McAllister Garfield, P.C. constantly tracks developments in the California cannabis market to provide our clients with the most up-to-date information that impacts their California cannabis businesses. As such, we have two important updates for California operators:
First, if you received your state temporary license on or near January 1, 2018, then your annual application is almost due! The regulations provide that the temporary license is valid for 120 days and may be extended in 90 day increments if a completed application is submitted before the expiration of the initial 120 day period. If you wish to continue operating under a temporary state license, then you are required to submit your completed annual application soon! Please contact McAllister Garfield, P.C. if you are looking for assistance with your annual applications.
Second, late last month, the Department of Public Health’s Manufactured Cannabis Department (the “Department”) released new emergency regulations for the licensure and regulation of shared-use cannabis manufacturing facilities. This new Type S license marks a dramatic shift from previous regulations and provides a path forward for smaller infused product manufacturers to compete in California’s regulated cannabis industry. Below, you will find a brief summary of pertinent information for this new Type S license.
What is a Type S License?
A Type S license only authorizes the licensee to conduct infusions, packaging, and butter or food grade oil extractions. A Type S licensee is not authorized to conduct volatile or non-volatile extractions (except using butter or food grade oil). Further, any resulting extract from butter or oils produced by the Type S licensee cannot be resold to any other licensee, and must be used solely to manufacture the Type S licensee’s infused products. Additionally, the Type S licensee cannot have a gross annual revenue of more than $500,000. While providing flexibility and cost savings for small operators, a Type S licensee’s operations are quite limited in both size and scope. Therefore, this license type would likely make sense for small scale infused products manufacturers who need the shared space to reduce expensive licensing and overhead costs.
How is the License Obtained?
Each shared-use facility must have one “Primary Licensee” who holds either a Type 7, Type 6 or Type N manufacturing license from the Department. Prior to the operation of a shared-use facility, the Primary Licensee must apply to the Department for approval to operate as a shared-use facility. In order to qualify their facility for shared-use, the Primary Licensee must provide the Department with proof of local authorization for the shared-use facility, an occupancy schedule of all proposed shared-use licensees who plan to operate in the facility, and a diagram that indicates the common-use areas as well as each area designated for the sole use of a Type S licensee. Upon registration by the Primary Licensee and approval by the Department, the facility will then be allowed to house Type S licensees.
To receive a Type S license, an applicant must submit the same information required for all manufacturing license types under section 40128 of the Department’s emergency regulations. Additionally, the prospective Type S licensee must provide, among other things, a “Use Agreement” between the Primary Licensee and Type S applicant that identifies the designated space of the Type S licensee within the facility, the days and hours in which the Type S licensee is authorized to use the common-use areas, an agreement to allocate compliance responsibilities (i.e. security, cleaning, maintenance, etc.), and an acknowledgement that the Type S licensee has sole and exclusive use of the common-use areas during the times and days designated in the Use Agreement. This Use Agreement essentially amounts to a sublease agreement, and will be considered the requisite landlord approval by the Department.
What are Some of the Compliance Requirements?
Once the Primary Licensee receives its authorization to operate a shared facility and the Type S licensee is approved by the Department, the Primary Licensee is required to provide written notice to the Department at least one day in advance of the commencement of operations by the Type S licensee. If, at any point, the occupancy schedule submitted in the original application changes, the Primary Licensee must update the schedule with the Department or receive prior approval to modify the schedule. Further, in the operation of the facility, all common-use areas may only be occupied by one licensee at a time. Therefore, if the Primary Licensee intends to use the common-use areas as part of its operations, it may only do so at times the Type S licensee is not allowed access to the area, and vice versa.
A shared facility also poses potential issues with respect to violations found at the facility. For instance, it can be difficult to discern whether the Primary Licensee is responsible for a violation, or if one of many potential Type S licensees is at fault. Therefore, the regulations provide that a violation that occurs in a licensee’s designated space or during their scheduled occupancy will be attributed to that licensee. However, the Department also has the authority to attribute violations to all licensees operating in the shared facility. Additionally, if a recall is triggered by one of the licensees operating out of the shared facility, the Department has the discretion to include all cannabis products produced at the facility within the scope of the recall – not just the products produced by the licensee in question – which can create serious problems for everyone who uses the shared facility. Therefore, it is important to structure the relationships between Type S licensees and Primary Licensees in a way that the continued operation of each does not jeopardize the operations of others in the shared facility.
In sum, the Type S license provides a great option for those looking to enter the cannabis industry, but do not have the resources to go it alone. If you are interested in finding out more about the Type S license or becoming a Primary Licensee, please contact McAllister Garfield, P.C.