Consumption of California Cannabis
While California’s journey to legalizing cannabis began in 1972, the first ballot initiative approved by California voters was the Compassionate Use Act of 1996 (also known as “Proposition 215”). Proposition 215 legalized the use, possession, and cultivation of cannabis by individuals with a physician’s recommendation as treatment for certain ailments and was the beginning of medicinal cannabis in California. Later, the Adult Use of Marijuana Act (“AUMA”), which proposed to legalize recreational cannabis in California, was approved by California voters in November 2016. AUMA legalized possession of up to one ounce of cannabis and the cultivation of up to six plants for personal use. In addition, AUMA signaled the beginning of commercial recreational cannabis in California by legalizing the sale of recreational cannabis starting January 2018.
In June 2017, the California Legislature passed a budget trailer bill, the Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”), with the intent to establish a comprehensive system to control and regulate the cultivation, distribution, transport, storage, manufacturing, processing, and sale of medicinal cannabis, medicinal cannabis products, recreational cannabis, and recreational cannabis products. MAUCRSA supplanted earlier legislation regarding medicinal cannabis and made adjustments to AUMA. As a result, California now has a single general framework for the regulation of commercial medicinal and recreational cannabis use. Unfortunately, while the commercial sale of cannabis was legally required to begin in January 2018, California licensing authorities would wait until November 16, 2017 to propose emergency regulations for licensing. As a result, current regulations pertaining to cannabis may change in the near future. For example, on March 23, 2018, nearly three months after commercial activity became active, the California Department of Public Health (“CDPH”) released additional proposed emergency regulations regarding shared use facilities for cannabis manufacturing.
Survey of the Current Cannabis Landscape
Legal cannabis activity is regulated by three different state licensing authorities: (1) The Bureau of Cannabis Control, which issues licenses for cannabis retailers, distributors, testing laboratories, and microbusinesses; (2) CalCannabis Cultivation Licensing, which issues licenses for commercial cannabis cultivators; and (3) the Manufactured Cannabis Safety Branch, a division of the CDPH, issues licenses for manufacturers of cannabis infused edibles. All three of these licensing authorities have the authority to issue both medical and recreational licenses.
Currently, all cannabis licensing authorities issue 120-day temporary licenses as well as annual licenses. In most cases, businesses benefit from seeking a temporary license. First, because the licensing authorities do not charge a fee for temporary licenses. Second, the temporary license process has fewer requirements and results in a quicker application approval process. This allows businesses to operate under a temporary license while waiting for approval of an annual license. In cases where an annual license has been filed, but not approved, before the 120-day period is exhausted, the licensing authority may grant additional 90-day periods for a business to operate while the annual application is processed. Businesses also benefit from the temporary license because the requirements for a temporary license also apply to an annual license. As a result, a business that successfully navigates through the temporary license process is already on the right track for the annual license.
Many businesses run into a specific issue when applying for a cannabis license. In order for a state licensing authority to issue an annual license, a business must first have local approval from city or county authorities. MAUCRSA gives city and county authorities broad discretion in their commercial cannabis licensing regimes and allows these local authorities to completely ban commercial cannabis activity. As a result, documentation indicating compliance with city or county regulations, if these regulations exist at all, varies and may take the form of a cannabis license or simply a letter of authorization. Many businesses find that they currently operate, or intend to operate, in cities or counties that do not currently permit commercial cannabis activity or subject cannabis activity to additional rules on licensing. For example, as of March 2018, the San Francisco Office of Cannabis only plans to accept, but does not currently actually accept, cannabis license applications for “equity applications” and “equity incubators.” The San Francisco equity programs place additional restrictions that many businesses may not have anticipated. Individual equity applications contain restrictions on financial, regional, and judicial criteria. Equity incubators must use local and inclusive business practices to support the community and must also pair with an equity applicant. In contrast to San Francisco, some cities, like Redwood City, have adopted zoning code amendments which entirely ban commercial cultivation, manufacturing, testing, retail, and distribution.
Manufacturing Cannabis Products
Forbes indicates that when Colorado first legalized recreational marijuana sales in 2014, the sale of edibles totaled $17 million in the first quarter of 2014. From 2014, sales soared to $53 million in the third quarter of 2016. The reasoning behind this rapid rise in market share? Theories range from individuals who don’t like smoking and prefer edible products to those seeking a more discrete experience. Whatever the reason, the rapid expansion is also mirrored by Washington state, where sales of pot infused edibles increased 121% in a year. It can be argued that the current fees for licensing reflect the significant opportunities in the cannabis market. Annual licenses have a $1,000 application fee per license and a scaled license fee corresponding to the gross annual revenue of the licensed premise which ranges from $2,000 to $75,000. With edibles encompassing a $7.2 billion market with expected growth of up to 25% annually, there may be billions of reasons to examine the manufactured cannabis products market in California.
All commercial cannabis licenses are restricted to either recreational (“A”) or medicinal (“M”) categories. However, a business may have both an A and an M license on the same premises as long as both applications are approved. Currently, CDPH sub-divides cannabis manufacturing into license types 7, 6, N, P, and S (S covers shared-use facility). Conveniently, businesses seeking a temporary license are not required to determine the applicable license type. Instead, the temporary license application requires that applicants identify the product types, activities, and extraction methods.
|Type 7||Volatile Solvents||Butane, Hexane, and Pentane|
|Type 6||Non-volatile Solvents and Mechanical Extraction||Oil, Water, Ethanol, CO2|
|Type N||Infusions||Pre-extracted oils for edibles|
|Type P||Packaging and Labeling||Repackaging|
Each A or M license type is inclusive of the license types below it. For example, a Type 7 licensee may perform all Type 6, N, and P tasks. The result of this inclusive licensing scheme is that a properly planned cannabis manufacturer will, at most, require two licenses, one for medicinal and one for recreational activity.
Certain Type 7 and Type 6 solvents have additional restrictions. Extractions using carbon dioxide (a Type 6 solvent) or volatile solvents covered by Type 7 licenses must be conducted using a closed-loop system and be certified by a California-licensed engineer. These solvents, with the addition of ethanol extractions, must also be certified by local fire code officials. In addition, Type 7 hydrocarbon based solvents must maintain a 99% purity. Additional restrictions are placed on manufactured cannabis products. Examples include a prohibition on infusing manufactured cannabis products with nicotine, alcohol, or caffeine. Edible products cannot be shaped like humans, animals, insects, or fruits. Edible products are also limited to a maximum of 10 mg of THC per serving and 100 mg of THC per package. Other cannabis products, such as tinctures, capsules, and topicals are limited to a maximum of 1,000 mg per package for the recreational use market and 2,000 mg of THC per package for the medicinal use market.