So, you want to grow marijuana?

In 1996, California voters approved Proposition 215, the Compassionate Use Act of 1996, which exempts from criminal prosecution for possession and cultivation of marijuana “a patient, or . . . a patient’s primary caregiver, who possesses or cultivates marijuana for the personal medical purposes of the patient upon the written or oral recommendation or approval of a physician.”

A “primary caregiver” is defined as “the individual designated by the [patient] who has consistently assumed responsibility for the housing, health, or safety of that person.”

The initiative also provides that “no physician in this state shall be punished, or denied any right or privilege, for having recommended marijuana to a patient for medical purposes.”

(Note that Proposition 215 does not protect patients and their caregivers from federal prosecution for possession and cultivation, though there has been some indication that Attorney General Holder has made such prosecutions a low priority.)

Proposition 215 did not address how patients are to obtain marijuana, other than cultivating it themselves.  Proposition 215 does not exempt patients from prosecution for purchasing marijuana.

Recognizing that it is not practical to expect each patient to grow his or her own marijuana and to address various other concerns, the California legislature adopted Senate Bill 420 (the Medical Marijuana Program Act) in 2003 to provide further guidance.

SB 420 contains the following provision: “Qualified patients . . . and the designated primary caregivers of qualified patients . . . who associate within the State of California in order collectively or cooperatively to cultivate marijuana for medical purposes, shall not solely on the basis of that fact be subject to state criminal sanctions.”

(A qualified patient is a person whose physician has recommended the use of marijuana to treat a serious illness.)

In August 2008, the California Attorney General issued additional guidelines.

The following are some guidelines for the formation of a cooperative or collective to cultivate medical marijuana.  Of course, this post does not include all of the information needed to form a cooperative or collective — it is advisable to consult with an attorney or expert.

Forming a Cooperative or Collective in California

Katovich Law Group has worked with many clients to form California cooperatives.  Our cooperative clients include a self-help bike repair workshop, a software developer, a biofuel provider, a group of IT consultants, a group of small businesses conducting a “shop local” campaign, a solar energy business, a grocery store, and a web developer.

While any business can operate cooperatively and democratically, in California, if a business wants to use the word “cooperative” in its name, it must form under one of the cooperative statutes.  California has statutes for electrical cooperatives, housing cooperatives, and agricultural cooperatives.  Any cooperative that does not fall into one of these categories can form under the California Consumer Cooperative Statute.  Despite its title, this statute can be used by any kind of cooperative.

A group of medical marijuana patients and their caregivers can form a cooperative under the consumer cooperative statute or the agricultural cooperative statute to cultivate marijuana.

The Medical Marijuana Program Act exempts from prosecution patients and caregivers that “collectively or cooperatively . . . cultivate marijuana for medical purposes.”  This seems to imply that a group of patients could choose to form something other than a statutory cooperative — something called a “collective.”  Unfortunately the word “collective” is not defined.

This language has been interpreted by some to mean that patients could form any type of entity they wish as long as it is operated collectively and meets the other requirements of medical marijuana law.  Unfortunately, the law and guidelines are not clear on this subject.  Some patient/caregiver groups have chosen to form a “collective” under the California Nonprofit Mutual Benefit Corporation Statute.  Forming under this statute has the benefit of qualifying the organization to receive exemption from state income tax.

While forming as a nonprofit mutual benefit corporation is not specifically authorized in the law or guidelines, a handout prepared by the California Secretary of State distributed at a meeting of the Nonprofit Organizations Committee of the State Bar states that an association of medical marijuana patients and caregivers can form as a consumer cooperative, an agricultural cooperative, or a mutual benefit corporation.

While patients and their caregivers may form a cooperative or collective, the entity itself cannot cultivate marijuana.  Only patients and their caregivers are exempt from prosecution for cultivation — the entity that they form is NOT exempt.  Therefore, individual members of the cooperative (note that only patients and their caregivers can be members) may cultivate marijuana and the cooperative may facilitate transactions between the members so that those members that cannot cultivate marijuana themselves can receive marijuana from those members that can.  In practical terms, this means that the cooperative should not hire employees or contractors who are not members of the cooperative to cultivate marijuana.

As the Attorney General puts it, “the cycle should be a closed circuit of marijuana cultivation and consumption with no purchases or sales to or from non-members.”

Additional requirements include the following:

  • The cooperative shall not transact any business with non-members.
  • The cooperative may not be operated for a profit (“Any monetary reimbursement that members provide to the collective or cooperative should only be an amount necessary to cover overhead costs and operating expenses . . . .  Marijuana grown at a collective or cooperative for medical purposes may be allocated based on fees that are reasonably calculated to cover overhead costs and operating expenses.”)
  • Any sales conducted through the cooperative are subject to sales tax.
  • Sellers of marijuana must have a state seller’s permit.
  • “Collectives and cooperatives should provide adequate security to ensure that patients are safe and that the surrounding homes or businesses are not negatively impacted by nuisance activity such as loitering and crime.  Further, to maintain security, prevent fraud, and deter robberies, collectives and cooperatives should keep accurate records and follow accepted cash handling practices.”
  • Cities and counties may require a business license.
Cutting Edge Counsel

About Cutting Edge Counsel

Specializing in both traditional and new economy law (benefit corporation, cottage food, sharing economy, crowdfunding, etc.), Cutting Edge Counsel offers a full menu of legal services to organizations of the new economy. Contact us at info [at] cuttingedgecounsel.com.
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