As most of you know by now, California voters yesterday passed Proposition 64, legalizing recreational cannabis in the state. As a California cannabis lawyer based in San Francisco, I could not be happier and I want to extend my heartfelt congratulations to my state for finally saying yes to a comprehensive recreational cannabis program that should provide more and better access to cannabis for adults in California. I also believe this vote will be the tipping point that will set in play the forces that will relatively soon lead to nationwide legalization.
Nice going California!
Under the ballot measure, the California state agencies responsible for issuing licenses have until January 1, 2018 to create regulations for the nineteen different license types available for cultivation, manufacturers, testing, retailers, distributors, and microbusinesses. Under California’s Constitution, the ballot measure takes effect “the day after the election unless the measure specifies otherwise,” which means as of today Prop 64 is up and running.
Leading up to this vote, I and the other California cannabis business lawyers in my firm have been getting a slew of phone calls and emails from people asking what they can do now to get ready for state licensing applications in the future. Given the timeline above, my response was and is, “a lot actually.” I tell them that they can and should be doing the following, starting now:
- Read Proposition 64 and then read it again. The Proposition is everything at this point and it’s imperative all prospective California cannabis operators read and thoroughly understand it because it provides the baselines for what’s going to be allowed and not allowed in the future.
- Figure out where you might want to operate and learn about the local government there. The initiative specifically states that local jurisdictions retain the authority to adopt and enforce local ordinances to regulate cannabis businesses, including banning one or more business types from operating in their jurisdiction. Several California cities and counties already have bans in place and are expected to remain opposed to both recreational cannabis businesses under Prop 64 and medical cannabis businesses under the Medical Cannabis Regulation and Safety Act. Still, others have been preparing for changing state marijuana laws by enacting municipal zoning and permitting laws. For more on local cannabis ordinances, check out our California Cannabis Countdown series, which most recently featured the City of Lynwood. Instead of spending dollars and time planning for a marijuana business in a California city that will never allow one, you should instead get a handle on friendly versus non-friendly local governments, especially since the state will ask local jurisdictions to identify potential license applicants. As for those local governments without a clear idea on what to do about cannabis, this is your chance to step up and help educate the local authorities about what their local industry should look like. Our cannabis lawyers have done this in countless cities and counties in multiple states and believe me when I tell you that this can profoundly impact which way a city or county will go on cannabis commerce. I cannot stress enough the importance of your understanding the local situation where you will be locating.
- Study other state regulatory models, including the super strict ones. You can learn a lot about what to expect from California by looking at other states’ regulatory models. Look at states like New York, Illinois, Nevada, and Minnesota, all of which have fairly limited and heavily controlled cannabis regimes. California’s cannabis regime is going to be more like these states than, let’s say, Oregon, where even out-of-staters can get a cannabis license and where there is no statewide limit on the number of cannabis licenses. Our cannabis licensing lawyers are constantly comparing laws in the older legalized states to get a better feel for what is likely to go down in the newer legalized states. If State A interprets X provision a certain way, there is a good chance State B will do the same. Note that California will have its own somewhat peculiar residency requirements for owning a cannabis business.
- Review the California corporate structures available and figure out now which makes sense for you. Applicants under Prop 64 include individuals, corporations, limited liability companies, joint ventures, and several other entity types and structures, including publicly traded companies and nonprofit entities. Since most cannabis businesses currently operating in California are formed as nonprofit collectives, these businesses will have to decide whether they want to convert to a for-profit entity or form a completely new entity. This means you should learn about the various corporate structures available to you, how they operate, and what you’ll need when you’re ready to file for your entity. Check out California’s AUMA: What You Need to Know NOW to Have a Recreational Marijuana Business Later.
- Start figuring out your budget and pace yourself. In anticipation of a fee-laden, probably very expensive application process to obtain a California cannabis license, you need to start thinking now about your budget and from where you are going to get your funding. In all of the states in which our cannabis business lawyers have operated, one thing always holds true: those with secure funding before the application process starts have always had a huge advantage in competing for a cannabis business license over those still patching together their funding when the application window opens. You should plan for more than just start-up costs such as inventory, employees, operational costs, etc. You should also have a good idea of the funding you will need for the application process itself, which will require legal oversight, expert advisory input, contracting with architects for floor plans, and all sorts of other expert assistance. And again, speaking from experience, those with the best and most experienced team in place are the ones that get the licenses. And speaking just for lawyers, the best lawyers will charge a lot but not take on many clients. All of this means that you must budget accordingly and pace yourself. We still have over a year before California agencies are required to issue state licenses, and during that time a lot could change through the rule making process. Get your budget in sufficient shape to weather these inevitable changes.
- Choose your partners wisely. Consultants and so-called cannabis experts are a dime a dozen. Take your time in choosing who you will be using to help you navigate what is sure to be a complicated application process. Ask lots of questions, especially about whether they will require you to give them equity in your company and whether their relationship with you will be exclusive. For more on why this choice can be so important, check out Buyer Beware: Pot Colleges and Canna Consultants.
- Choose your legal counsel wisely. Lawyers claiming to be marijuana business attorneys are also a dime a dozen and you need to proceed with caution in choosing your legal counsel as well. Make sure you choose a law firm with extensive experience in navigating robustly regulated application processes, the more states the better. Make sure your law firm also has corporate lawyers experienced in forming cannabis businesses and in dealing with state cannabis laws and regulations. Make sure to get clear on whether your law firm will be representing just you in seeking a particular license, or ten of your potential competitors as well. Make sure your law firm also has experience with commercial leaseholds for the cannabis industry. For why this matters, read Marijuana Commercial Leases: This Industry Is Different, You Know. And, given the wild west nature of this industry, no matter how regulated it is by a given state, make double-sure your attorney is an ethical one. And to put it bluntly, ethical lawyers do not take equity in cannabis businesses; they just don’t.
- Don’t forget about federal illegality and get comfortable now with what that means. Those of us with years of experience in the state-regulated marijuana industry know all too well how the federal illegality of marijuana makes day to day business difficult and you need to start educating yourself on this as well. It’s not too early for you to start figuring out how you will deal with the difficulties of opening a bank account due to federal anti-money laundering laws or protecting your trade name and your brands without being able to register trademarks with the USPTO. To make IP matters worse for you California does not even allow for state registration of cannabis trademarks. It also makes sense to start navigating how you can best mitigate against federal income tax laws that prohibit all normal business deductions under IRC 280E, and add to that new California cannabis taxes under Prop 64 and local initiatives and the fact that bankruptcy isn’t a likely option in the event of failure. And, finally, how will you advertise your new cannabis business when Google and most major social media platforms will not allow you to do so, and California’s Prop 64 creates new limits on marijuana advertising?
California has legalized recreational cannabis. This means now is the time to get going on staking your claim to a piece of this industry.