By John Schroyer
The latest version of the California state marijuana market regulations were released earlier this month, and there’s a mountain of particulars for cannabis entrepreneurs to wade through.
The California market – already the biggest on Earth – will officially launch on New Year’s Day, meaning that companies wanting to participate have a good bit of work in front of them to ensure their operations run smoothly.
To get the most important highlights for companies looking to obtain recreational or medical licenses, Marijuana Business Daily spoke with four California experts who have been directly involved in crafting the regulations or have been tracking them closely:
- Lori Ajax, chief of the California Bureau of Cannabis Control
- Henry Wykowski, a longtime cannabis industry attorney based in San Francisco
- Kenny Morrison, chairman of the California Cannabis Manufacturers Association and CEO of VCC Brands, a Southern California edibles maker
- Chris Boudreau, a marijuana entrepreneur with an MMJ dispensary, delivery operation and Sunstone cannabis distributorship
The regulations cover a lot of ground, so only the business intelligence that affects the greatest number of entrepreneurs is covered here.
What’s the update on licensing deadlines?
The agencies in charge of licensing MJ businesses – Bureau of Cannabis Control, Department of Food and Agriculture, and Department of Public Health – will likely start accepting temporary license applications sometime in December and will begin issuing permits Jan. 1.
To obtain a temporary license, an existing business must prove to the state that it has community approval of some sort, whether a city permit or literally just a letter of support from local officials.
So far, only the health department – which is overseeing cannabis manufacturers and edibles makers – has issued a temporary license form for applicants to complete.
Once a company obtains a temporary permit – which will be good for 120 days but can be extended for 90 more – the next step is to file an application for a permanent business permit.
Those can be filed anytime starting Jan. 1, with priority going to companies that can prove they were in compliance with California’s state MMJ law before September 2016.
There also will be a transition period for the program’s first six months – until July 1 – during which businesses with temporary licenses won’t be required to fully comply with the new state regulations. This is to help ease the switch to the regulated market.
For instance, there will be two separate categories of MJ licenses – adult use (“A”) and medical (“M”) – but they’ll be allowed to do business with each other irrespective of license categories until July.
After that, “A” and “M” licensees may do business only with licensees that share their designation.
Will businesses be limited in size?
One of the biggest changes in the newest version of the regulations is a one-license limit per company for medium-sized cultivation operations.
That means a single grow operation can only get a permit for up to one acre of outdoor cultivation – or up to 22,000 square feet of indoor canopy.
A Department of Food and Agriculture spokesperson did not immediately return messages seeking clarification.
But several industry insiders told MJBizDaily they interpret the regulations to mean it will be legal for large commercial-scale cultivators to obtain multiple “Small” licenses – which allow for up to 10,000 feet of canopy – and stack them at a single location to have a much bigger grow operation.
Such a move would be costlier, since a business would have to pay for, say, 10 “Small” licenses to have 100,000 square feet of grow space at a single location.
The license cap expires in 2023.
By contrast, there’s no such limit for any other type of cannabis business license, so it probably won’t be long before retail chains begin emerging.
Is there flexibility for vertically integrated businesses?
The regulations give some leeway to companies that want to do it all – grow, manufacture edibles and run a retail storefront.
For such companies, the Bureau of Cannabis Control developed a “transport only” distributor permit, since licensed distributors will handle literally all cannabis products on their way to market.
With the “transport only” license subcategory, growers that also want to sell – or retailers that want to grow – will be allowed to do so, as long as they obtain all the necessary permits.
Full distributors, however, will have much more responsibility, such as collecting and remitting excise taxes on MJ products to the state.
Is there a potency cap for edibles?
A big snag remains for many edibles makers – a 100-milligram potency cap for each edibles package, for both adult-use and medical products.
Although there’s an exception for topicals and other infused products that aren’t typical baked goods – such as brownies – the 100-milligram limit will render many existing products in the market illegal.
And it’s going to be hard on edibles makers’ bottom lines, said Morrison, CEO of VCC Brands.
“Every (Manufacturers Association) board member who makes edible products, over 70% of their revenue come from products that were just disallowed, from products that are over 100 milligrams,” Morrison said. “That’s a painful statistic.”
However, according to the Bureau, existing inventory that doesn’t fall within the new potency cap may be sold until July.
Attorney Wykowski noted that the current regulations are not final.
That means it’s still possible the potency cap will be raised, if not eliminated altogether, at least for medical cannabis products.
Wykowski, for instance, noted that plenty of MMJ patients often will go through several hundred milligrams of edibles in a single day, which means a potency cap could be problematic for thousands of California consumers.
Are systems in place for shipping?
Marijuana distributors could prove to be another hurdle – just not in the sense many in the industry expect.
“There’s not one company right now that has a well-operating system for cannabis distributors in California,” Sunstone’s Boudreau said.
“So even if the state wanted to implement and was ready, the systems aren’t ready for the businesses,” he added, referencing software platforms that will allow distributors to actually track and report all the inventory information the regulations require.
“Even if the state had the infrastructure to manage everything,” Boudreau said, “none of the companies can get access to systems for distribution at least, and distribution is the linchpin for everything.
“So the supply chain itself, functionally, is extremely limited. The whole thing is way, way behind.”
However, there are at least three private cannabis tech companies that Boudreau knows of that are currently working on distributor software systems as well as one other existing California distributor that has a “fledgling” system.
The question is when they all may be operational.
In the meantime, Boudreau said, there are stopgap systems that will likely prove functional. But initially they just won’t be able to fully comply with all the inventory information the state wants licensed distributors to gather.
What’s the status of testing labs?
Another big unknown in the California market – and one that may become apparent very quickly in 2018 – is whether there will be enough testing labs to handle all the cannabis products that will be produced.
Full mandatory testing will be phased in throughout 2018.
At the beginning, retailers will be allowed to sell existing inventory that doesn’t meet the standards that will eventually be in place for all MJ products – as long as they carry disclaimer labels noting that they haven’t been tested.
Ajax, head of the Bureau of Cannabis Control, is concerned there won’t be enough labs to meet demand.
“We were able to identify … about 30-40 laboratories” in existence that intend to get licenses and continue working in cannabis, she said.
“Right now, it’s looking like we have coverage across the state for labs. Is it going to be enough? I think that still remains to be seen.”
John Schroyer can be reached at [email protected]