Cannabis Regulation in Nevada: A Guide for Potential Entrants into the Marketplace

As all stakeholders in the cannabis industry are well aware, medicinal and recreational marijuana cultivation and dispensing is a high-profile, heavily regulated industry. Currently, marijuana and cannabinoids are classified as Schedule I drugs by the federal government. However, despite this restriction, 25 states and the District of Columbia currently have laws exempting authorized medicinal marijuana use from criminal prosecution within that state. Additionally, Alaska, Colorado, the District of Columbia, Oregon and Washington have exempted recreational marijuana use from criminal prosecution within the state, with five states, including Nevada, set to vote on similar ballot measures.

The ever-shifting landscape of marijuana regulations on a state-by-state basis and associated changes in federal government policies create a difficult regulatory landscape for those seeking to enter the exploding cannabis marketplace.

Current Nevada Medicinal Marijuana Regulations

Nevada enacted legislation which permits the use, cultivation, possession and sale of medicinal marijuana within the State of Nevada. The statute permits physicians to provide a registry identification card to individuals with certain statutorily defined illnesses to purchase marijuana from licensed dispensaries.

Nevada law permits four classifications of medical marijuana establishments to obtain registration certificates to legally operate within the marketplace:

• Medical marijuana dispensaries are permitted to sell and dispense marijuana to holders of a valid medical marijuana registry identification card.
• Cultivation facilities are permitted to acquire and grow marijuana to be sold to marijuana dispensaries and production facilities.
• Medical marijuana production facilities are permitted to manufacture edible marijuana products and marijuana-infused products to be sold to medical marijuana dispensaries.
• Medical marijuana testing laboratories are permitted to test marijuana, edible marijuana products and marijuana-infused products which will be sold within the state.

In August of 2014, the Nevada Division of Public and Behavioral Health (DPBH) accepted applications for medical marijuana establishments of all types, granting 372 provisional certificates. Of the 372 provisional certificates issued, the state issued 163 final certificates consisting of 53 dispensaries, 65 cultivation facilities, 35 production facilities and 10 laboratories.

At this time, Nevada is not currently accepting applications for new registration certificates, and it is unclear when that will change. But, as many provisional certificate holders are not prepared to commence active operations, these certificates are available for purchase, provided that the purchaser can meet the state’s statutory requirements.

Indeed, the statute was specifically amended to allow for the transfer of marijuana registration certificates, provided that the prospective new holder of the certificate complies with the regulations. To transfer a final registration certificate, in addition to acquiring the medical marijuana establishment in conjunction with the certificate, the transferee must:

(i) present evidence that the new acquiring party controls not less than $250,000 in liquid assets to cover the initial expenses of opening the proposed medical marijuana establishment which complies with the statute,

(ii) furnish the name, address, date of birth, complete set of fingerprints for each person who is slated to acquire the license and/or will be an owner, officer or board member of the proposed medical marijuana establishment; and

(iii) furnish proof to the DPBH sufficient to demonstrate that no person, group or entity will own a percentage of medical marijuana certificates beyond the statutory cap.

As you can see, those individuals or entities seeking to acquire an already issued medical marijuana certificate face significant initial regulatory compliance burdens in order to obtain DPBH approval for the transfer of the certificate.

Question 2: New Recreational Use Regulations

Nevada voters are set to vote Tuesday on ballot initiative Question 2, which would permit the recreational use of marijuana. If passed, the recreational consumption and possession of marijuana by individuals aged 21 and over will be exempt from prosecution under the laws of the state. The stakes for passage of the new law are high.

RCG Economics and Marijuana Policy Group estimate that in the first seven years following the legalization of recreational marijuana use, $7.5 billion will be added to Nevada’s economy, about 41,000 person-year jobs will be supported and $1.7 billion in direct and indirect income will be generated for business owners and workers.

Assuming the law’s passage, it’s extremely likely that a new application period for recreational marijuana distribution, production, cultivation, selling and testing certificates will open in the near future. However, for the first 18 months, these applications will be restricted to those already in possession of a medical marijuana establishment registration certificate. Therefore, those who already possess or can soon come into possession of a medicinal marijuana certificate will have a significant competitive advantage in the form of early access to the market for a year and a half period.

Of course, new laws permitting the recreational use of marijuana will be accompanied by new regulations promulgated by the Department of Taxation.  Inclusive in the new regulations will be rules regulating:

(i) Procedures for the issuance, renewal, suspension and revocation of a license to operate a marijuana establishment;

(ii) Qualifications for licensure that are directly and demonstrably related to the operation of a marijuana establishment; and

(iii) Requirements for the security of marijuana establishments, among other regulations.

Consequently, marijuana businesses, whether they are dispensaries, cultivation facilities, or another category, will need to comply with two sets of regulations—one of which has not yet been enacted—from two different regulatory organizations and maintain two licenses/certificates in order to operate jointly within the medicinal and recreational spheres to maximize potential profits and efficiency.

The Federal Question: How Do Federal Laws Impact Marijuana Commerce In Nevada?

As previously noted, marijuana use, cultivation and distribution, whether recreational or medicinal, remains illegal under federal law. Normally, the Supremacy Clause of the Constitution would ensure that federal law is “supreme” over all state laws, thereby implicitly invalidating any state law which “legalizes” marijuana use. Of course, states generally have avoided implicating the Supremacy Clause in enacting marijuana legislation by exempting the marijuana activities from state criminal penalties. Therefore, all stakeholders within the field are still theoretically subject to federal criminal prosecution for any marijuana-related activity prohibited by federal law. Fortunately, recent federal trends have ensured that, at a minimum, those engaged in state-approved medicinal marijuana-related activities have no cause to fear federal prosecution.

Critically, in December 2014, the United States Congress’ appropriations bill funding the federal government contained the following provision:

None of the funds made available in this Act to the Department of Justice may be used…to prevent such States from implementing their own State laws that authorize the use, distribution, possession or cultivation of medical marijuana.

Subsequent appropriation bills contain a substantially similar provision.

In United States of America v. McIntosh, the Ninth Circuit Court of Appeals concluded that this language prohibited the Department of Justice from spending funds on the prosecution of individuals who were engaging in conduct permitted by state law, provided that those individuals fully complied with the state law. Therefore, under the precedent established in the McIntosh case, as long as the federal government continues to prevent the Department of Justice from expending federal funds prosecuting state approved medicinal marijuana activities, those entities, including those in Nevada, are unlikely to face any federal penalties.

At this time, however, the appropriations provision does not extend to recreational use. Therefore, the federal legal landscape for recreational marijuana use is, at best, unsettled. With more and more states legalizing recreational marijuana use in defiance of federal law, this is presumably a question that will be addressed by federal authorities in the near future.

For those individuals and organizations already in the medicinal marijuana marketplace seeking to enter into the recreational sphere, or those looking to acquire a medicinal marijuana license in order to access the recreational marijuana market before the expiration of the exclusivity period, competent legal counsel will be necessary in order to ensure compliance with all applicable laws and regulations.

Joshua S. Bauchner, Esq. and Anthony J. D’Artiglio, Esq. are attorneys with the law firm of Ansell Grimm & Aaron, PC and members of the Cannabis Law Practice Group.

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