September 20, 2016

The Death of AB 1575

With the Medical Cannabis Regulation and Safety Act (“MCRSA”), came the exciting prospect of for-profit entities in the California medical cannabis industry. Specifically, MCRSA defines a “person” as an individual, corporate entity, or any combination thereof. However, nowhere in the text of MCRSA does it explicitly state that medical cannabis businesses can operate as for-profit entities, thus it is only an implicit assurance that for-profit entities will receive licenses or benefit from the protection of the law.

To clarify, legislators introduced Assembly Bill 1575 (“AB 1575”). AB 1575, the first iOS update of MCRSA, aimed to clear up many of the ambiguities in the MCRSA. Specifically, AB 1575 states “A collective or cooperative…may operate for-profit, not for profit, or any combination thereof.” Perfect. For-profit entities are now allowed in the medical cannabis industry. Right? Not quite.

So what’s up with AB 1575? Actually, nothing. AB 1575 was held under submission in the Senate Appropriations Committee in mid-August and essentially died on the Senate floor. It can be argued that the death of AB 1575 was inevitable after the Adult Use of Marijuana Act (aka Prop. 64) qualified for the upcoming November ballot. With the Adult Use of Marijuana Act casting such a large shadow, word on the street is that legislators didn’t want to spend more time and resources redefining MCRSA. So, where does this leave the prospect of medical cannabis businesses operating as for-profit entities?

What the Death of AB 1575 Means About For-Profit Status

Looking at the big picture, the death of AB 1575 will have very little impact on the ability of for-profit entities to obtain state licensing and operate medical cannabis businesses in California. Despite only an implicit assurance in the MCRSA, it is likely to be made explicit by administrative or judicial decision during the rollout of the MCRSA in 2018.  However, until 2018, medical cannabis businesses must continue to operate solely as non-profit unless their local ordinances specify otherwise.

Transitioning from Non-Profit to For-Profit

California law requires medical cannabis businesses to operate as not for-profit. This means that medical cannabis businesses in California don’t have owners, only directors and officer, thereby causing problems in the event the company needs to distribute its assets. Thus, allowing medical cannabis businesses to operate as for-profit entities will mitigate some of these problems. But for existing medical cannabis businesses operating as non-profits, how would the transition process work? Though it involves some difficult administrative and legal proceedings, California law will allow you to convert your existing non-profit cannabis business into a for-profit entity. The process takes one of two forms. Either a new for-profit entity is formed and then merged with the old non-profit, or the non-profit amends its articles of incorporation with the California Secretary of State. In conclusion, it is likely that the medical cannabis industry in California will eventually enjoy the benefits of for-profit status despite the death of AB 1575.

Disclaimer: This article has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice.