What Lawful California Cannabis Businesses Can Expect with Passage of the Adult Use of Marijuana Act

Hot on the heels of the recently-enacted, comprehensive state-wide licensing and regulatory scheme under the Medical Cannabis Regulation and Safety Act (or “MCRSA”), lawful medical cannabis businesses in California may soon find themselves in a new regulatory landscape if California voters pass the landmark drug policy reforms contained in Proposition 64, the Control, Regulate and Tax the Adult Use of Marijuana Act (the “Adult Use of Marijuana Act” or “AUMA,” full text here), this November.

AUMA would permit all adults 21 and older to purchase, possess, transport, and use up to an ounce of dried cannabis and up to 8 grams of cannabis concentrate, at their discretion. AUMA expands the addressable market beyond the patient-consumers that existing cannabis businesses currently serve.

 

With new opportunities come new licensing requirements

If AUMA passes, businesses may apply for state licenses to serve the adult-use market starting in 2018. The licensing scheme in AUMA is modeled on the licensing system enacted under MCRSA, with largely the same license types, and the same state executive agencies exercising the same regulatory mandates.

AUMA contemplates 19 different license types for cultivators, manufacturers, retailers, distributors, transporters and testing labs. The “Bureau of Marijuana Control,” within the Department of Consumer Affairs (“DCA”), would oversee the system as a whole, and DCA would also license and regulate cannabis retailers, distributors, and microbusinesses. The Department of Food and Agriculture would license and regulate cannabis cultivation, and the Department of Public Health would license and regulate both manufacturing and testing.

Like the MCRSA, AUMA accommodates both for-profit and non-profit licensees, imposes new state taxes, independent lab-testing of products and seed-to-sale tracking—but that’s where similarities between the two regulatory systems largely end.

 

Important differences between MCRSA and AUMA for Businesses

AUMA does not mandate a dual licensing system. Unlike MCRSA, AUMA doesn’t require applicants for a state license to obtain a local county or city license as a pre-requisite to obtaining a state license. At the same time, AUMA doesn’t prevent local governments from licensing, regulating or even banning most commercial cannabis activity.

Additionally, AUMA doesn’t prohibit licensing of vertically integrated businesses or impose an independent distributor mandate; MCRSA, in comparison, expressly prohibits most businesses from concurrently owning cultivation, manufacturing and retail licenses, and expressly prohibits licensed cultivators, manufacturers and retailers from obtaining distribution and/or transportation licenses.

Thus, under AUMA, cannabis businesses that are currently vertically integrated may be able to preserve distribution assets that they would otherwise be forced to sell off under MCRSA. Instead, AUMA fosters a competitive market by limiting concurrent ownership of different license types on case-by-case basis, at the discretion of regulators, and using market analysis to substantiate decisions. Small businesses under AUMA may also apply for “microbusiness” licenses, a new license type which explicitly contemplates employing a vertically-integrated business model.

 

AUMA Protects Existing Lawful Cannabis Businesses in California

AUMA gives MCRSA licensees priority consideration for adult-use licenses, as long as they were operating in compliance with currently-effective state and local laws as of January 1, 2016. Additionally, AUMA imposes residency rules on individual license applicants and controlling persons of business entities applying for licenses, requiring such applicants to demonstrate continuous California residency since January 1, 2015. Residency requirements would sunset at the end of 2019, unless re-enacted.

AUMA’s accommodation of vertically-integrated “microbusinesses,” and its 5-year moratorium on licenses to grow unlimited canopy amounts, are also intended to protect the state’s currently-operating businesses. These provisions may protect current operators from new market entrants backed by business interests outside California—including already established adult-use cannabis businesses in Colorado and Washington—and well-capitalized interests from tobacco, agribusiness and other industries, which could employ economies of scale to flood the cannabis flower markets.

 

Future Harmonization of Adult-Use and Medical Cannabis Regulations?

Will these differences between the medical and adult-use regulatory regimes for cannabis persist to make AUMA more business friendly for existing operators? Opportunities for the state legislature to amend AUMA are limited by the text of the Proposition. Thus, if AUMA passes, the state legislators and regulators may decide to harmonize the medical and adult-use cannabis licensing regimes during the impending agency rule-makings intended to fully implement MCRSA. County and city lawmakers and regulators may well do the same on the local front.

 

Khurshid Khoja is the Principal of Greenbridge Corporate Counsel, a transactional law firm representing the legal cannabis industry in California, Washington and Hawaii.  He currently serves on the Board of Directors of the National Cannabis Industry Association (NCIA), providing pro bono counsel to NCIA on IP matters, serves as the General Counsel of the California Cannabis Industry Association (CCIA) and is a founding member of its Board of Directors.  Khurshid also serves as a registered state lobbyist for CCIA and the Arcview Group, working with lawmakers and regulators on clarifying and implementing California's legal cannabis laws. 

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