Why 2018 was a Tough Year for the California Cannabis Industry

2018 has been a roller coaster for California cannabis businesses. The cannabis laws and regulations in California have made life difficult, to say the least, for anyone wishing to obtain licensure. This isn’t necessarily the fault of any single legislature, municipality, or agency, but instead was the result of a perfect storm of legal and non-legal issues.

The beginning of the year saw the opening of adult use licensing under the Medicinal and Adult Use Cannabis Regulatory and Safety Act (or “MAUCRSA”). Businesses that sought licensure could apply as of January 1, 2018 for an annual application. In theory, this could have been simple, but it turned out to be far more complex than anyone probably intended.

One provision in MAUCRSA that has been the bane of any applicant’s existence is the requirement to have local approval when applying for an annual (or temporary) license. What this means is that applicants couldn’t apply for state and local licenses concurrently; instead, they had to apply for and obtain full local approval first, and then move onto the statewide licensing. Localities have been all over the map in terms of how they process applications, which means that it could take months between finding an eligible parcel of land and even starting the process of applying for state licensing.

Many cities (for example, Los Angeles) have created complex, phased licensing schemes that meant that certain applicants couldn’t even apply until late in the year. (For Los Angeles, the final, third phase won’t even open until some undisclosed time in 2019.) It’s understandable why larger cities would want to phase their application processes—but for operators, this posed a pretty big problem in terms of delays to apply for annuals and the temporary license deadline.

And regarding temporary licenses, MAUCRSA set up a scheme to allow for temporary licenses that last for 120 days and could be renewed for 90 days. The intent appears to have been to allow operators with local approval to start engaging in business while applying for annual licenses. For reasons that in hindsight appear to not make too much sense, these temporary licenses could only be issued during 2018.

This end-of-2018 cutoff meant that applicants needed local approval prior to the cutoff date so that they could obtain temporary licenses while awaiting the very, very slow annual license application process. But the problem was that cities were so backlogged—or in some cases hadn’t opened all phases until too late in 2018. To solve this issue, many localities started providing applicants with local approval letters late in 2018, and there was a bottleneck in applications in November and December.

Additionally, over the summer, the California legislature, recognizing the delay in processing local approvals (some of which was caused by environmental disasters and other forces that nobody drafting MAUCRSA probably anticipated), created a new kind of “provisional license” to be issued through 2020, which is similar to the temporary license but will last longer. This could have been a saving grace for applicants who were delayed by phasing or other local issues into late 2018. However, the legislature expressly required that an applicant for a provisional license had to have obtained a temporary license at some point in 2018. In other words, the provisional license scheme really only benefits those who were already first in line in 2018.

Separate from these licensing issues, the regulations have undergone numerous and drastic changes many times in 2018. For example, in October 2018, the Bureau of Cannabis Control (“BCC”)—which regulates distributors and retailers, among other things—issued modified proposed regulations that seemed to ban many IP licensing agreements and vastly broaden the ownership definitions in requirements in a manner unlike the other California cannabis regulators. It appears that some of these expansions may have been drawn back in subsequent proposed final regulations. But these many rounds of proposed or emergency regulations have imposed a lot of stress on applicants already under the stress of the foregoing application process.

This is only a short post and we can certainly point out many more areas in which the cannabis industry in California undergone growing pains this year.  We intend to write soon about what 2019 will look like for applicants, but suffice it to say, for those who don’t have temporary licenses, there will be more delay.