Challenges Remain as California Prepares for Recreational Cannabis Licensing
By Dominic J. Bartolone
As California prepares for full implementation of recreational marijuana, challenges remain on several fronts. Governor Jerry Brown, recognizing the uncertainty within the cannabis industry, has released a draft Cannabis Regulation Trailer Bill in an attempt to reconcile the Medical Cannabis Regulation & Safety Act of 2015 (MCRSA) with November’s Proposition 64 – The Adult Use of Marijuana Act (AUMA).
So why does a reconciliation have to take place between the two laws? To begin, AUMA was originally written with the intention of merging its licensing requirements under MCRSA. Lawmakers believed there was no reason to keep separately licensing medicinal dispensaries if the casual use of marijuana was now decriminalized. It is also important to note that much of the regulatory framework of MCRSA extends to AUMA under current legislation, so it made sense to combine the two.
Since MCRSA already contained the legal framework for licensing all marijuana businesses, and with its non-profit mandate scheduled for removal by 2018, it seemed like the ideal mechanism for AUMA implementation as well. However, according to Governor Brown’s office, the state is now taking the position of preserving both licensing structures in order to “protect public and consumer safety.”
Another reason for the Governor’s action is to reduce the possibility of the Trump Justice Department from bringing federal marijuana enforcement to the state. Under the so-called Cole Memo, the Justice Department will not enforce federal laws in states that implement “robust” cannabis laws. So, dual licensing appears to be the new path forward for California implementation.
Through the Department of Consumer Affairs and the Bureau of Cannabis Control, the Governor indicates that the primary reasons behind the recommendation are to remove the confusion that would be caused by combining both medicinal and recreational types of cannabis licensing, improve oversight abilities, and reduce implementation costs while streamlining the process.
Licensing
Under AUMA, the adult use and possession of cannabis became legal on November 9, 2016. However, the regulated sale and distribution (wholesale and retail) will not be implemented until January 1, 2018, after MCRSA rules go into effect. Proposition 64 requires marijuana businesses to obtain state licenses similar to those required by MCRSA. The licensing categories are nearly identical under both laws, except for the designation “retailers” for pot shops, and added availability of micro business licenses under AUMA.
There are six different license types available under both MCRSA and AUMA:
- Cultivation
- Manufacturing Testing
- Dispensary (MCRSA)
- Retailer (AUMA)
- Distribution
- Transport (MCRSA Only)
Another significant change is that the state proposes eliminating the restriction on one entity holding multiple licenses. Under MCRSA rules, a single entity was restricted from holding multiple licenses. This restriction was seen as an unfair practice that would only serve to limit business growth within the industry. There is an exception for testing, where a licensee must be deemed “independent,” and as such, will not be allowed to hold any other license.
Changes Ahead
So, if you are totally confused by now, you are not alone. There is a real need for the state to iron out overlap and provide some regulatory clarity before beginning the licensing mechanisms in January. In seeing the benefits of providing clearer industry oversight, the Governor has proposed keeping the two licensing mechanisms distinct by maintaining two separate licensing systems with the same basic requirements.
Of primary concern is the fact that while cannabis is legal under California law, it remains a Schedule I drug, prohibited under federal guidelines. In an attempt to provide robust oversight, California is seeking to establish a complex track and trace program, effectively barcoding weed from “seed to sale.” This tracking system is said to be an important safeguard against having a portion of what is expected to be California’s largest agricultural crop disappear across state lines.
Since federal safety oversight has no authority in the state, the recommended changes also seek to establish FDA-type guidelines regulating the quality and potency of the cannabis products. Many industry insiders oppose this type of government control, which could require cultivators to ratchet down THC levels in all marijuana products, regardless if they are intended for recreational or medicinal use. However, Brown sees it as a way to keep the federal government, which controls the FDA, out of California’s cannabis business by quieting Justice Department concerns over excessive THC levels offered in some marijuana strains.
Banking Challenges Continue
On December 2, California State Treasurer, John Chiang, announced the formation of the Cannabis Banking Working Group to address the banking issues surrounding state-licensed marijuana businesses. With full commercial regulation of cannabis several months away, state legislators are hammering out the details surrounding licensing, taxes, enforcement and rules; and providing banking access for marijuana businesses will be every bit as much an imperative.
Under the Schedule I federal designation, as regulated under the Controlled Substances Act, federally-insured financial institutions are forbidden to engage with businesses conducting illegal activities.
These federal rules leave states that have legalized marijuana in a precarious situation concerning the transfer of money, granting of loans, the collection of tax revenue, and the ability of businesses to conduct normal financial transactions and other commerce.
States are facing an uphill battle directly convincing national banks to work with their legal cannabis operations, and, along with Chiang, will continue to lean heavily on their respective congressional representatives to start a conversation in Washington.
California’s cannabis market is projected to become the biggest in the nation in just a few years, so Chiang and Brown are proactively seeking remedies to banking issues and regulatory obstacles before full-scale licensing goes into effect in 2018.
With California’s 58 counties and 482 cities waiting for guidance from the state before making decisions on their local permitting requirements, time is running short for Sacramento to approve a clear path forward for the full commercial implementation of legal marijuana.
Dominic Bartolone is a legal writer who provides consultation services through his website CannabizStartup.com, where he offers business plans, financial plans, and licensing application packages and resources to cannabis startups.
