A client newer to the marijuana industry recently asked me about the differences between a collective, cooperative, and California non-profit. I researched the full answer, and this is what I found.
Previously among California dispensaries and cultivators, the most widely found entity was the California Mutual Benefit Corporation (“CMBC”), a non-profit type of entity found in California Corporations Code §§ 7110, et seq. Similar to an average C corporation, the CMBC has a membership, board of directors, and corporate officers, but what sets the CMBC apart from for profit entities is that its sole purpose is limited in scope and should only inure to the benefit of its collective membership and should not generate profits. California case law has been clear, impliedly requiring that dispensaries and collectives form as non-profits. In Qualified Patients Association v. City of Anaheim, the court held, “The MMP bars individuals and any collective, cooperative, or other group from transforming medical marijuana projects authorized under the MMP into for-profit enterprises.” Qualified Patients Association v. City of Anaheim (2010), 187 Cal.App 4th 734, 746. Additionally, neither Proposition 215 nor the MMP authorized collectives, cooperatives or individuals to profit from marijuana sales or distribution.
Cooperatives (“Co-op”) are very specifically defined under the Corporations Code §§12200, et seq. Previously, few dispensaries formed as cooperative corporations, and a non-profit cannot call itself a “Co-op” or “Cooperative” unless officially created under this part of the Corporations Code. A Co-op, is similar to a CMBC because it is structured for the benefit of the membership, except for their benefit as members of the corporation, which is controlled democratically by vote, and allows for distributions of net corporate profits. As a side note, Co-ops are subject to more rigorous registration requirements.
The term Collective derived from the MMP provision under California Health and Safety Code § 11362.775, permitting patients and caregivers to “collectively or cooperatively” cultivate medical marijuana. The term was further interpreted by the Attorney General’s office, “…a collective should be an organization that merely facilitates the collaborative efforts of patient and caregiver members – including the allocations of costs and revenues. As such, a collective is not a statutory entity, but as a practical matter it might have to organize as some form of business to carry out its activities.”
With the roll-out of the Bureau of Cannabis Control’s Medical Cannabis Regulation and Safety Act (“MCRSA”) regulations on January 1, 2018, these regulations will supersede all prior medical marijuana laws. As proposed, MCRSA does not specifically restrict for profit entities. This fact will have a huge impact on cannabis business M&A activity over the next few years.