California’s Newly-Formed Department of Cannabis Control Seeks to Bolster Legal Cannabis Market

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California has the world’s largest legal cannabis market, at about $4 billion in annual sales. Its illicit market, however, is nearly twice as large, at $8 billion – also the world’s largest.  This massive discrepancy reflects the challenges in meeting the goal of California’s Prop. 64 to eliminate this illicit market and bring all cannabis sales within the legal framework.   

In an effort to help fulfill the goals of Prop. 64, Governor Gavin Newsom signed legislation to streamline and simplify the state’s cannabis regulatory framework. In July 2021, the three previously existing state cannabis regulatory agencies – the Bureau of Cannabis Control, California Department of Food and Agriculture’s CalCannabis Cultivation Licensing Division, and California Department of Public Health’s Manufactured Cannabis Safety Branch – were rolled into the newly formed Department of Cannabis Control (DCC).  DCC now licenses, inspects, and regulates all cannabis activity in California. 

Newsom created the DCC to help streamline the licensing process.  Many believe the difficulty of working with three separate government agencies had created a regulatory barrier to entry to the legal cannabis market and has helped fuel the continued strength of the illicit market.  

The DCC has wasted no time moving forward with new regulations in an effort to bolster the legal cannabis market.  

Approval of Consolidated Commercial Cannabis Regulations within the California Code of Regulations 

DCC has taken the first step, in a multi-step process, to consolidate and streamline the three separate sets of regulations of the Bureau of Cannabis Control, the California Department of Food and Agriculture, and the Department of Public Health into one central location in the California Code of Regulations (CCR). This will combine similar sections and resolve conflicts between them.   

DCC believes that consolidating regulations will make it easier for businesses, local governments and the public to understand and comply with the law – and, by extension, lower the transactions costs associated with participating in the legal cannabis market.   

The consolidated regulations are now located at CCR, title 4, division 19, sections 15000 through 17999. Aside from section numbers changing and other minor technical changes, there have been no changes to the requirements in the regulations. These regulations will govern all commercial cannabis licensees until the Department takes additional actions to consolidate and streamline the regulations.  

Within DCC, the Licensing Division will oversee all cannabis licensing in the state. This will create more consistency in how applications are reviewed. While businesses will continue using the existing three online systems, DCC plans to build a single online licensing system for all cannabis businesses. 

New regulations for Quick Response (QR) Code certificates 

DCC has proposed regulations that will require retailers and distributors to display a QR Code certificate provided by DCC. The regulations will also require employees transporting or delivering cannabis goods to carry the QR code certificate. The QR Code certificate helps the public verify that a cannabis business is licensed and easily distinguish licensed cannabis retailers from unlicensed ones. 

Licensed cannabis businesses are only authorized to sell cannabis goods that have passed mandatory laboratory testing requirements prior to sale. Cannabis goods sold by unlicensed businesses do not have the same laboratory testing requirements and involve a higher risk of causing harm to consumers. This risk is highlighted by an outbreak of lung injuries across the state and the country in the fall of 2019 and early 2020, which the California Department of Public Health and the Center for Disease Control determined were likely caused by unsafe vape products, including cannabis vape products from unlicensed sources. Thus, the ability to easily identify licensed cannabis businesses is critically important to protect cannabis consumers.   

By requiring all storefront retailers to clearly display a QR Code Certificate, the public will be able to easily distinguish licensed cannabis retailers from unlicensed retailers because the QR Code Certificate is posted and easily identifiable and used. Once the QR Code is scanned, it will display information about the license and licensee, including if it is an active state license. The goal is to decrease the risk of harm that may result from the purchase and consumption of untested cannabis goods. Additionally, requiring delivery and transportation employees to carry a copy of the QR Code Certificate is expected allow delivery customers, law enforcement, and other members of the public to use the QR Code Certificate to verify the licenses of the cannabis businesses for whom the employees work.  

DCC believes these regulations will allow customers to more easily determine the legality of a specific cannabis business and avoid entering unlicensed premises, thereby decreasing purchases from unlicensed businesses. This should aid in preventing illegal cannabis goods from reaching consumers, thereby reducing the potential consumer harm.  

The notice and comment period on these regulations expires on September 21, 2021.  

Re-Adoption of emergency regulations allowing for information sharing with financial institutions. 

DCC has provided notice to the public of its intent to readopt its emergency regulations that implement the provisions of Assembly Bill 1525 known as Information Sharing with Financial Institutions, AB 1525 (Jones-Sawyer, Chapter 270, Statutes of 2020). This chaptered bill created a safe harbor under state law for financial institutions and accountants that provide services to the cannabis industry. This bill also allows cannabis businesses to permit the DCC to share licensee application and regulatory information, including track-and-trace data, with financial institutions. Commercial cannabis businesses have experienced difficulty obtaining traditional financial services. This, in turn, required many of them to conduct business primarily on a cash basis, which is a public safety concern. Therefore, it was necessary to expediently create a process for providing licensee information to financial institutions to facilitate the provision of financial services to commercial cannabis licensees, while ensuring that the Department only provided confidential information as authorized by the licensee.  

The DCC is now moving to re-adopt these emergency regulations that were necessary to implement California AB 1525, as required by Governor Newsom’s signing statement directing the cannabis licensing authorities to promulgate regulations necessary to implement the provisions in a manner that protects confidential and proprietary data.  

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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