.

“On December 22, 2023, President Biden issued another proclamation that expanded the relief provided by the original proclamation.” the bulletin read. “The December 2023 proclamation adds to the list of pardoned offenses the following: offenses under federal law for attempted possession of marijuana; additional offenses under the D.C. Code for simple marijuana possession; and violations of certain sections of the Code of Federal Regulations involving simple marijuana possession and use.”

Once again, this bill does virtually nothing beneficial for anyone convicted and/or incarcerated for similar offenses on any state level. However in the official White House statement released on the same day, Biden directly addressed those thousands of individuals serving unnecessary years in prison for victimless drug charges and spoke to the governors of those states.

“Just as no one should be in a federal prison solely due to the use or possession of marijuana,” Biden explained, “no one should be in a local jail or state prison for that reason, either. That’s why I continue to urge Governors to do the same with regard to state offenses and applaud those who have since taken action.”

Still though, this new update to the previous mass pardon once again only applies to simple possession or use cases. If an offender is still incarcerated or lives with a conviction for any type of cannabis distribution-related charges, which are commonly added to many possession cases, then they’d still be ineligible for any type of pardon.

There were also 11 people that received clemency from Biden for non-violent drug-related offenses who received steep and unfair sentences due to either Reagan-era or 1994 Crime Bill-related sentencing guidelines. Some of these convictions were related to crack cocaine possession, a substance that received significantly longer sentences for the possession and distribution of when compared to sentencing for powder cocaine possession.

“These individuals, like so many others, were convicted of drug offenses and sentenced to decades in prison, including in some cases mandatory life sentences,” a White House official said. “Some individuals received sentences that are twice as long as they likely would have been today and could not benefit from subsequent changes in the law.”

Long road ahead

Reformative changes, especially those related to drug sentencing and the millions of lives affected by those policies, come in waves and won’t rapidly be enacted overnight. For an unjust decades-long and trillion-dollar failure that the War on Drugs truly is, it’ll take the work of several different Presidents and Congressional sessions to attempt to undo all the colossal wrongs. However, this recent December policy is a further step in the right direction for a President who ran so heavily on criminal justice reform and who’s facing reelection in November.

For more on President Biden and cannabis, check out the following posts:

• I Have Some Thoughts on this Biden Cannabis Play
• Grading the Presidential Candidates on Cannabis: Joe Biden (2024)
• Grading the Presidential Candidates on Cannabis: Joe Biden (2019)

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10 best cannabis lubes for Valentine’s Day and beyond 2024

Cannabis revs our engine inside and out. To pave your road to romantic bliss, here are 10 of the best cannabis-infused lubes coast to coast.

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Medical cannabis patients’ quality of life improved during 1-year study

The UK-based study of over 1,000 medical patients showed promising results, despite its limitations.

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California Bill May Change State’s Cannabis and Hemp Industries

On February 7, 2024, California Assembly Member Aguilar-Curry introduced AB 2223. The bill, if passed, would significantly change the state’s cannabis and hemp industries – for better or worse. Today, we’ll take a look at how AB 2223 could change both the cannabis industry and hemp industry in the Golden State.

First though, a brief caveat. AB 2223 was just proposed. The bill is certain to undergo changes as it winds its way through the state legislature. Those changes could be so significant that we end up with a different law at the end of the day. And of course, the bill may not end up becoming law. So take all of the following with a bit of a grain of salt.

#1 The cannabis industry could be allowed to use hemp

AB 2223’s most significant change would be a change to MAUCRSA (the state’s cannabis law) that allows cannabis licensees from selling or incorporating products that include industrial hemp or its derivatives. Manufacturers could procure industrial hemp or derivatives from California Department of Public Health (CDPH) registered persons (including potential out-of-staters), and eventually would be able to procure a CDPH registration at the same premises once regulations are adopted.

Products containing industrial hemp would still have to comply with all legal requirements for cannabis products and would have to be tracked and traced as separate batches. If the law passes, the state has until July 1, 2025 to implement regulations.

#2 The battle over “synthetic cannabinoids” will be fought

If AB 2223 passes, cannabis licensees could not use “incorporate delta-9 tetrahydrocannabinol that has been converted from a hemp-derived cannabinoid.” Additionally, retailers would be forbidden from selling “cannabis, a cannabis product, or an industrial hemp product that contains converted delta-9 tetrahydrocannabinol.” Similarly, the term “industrial hemp” (with respect to existing hemp regulations” will be defined to exclude any “synthetically derived cannabinoid”.

Anyone in the hemp industry is well aware over the myriad issues concerning the precise definition of “synthetic” (see here or here, for example). So it probably won’t come as a surprise to learn that AB 2223’s proposed definition is complicated. Let’s take a look:

“Synthetically derived cannabinoid” means a substance that is derived from a chemical reaction that changes the molecular structure of any substance separated or extracted from the plant Cannabis sativa L. A synthetically derived cannabinoid does not include any of the following:

(1) A naturally occurring chemical substance that is separated or extracted from the plant by a chemical or mechanical extraction process, as long as that naturally occurring chemical substance does not undergo a change in molecular structure.

(2) Cannabinoids that are produced by decarboxylation from a naturally occurring cannabinoid acid.

(3) Any other chemical substance approved by the department in regulation.

This is a lot to unpack, but the bottom line is that changes in molecular structure would deem a cannabinoid synthetically derived. Simply processing hemp won’t count unless there’s a molecular change. With respect to exception (2), this seems like it could provide a state-law carveout for THCA (read here for some of my thoughts on THCA). And notwithstanding all of this, the CDPH would have authority to exempt even some cannabinoids that meet this definition by regulation.

#3 California reinforces its restrictive total THC standards for the hemp industry

Anyone in the hemp industry is also familiar with the many problems that arise from the USDA’s definition of total THC. California’s last major hemp law (AB 45) adopted a definition that is much more restrictive: the sum of THC + THCA, with THC defined to include any THC (delta 8, 10, etc.) or any other cannabinoid that the CDPH deems “intoxicating.” Ab 2223 reworks these provisions, which essentially appear to have the same effect.

In sum, a product with a high level of any cannabinoid that is intoxicating will be very likely to have a total THC in excess of the state’s 0.3% limit. This means that virtually any hemp produced product (such as THCA flower or delta 8) will be banned. It appears that California is going out of its way to make clear that the state won’t stand for intoxicating hemp products.

#4 New product requirements for the hemp industry

AB 2223 would impose some new standards for hemp food and beverages as follows:

(1) A single serving of an industrial hemp product shall be based on the amount of food or beverage customarily consumed in one eating occasion for that food or beverage.

(2) A single serving of an industrial hemp dietary supplement in pill, tablet, or capsule form shall be one unit.

(3) A product shall not exceed five servings per package.

The bill would also put a total THC cap on final form products, but the drafters forgot to fill in the specific number! (“An industrial hemp final form product shall not have a level of total THC that exceeds _______. A qualified testing laboratory shall establish a limit of detection of ______ or lower for total THC and a sample shall pass if total THC does not exceed the limit of detection.”) In all likelihood, the state will put a low limit on there to once again restrict intoxicating products.

Conclusion

I won’t break down all of the provisions of AB 2223 today, for the reasons I expressed above. The point of this post was to highlight some of the key provisions and to show how it will affect both the cannabis industry and hemp industry. Stay tuned to the Canna Law Blog for more updates on this proposed bill.

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Pop seeds 2024-Part II: Attack of the Sours

Sours, OGs, Tangies, sativas, Cheeses, and Purps—oh my.

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DEA’s Post on the Start of Black History Month

As America celebrates and commemorates Black History Month, it’s important to remember exactly how Black Americans have been disproportionately impacted by the criminal justice system in our country. From the crack vs. cocaine sentencing disparities to the fact that Black Americans are on average four times as likely to be wrongfully convicted of a serious crime based on statistics provided by the Innocence Project and the many ways that cannabis prohibition has directly damaged and devastated Black communities, these punishments and subsequent penalties have ranged from unjust to clearly unconstitutional.

Besides the countless examples of unjust and unnecessary sentencing and policing practices that unfairly targeted Black communities across generations, the longest lasting impact of President Richard Nixon’s trillion-dollar and multi-decade failure was the creation of the Drug Enforcement Agency. Formed in 1973 and serving as the successor to the equally as unnecessarily authoritarian Federal Bureau of Narcotics which itself was founded by the most notorious yet influential prohibitionist of them all, Harry Anslinger, the DEA was the enforcement arm of the endless draconian policies of the Drug War that only increased in severity as both Ronald Reagan and Bill Clinton took office. Worse even, both George H.W. Bush and his son didn’t do much to reform these dangerous and ineffective policies either.

One of the most unexplainable and continuously disproven series of laws that the DEA have enforced for decades is the illogical Controlled Substances List. “Marihuana”, a plant with clearly proven medicinal remedies for some and legal for approved medical usage in the majority of American states, is designated as the highest and most deadly class of Schedule I. According to the Controlled Substances List, this plant is far more deadly than fentanyl, a synthetic opiate killing thousands of Americans across all socio-economic and geographic demographics every year. OxyContin, the main culprit along with Purdue Pharma in causing the catastrophic opioid epidemic that has taken hundreds of thousands of lives and is still ongoing today, is a Schedule II substance and therefore considered less dangerous according to the DEA.

Throughout decades of enforcement of deeply flawed policies that resulted in the unjust incarceration of countless individuals for decades or life sentences in the most severe cases, the DEA’s actions and operations in their clearly unsuccessful attempt to rid America of drug abuse have conclusively been a failure and haven’t resulted in any sort of widespread abstinence from the drugs on the Controlled Substances List. Tragically still though, thousands went to American jails over these decades for drug-related offenses that were non-violent and even victimless in some cases.

Just last week for the start of February, nationally recognized as Black History Month which is a month to honor the innumerable contributions by Black Americans to this great nation, the DEA decided to post a dedication on their Twitter account. Not a dedication to a famous and influential Black American throughout political or legal history such as Thurgood Marshall, but rather a bizarrely timed tribute to the only American president to ever resign from the position and a supposedly prestigious award that he was gifted in the first few months of the Drug War.

“On Dec. 14, 1970, at the White House, the International Narcotic Enforcement Officers’ Association presented President Nixon with a “certificate of special honor” in recognition of the outstanding loyalty and contribution to support narcotic law enforcement.” the caption read.

If this photo of Nixon and caption were posted on the first day of any other month, then this strange tribute post would have been only considered random at best and a painfully cheesy praise of ineffective policies at worst. However, because of the posting date of February 1st, the first day of Black History Month, many cannabis and drug policy reform organizations found this post to be both astoundingly tone deaf and poorly timed.

Given that Nixon was the president who started the Drug War that rapidly spiraled into subsequent decades of mass incarceration and even stricter policies in the presidencies since his resignation, this Twitter post was heavily criticized due to those policies being so destructively discriminatory towards Black Americans.

As would later come out according to the testimony of former White House Counsel John Ehrlichman, that was the underlying goal of those laws and policies.

“We knew we couldn’t make it illegal to be either against the war or black,” Ehrlichman said, “but by getting the public to associate the hippies with marijuana and blacks with heroin, and then criminalizing both heavily, we could disrupt those communities. We could arrest their leaders, raid their homes, break up their meetings, and vilify them night after night on the evening news. Did we know we were lying about the drugs? Of course we did.”

While any social media post from the DEA probably wouldn’t be met with overwhelming praise, this post was particularly ill-timed. Especially after the federal government agency openly admitted themselves that the agency was created due to prejudicial laws and policing practices, the fact that the DEA posted this strange throwback photo on the first day of an important month meant to remember and celebrate the indelible and incredible contributions of Black Americans shows how out-of-the-loop and aloof that some governmental agencies can still be.

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