Cannabis Q&A with legal expert, Beau Epperly

As part of our ongoing efforts to help people stay abreast of the latest in cannabis legislation we spoke with Beau Epperly of Epperly|Elam, a cannabis law firm based in San Francisco and Washington D.C. focusing on deal structure and financing rounds for the cannabis industry. This originally aired on The Big Rock Podcast on January 19, shortly after the legalization of recreational cannabis use in California.  We found the content so valuable we have pulled all the best bits into the Q&A below in hopes it will bring clarity to others.

What happened in January, 2018?

January 1st marked the day that MAUCRSA finally took effect. MAUCRSA is the Medical and Adult-use Cannabis Regulation and Safety Act. It now governs the cannabis industry in California from seed to sale.

What does that mean for cannabis businesses? Is there a medical designation and a recreational designation? Can you have both? Do you need both?

So what MAUCRSA does is it allows an operator and business anywhere up the supply chain, from seed to sale, to apply for, and obtain, licenses for either medicinal cannabis or adult use cannabis, or both. So any existing dispensary now, so long as they meet the minimum requirements for the licenses, as required in the statute, can go and obtain both. That’s already started to take place.

How about for consumers? Do we still need to have medical recommendations when we’re going to a dispensary? Can I walk into any dispensary or use any delivery service? What is the M and A class mean for consumers?

I think probably the simplest way to look at it for a consumer is, “How do I get it?” It’s pretty simple – if you’re over twenty-one years old, you can walk into any dispensary that has an adult use license, and you can procure cannabis for recreational purposes. If you’re under twenty-one, but over eighteen, you can go procure cannabis for medicinal purposes. In order to be able to do that you have to get a doctor’s recommendation.

So far everything discussed has been at the state level, but ultimately the state of California gave the rights to individual counties and cities to regulate the cannabis businesses that operate within them as they see fit. How does that work?

First of all it’s important to mention that in California if you want to be an operator of a cannabis business, you have to have a local and state license. Both. The state came along and said, “You have to meet these minimum standards. We, the state, will allow any locality, and local government, to make these laws more restrictive, but you can’t make them any less restrictive.”

For example, the state now says that any cannabis business has to be farther away than six-hundred feet from a school or youth facility. So on a local level, a local government like San Francisco, can come along and say, “Actually, we want to make that more stringent. We want it to be at least a thousand feet.” They’re more than free to do that.

What they can’t do is relax it and say, “Actually, we don’t agree with the state. We want a cannabis business closer to a youth facility, so we’re going to allow anything that’s within fifty feet,” as ridiculous as that sounds. Keep in mind that’s just one of many examples.

Bottom line, the state sets forth a minimum requirement, and then each locality can decide how they want to enforce that.

It seems like there are a lot of challenges at the local government level, to figure out how they want to regulate these issues. It also sounds like there are additional challenges to get the cannabis business through all these processes. Using San Francisco as an example, how is this city doing in the respect of getting people licensed, etc.?

It’s a big challenge. The state says as of January 1, in order to operate you have to have a state and local license. The localities are trying to come up with regulations, processes to accept and issue applications, and to govern in a meaningful way – they are working as hard, and as quickly as they can, but it’s challenging. I know they are working hard to get through all these issues, but for businesses it’s a challenge because they have to shut down operations in order to be compliant with the new state law.

How would a business figure out what is happening at their local level? Where can a business owner go for help?

It really depends on the county, but my advice to all my clients is when you are thinking about locating in a certain jurisdiction the first thing you do is you go to that local government. If you’re in the city of Sacramento, for example, go to the city of Sacramento, either their website, or just walking into their office and finding out. Google “city of Sacramento cannabis government,” and it will come up.

Those websites are very helpful because all the state and local governments are working very hard to get people information about the requirements to apply. Often times they will even have the forms online.

Also, I have to mention that my experience with talking to these local government officials, and that of my clients, is nothing but positive. They’re there to help. I know a lot of people are really reticent to reach out, especially when it’s government and it’s bureaucracy and red tape, but I can tell you that they welcome those conversations. They’re very helpful, because everyone understands that people are sort of in the dark, and they want to get them into the light.

Now that we’re talking about coming out of the “gray zone” there’s concern from business owners who are worried about losing a majority of their revenue that they were making in this gray zone to taxes, and just in general about becoming regulated. What can you tell us about that?

That’s a huge question. The industry is coming out of a gray zone and facing new regulations, including having to submit to this complex tax structure. You are going to have to incur additional taxes, some localities have excise taxes, certainly the sales tax aspect. But, on the flip side of that, if you don’t come in the light, it’s going to be hard to find a market. You know MAUCRSA now requires that each dispensary, each retail outlet, track and trace everything from seed all the way to sale. At each process along the supply chain everything has to be tracked. If it’s not, then a dispensary can’t purchase it. If you’re a grower somewhere and you have this amazing product that you want to get out there, unless you go through the proper licensure and the proper way of doing it under MAUCRSA, no dispensary is going to be able to buy your product because if they do they’ll put their own license in jeopardy.

If you consider the target market you’re going for, your clients, your customers, how are you going to get it to them if not through these dispensaries? So yeah, in a way, taxes are hard. But, gosh, you don’t have a market unless you do it. Let alone the fact that you’re breaking the law.

Can I profit off of being a cannabis business? Is there money to be made? Is this green rush what people say it is?

There is money to be made, there’s top-line revenue. I read a report by Arcview where they’re projecting this industry goes to twenty-billion dollars. That it’s already bigger than coffee and some other businesses combined. Regardless of the validity of that, there’s a lot of money, of course. But whether or not you can profit, the answer is no. Not in California. It’s illegal to profit in California.

What you do you mean I can’t profit off of this business?

Let’s go back to our explanation of MAUCRSA. Before that, what had happened in California was the compassionate use act (in 1996), which was Prop 215. Then in 2003 there was the medical marijuana program act, and in 2008 Jerry Brown, the attorney general, came forward with some guidelines to delineate some of those rules.

One of the main things that came out of all of those early legislative acts is that you couldn’t be profitable. In fact, those acts went into the health and safety code of California, and specifically health and safety code 11362.765. It says in there that nothing in that section authorizes any individual or group to cultivate or distribute marijuana for profit. Now, the new laws that came in, the MAUCRSA, none of that affects that language. So it’s still there, it’s still in the code. It’s been a major point of confusion because websites like the Board Of Equalization say, “You know in 2018 cannabis will be for-profit and this is how you file your taxes.” That’s confusing. Humboldt for example, in the preamble of their local laws they say, “We recognize that California is going to a for-profit model in 2018.” Well, does that make law? If I’m the judge and I am looking at the law, what am I going to rely on?

So the answer to the can you profit question is, no, you are not allowed to operate as a for-profit.

If I’m an investor, why would I give anyone in the cannabis industry money if they can’t profit? If they can’t profit, I can’t profit.

You’re right, because if I’m a company and I’ve got investors, then I need to either make a dividend issuance, or I need to distribute money, and I can’t do that unless it’s a for-profit enterprise. With that said, however, we could probably fill an entire section on how people are managing that risk and how people are structuring their deals in such a way that people can be compensated for the risk they’re taking. (Check back here for more on that at a later date!).

I’m flying to Las Vegas next week. Las Vegas, or the state of Nevada, has legalized recreational use of cannabis. I live in California, they’ve legalized recreational or medicinal use on both sides. Can I fly to Las Vegas with cannabis?

Unfortunately no. The controlled substance act of 1972, under Nixon’s war on drugs, says that cannabis is a schedule one drug. That still has not changed. In fact, Jeff Sessions is pushing that, so the problem with getting into an airport, is now all of the sudden you’re in an international port, and that’s all governed by federal law. So technically you’re on federal land, and federal laws apply, and now you’re in possession of, or you’re distributing, or you’re transporting an illicit schedule one drug.

It’s the same thing if you go over a state line in your car. If you drive over state lines, you are now involved in what’s called inter-state commerce. Inter-state commerce triggers federal jurisdiction. So you go from one state to the other, you’re now in federal court, and they’re going to apply federal laws, meaning you’re trafficking a schedule one drug.