Changes to State License Renewals

I wanted to make sure you are aware of an important change to Colorado’s marijuana rules regarding license renewals.

Due to a change in Colorado statutes and rules, the Marijuana Enforcement Division no longer can accept late license renewal applications. Under this rule change, a license is immediately invalid upon expiration if the licensee has not submitted a renewal application prior to the license expiration date. If the license renewal application is submitted on time, the licensee may continue to operate until the licensing authorities act upon the application.

Please be aware, if a licensee fails to submit a timely renewal application, it is require to immediately cease all operations, and then apply for a new state license.

Please keep this change in mind as you monitor future license renewals for your businesses.

Cannabis Delivery – an update

The Marijuana Enforcement Division (MED) recently issued a bulletin to clarify marijuana delivery policy changes. For your reference, I have included key highlights of the new regulations below.

Delivery Permits

• Medical Marijuana Stores may apply for a delivery permit now
• Retail Marijuana Stores and all Transporters may apply for delivery permits beginning January 2, 2021

Municipality Approval

• Marijuana delivery is prohibited unless the municipality has enacted an ordinance or resolution explicitly allowing delivery. Applicants must show the MED that the local jurisdiction has enacted such an ordinance or resolution and that the local jurisdiction is currently accepting applications.
• A Medical Marijuana Store with a delivery permit may deliver medical marijuana in a municipality beyond where it is physically located, unless the municipality has enacted an ordinance or resolution that prohibits such delivery.

Taxes and Surcharges

• State and local sales taxes are generally determined at the point of delivery, not the store location.
• Medical Marijuana Stores are required to charge a one-dollar surcharge on each delivery, which shall be remitted to the municipality where the store is located.

Inventory Tracking

• Medical Marijuana stores must track all marijuana delivered to a patient, including by use of an inventory tracking system and a transport manifest. Please see MED Rule 3-615(C) for further requirements.

Cannabis Delivery and Licensing

Governor Polis signed The Sunset Regulated Marijuana Bill, SB19-224 into law on May 29, 2019. While the bill contained numerous changes to marijuana businesses, one of the most exciting opportunities is the new Marijuana Delivery Permit. Licensing will begin January 2, 2020 for medical, and January 2, 2021 for retail. Only medical businesses are able to be licensed next year, but the regulations are very similar between medical and future retail.

Unlike other marijuana licenses, the delivery permit is not a stand-alone license and can only be attached to an existing retail or medical marijuana license holder. The delivery permit will be limited to Marijuana Store license holders and Marijuana Transporter license holders.

The permit is valid for one year and must be renewed annually with the Marijuana Store license or Marijuana Transporter license. Each physical location must hold its own delivery permit, so businesses holding multiple Marijuana Store licenses will need to obtain a permit for each location from which it intends to deliver.

Orders and Deliveries

Orders can be placed electronically or through “other means.” If web ordering is used, the website must be designed so that the patient must select the individual medical store before displaying a price.

The patient placing the order must be a current registrant and must be 21 years or older, and deliveries may only be made to the patient who placed the order. Delivery may only occur to a private residence and may not occur more than once a day to the same patient or address. The delivery driver must possess an active occupational license and be an employee of the store or transporter licensee that holds the delivery permit, and MED will create rules establishing the type of vehicle permitted.

The driver must undergo training on identification.

For future retail, there will be a $1 surcharge added to be paid to local jurisdiction per delivery.

Compliance

A primary concern for business owners is local compliance. Compliance violations arising from delivery can impact the Delivery Permit, the underlying marijuana license, or both. It is unclear what type of practices MED will adopt with regard to violations at this time.

Since delivery occurs in a less controlled environment, it is important that businesses put adequate measures in place to protect both their permit and existing license.

Delivery is not permitted in any local jurisdiction unless the local jurisdiction votes to specifically allow such delivery to be conducted. This will have the effect of delaying most businesses from being able to operate. Businesses may need to take political action to persuade the local government to allow delivery. Gard Law Firm, LLC has assisted clients with this type of process in the past, but it is a difficult process in many jurisdictions.

Be sure to read the full bill here:
https://leg.colorado.gov/bills/sb19-224

Smoking Lounges and Hospitality Licenses

Governor Polis recently signed a marijuana hospitality bill into law on May 29, 2019 which bill has generated excitement among current license holders. While such establishments have been illegal or operating in a grey area in the past, this bill will allow the MED (Colorado Marijuana Enforcement Division) and local licensing authorities to issue licenses for facilities where customers can consume marijuana.

The bill sets up two new license types: Marijuana Hospitality Establishments and Retail Marijuana Hospitality and Sales Establishments.

Marijuana Hospitality Establishment

A Marijuana Hospitality Establishment is a facility where marijuana may be consumed but not sold. The advantage of this license type is that the facility can be mobile and customers can bring their own marijuana.

Retail Marijuana Hospitality and Sales Establishment

A Retail Marijuana Hospitality and Sales Establishment allows both consumption and sales but cannot be mobile and must only allow consumption of products sold by the facility. No outside product is permitted in Hospitality and Sales Establishments.

MED Requirements

The bill also requires the MED to create rules and regulations to govern the specifics of these businesses and allows them to begin issuing licenses after January 1, 2020. Even after MED has issued its rules and begins accepting applications, the facilities will be disallowed in most local jurisdictions by default since the bill only allows the MED to issue hospitality licenses if the local licensing authority permits such establishments to operate.
The highlights of the regulation requirements given to MED include a sales limit, a separate license for cultivation and processing, and insurance requirements.
Mobile establishments will also be subject to regulations which include vehicle registration, surveillance cameras, GPS tracking and route logging, and ventilation standards.
Other Rules
The legislature also established other regulations that do not require MED to set new rules. For example, Retail Marijuana Stores and Infused-Product Manufacturers will be permitted to sell product to marijuana hospitality and sales licenses. Retail food establishments may get licensed to allow a portion of the premises to operate as a hospitality establishment. Marijuana-infused food and other Infused-Products manufacturing will still be prohibited by these establishments. If a retail food establishment already holds a liquor license, they will not be eligible to obtain a marijuana hospitality license.

Restrictions on Retail Hospitality Establishments

There are several restrictions the bill places on Retail Hospitality Establishments. They may not engage in or permit the sale of marijuana, allow on-duty employees to consume marijuana, distribute free samples of marijuana, allow alcohol consumption, allow smoking of tobacco, allow use of butane lighters or matches if prohibited by local ordinance, permit patrons who display signs of intoxication to consume marijuana, or allow anyone under 21 years of age to enter the premises.

Restrictions on Retail Hospitality and Sales Establishments

There are also several restrictions the bill places on Retail Hospitality and Sales Establishments. These restrictions are the same as the Hospitality Establishments, with added restrictions against allowing multiple sales to the same patron when the sales may lead to the patron possessing more than the legal limit, allowing on-duty employees to consume marijuana, distribute free samples of marijuana, or sell any marijuana products that contain nicotine or alcoholic beverages.

Finally, any businesses already operating under local ordinances will be permitted to continue operating but must apply for one of these new hospitality licenses prior to December 31, 2019.

Be sure to read the full bill here:
https://leg.colorado.gov/bills/hb19-1230

Brokering Cannabis Current and Future Risks

As I have repeatedly advised over the last 10 years, brokering wholesale cannabis is not legally protected. In a formal opinion issued yesterday which I have attached, MED states:

Facilitating or brokering a sale, therefore, is not one of the privileges granted to Licensed Transporters by the State Licensing Authority. Finally, only a person that is expressly authorized by the Medical Code, the Retail Code, and State Licensing Authority rules to sell marijuana, either directly to a consumer or patient or by transferring to another licensee, is permitted to do so. Further, a licensee who exercises privileges that are not granted by the State Licensing Authority for that license, may be suspended, fined or revoked for acting outside the scope of their licensed privileges. See §§ 44-11-601 and -901, and 44-12-601 and -901, C.R.S.

This opinion was issued in the context of a transporter’s inquiry, but you can see that MED also made sure to expand the opinion to anyone, not just transporters, who broker wholesale cannabis and cannabis products. Also, this “warning” should be understood to include the risk of criminal prosecution. Anyone who distributes cannabis, in any amount, without being licensed to do so commits a felony(s).

It is my view that there are no regulations that permit wholesale cannabis brokering since the activity necessarily involves profit sharing. However, based primarily on prevalence of the activities in the industry, MED’s cannabis brokering opinion remains limited to transporter licenses. However, the MED is still investigating the matter and determining whether the opinion will be more broadly applied in the future. Until the MED says otherwise, you can still contract with brokers, although I would tread with caution until MED releases a formal opinion on the matter.

Robbery protocol

We have received questions about the robbery protocol for marijuana businesses. In response we have prepared best practices outlining the proper protocol. This robbery protocol is primarily aimed at training employees, but it also contains information for owners and managers so you have quick access to the reporting requirements.

The Protocol:

Preventing Robberies

Employees should take the following daily precautions to try to prevent break-ins and robberies at the facility:
1. Check all security equipment and carefully follow opening and closing procedures to ensure the business is secured in non-business hours.
2. Do not discuss cash levels and security procedures with non-employees.
3. Be alert for suspicious persons loitering around the interior or exterior of the licensed premises.
4. Be alert for suspicious vehicles near the licensed premises.
5. Suspicious activity should be reported to the manager on duty.

Robbery in Progress

If employees encounter an in-progress robbery, the following action should be taken.
1. Remain calm and avoid any action that would jeopardize the safety of personnel or customers.
2. Obey the robber’s instructions, even if it appears that employees or customers cannot be harmed. No amount of money or product is worth the risk of endangering a person’s life.
3. Try to be as observant as possible. Take note of the following:
1. The robber’s physical characteristics, including: race, sex, height, weight, facial features, accents, scars, marks and/or deformities, and right or left-handed.
2. The number of robbers and their clothing description, as well as any names used by the robbers.
3. Description of any weapons used.
4. If the robber uses a note, place it out of sight to retain as evidence.
5. Description of vehicles used and license plates if possible.
4. Inform the robber of any surprises. If someone is expected back soon or if you must reach or move in any way, tell the robber what to expect so they will not be startled.

After the Robbery

Immediately after the robbery, follow the below instructions, in order:
1. Lock the doors once the robbers have left the licensed premises so that they cannot reenter.
2. Check employees and customers for injuries. If anyone is injured, immediately call 911 for medical assistance.
3. Call 911 and give your best description of the events to the dispatch operator including all items above that you observed.
4. Close and secure the licensed premises until the police arrive to preserve the scene of the crime for physical evidence.
5. Each employee (and customer, if cooperative) involved in the incident should write down his/her description of the robber and events. Employees should not confer with other witnesses or compare notes. This should be done as soon as is safe to take advantage of your short term memory.
6. Ask customers and witnesses to remain at the licensed premises to assist with police. If customers insist on leaving, obtain their full name and contact information and permit them to leave once it is safe to do so.
7. The manager on duty should call the owners to inform them of the situation.
8. The owners or managers will report the incident to the local licensing authority and Marijuana Enforcement Division as is required by the marijuana rules.
9. Do not post about the robbery on social media or discuss the incident with others until police have confirmed it is ok to do so. Do not disclose at any time how much money or property was stolen except to police and other staff. If the amount of money is released, it may encourage subsequent robberies or robberies of other marijuana facilities in the area.
10. Cooperate with police as the investigation progresses.

Management: After the Robbery

Management and Owners should be aware of the following marijuana regulations in addition to the above:

1. The Marijuana Enforcement Division R904 requires the following in relevant part:
“Reporting of Crime on the Licensed Premises or Otherwise Related to a Retail Marijuana Establishment. A Retail Marijuana Establishment and all Licensees employed by the Retail Marijuana Establishment shall report to the Division any discovered plan or other action of any Person to (1) commit theft, burglary, underage sales, diversion of marijuana or marijuana product, or other crime related to the operation of the subject Retail Marijuana Establishment; or (2) compromise the integrity of the Inventory Tracking System. A report shall be made as soon as possible after the discovery of the action, but not later than 14 days. Nothing in this paragraph (B) alters or eliminates any obligation a Retail Marijuana Establishment or Licensee may have to report criminal activity to a local law enforcement agency.”
To complete this requirement, email the Marijuana Enforcement Division.
2. Make sure to comply with any local jurisdiction reporting requirements.

MED Eliminates Face to Face Meetings

It has been a strange few weeks for the industry. MED policies are changing quickly and the obligations for the businesses are ever increasing.

Of particular concern is the newfound zeal in the financial investigation area. PEI investors are experiencing extreme and, in my opinion, unnecessary scrutiny. It is no longer enough to show proof of funds that match the intended investment. Instead, the investors are required to prove the source of all of their money, investments, and other sources of income. In one case, a client worth several million dollars was required to show the sources of all of the money even though only a few hundred thousand dollars were to be invested and proof of those funds was provided. Wealthy investors typically have many layers of financial intricacy including trusts, investment accounts, rental income and other complex vehicles to diversify their money. This is posing a very significant burden on any anticipated investor.

Next, MED is prohibiting any interim use of money by a potential buyer of a cannabis business. Many of the businesses being sold are in distress and having trouble making rent, payroll and paying their taxes. Traditionally, we have used interim loans to cover the shortfalls so that the asset still exists at the end of the approval process.  It is unclear whether any such lending will now be permitted by MED.

Finally, MED has now eliminated face-to-face meetings with the investigators and is requiring all applications be submitted at arm’s length. This is problematic because the investigators often head off issues at the application meeting that would not otherwise be anticipated due to constant rule changes. The businesses will now be “flying without a net” and it is imperative that great care be used in preparing any application. This works a particular hardship on the less wealthy entrepreneurs who cannot afford the luxury of legal services and were accustomed to working directly with the investigation team on their applications. But, like always, we have to comply first and complain later. We’ll see how this all shakes out.

House Bill 18-1381

The legislature finally eliminated the requirement that medical marijuana businesses be vertically integrated and sell at least 70% of the cannabis they produce through their designated centers.  House Bill 18-1381 phases out vertical integration and the 70/30 rule in two stages.  A copy of the bill can be found here: https://leg.colorado.gov/bills/hb18-1381

Effective immediately, medical marijuana businesses are only required to sell 50% of the medical cannabis it produces through their designated centers.  Effective 7/1/2019, the medical marijuana centers will no longer be required to produce any of their own medical cannabis.  Carrying the dual burden of a retail store and cultivation operation has been devastating the medical cannabis businesses.  Hopefully, leveling the “playing field” with recreational cannabis businesses will help medical cannabis thrive and continue to focus on and support the medical marijuana patients they serve. It is not yet clear how plant counts and other inventory tracking will be handled since medical cannabis businesses currently cultivate medical cannabis based on the patients who assign the medical marijuana center as their primary center.  I suspect that it will be handled by the tier system currently used for recreational cannabis, but stay tuned.

Hemp and CBD Legality

After counseling several clients on the legal use and production of cannabidiol (CBD), it has become apparent that there is still a lot of confusion surrounding the issue. To help dispel some of the misunderstandings, especially in relation to last month’s 9th Circuit Court of Appeals ruling in Hemp Industries Assoc. v. U.S. Drug Enforcement Administration, we have compiled an overview of the case and its implications on local hemp businesses. The case may raise some concerns about the future of federal hemp and CBD legality.

The case brought by the Hemp Industries Association (HIA) asked the court to review a 2016 Final Rule enacted by the Drug Enforcement Administration (DEA) that may be read to classify CBD as an illegal drug under the Controlled Substances Act (CSA) because it is extracted from marijuana flower. The HIA argued: (1) that the DEA overstepped its authority in making this change; and (2) that because CBD can be extracted from hemp flower, and industrial hemp with less than 0.3% THC is lawful, CBD production is protected by the 2014 Farm Bill and beyond the reach of the DEA.

In the opinion, the 9th Circuit judges dismissed the HIA’s claim on a technicality, stating that because the HIA failed to actively participate in the DEA’s rule-making process they lacked standing to the bring the current challenge. The court, though, did clarify that the DEA’s “marijuana extract rule” does not apply to hemp or hemp-derived products produced in compliance with the Farm Bill. Therefore, hemp producers may continue to extract and sell CBD where it is permitted under state law.

Ultimately, CBD production and the DEA rule can coexist where hemp is grown and processed pursuant to the Farm Bill. However, outside of this interpretation, no formal legal protections have been afforded to CBD and hemp production. The circuitous path of legal precedent surrounding CBD and hemp products raises concerns as to the questionable legality of hemp and CBD. Producers should be cautious and remain vigilant of new developments in this area of the law.

The most recent effort to ensure the future of CBD extractions in the Hemp Farming Act of 2018. Passage of this law would permanently remove hemp and hemp products from the umbrella of the CSA.  However, until that time the future of hemp and CBD production remains uncertain.

If you have any questions regarding hemp extraction or CBD production, or would like to learn more about Hemp Industries Assoc. v. U.S. Drug Enforcement Administration, please do not hesitate to contact our office.

Respecting the Corporate Form for Marijuana Businesses

One of the main reasons we recommend our business-owning clients incorporate their business or form an LLC is for the personal asset protections these business models provide. However, in my years of practice, I have witnessed an alarming number of clients jeopardize their personal assets by failing to adequately separate their business activities from their personal endeavors. When this happens, owners risk “piercing the corporate veil” – meaning they risk losing the liability protections that having an LLC or a corporation provides them. If a business’s corporate veil is pierced, a judge may order the owners’ personal assets be used to satisfy their business’s debts and liabilities. To avoid this unfavorable outcome and maintain your limited liability protections, it is important to abide by the key responsibilities outlined below:

  1. Undertake the Necessary Formalities. Businesses must complete any annual filings required by the state to protect and ensure the longevity of the company. This includes obtaining all applicable permits, licenses, or approvals necessary for legal compliance. All businesses should also create and regularly update their bylaws or operating agreement, and hold annual meetings of the members/shareholders and managers/directors.
  2. Avoid Under-Capitalization. Under-funded businesses have a higher risk of veil piercing because creditors may argue the business exists solely to shield the owners’ assets. Businesses should be equipped with enough resources to both start and continue operations. Funding may come through the owners’ own money, outside investors who become owners, or business loans. Regardless of the method used to accrue capital, the money should be designated to the business, not the owners personally.
  3. Maintain a Written Record of Business Decisions. All business meetings should be documented through meeting minutes, emphasizing any major business decisions reached in the meeting. Additionally, all formal contracts entered into by the company should be signed and kept for at least seven (7) years. These records protect the corporate veil by evidencing the business’s separate existence and operation outside of the owner(s).
  4. Do Not Comingle Business and Personal Assets. Whether arising from loans, shared bank accounts, shared tax returns, or personal use of business assets, failing to separate business assets from personal assets negates the business’s separate identity. All business owners should, at minimum, set up a business checking account and a business credit card, and only use these for business expenses. It is also important to keep business assets, like property and equipment, separate from personal assets. Notably, businesses should not be used as a lender for their owners.
  5. Make Your Business Status Known. Create business cards and email addresses using the business name, and make purchases or receive payments through the business bank account. It should also be made clear when the business, not an individual owner, is acting. When the business enters into an agreement, use the company name and have the owner(s) sign with reference to their corporate designation. By clarifying when the business, not an individual owner, is acting, the corporate veil becomes more resistant to attack.

The most important thing to remember is that there must be a clear distinction between what assets and activities are attributable to the business and which are attributable to the owner(s). If owners cannot prove that the above steps have been followed, it may be determined that the business is operating as a sole proprietorship or general partnership, in which case the owner(s) would lose the limited liability protections inherent in an LLC or a corporation and the corporate veil may be pierced.

Research shows that approximately 50% of “piercing the veil” court cases succeed because business owners fail to follow the corporate formality requirements above. If you have any questions about respecting the corporate veil or what your business can do to ensure it is protected, please let us know.