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Canna-Business in California

How would you describe the current state of the cannabis industry in your jurisdiction, including areas of growth, market prospects and trends, and M&A activity?

Beginning in 1996 with Proposition 215, better known as the Compassionate Use Act, California has developed into the largest commercial cannabis market in the world. The state’s cannabis market saw a revenue of approximately $2 billion in 2018 and is projected to exceed $5 billion by 2025.

California’s three cannabis regulators began issuing adult use and medical cannabis licenses under the state’s new licensing structure on January 1, 2018. The state cannabis regulations are characterized by a fully vertical licensing structure (with the exception of licenses for testing laboratories, which may not be vertically integrated with other license types). There is also a two-tiered licensing system whereby all licensed entities must obtain a local permit as well as a state license. Currently, approximately 30% of California municipalities allow for cannabis licensing. This has resulted in a slower than expected growth rate for the industry within the state and has resulted in supply and distribution bottlenecks. There nevertheless remains an inadequate number of testing laboratories to meet growing demand.

Certain larger metropolitan areas, most notably Los Angeles, have experienced a slow and difficult permitting process. Cannabis retail storefronts in California have a low concentration based on population statewide compared with other adult-use states, such that demand can support significant retail growth in the next few years. State regulations allow for home deliveries on a statewide basis, even in local jurisdictions that do not permit cannabis businesses to operate.

M&A activity within the California cannabis commercial market remains strong. Mergers and acquisitions entail diversification through the vertical integration of licenses, geographical expansion and consolidation, especially when it involves rolling up competing businesses in an attempt to realize economies of scale. This could be a powerful driver in the next 12 months, especially as some current market participants show signs of weakness. The current market in some respects resembles the pre-crash dotcom bubble—many businesses may fail because cannabis “experts” lack business skills. Further, technology or know-how alone will not save a company. A lack of banking facilities has also hampered M&A efforts, such that much of the financing of mergers and acquisitions comes from private sources.

While 2018 saw many startups and new market entrants, as well as large infusions of capital primarily through private capital raises, 2019 will likely be characterized by consolidation of the market through acquisitions of licenses and brands.

Legal framework

Legislation

What primary and secondary legislation governs the use, cultivation and retail of cannabis in your jurisdiction?

Senate Bill 94, the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA), signed into law in 2017, creates the general framework for the regulation of commercial medicinal and adult-use cannabis in California.

The commercial cannabis licensing regulations, proffered by the three California cannabis licensing agencies, are:

  • Sections 5000 et seq., Title 16 of the California Code of Regulations (January 2019) (Bureau of Cannabis Control);
  • Sections 40100 et seq., Title 17 of the California Code of Regulations (January 2019) (CDPH Manufactured Cannabis Safety); and
  • Sections 8000 et seq., Title 3 of the California Code of Regulations (January 2019) (CDFA CalCannabis Cultivation Licensing).

Secondary laws pertaining to the use, cultivation and retail of cannabis in California include:

  • Sections 11000 to 11651 of the Health and Safety Code, (California’s Uniform Controlled Substances Act);
  • Sections 2525 to 2525.5 of the Business and Professions Code (regulating medical cannabis recommendations by a physician);
  • Section 12029 of the Fish and Game Code (environmental damage, fines and penalties);
  • Sections 8100 to 81010 of the Food and Agriculture Code (eff. January 1, 2017) (regulating California’s industrial hemp program);
  • Section 147.6 of the Labor Code (study on second-hand smoke exposure by employees);
  • Sections 34010 to 34021.5 of the Revenue and Tax Code (cannabis taxes);
  • Sections 23152 et seq. of the Vehicle Code, Sections 23152 et seq. (cannabis and vehicles); and
  • Section 13276 of the Water Code (water discharge requirements).

California’s two-tiered cannabis legal regime permits local governments to impose additional requirements or limitations on cannabis use and operations within their jurisdictional boundaries, subject to a “reasonable” regulation standard.

Regulators

What bodies regulate the use, cultivation and retail of cannabis, and what is the extent of their powers?

The Bureau of Cannabis Control is the lead agency regulating commercial cannabis licenses for medical and adult-use cannabis in California. The bureau is responsible for licensing retailers, distributors, testing labs, microbusinesses, and temporary cannabis events and is part of the California Department of Consumer Affairs.

The Manufactured Cannabis Safety Branch, a division of the California Department of Public Health, is responsible for regulating and licensing manufacturers of cannabis-infused edibles for both medical and nonmedical use.

CalCannabis Cultivation Licensing, a division of the California Department of Food and Agriculture, is responsible for regulating and licensing cultivators of medical and adult-use cannabis and managing the state’s track-and-trace system, which tracks all commercial cannabis and cannabis products through the distribution chain.

Other state agencies involved in drafting, implementing, or enforcing California’s cannabis regulations include:

  • the State Water Resources Control Board;
  • the Department of Fish and Wildlife;
  • the Department of Tax and Fee Administration;
  • the Secretary of State’s Office;
  • the State of California Employment Development Department;
  • the California Governor’s Office of Business and Economic Development;
  • the Division of Occupational Safety and Health;
  • the California Department of Insurance;
  • the California Highway Patrol;
  • the Cannabis Control Appeals Panel;
  • the State of California Franchise Tax Board;
  • the Medical Board of California; and
  • the Department of Pesticide Regulation.

Personal use and cultivation

Possession and consumption

What rules and restrictions govern the personal possession and consumption of cannabis in your jurisdiction?

On January 1, 2018, recreational marijuana possession and use became legal in California, allowing adults aged 21 years old and over to possess, purchase, or give away up to one ounce of dried marijuana or eight grams of concentrated cannabis and to smoke or ingest cannabis or cannabis products (Section 11363.1(a) of the California Health and Safety Code). Cannabis consumption is not permitted in public, locations where smoking tobacco is prohibited, within 1,000 feet of a school, nursery, or youth center while children are present, or while driving or riding in a motor vehicle, or other vehicle used for transportation, except as permitted on the premises of a licensed retailer per local regulations. (See id. and Section 26200(d) of the Business and Professions Code.)

Qualified medical cannabis patients or their designated primary caregiver may possess no more than eight ounces of dried marijuana per qualified patient and maintain no more than six mature or 12 immature marijuana plants (Section 11362.77 of the Health and Safety Code).

To Read The Rest Of This Article By Wilson Elser on Lexology

Published: March 13, 2019

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