Infusing Cannabis Manufacturers With a Little More Cash: Applications for ‘Type S’ Licenses To Begin Soon in California

April 12, 2018Alerts Cannabis Law Alert

The California Department of Public Health released proposed emergency regulations on March 22, 2018, to allow Type 6, 7, or N cannabis licensed manufacturers to register their facility as a “shared-use” facility. The Emergency Regulations also provide for a new license, the Type-S license, which would allow holders of such license to conduct the following manufacturing activities:

  • Infusions;
  • Packaging and labeling of cannabis products; and
  • Extractions with butter or food grade oils; provided, however, that the extract or concentrate produced may only be used in infused products manufactured by the Type-S licensee.

These permitted activities by a Type-S licensee would be conducted in a shared-use facility.

Key Takewaway

The Emergency Regulations are expected to be approved by April 13, 2018. While the Type-S license is still new, this new license designation appears to be a win-win for both parties: The Primary Licensee can generate substantial additional revenue by providing equipment and the shared-use facility, and the Type-S Licensee can enter into the cannabis manufacturing space without having to incur significant tenant improvement costs.

How It Works

The primary licensee (the “Primary Licensee”), must hold a Type 6 (manufacturer 1 – nonvolatile substances), 7 (manufacturer 2 –volatile substances), or N (for manufacturers that produce edible products or topical products using infusion processes, or other types of cannabis products other than extracts or concentrates, but that do not conduct extractions) cannabis license and is the owner and operator of the shared-use facility. The Primary Licensee and the holder of the Type-S license (the “Type-S Licensee”) enter into a shared-use agreement that provides, among other things, that the Type-S Licensee can use the equipment and the shared-use facility to conduct the Permitted Activities subject to payment of a fee to the Primary Licensee.

Responsibilities of Licensees

Primary Licensees

In addition to holding a Type 6, 7 or N license, the Primary Licensee must obtain a valid license, permit or other authorization from the local jurisdiction that permits the Primary Licensee to operate a shared-use facility. After obtaining local jurisdiction approval, the Primary Licensee must register with the CDPH to become a shared-use facility. The Primary Licensee must provide the following to the CDPH in order to register as a shared-use facility:

  • A copy of the local license, permit, or other authorization for operation of a shared-use facility;
  • A diagram of the shared-use facility, which details:
    • The designated common-use area for the Type-S licensee, and
    • Identification of any shared equipment; and
  • Proof of compliance with security, storage, waste management, and contamination controls.

One day before commencement of the shared-use facility operations, the Primary Licensee must provide written notification to the CDPH, which provides the Type-S Licensee’s business name, contact person, contact phone number, and license number. The Primary Licensee must provide a copy of the occupancy schedule to the CDPH and the occupancy schedule must be prominently posted near the entrance of the shared-use facility. Any changes to the occupancy schedule must be provided to the CDPH, and the changes to the occupancy schedule may take not effect until such time that the Primary Licensee obtains approval from the CDPH.

Type-S Licensee

A Type-S Licensee is responsible for the following:

  • Ensuring products manufactured in the shared-use facility are free of contaminants;
  • Proper sanitation of the space; and
  • Adhering to the state and local requirements of the manufactured cannabis products.

To apply for a temporary Type-S license, the applicant must first obtain a license, permit or other authorization from the local jurisdiction that allows the applicant to conduct commercial cannabis activity. In addition to authorization from the local jurisdiction, the applicant must provide the CDPH with the following:

  • Shared-use agreement between the Primary Licensee and the applicant;
  • Diagram of the common-use area; and
  • A copy of the occupancy schedule.

Benefits

The addition of the Type-S license provides benefits to both the Primary Licensee and the Type-S Licensee. First, the Type-S Licensee does not have to expend the costs necessary to apply for a Type 6, 7 or N license. Second, the Type-S license provides smaller manufacturers who might not have the capital necessary to build out a manufacturing facility with access to commercial kitchens and equipment.

As to the Primary Licensee, the shared-use model allows the Primary Licensee to recoup its investment in tenant improvements by obtaining lease payments from Type-S Licensees. This could be a significant revenue source for the Primary Licensee since there is no limit to the number of Type-S Licensees that can use the shared-use facility; provided, however, that only one Type-S Licensee can use the facility at any time.

Concerns for Licensees

Most local jurisdictions have not yet addressed licensing for shared-use spaces. As such, the Primary Licensee must ensure that its local jurisdiction authorizes the shared-use model before proceeding with the CDPH.

This publication is intended for general information purposes only. It does not constitute legal advice. The reader should consult with knowledgeable legal counsel to determine how applicable laws apply to specific facts and situations. This publication is based on the most current information at the time it was written. Since it is possible that the laws or other circumstances may have changed since publication, please call us to discuss any action you may be considering as a result of reading this publication.

*Please be mindful that possessing, using, distributing and/or selling marijuana is a federal crime, and no legal advice we give is intended to provide any guidance or assistance in violating federal law nor will it provide any guidance or assistance in complying with federal law. Please also note that we are not advising you regarding the federal, state or local tax consequences of engaging in any business in this industry.