HOW CAN A NONLICENSED OPERATOR PARTICIPATE IN LICENSED OPERATIONS?Jared Younker2019-02-06T10:14:44-08:00
We are frequently asked by parties who either do not want to be formally involved in the cannabis industry, or who otherwise for whatever reason would prefer to avoid licensing, under what circumstances they can be involved in the industry.
For example, foreign companies approach us to license technology in exchange for a share of cannabis operations profits or a relatively well-known brand (for example some of the second tier beer brands) want to license a trademark for a percentage of revenues. Another example is a master grower who contracts with a licensed grow operation and to what extent can the master grower participate financially in the results of operation. The question becomes under what circumstances are such arrangements lawful?
No doubt the State of California is fully aware of the market presence of technologies like Eaze, where a technology is licensed to a licensed dispensary, in exchange for a fee which is not tied to revenue participation and Eaze is not licensed. While regulations proposed in the second half of 2018 suggested this would be unlawful, the final regulations imply that arguably the Eaze approach is legal:
The final language of Section 5032(b) of the Cannabis Bureau Regulations reads as follows: “Licensees shall not conduct commercial cannabis activities on behalf of, at the request of, or pursuant to a contract with any person who is not licensed under the Act.”
No one entirely knows where this statute begins and ends, but we have focused upon a few ground rules which we think can be gleaned from the above:
- A non-licensed party cannot market a brand, instruct licensed parties on how to manufacture and package the brand and then the non-licensed party sells the finished product; this would be illegal;
- A non-licensed party can license intellectual property such as a trademark, to a licensed party, in exchange for a royalty based upon a percentage of financial performance;
- A party with a small percentage interest in a licensed entity would be deemed to have a “financial interest” in the licensed party for purposes of the above; for example, a non-licensed entity who owns a 10% interest in the profits of a licensed entity would need to be disclosed as such with the Bureau, but under certain defined circumstances would be allowed to conduct licensed activities.
The bottom line here is that the State continues to monitor and adjust regulations based upon market demand and developments. There are a number of alternative approaches which sometimes, not always, but sometimes can properly address the license issues. We suggest that you work with professionals versed in the space to sort out where to draw the red lines and implement strategies moving forward.