Commercial cannabis licensing in California kicked off on Jan. 1, 2018, and it’s safe to say that the chaos that commenced with initial licensing under the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA) has never abated, and certain bad and/or bizarre behavior persists. If you’ve seen any of this activity out in the marketplace, you’re not alone. And hopefully most if not all of these six cannabis issues will abate as the market matures.
Straight Up Unlicensed Actors
It’s no secret that California has a large illegal market problem. And maybe it always will, given its size. However, we have multiple cities and counties in California that will not get on board with legalization, and these places are hotbeds for drug dealers and criminal operators. In addition, in a place like the city of Los Angeles, you have a culture of persistence still that is more than happy to set up fly-by-night shops and delivery services only to be shut down and then re-open again and again. The state has upped the ante on illegal operators with steep fines, penalties and even potential jail time, but it’s going to be a hot minute before we eliminate even a small portion of the black market (if ever).
The “Collective Hangover”
As an active member of the legal cannabis industry, I still get calls from people who want to set up non-profit “collectives” under the Compassionate Use Act of 1996. It should be well-known by now that the “collective model” died on Jan. 1, and it’s not coming back. Of course there are those who would still set up collectives anyway knowing that they’re violating the law, but this is one issue that should burn away pretty quickly for obvious financial and organizational reasons.
Cannabis mergers and acquisitions (M&A) is not a straightforward situation because of state and local licensing laws and resulting changes of ownership protocol, but a ton of people are breaking state and local laws left and right through M&A in California based on illegal changes of ownership. It’s only a matter of time before regulators catch on to people’s recklessness here, which will lead to license cancellations and a good amount of lost investment, but until then (because of inconsistent enforcement combined with buyer momentum), many cannabis businesses that have sold ownership interests are likely sitting on significant rule violations.
“It’s no secret that California has a large illegal market problem. And maybe it always will, given its size.”
Poor Legal Advice
Cannabis is still an emerging marketplace. And the fact that it’s federally illegal has still mostly kept the large, white-shoe law firms out of the scene (unless they form small practice groups to advise on things like employment and financing, which we see on occasion). This has led to a significant amount of legal hacks and newbies joining the industry holding themselves out as “legal experts” in the field. I’m constantly in receipt and reviewing legal work being produced in California relative to intellectual property licensing, M&A, inventory purchase agreements, distribution contracts, and a number of other transactions between licensees, and some of it is still terrifying coming from attorneys who are not competent in the area (in that they completely ignore applicable regulations) or unethical in their dealings altogether.
Regulators Shuffling the Deck
It’s a common annoyance in the state legal cannabis industry where state regulators constantly change the rules or, more accurately, their interpretation of certain rules as time goes on (and you better learn “regulatory language” now to better deal with this issue). California, again, is no different. Each state agency regarding change of ownership laws, distribution rules, testing requirements, the ability to return products and other lucrative day-to-day licensee tasks provides different answers. As industry issues arise and fall, and the political powers change, so too will the state’s interpretation of its own rules.
Local Authorization Headaches
It seems that certain Californian cities have really dragged out the license approval process to no end, either flipping their position from allowance to prohibition or significantly changing the entitlement process at the expense of applicants. In some cases, third party litigation has halted commercial cannabis activity in cities that allow it. The city of Los Angeles is another prime example of municipal change in that it has navigated complex issues relative to three phases of local licensing and implementing a social equity program that it’s had to refine for months and months (as opposed to Los Angeles County, which commissioned a group to study the impacts of legalization and regulation and even has an Office of Cannabis Management, but still has a ban in place).
A few of these hazards cannot be avoided right now in California, but most will go away with time as the market stabilizes. In the interim, compliance is king and that, alone, will help you avoid getting into most of the foregoing trouble.