Lessons from California, Part 2: Licensing and Compliance Issues

By J.J. McCoy, Senior Managing Editor for New Frontier Data

[Editor’s note: This is the second of a three-part blog series about the first month of California’s legalized adult-use cannabis market.]

Having addressed issues for retailers in California’s new adult use market, now we recognize the haphazard dance between state regulators and their would-be suitors for licensure and legal compliance.

“Given how massive a task it was to transition this market into facilitating adult use with a fully regulated and licensed medical market, I am pretty impressed with how smoothly things have gone overall,” said Khurshid Khoja, founder and principal of Greenbridge Corporate Counsel in Sacramento.

Disconnect between local and state licensing

Before the end of January, the state’s regulatory California Bureau of Cannabis Control (BCC) reported issuing about 800 licenses, while its Department of Food and Agriculture overseeing cultivation had issued around 700, and the Department of Public Health overseeing manufacturing had issued 455.

Currently, licensees have a free, four-month permit to operate while they hope to receive a state license. The trouble, however, is that for operators to be granted a temporary license, they first need to have a local license, and respective jurisdictions have been varying considerably in terms of their efficiency. Most notably, in Los Angeles “the regulators seem completely underwater,” according to Khoja. “Even state licensing agencies cannot get answers.”

Unforeseen disruptions to established business practices

Prior to the market’s opening, many operators did not anticipate issues with specific regulations. For example, established practices in the medical market allowed producers to provide free samples for dispensaries to test before offering on their shelves, or for dispensaries to provide to indigent medical cannabis patients. Now, Khoja notes, “operators are still figuring out who collects the taxes, how they get transferred, and whether the retailer also has to pay the excise tax for giving an indigent patient that free sample.”

Balancing small or medium operators against big players

The California Growers Association (CGA), representing about 900 cannabis cultivators statewide, argues that Proposition 64 was passed with intent to support small and medium-sized cannabis businesses.

Yet, the CGA claims in a lawsuit, a loophole in the regulations has allowed large farming operations to jump into the space. About 250 cannabis operators have been awarded small cultivation licenses (with 1-acre caps for growing space), yet 10 of those businesses control approximately 30% of all the licenses awarded. Two such cultivators — Honeydew Farms and Central Coast Farmer’s Market Management — have been awarded about 30 licenses apiece.

The contention, Khoja explains, is whether each licensee is limited to a total of 1 acre of cultivation, period, or that companies can obtain small and/or cottage licenses which can be stacked for an extensive canopy in overall terms of cultivation throughout the space.

Takeaway

“We went from zero to 60 [mph] in terms of regulations that people had to comply with,” Khoja said. “Lori Ajax (chief of the state’s Bureau of Medical Marijuana Regulation) said ‘we won’t bust people for being noncompliant before they can even get compliant,’ and [they] know it’s their job not just to regulate the legal market, but to help eliminate the illicit market. That serves the public, the industry, and the taxing authorities alike. It’s not an easy mandate, but they are aware of it, and that’s half the battle.”

J.J. McCoy

J.J. McCoy is Senior Managing Editor for New Frontier Data. A former staff writer for The Washington Post, he is a career journalist having covered emerging technologies among industries including aviation, satellites, transportation, law enforcement, the Smart Grid and professional sports. He has reported from the White House, the U.S. Senate, three continents and counting.