Sylva A Law Corporation

Julia Sylva is the founding member of the Law Offices of Julia Sylva, A Law Corporation, and a transactional, litigation and regulatory attorney. She represents public and private clients in real estate, land use, business, trusts and estates, and commercial cannabis law. Sylva also serves as corporate counsel advising on formation, governance and compliance, and as real estate counsel handling purchase and sale, landlord tenant, broker liability, escrow and title disputes. She is an Adjunct Law Professor at Southwestern Law School, where she teaches Commercial Cannabis Law and contributes to legal education and policy development in the field.

Operators are not the only ones who want to profit from commercial cannabis activity. Local government seeks to regulate the industry for health and safety concerns, but they also wish to gain financially for the benefit of their constituents. Some are low-income communities that wish to give opportunities to the underprivileged with social equity programs.

The State of California consolidated all commercial cannabis regulations, which are administered by the Department of Cannabis Control (DCC). However, each city (total 482) and each county (total 58) retains independent authority; regulations are not uniform; they are multi-jurisdictional. Local government is bound by State law and may govern provided they do not conflict with State law.

There has been extensive litigation in this industry. Most disputes revolve around the nonpayment of taxes and fees due. Sadly, municipalities don’t have the resources to closely monitor illicit commercial cannabis activity. So the operators continue to operate without code compliance and refuse to pay the taxes and fees.

Some operators operate under the radar. When the regulators seek to “close them down” they have already left the premises, leaving cannabis sativa remnants and other paraphernalia that evidence recent commercial cannabis activity.
Others are sophisticated in corporate restructuring. An operator applies with the use of a corporate entity, then fails to pay the taxes and fees. Thereafter, the successor operator takes the helm (undoubtedly related) but claims not to be the successor entity. It’s like playing whack-a-mole with these entities. Other entities formed in Delaware, Nevada, and other states that don’t share information about their principals. So, the municipalities never really know who the actual principals are. Why allow out-of-state operators? We don’t allow out-of-state product! I have an easy fix: No need to apply if you aren’t a California corporate entity.

Knowledge of the actual owner is a strong public policy. In order to fight the cartels, prevent sales to minors, unlawful labeling, and other illicit activity, regulators must be able to trace the true ownership. Fortunately, we have rules that seek to do just that.

An “owner” of a commercial cannabis business is an ownership interest of 20 percent or more in the business, and includes managers, directors and others who control operations, including a member of the board of directors of a nonprofit, a general partner, a non-member manager or managing member of an LLC, the trustee or trustees and all persons who have control of the trust or the commercial cannabis business that is held in trust, and the CEO, President or their equivalent, or an officer, director, Vice President, General Manager or their equivalent [CA Code of Regulations, Title 4, § 15003].

Clearly, an “Owner” is also an Investor who contributes less than the 20% threshold but also participates in the management, direction, or control of the licensed owner. This includes angel investors or VC firms that offer executive and high-level assistance to founders to help the start-up. Investors must submit to extensive background checks and disclosure requirements — but they don’t. Therefore, regulators don’t know the identities of these individuals —a very dangerous situation for all. If the above does not apply, Investors are subject to disclosure as “financial interest holders.” This is limited compared to the ownership disclosure, but it is nonetheless important.

A “financial interest holder” includes all of the following: an aggregate ownership interest of less than 20 percent, a lender, a person entitled to receive 10 percent or more of the profits, an employee who has entered into a profit share plan, a landlord who has entered into a lease agreement for a share of the profits, a consultant who provides services for a share of the profits, an agent, accountant or attorney who works for a share of the profits, a broker who is engaging in activities for a share of the profits, a salesperson who earns a commission, and a person who has entered into an intellectual property licensing agreement for a share of the profits [CA Code of Regulations, Title 4, § 15004].

There is a framework for violating the above Regulations; namely, penalties and fines, and suspension and revocation of a license. Undisclosed owners may also be subject to personal liability for the failure to disclose their interest.

Ultimately, WE MUST KNOW WHO YOU ARE. The DCC has established the Unified Cannabis Enforcement Task Force with a focus on enforcing the Regulations and seizing unlicensed cannabis products. It is an ominous task.

Noncompliant operators/investors must be held accountable. They must be threatened with heightened scrutiny and enforcement teams. Unfortunately, local government does not have the resources to consistently monitor these businesses. When they seek to enforce, operators cry foul, claiming unlawful taking, trespass, discrimination and illegal seizures, and then they sue, creating a pitiful scene.

In sum, local government wants and needs the revenues that legitimate, legal operators can bring to the communities. There is no easy answer. Cooperation and respect are a two-way street…