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[dropcap class=”kp-dropcap”]I[/dropcap]n March of 2017, Angelenos voted in favor of Proposition M, which is a licensing and regulatory piece of legislation implemented and overseen by the city’s Department of Cannabis Regulation (DCR) and the Cannabis Regulation Commission. Under Prop. M, the city is licensing cannabis businesses in three phases, the first of which was exclusively for “Existing Medical Marijuana Dispensaries” (EMMDs). EMMDs are basically grandfathered Prop. D/Pre-ICO operators that met certain compliance criteria set forth by the city under Prop. M. As of the writing of this article, there are only 164 EMMDs in the entire city of Los Angeles.

This low number of dispensaries in potentially the largest cannabis market in the world makes the secondary market for purchases of these storefronts incredibly hot. In turn, here are the major bases to cover when buying an EMMD in the city of Los Angeles under Prop. M:

 

  1. Is the dispensary even on the city’s EMMD list? The DCR has done a fantastic job of continually updating its EMMD list on its website. Checking that list is the very first step for any reliable due diligence. If the dispensary is not listed, ask the sellers why that’s the case. At this point, with the window for EMMD licensing closed, failure to appear is going to be a huge and fatal red flag that’s fatal unless the selling dispensary can provide viable proof that they are in valid pursuit of EMMD status from the DCR or appealing a DCR denial of EMMD status.

 

  1. Licenses are not transferable. Many people don’t realize that commercial cannabis licenses are not transferable under California state law. The same goes for commercial cannabis licenses in the city of L.A.—they cannot be bought and sold as individual assets; only the entity that holds them can change owners (meaning, you’re looking at purchasing the company that holds the license). Therefore, any EMMD that’s trying to sell you one of its licenses (or one of its future licenses) is not recognizing that it can only sell its membership interests or stock, and not the licenses themselves, under state and L.A. laws and regulations.

 

  1. Phase 3 may be a dead end. If part of your purchase agreement is that the EMMD status will help you secure additional retail licenses in phase 3 (the general public phase of licensure in LA), you really need to be careful with that performance obligation. In phase 3, the city is already obligated under Prop. M to issue retail licenses to social equity applicants on a 2-to-1 basis relative to other general public (non-social equity) applicants. Since over 160 EMMDs already exist in L.A., this means that before even a single retail license issues to a general public (non-social equity) applicant, the city must firstissue over 300 retail licenses to social equity applicants. Couple that with the fact that Los Angeles has undue concentration caps for retail licenses and the writing is on the wall that retail licensure may not be possible for non-social equity general public applicants in phase 3, and that includes for non-social equity EMMDs seeking additional retail licenses.

 

  1. This isn’t your daddy’s M & A. Mergers and acquisitions in regulated industries are a different animal, because the transaction has to fit with regulatory vetting and approval before anything really becomes effective between the parties. Cannabis M & A is no different and, in fact, is probably worse since it’s an emerging industry and because commercial cannabis activity remains federally illegal. Once a California cannabis business has its annual license, if it wants to sell its membership interests or stock to bring in a disclosable “owner” (i.e., among other things, anyone or any entity that owns 20 percent or more in equity), it will first need to seek approval from the state agency that issued its licenses. That’s not uncommon in states with robust cannabis regulations. What people may not know, though, is that the DCR also wants to know about changes in ownership and has full authority to reject the change request based on its scrutiny of the incoming owners.

“This low number of dispensaries in potentially the largest cannabis market in the world makes the secondary market for purchases of these storefronts incredibly hot.”

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