California Rules May Black Out ‘White-Label’ Canna-preneurs
Marilyn Robinson is a solo entrepreneur who found recognition and business success with Lizzy Tish, her line of artisanal THC-infused cookies she sold through Los Angeles dispensaries and at private events.
The former fashion designer from Los Angeles, California, began selling her tins of shortbread cookies last year and was preparing to enter into a so-called “white-label” manufacturing deal to dial up sales and distribution, but her plans to expand distribution have not only come to a screeching halt, but they also may go in reverse.
Proposed regulations from the California Bureau of Cannabis Control (BCC) that could end many “white-label” deals have some marijuana-related businesses concerned.
The BCC in mid-October 2018 launched a 15-day public comment period on the newly proposed regulations. Those include prohibiting marijuana business licensees from conducting commercial cannabis activities on behalf of any entity that is not licensed under California’s Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA). Specifically, the proposed regulations state that “licensees shall not conduct commercial cannabis activities on behalf of, at the request of, or pursuant to a contract with any person that is not licensed under the Act.”
The comment period ended on Nov. 5, 2018, and if passed, the rules could end up being in force by the start of 2019, according to BCC spokesperson Alex Traverso.
“I’m trying to figure out how I’m going to operate now with these new regulations,” said Robinson, who has submitted comments to the BCC detailing how she will be affected.
Look for the White Label
White-label deals can enable businesses without a license from the appropriate state agency to enter into the marijuana business under the umbrella of licensed operators.
It’s similar to practices in other industries, but the proposed changes would either force businesses operating under those deals to get licensed, or take more radical steps, according to Lauren Geisser, a transactional attorney with Los Angeles law firm Russ, August and Kabat.
“I have been speaking with companies that are seeking creative solutions to either get licensed or form joint ventures or be acquired by companies that are licensed,” said Geisser, whose practice has a focus on the cannabis business. “We are seeing a lot of moves in the marketplace just preparing for these proposed regulations.”
Geisser said companies of many sizes across the industry could be impacted by the new regulations, especially co-packers. Co-manufacturing, or co-packing, is a standard food and beverage industry practice, which encompasses procurement, production, packaging, design, labeling and distribution.
Manufacturers, distributors, and unlicensed businesses inside and outside of the state and in Canada that are engaging manufacturers as co-packers could be affected, Geisser said.
“Many businesses seeking to enter the cannabis market without obtaining a license have resorted to such turn-key co-packing practices with existing licensees,” she said.
However, the proposed regulations seek to prohibit licensees from contracting with an unlicensed cannabis businesses for manufacturing, packaging, labeling and distribution of products not under the licensees’ specifications or brands, Geisser added.
The newly prohibited commercial cannabis activities listed in the proposed regulations could include:
- Procuring or purchasing cannabis goods from a licensed cultivator or licensed manufacturer;
- Manufacturing cannabis goods according to the specifications of a non-licensee;
- Packaging and labeling cannabis goods under a non-licensee’s brand or according to the specifications of a non-licensee;
- Distributing cannabis goods for a non-licensee.
“The next steps will be to evaluate the comments received and respond to them,” Traverso said. “We’ll work with the governor’s office, the (Business, Consumer Services and Housing Agency) and Consumer Affairs to finalize regulations by the first week of December, at which time we’ll send everything to the Office of Administrative Law.”
Traverso said the proposed regulations came about as the result of an earlier public comment process, which he said included some 6,000 comments, and from industry stakeholders. He didn’t mention white-label deals, and didn’t offer details on what among those comments prompted the regulations.
It would seem that the easiest path for the affected companies would be to obtain a license instead of being acquired or forming joint ventures.
Licenses Require Lots of Money and Time
However, Geisser said that getting a marijuana business license can be an expensive and time-consuming process.
A manufacturer, for example, must pay $1,000 to get licensed, not including legal fees, followed by an annual fee that can range from $2,000 to $75,000, which is a function of gross revenue.
Robinson has consulted with her attorney and was told the entire process of obtaining a manufacturing license could end up costing her $50,000, and that it would take about six months — keeping her products off the shelves and her business in limbo all that time.
“To get a license is really expensive,” she said. “These regulations have really impacted the development plan and the ability to legally get my product into a market.”
She said she believes the new regulations favor big corporations with the money and resources to get licensed. Robinson now must consider other options, including partnering her small, sole-proprietor business with a bigger operation.
“I definitely need investment,” she said. “I might end up having to do a partnership if they keep this regulation in.”
Not all unlicensed businesses in the cannabis industry will be required to get a license if the new regulations pass.
Cannabis Packager Acorn Paper Products Co. is one such company, according to General Manager Brad Davis.
When the regulations were proposed, Davis and other executives met with the company’s attorneys, who determined that since their operation doesn’t involve touching the plants, their business isn’t impacted.
“We have services and solutions for the entire supply chain — from cultivation to manufacturing to distribution, all the way to testing and direct-to-consumer,” Davis said. “We are outside of the whole license aspect other than complying, and making sure our clients are complying, to BCC regulations.”
The structure of the proposed regulations may choke the kind of innovation that often comes from small companies, which now have significant barriers to entry.
“Brand marketing and vertical companies are taking multiple brands underneath their wing to allow those brands to get into the legal space,” Davis said. “There are some big companies that are doing it.”
From a government perspective, getting more companies to obtain licenses may also come down to tax and licensing revenue that the state is missing out, according to Geisser.
That’s why she’s betting that the regulations pass.
“For unlicensed brands,” she said, “they are going to have to scramble and figure out how to comply with the regulations.”