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3 Concerns for California Cannabis Entrepreneurs prior to state regulations

January 26, 2017 | G. Takagawa

Last week, representatives who are tasked with a role in drafting California cannabis regulations highlighted concerns about the transition from our decades-old gray market to the new legal market under the MCRSA (medical) and Proposition 64 (adult use) laws.

 

Lori Ajax (Bureau of Medical Cannabis Regulation) and Amber Morris (CalCannabis Cultivation Licensing within the Department of Food and Agriculture) spoke at the California Growers Association policy summit on January 18.

 

Many of the points from the conference have been covered elsewhere:

 

 

Instead of recapping the same points, we’d like to highlight some concerns raised during the regulators’ presentations - and how they affect California cannabis entrepreneurs now:

 

1. Type 3 Cultivation Permits MUST be capped and criteria are not yet known

 

The MCRSA mandates that there must be a state-set limit to the number of type 3 (the largest) cultivation permits. CalCannabis is therefore preparing criteria that will determine who receives some of these limited permits.

(See end of post for details on the Type 3 cultivation license type.)

 

Local jurisdictions who are offering cultivation permits of equivalent size may not have the same criteria – because we don’t know what that criteria is yet.

 

As a result, anyone contemplating or actively applying for a local permit of Type 3 size is taking a business risk.

Some jurisdictions are offering permits that are even larger than the state’s proposed Type 3. This could also be a problem.

 

 

Can cultivators hold multiple cultivation licenses?

 

(Outside of the “3-1-4” model. See end of post for a description of this model.)

 

The answer from the regulators was “wait for regulations.”

 

In other words, do not assume cultivators will be able to hold multiple licenses.

 

 

2. How will the medical and adult use markets work?

 

We’ve seen in the 2017/2018 budget that California intends to unify the medical and adult use markets.

However, regulators are bound to implement current legislation. And the law as it stands mandates two separate systems.

 

There was some discussion of anticipating a system where the supply chain would be able to serve both markets. In other words, cultivators, manufacturers, distributors, testing labs and all variations thereof would be able to supply both the medical and the adult use markets.

 

As far dispensaries go, it seemed these licensees would be offered a choice – either medical, or adult use, or both.

However, it is again important to remember that all of these options are subject to local ordinance. If a local jurisdiction only allows commercial cannabis operations within the medical market, that may limit the marketing of the products.

In order to further this model, the intent is to have the same regulatory standards for both markets.

 

3. What impact will federal uncertainty and the selection of Jeff Sessions as Attorney General have? (Hint: a lot of concern about the adult use market)

 

We don’t know what the new federal administration will do.

 

Regulators and industry professionals alike raised the concern that even if medical cannabis markets are left alone, recreational markets may become targets. As a result, will unifying the medical and adult use markets expose medical cannabis business operators to greater risk?

 

While there are no clear answers here, it’s critical to consider the risks as entrepreneurs contemplate entering this industry.

 

 

Brief primer on Cultivation Types & the 3-1-4 model

 

The MCRSA and Proposition 64 share the following cultivation license types:

 

Tier 1: Specialty. Up to 5,000 sq ft of canopy.

  • License 1: Specialty Outdoor. Alternative size: up to 50 mature plants on noncontiguous plots.
  • No supplemental lighting.
  • License 1A: Specialty Indoor. Exclusively artificial lighting.
  • License 1B: Specialty Mixed-Light. Both natural and artificial lighting.

 

Tier 2: Small. Between 5,001 and 10,000 sq ft of canopy.

  • License 2: Small Outdoor. No supplemental lighting.
  • License 2A: Small Indoor. Exclusively artificial lighting.
  • License 2B: Small Mixed-Light. Both natural and artificial lighting.

 

Tier 3. Over 10,001 sq ft. Max size varies.

Total number will be limited (unclear how), and combining with other licenses.

  • License 3: Outdoor. 10,001 sq ft to one acre of canopy.
  • License 3A: Indoor. 10,001 to 22,000 sq ft of canopy. Exclusively artificial lighting.
  • License 3B: Mixed Light. 10,001 to 22,000 sq ft of canopy. Both natural and artificial lighting.

 

License 4: Nursery. Clones, immature plants, seeds; no mature plants.

 

Hezekiah Allen, the Executive Director of the California Growers Association, explained to event attendees that the canopy tiers were proposed to mirror federal law mandatory minimum sentencing thresholds. While federal law uses plant count and California uses canopy size, the proposed square footage is based around estimated space required for the plant counts under federal law.

 

Additional Licenses within the Medical Market

 

Cultivation License 1C: Cottage Cultivation: Thanks to advocate efforts and last year’s legislative session, the MCRSA was amended to include this micro craft growing option. Up to 25 mature plants outdoor, OR up to 500 sq ft of canopy indoor, OR up to 2,500 sq ft of mixed light canopy.

 

Advocates are seeking to bring this model into the adult use market as well.

 

Additional Licenses within the Adult Use Market

 

Cultivation Tier 5: Proposition 64 includes a “sunrise clause” to add in large-scale, unlimited size cultivation starting in 2023. This proposed license type is intended for post-federal legalization and legal interstate commerce.

Microbusiness License 12: Proposition 64 creates a vertically integrated option allowing up to 10,000 sq ft of cultivation, distribution, non-volatile manufacturing, and retailing.

 

* Note: License 12 in the MCRSA is for Transportation, a license type that does not exist in the Adult Use proposition.

Advocates hope to bring the microbusiness model into the medical market as well.

 

The 3-1-4 model: Vertical integration under the MCRSA

 

While creating the MCRSA, there was a strong emphasis on keeping small players in the industry. That led to limits on vertical integration.

 

Industry members pushed back, seeking a way to be vertically integrated. Legislators included the 3-1-4 model as a test to see if limited vertical integration would be feasible within the intent of keeping small players in the industry.

 

The 3-1-4 refers to the types of licenses it allows to hold together:

  • 3 retail licenses (Type 10A)
  • 1 manufacturing license
  • 4 cultivation licenses

 

This model sunsets (ends) in 2026, unless extended by the legislature.

 

Long-time operators

 

Note: there is an additional c(1) exemption for folks who were continuously operating (with all of cultivation, manufacturing and dispensary) and compliant with a local ordinance since at least July 1, 2015. This special case only applies to a few operators. If you believe you may meet the requirements and would like to discuss further, contact Green Rush Consulting at services@greenrushconsulting.com.