California cannabis rules taking shape: Q&A with MJ attorney Khurshid Khoja

By John Schroyer

California took a big step forward in June by passing a law designed to streamline government oversight for the state’s medical and recreational marijuana industries.

Because the new measure combines two laws, it’s complicated.

So Marijuana Business Daily enlisted cannabis attorney Khurshid Khoja to help break it down.

The new law – a “trailer bill” proposed by Gov. Jerry Brown – bears the cumbersome title of Medical and Adult Use Cannabis Regulation and Safety Act, or MAUCRSA for short.

The former MMJ law, passed in 2015, was called the Medical Cannabis Regulation and Safety Act (MCRSA); the rec measure, approved in 2016, was dubbed Adult Use of Marijuana Act (AUMA), though it was also known as Proposition 64.

Here’s how Khoja – founder of Greenbridge Corporate Counsel and founding board member of the California Cannabis Industry Association – sees the state’s current marijuana landscape.

Is this a regulatory improvement from a business perspective?

Absolutely. Not only does the trailer bill harmonize conflicting aspects of (the MMJ and adult-use laws), it does so in a way I think is a net positive for the industry, for investors and for businesses. One of the main structural changes we see is that (MMJ law) is actually repealed and is being replaced with MAUCRSA, which takes some elements of (the MMJ and adult-use measures) and melds them into this new law.

One of the major features worth noting is there’s no more mandated third-party distribution. That was a big bone of contention in the industry in California, that (the MMJ measure) had mandated third-party distribution and (the adult-use law) did not.

And that was by design – when the drafters came to the industry asking for input, that was an element that I and others asked to omit from (the adult-use law) to avoid the forced breakup of existing vertically integrated and self-distributing businesses.

The new law would also broadly permit vertically integrated businesses by deleting (the MMJ law’s) restrictions on cross-licensing. There are still some cross-licensing restrictions, but those only apply to the Type 5 unlimited canopy cultivation licenses – and those aren’t even available until 2023. So if you’re a Type 5, you can’t hold a distributor, testing lab or microbusiness license. But you can still hold retail and manufacturing licenses.

For everyone else other than labs, it’s very open. They can hold any combination of licenses other than lab licenses. That’s a net improvement.

Will there be a residency requirement, or will the California market be open to anyone who wants to jump in?

(The MMJ law) didn’t have one, (the adult-use measure) did have one, and that was going to be effective through 2019. That is gone. So there’s no longer any residency requirement to hold a controlling interest in a licensed adult-use entity.

That sounds like a significant development, given the amount of interest in the California market.

I get significant interest from Israelis, I get the Dutch, I get the Canadians, I get everyone from all over wanting to participate in the California adult-use market. It’s definitely not isolated to U.S. business interests in the other cannabis states.

Will companies still have to obtain both a local and state permit – or a local license as a prerequisite to obtaining a state one?

Under (the MMJ law), a local license was a prerequisite before you could apply and obtain a state license. Under the (adult-use law), that’s not the case, but you still must comply with local law.

So if the locals say, “You’re out of compliance” or “We don’t want you here,” that’s going to preclude you from getting a license under the (the adult-use measure). But you don’t have to show up with a local license in hand in order to be eligible.

Basically, the MAUCRSA adopted the (the adult-use law’s) approach, in which the locals still have the ability to pass ordinances on land use and business licensing, and they can force businesses to comply. If any business that holds a state license doesn’t comply (with local law), they risk having that license withdrawn.

Also, if you’re an existing operator who wants to continue operating past January 1, 2018, while your permanent state license is pending, then it’s still necessary to have a local permit, license or authorization that explicitly says you’re allowed to operate in that jurisdiction. That local approval will qualify you for a temporary state license to operate in 2018. Without a temporary license, your business cannot operate until you have a permanent state license.

Any downsides, from a business perspective, to the regulatory merger?

There is still some conflicting language on whether a single license can operate more than one licensed business on a single licensed premise. So if you’re a vertically integrated manufacturer, cultivator and retailer, you may still have to get different premises on which to operate each of those businesses – unless you’re a microbusiness, in which case you are explicitly permitted to operate all those on one premise.

There’s also still a distinction between medical and adult-use licenses. So you can have a retailer that has both adult-use and medical licenses, and it’s uncertain whether you can operate both on the same premises.

We’re getting different views from industry lobbyists, from the governor’s office and also from the regulators themselves on how they interpret the trailer bill’s language – although no one seems to disagree the intent is to allow co-location of licensed businesses held by a single licensee. So that will need to be addressed in either follow-on legislation or in agency regulations.

Certainly, it wouldn’t be tenable to have a retailer who has both a medical license and an adult-use license having to get two different premises to operate those. It should be one premise, but that’s not how the law currently reads.

Other high-level items worth noting: There wasn’t any accommodation for delivery-only licenses previously under (the adult-use or MMJ laws), and now there is. You will have to have a licensed premise, but that premise won’t have to be open to the public. So you can have a delivery-only retail operation and be licensed for that, which is a big improvement.

Another big improvement is that the trailer bill provides for temporary event licenses. There were questions about all these consumer-focused events that we have in California where there is consumption onsite. Those were in a gray area under both (the MMJ and adult-use laws), and now there’s language that explicitly says those types of licenses may be granted for people to sell cannabis for consumption at outdoor events where local laws allow it.

How much of the industry will still be determined at the local level, as opposed to state? Is California going to remain a patchwork of industry rules, from town to town or county to county?

There is explicit language in the trailer bill that says nothing in the new act can preclude or prevent or otherwise obstruct locals from passing any relevant licensing or land-use ordinances they want. So there’s no limit on what locals can do.

The cities and counties are very powerful in state government, so it’s not unexpected they would retain broad local control. So quite a bit of deference and, with it, the possibility of variation among local jurisdictions.

But the amount of variance depends on when a county or city comes online. If they’ve come online since the passage of the (MMJ law), you’ll see what they’re adopting is a lot closer to that. So, yes, there’s going to be a patchwork in the sense there will be different local laws to comply with.

But I think that, by and large, a lot of those are going to conform to the state laws, so there’s ultimately not a lot of daylight between the two or among local jurisdictions that license and regulate the cannabis industry.

This interview has been edited for length and clarity.

John Schroyer can be reached at [email protected]

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 3 Comments

  1. Dave June 27, 2017
  2. Warren Holden June 28, 2017
  3. Duane August 1, 2017

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