Ep 350 – Insider Details Important Changes To The Califorina Cannabis Market

Khurshid Khoja greenbridge

California is the world’s largest cannabis market, and that means navigating everything that’s happening on the legal and regulatory front can be tricky. Here to help us is Khurshid Khoja of Greenbridge Corporate Counsel.

Learn more at http://www.greenbridgelaw.com 

Key Takeaways:

[00:54] An inside look at Greenbridge Corporate Counsel, a California business and regulatory law boutique that provides industry-focused legal expertise to cannabis companies

[1:24] Khurshid’s day-to-day interfacing with Sacramento regulators and politicians to help his clients see what’s just around the corner

[3:54] California’s provisional licensing crisis and where Khurshid sees things heading over the next year

[7:53] How Governor Newsom’s potential recall could affect California’s cannabis industry

[9:14] The Budget Trailer Bill and why it’s important

[12:24] Why Khurshid believes California’s regulatory landscape will evolve to become much more streamlined over the next few years

[15:29] The pending legislation around veterinary cannabis products

[17:17] The current regulation and taxation for non-cannabis cannabinoids

[20:08] What Sacramento regulators are saying about delta-8 THC, a hemp-derived cannabinoid that some states are banning due to its close relation to delta-9 THC

[26:30] What California business owners are excited about right now and the big opportunities that lie ahead

Click Here to Read Full Transcript

Matthew Kind: Hi, I'm Matthew Kind. Every Monday, look for a fresh new episode where I'll take you behind the scenes and interview the insiders that are shaping the rapidly evolving cannabis industry. Learn more at cannainsider.com. That's C-A-N-N-A insider dot com. Now here's your program.

California is the world's largest cannabis market. Navigating and understanding everything that is happening on the legal and regulatory front can be tricky. That's why I've invited on Khurshid Khoja, founder of Greenbridge Law to help us understand the latest in California cannabis from a legal and regulatory level. Khurshid, welcome back to CannaInsider.

Khurshid Khoja: Thanks so much, man. It's a pleasure to be back.

Matt: Give us a sense of geography, where are you sitting right now?

Khurshid: I am sitting in my office and warm sunny Sacramento.

Matt: Just a quick reminder for new listeners, what is Greenbridge Law on a high level?

Khurshid: Greenbridge Corporate Counsel is a regulatory and business law firm that's focused on the psychoactive cannabis, hemp, and cannabinoid industries. We represent businesses up and down the supply chain, primarily in California. Our clients includes several large publicly traded multi-state operators as well and smaller mom and pop businesses as well as up and coming social equity businesses.

Matt: Great. Listeners to understand what your day-to-day is, really involved in the California market deeply. As you mentioned, you're in the Sacramento area right now. Can you give just a snapshot of what a typical month looks like, what you do?

Khurshid: Sure. I'd say the last month is fairly typical. I'll give you some of the highlights from the last month. The past month I spent a lot of time advising a publicly traded MSO social equity fund on their investments into social equity businesses in Oakland and Los Angeles, conducted legal due diligence into their licensing and regulatory posture in connection with that. I've advised clients on regulatory disclosures to state and local licensing agencies related to mergers and acquisitions activity, as well as going public transaction. One of our clients went public on the Canadian exchanges.

I've assisted various clients with state local licensing applications and renewals, advised clients on regulations applicable to various consulting and management services agreements. I've advised the pharmaceutical company on state and federal laws applicable to research and development. Using biosynthesized cannabinoids. I've assisted C-level executives at cannabis companies on various matters, including business immigration matters.

Just had something where I had to look deeply into US Customs and Border Protection policies. I've had discussions with the governor's office of Business and Economic Development regarding the upcoming licensing agency consolidation here in Sacramento. I've chaired a meeting of the board of directors of the National Cannabis Industry Association. I serve as their chair currently and participated in multiple discussions on the status of pending and future federal legislation.

I'm currently preparing for something fun, I get to teach a continuing legal education seminar for California NORML, where I'll have an opportunity to dialogue with our current chief of the Bureau of Cannabis Control, Tamara Colson, and also present on a panel discussing the status of federal legalization. That gives you some of the highlights in the last month.

Matt: Wow, that's great. You have good recall, too. If someone asked me what I did this weekend, there'd be a 30-second pause before I could answer, Khurshid.

[laughter]

You got all the bullet points down. Let's just jump right in. There's a crisis right now with provisional licensing. Why is that important and what do we need to know?

Khurshid: Sure. Yes, provisional licensing was an accommodation that was made to businesses in the state who were having trouble getting their local jurisdictions to complete the licensing process. A lot of local jurisdictions have pretty stringent licensing requirements, but they don't necessarily have the funding and the human resources to actually get it all done in a timely manner.

In addition to licensing requirements, there's all sorts of environmental requirements including CEQA, and in order to get a permanent annual state license, you have to have your local license in hand. You have to be able to show, "Hey, I'm right with Jesus at the local level, and I've got everything squared away here." Businesses that were applying for state licenses were not able to show that because local jurisdictions don't have what they need to get all these businesses licensed.

Provisional licensing was implemented essentially to give these businesses something in hand to be able to show investors and other folks who are interested in this status of the business. They couldn't quite operate with a provisional necessarily, but it was something. As soon as they got their local stuff squared away, they would be able to move into the regular annual license.

That program is actually sunsetting or would sunset, but for actions that the governor's office is going to be taking in their trailer bill. That could all be over if this program is not extended, if there aren't further accommodations made to these businesses that are applying for licenses, and if the local jurisdictions don't get some help with clearing the backlog of local licensed applications.

We are going to run out of the solution that we have right now if it's not extended, and local jurisdictions don't seem to be-- Yes, some are doing better than others. There's some really exemplary jurisdictions that I'm a big fan of. I'll say, San Leandro, I really enjoy working with them. I enjoy working with some other regulators as well, but a lot of them are struggling. It's having a downstream waterfall effect on state licensing. That's the quandary that businesses find themselves at right now.

Matt: Wow. What do you think the most likely outcome is going to be? I know you don't have a crystal ball, but what do you think's going to happen?

Khurshid: I think there has to be an extension on provisional licenses. That is, essentially what the governor's office is trying to do is to extend the time through which they can grant provisional licenses. I think they're shooting for at least a six-month extension. It's going to end this coming January. They're trying to stretch that out further, and also loosen up some of the criteria so that you can show progress to the state and get your provisional without having to get everything done at the local level, if the the hiccup is at the local level.

The trailer bill, which I'm sure we'll talk about, as well, has that extension in there. That could help us. It's a band-aid. The real solution is the locals getting their backlogs cleared. Hopefully, that will happen as well with some of the additional funding that's going to go to these jurisdictions to help them through that.

Matt: I've read that Governor Newsome may be recalled. Where is that on a high level and what's your opinion of the most likely outcome there?

Khurshid: Yes. To me, right now, it doesn't seem likely that that is going to succeed. Personally, I sure hope it doesn't as a cannabis industry advocate, because the governor has been a very strong advocate for the industry. He was a big backer of Prop 64. I'd like to see him stay. I'm sure a lot of people in the industry share that desire. Right now, it doesn't seem like there are any serious challenges to the governor. We've got a couple of Republican candidates. We've also got a couple of MAGA type candidates as well that are in it to be disruptive. I don't see that as happening. I'm hoping that come June that-- I'm sorry, come December, that the governor will still be in office and we will go on with business as usual.

Matt: You mentioned the budget trailer bill, what is that, and what do we need to know there?

Khurshid: The budget trailer bill comes out-- Every budget cycle, the governor puts forth a proposal for how we're going to allocate funds among various state agencies and state programs. The reason why this trailer bill, in particular, is so momentous for the industry is that it includes a proposal to consolidate all three of the state licensing agencies. Right now we've got the Bureau of Cannabis Control, we've got the Manufactured Cannabis Safety Branch at the California Department of Public Health, and we've got Cal Cannabis at the California Department of Food and Agriculture.

In addition to that, we've also got CDTFA, which does the tax collection, the California Department of Tax and Fee Administration. We've got other agencies that perform various tasks in the industry as well, but those are the big ones. The three licensing agencies all have their own sets of regulations. They don't always match up. The way that one agency defines who is an owner isn't the same as the way another agency defines it.

It creates a very cumbersome licensing system for the state's industry, especially those companies that are vertically integrated and work up and down the supply chain. They have to get multiple different licenses and they have to apply to these different agencies to get that, and they have to deal with different regulators for each different facility that they have licensed.

The governor's proposal is to create from these three agencies, a department of cannabis control that would replace the three licensing agencies, and then the new licensing agency would essentially pass consolidated regulations as well. There wouldn't be this issue of variance between the regs for each of the licensing agencies and each of the license types. That's really the big headline from the trailer bill.

There are a lot of other great things that the trailer bill does, including creating a director for social equity, Deputy director for social equity, and extending indefinitely funding for support of local jurisdictions that have social equity programs. There are a number of other things that the trailer bill does as well. Obviously, it clears up a lot of the regulatory complexity by wiping out a lot of provisions that have to deal with the different agencies and just vesting all that authority in the department of cannabis control. Those are the big headlines of what the trailer bill does.

Matthew: Wow, that sounds like a lot. If I was a California business operator, this would cause me a lot of anxiety. Do you think if you were to look into the future, a few years, this is going to be a lot more streamlined and less friction?

Khurshid: Yes, I think so. That's certainly the hope. While, yes, it can produce a fair amount of anxiety because we're going to have to go through rulemaking again. That's a pretty arduous process. The rulemaking, that's going to occur in the first instance. The new department is also going to suspend some of the procedural protections that licensees might have in terms of the rulemaking process itself. The new agency won't necessarily have to publish in advance what it's planning to do for emergency regulations, for temporary regulations for the first six months to a year.

They basically built into this trailer bill, "Hey, we're not going to follow this process. We are going to follow the regular rulemaking process once we get past this emergency phase." For now, the agencies are going to attempt to identify where there are conflicts in their existing regulations, clearing those conflicts up, rationalizing the system a bit more, getting rid of some of the requirements that are currently in the regs that cause a lot of friction in terms of getting licensed and also keeping your license.

For example, what I'm reading is that they may do away with fingerprinting, and instead allow the agency to go in and enquire with state, federal, and local law enforcement on criminal background checks. That could really alleviate a lot of stress going forward. You're not having to guess as to what a regulation means because they've had a chance to clarify it. I think that's also going to reduce quite a bit of stress.

Initially, yes, I think people are going to feel very anxious about it, but I think long-term everyone knows that this is a very good thing. It's going to reduce the regulatory burdens and costs on operators. Frankly, I hope it takes a lot of work off my plate. There are a lot of interesting things that I get to do. Having to tangle with licensing agencies on ownership disclosures isn't the most interesting. If we can get rid of some of those tedious requirements, not do away with them, but just rationalize them make them simpler, I think everyone's better off.

Matthew: There's some pending legislation around veterinary CBD. Can you tell us about that?

Khurshid: Sure. The veterinary space is a really interesting one. Not just CBD, but also other pending bills as well that would essentially incorporate veterinary products into the Medicinal and Adult-Use Cannabis Regulation and Safety Act. Right now veterinary products are not contemplated, and these are products that include THC. If you're a veterinarian, you could lose your license potentially for advising a patient's owner on administering cannabis to their pet.

There's a bill AB 384, I believe it is, that would essentially protect veterinarians and allow them to do that. AB 45 is the bill that's on veterinary CBD that would essentially say, "Hey, for non-cannabis products, for CBD derived from industrial hemp, putting these products into veterinarian preparations is not going to "adulterate" those preparations." It's still going to be illegal to sell those. Right now, it's arguably not legal to sell those. Those can be deemed adulterated because CBD is not approved as an ingredient. These bills would essentially make it safer both for veterinarians to advise on THC in cannabis and CBD as well and also to manufacture these products and to regulate them properly as well.

Matthew: Talk a little bit about the regulation and taxation for non-cannabis cannabinoids. I think this means non-psychoactive cannabinoids and what insight to have around this. You talked about that for veterinary CBD or veterinary regulations, but how about just in general?

Khurshid: Yes, so non-cannabis cannabinoids that I consider it to be not just the non-psychoactive cannabinoids, but any cannabinoids not derived from marijuana. Derived from industrial hemp. I'm not aware of any other plants that produce cannabinoids so I think that's what we're really talking about is industrial hemp-derived cannabinoids. Currently, in MAUCRSA, there is no pathway to be able to use cannabinoids derived from anything other than psychoactive cannabis or marijuana.

There have been manufacturers and operators that have wanted to either incorporate hemp CBD or sell hemp CBD and they have not been able to do so because it's not within the ambit of MAUCRSA, it's carved out. The current regulations don't allow licensees to actually incorporate hemp CBD or any other hemp cannabinoids into their supply chain, even though it might be significantly cheaper than extracting them from psychoactive cannabis. There hasn't been a pathway for that.

There are a couple of bills that would create this pathway for hemp-derived cannabinoids, not only to incorporate them into the supply chain for folks who are licensed under MAUCRSA but also generally as well to allow for the incorporation of hemp CBD and hemp-derived cannabinoids into other foods, cosmetics, supplements, veterinarian products that are not sold by a MAUCRSA licensee. Just out in the general market.

AB 1435 is the one that creates a pathway for MAUCRSA licensees to incorporate hemp-derived cannabinoids, and AB 45 is the one that does this more generally. In each of these instances, there's going to be testing of these cannabinoids, may be taxation of these cannabinoids as well. Again, this is an effort to create a pathway for these hemp-derived cannabinoids. It doesn't address any of the biosynthesized cannabinoids, but it does address hemp-derived cannabinoids.

Matthew: Everybody's familiar with THC which is also called Delta-9 THC, but now there's Delta-8 THC products out there. Some states are banning this. What's the general mood around Delta-8 THC in Sacramento and California at large?

Khurshid: I think amongst operators, there is a concern, because, again, when people talk about Delta-8 THC, they're talking about THC derived from hemp. Again, they're assuming that because the hemp legislation at the federal level calls out Delta-9 in certain places that it doesn't apply, that the prohibition on the volume of THC allowable in industrial hemp, that it doesn't apply to Delta-8 or that somehow Delta-8 THC is not prohibited under federal law, that the hemp bills-- I'm sorry, the hemp legislation at the federal level completely legalizes that.

That does not seem to be what the DEA thinks, however, because when you look at DEA guidance on what they consider to be prohibited and THC is prohibited, they include all variants of THC. Delta-8 would be included in that. There's a publication called the Orange Book that the DEA puts out that goes into a lot of detail about the various different controlled substances that are banned under the CSA. If you look at THC, they include not just Delta-9 but all variants of THC.

The issue at the federal level is, is this really lawful? Is there actually a carve out for Delta-8? A lot of folks would argue, no, there isn't. At the state level in California, again, the concern among operators is, "All right, we have all these folks who're selling THC products essentially outside of the regulated system without a license, without any testing, without any taxation, and this is unfair, and it creates public health issues as well."

Presumably, if some of these non-cannabis cannabinoid bills are passed, that would address some of the issues, some of the concern, and that you could have Delta-8 incorporated into the supply chain and tax it and test it and ensure that a lot of the problems that would otherwise exist without regulation are addressed. I think the hope is that "Hey, no one wants to deprive anybody else the benefits of Delta-8 THC but we also want to ensure that it's safe and that it's not going to undercut the regulated tax they market."

Matthew: Let's talk about tax relief a little bit. Any good news there?

Khurshid: Yes. There is legislation pending currently at the state level that would essentially relieve licensees of penalties in the event that they aren't able to pay cultivation excise taxes on a timely basis, as there are a lot of reasons why that hasn't happened. This bill would essentially eliminate the penalty for licensees while maintaining the penalty for anybody who's operating without a license. The reason why again this is important is that the tax system in California is quite tedious and very inefficient and imposes a lot of regulatory costs on operators.

You've got a cultivation tax that has to be passed from the cultivator to the manufacturer to the distributor and then remitted by the distributor. You've got an excise tax that has to be remitted by the retailer to the distributor. The distributor needs to factor that into sales ahead of time. There's a lot of record-keeping, a lot of back and forth, a lot of places where this could go wrong as well.

We had a lot of instances, for example, of distributors selling to retailers on terms, and then the retailers not paying them. Not only not paying them for the product but also not remitting the tax, the excise tax that is due. Guess who's on the hook for that? It's the distributor who's offered terms to the retailer. They still have to pay and remit excise tax and saying, "Hey, the retailer stiffed me," isn't going to cut it. It doesn't give them the relief that they need. As a result, they get slapped with penalties for that as well even though it's not their fault and they have tried to get payment for goods.

There are various proposals being floated about consolidating the taxes. Beyond this penalty relief bill, there's talk of folding the cultivation tax into the excise tax. There's talk of having-- because the retailers already collect sales tax for example, why not just have them collect the excise tax and remit the excise tax rather than paying it to the distributor when they buy the goods? Pay it in advance essentially. Let them collect it, and record it, and pay it just like they do with sales tax.

Whether or not that is a net positive for the industry I think it depends on whether you're a retailer or a distributor or where you are in the supply chain but I think definitely those proposals I'm hoping to see them advanced. A lot of folks in the industry are because this is one of the key things that we need to get right if this system is going to survive and if we are going to beat the illicit market and outperform it. We need to have a rational tax system that is not going to create as many problems.

Matthew: Khurshid, you talk to a lot of cannabis business owners and operators in California and nationally, but what is one big opportunity they're seeing? Conversely, what's one thing that keeps them at night?

Khurshid: I think the fact that we still have a lot of illicit operators, that's something that obviously keeps folks up at night. We've talked about some of these other supply chains like the hemp-derived cannabinoids not being regulated. That obviously keeps them up at night. I think that this consolidation of the licensing agencies and this pending legislation that we've got is going to certainly rationalize their business structure. It is going to give them a lot of opportunities to grow and scale. I think that's it's not one opportunity, it's what the future holds in terms of the regulatory system. I think it's not, it's weird to think about that as an opportunity but it is an opportunity to get it right.

From a regulatory lawyer's perspective, the big opportunity is this coming rulemaking and ensuring that we have a say. Even though we've got these emergency regs coming up, we've got a say in how things move forward. Even with the emergency regulations in place the agencies and the soon-to-be the single agency they're still listing, they're still very responsive to operators especially when big groups of operators come together and press their case. I think this is a big opportunity coming up to restructure the market and to create a lot of efficiencies here and essentially a lot of gains from that.

Matthew: Khurshid, I'd like to transition to some personal development questions. What is one trend or development you see in the cannabis space that you feel like people aren't fully appreciating how big it's going to be or how disruptive it's going to be or the impact it's going to have?

Khurshid: We've talked about this, you and I talked about this before in terms of the application of blockchain and cryptocurrency to the industry. Folks have been talking about this in terms of a solution to the banking issues that the industry has. What if we all use bitcoin? Previously, because the regulators didn't know a whole lot about bitcoin, didn't know a whole lot about cryptocurrency, they just described ill intent to it. It is true that people have used cryptocurrency for illicit transactions. Without a doubt, yes, that's happened, but that's not the only thing that happens with cryptocurrencies.

I think that that space is going to change our space in a massive way, especially after we finally get descheduling at the federal level. Once we get descheduling at the federal level, things like a cannabis futures market are going to be a reality. When we have interstate commerce, we'll be able to have true futures markets at the national level and then at the international level, as well as rollback prohibition internationally.

Think about the application of NFTs, think about the application of decentralized exchanges, think about the applications of DAO, a decentralized autonomous organization. We're already seeing transformations in corporate law. I think Wyoming just passed a DAO LLC bill, that essentially gives the green light to form DAOs and have some limited liability protection for folks who are invested in that DAO.

I think about how all of these technologies are going to create the market of tomorrow and it's very exciting. It's going to transform regulations. When you don't have owners per se, you don't have C-level executives running a company, it's run by the DAO, that's going to be huge. You already see at this point, like I got to work with a client that was evaluating an investment into a social equity entrepreneur that is doing cannabis NFT's, so-called Digital strains. Very exciting stuff. I'm just enthralled by all that, and I'm very excited about what this is going to mean especially post descheduling.

Matthew: This is really an interesting time especially the mash-up of these things is they come together DAOs, blockchain cryptocurrencies in cannabis. It's just going to be crazy. Everything is accelerating so fast. It's fun, but it's also like Star Trek warp speed a little bit.

Khurshid: Yes, it can be hard to keep up, but that's what keeps it fun too. There's always so much to learn and you can easily spend hours and hours and hours developing your knowledge on that space and thinking about the application in the cannabis industry.

Matthew: Khurshid, last question. What is your favorite unhealthy comfort food or guilty pleasure?

Khurshid: Oh, man, it's hard to choose but I guess, pizza and whiskey if I had to choose. Pizza is definitely one of my favorite things being a Chicagoan, but it's also one of the worst things I think that paying a healthy weight, and whiskey, that kind of speaks for itself. I love bourbon but too much of a good thing is not a good thing.

Matthew: Well said. Everything in moderation, but including moderation once in a while you have to go crazy.

Khurshid: That's right.

Matthew: Khurshid, let listeners know how they can get in touch with you. If you have a cannabis business or who your clients would be that could reach out to you and say, "Hey, I need help in the legal arena." How can I connect with you?

Khurshid: Sure. I'm not a big marketer but I do have a LinkedIn profile where folks can find me pretty easily. Our firm has a website, the Greenbridge Corporate Council website is just greenbridgelaw.com. It's a dot com for now. It's going to be dot crypto in the next year just as a teaser. Right now it's greenbridgelaw.com and that's our website. You can connect with us there and occasionally I'm on Twitter, but not a whole lot.

Matthew: All right. Well, Khurshid, thanks so much for coming on and giving us a brief of what's going on with California and cannabis. Really appreciate it. Man, there is so much going on. We really needed that digest version. Well done, and look forward to the next update.

Khurshid: Thank you very much, Matt.

Matthew: If you enjoyed the show today, please consider leaving us a review on iTunes, Stitcher, or whatever app you might be using to listen to the show. Every five-star review helps us to bring the best guest to you. Learn more at cannainsider.com/iTunes.

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