Eight Unknowns About California’s MCRSA and Proposition 64

California cannabis lawyers Since passage of the Medical Cannabis Regulation and Safety Act in California (“MCRSA”), our California cannabis attorneys have been getting calls nearly non-stop regarding what to do now to have a medical marijuana business later. Passage of Proposition 64, California’s legalization initiative, has only accelerated the questions on what to expect when California adds a comprehensive legal marijuana licensing system.

Though the three bills that comprise the MCRSA and Proposition 64 lay the foundation for California’s future medical and recreational marijuana licensing systems, these laws are only the beginning. California’s Bureau of Marijuana Control (“BMC”), and various other California state agencies granted governing authority under these new laws will be filling in the blanks on the actual substance of all medical and recreational rules and enforcement.

The below are the eight most relevant “blanks” for those planning on having a California marijuana business:

  1. Residency Requirements For Cannabis Licensees. The MCRSA does not include a residency requirement, but that could change with future rule making. However, Chapter 5, Section 26054.1(a) of Proposition 64 states that, “[n]o licensing authority shall issue or renew a license to any person that cannot demonstrate continuous California residency from or before January 1, 2015. In the case of an applicant or licensee that is an entity, the entity shall not be considered a resident if any person controlling the entity cannot demonstrate continuous California residency from and before January 1, 2015.” This residency requirement expires on December 31, 2019 unless the California state legislature renews it. If — as expected — California begins issuing cannabis licenses in 2018, California legal marijuana will at least at the start have a residency requirement. However, it is important to note that this residency requirement applies to “controlling persons”  and “controlling” is nowhere defined in the initiative. How the state eventually defines “controlling” will likely determine whether out-of-staters (including residents of foreign countries) can own a licensed California cannabis business.
  2. Cannabis Financing. California’s new laws do not address financing beyond Proposition 64’s residency requirement for ownership and “control.” This means it is not yet clear who can finance California’s marijuana businesses. In some states, residency requirements have essentially forced licensees to rely on money from family and friends (Washington State, for instance). In other states, rule makers have allowed financiers from anywhere to invest in their cannabis businesses. If California borrows from Washington, Colorado, or Alaska, financing for California cannabis businesses will likely be hamstrung by residency. If California takes its financing page from Nevada, Illinois, or Oregon (these are states which do not have residency requirements), cannabis investments in California will likely explode.
  3. For-Profit Cannabis Entities. Though still unclear, our California cannabis attorneys believe for-profit cannabis companies will be allowed under the MCRSA. The MCRSA defines a license “applicant” as an “[o]wner or owners of a proposed facility, including all persons or entities having ownership interest other than a security interest, lien, or encumbrance on property that will be used by the facility,” and defining a “person” as “an individual, firm, partnership, joint venture, association, corporation, limited liability company, estate, trust, business trust, receiver, syndicate, or any other group or combination acting as a unit and includes the plural as well as the singular number.” Proposition 64 has almost identical language for the terms “applicant,” “owner,” and “person.” Will California allow existing non-profit medical marijuana collectives to convert to for-profit companies or will it instead force its cannabis collectives to first wind down and then start brand new for-profit companies? This transition matters for things like the distributing assets upon dissolution, tax consequences, and using the non-profit’s already established goodwill. For more on our views regarding the California non-profit transition, go here.
  4. Priority Cannabis Licensing. Both the MCRSA and Proposition 64 contain priority licensing thresholds. Article 4, Section 19321 of the MCRSA states that “[i]n issuing licenses, the licensing authority shall prioritize any facility or entity that can demonstrate to the authority’s satisfaction that it was in operation and in good standing with the local jurisdiction by January 1, 2016.” Proposition 64 at Chapter 5, Section 26054.2(a) contains the following “priority” language similar to the MCRSA: “A licensing authority shall give priority in issuing licenses under this division to applicants that can demonstrate to the authority’s satisfaction that the applicant operated in compliance with the Compassionate Use Act and its implementing laws before September 1, 2016, or currently operates in compliance with [the MCRSA].” Proposition 64 also provides that “[t]he [BMC] shall request that local jurisdictions identify for the bureau potential applicants for licensure based on the applicants’ prior operation in the local jurisdiction in compliance with state law, including the Compassionate Use Act and its implementing laws, and any applicable local laws.” But none of this reveals much about what priority status will actually mean or the detailed standards for proving it. Does it put you first in line for a cannabis license? Does it get you a cannabis license that no one else can get? It will all depend on how the state defines it, which we likely will not know until it issues its initial rules.
  5. Number of Cannabis Licenses. The MCRSA mandates limiting the number of certain licenses, but it does not specify what those limitations will be. Limited licenses under the MCRSA include the “Manufacturing level 2” license “for manufacturing sites that produce medical cannabis products using volatile solvents,”  the Type 3 outdoor cultivation license, the Type 3A indoor cultivation license, and the Type 3B mixed-light cultivation license. Other than prohibiting large scale cultivation for the first five years of the program, Proposition 64 contains no licensing limitations, though that could change once California starts its rule making.
  6. Cannabis Distribution. The MCRSA mandates distributorships  and it defines “distributor” as “a person licensed . . .  to engage in the business of purchasing medical cannabis from a licensed cultivator, or medical cannabis products from a licensed manufacturer, for sale to a licensed dispensary.” Formerly, distributors were also the only channel through which cultivators and manufacturers could transport product to other manufacturers for further manufacturing, but this changed with this year’s passage of SB 837. Unlike in any other cannabis legal state, California cultivators and manufacturers must go through a licensed distributor to get their product to retail. We anticipate additional roles and responsibilities of the distributor will likely come from the governing state agencies through rule making. Though Proposition 64 requires all licensees use a distributor, that distributor does not have to be an independently-owned company, except for large-scale cultivators with a Type 5 license, which licenses won’t even become available until 2023. Expect future California rule making to clarify the role of distributors under Proposition 64.
  7. Cannabis Licensing Fees. Neither the MCSRA nor Proposition 64 reveal license fee amounts. Given how other recreational states have handled licensing and how California does not want to push out its existing MMJ operators, California likely will make its licensing competitive and its fees at least somewhat reasonable, though it may implement some sort of lottery system for the limited licenses under the MCRSA. In most recreational states, the license application fee has been $250 or less. In medical marijuana states however, license application fees have ranged from approximately $60,000 in Florida (non-refundable) down to $5,000 in Nevada. Both the MCSRA and Proposition 64 mandate license fees be on a “scaled basis” and cover the costs of administering the programs.
  8. Cannabis License Applications. Neither law reveals what California will require in its licensing applications. Even in less competitive cannabis licensing states (like Oregon and Washington) the state regulators want to see every detail of your proposed cannabis business from start to finish. And in the more competitive states (like New York and Maryland), the regulatory authorities usually want a thesis-level explanation of every arm of your business. Based on the experience of our cannabis lawyers in helping clients with cannabis licensing applications in more than a dozen states, we can tell you that, at minimum, you should expect California’s marijuana licensing applications to require the following:
    1. detailed financial and criminal background checks and disclosures for every owner and financier of the business,
    2. calculated start-up costs and annual budget,
    3. a detailed business plan and operational plan,
    4. a floor plan,
    5. proof of a lease agreement or right to use the proposed real property,
    6. buffer measurements,
    7. local law approval or compliance at some point,
    8. fingerprinting,
    9. proof of security measures,
    10. proof of environmental compliance (or capability of compliance),
    11. proof of insurance,
    12. a transportation plan including a planned transportation manifest,
    13. list of products to be cultivated, manufactured, and/or sold,
    14. a list of soil amendments or fertilizers to be used on plants if you’re a cultivator,
    15. the type of closed loop system you’ll work in if you’re a manufacturer, and
    16. how products will be stored and quarantined if you’re a retailer.

For more on what California’s new cannabis regime is going to look like, I urge you to check out our California cannabis page here.