Proposed rule changes could have big impact on California’s cannabis businesses

The newest draft of California’s permanent marijuana business regulations could, if adopted, produce financial fallout and a licensing logjam for a variety of cannabis companies – from edibles makers and retailers to delivery businesses and growers.

In particular, the proposed rules – released last month by state regulators – could:

  • Shrink the revenues of companies that make infused products and concentrates.
  • Sharply reduce the amount of product that cannabis delivery operators can transport. That, in turn, could slow deliveries to the customers of MJ retailers that are selling those products.
  • Slow the government’s licensing of all marijuana companies, from growers to retailers and testing labs.

That assessment is based on interviews with more than a dozen California marijuana industry officials.

The public comment window on the proposed permanent regulations ended Nov. 5.

It’s possible the three state agencies tasked with writing the final rules will alter them again, but they could choose to keep the regulations in place. Industry watchers will see how the final regs shake out on Dec. 3.

Below is a closer look at three potential changes and their possible impact:

1. The end of contract manufacturing?

A proposed change would bar all licensed companies from doing business with any commercial MJ operator that lacks a license – say, a celebrity-endorsed brand or a long-established cannabis business that has production facilities in a municipality that has recently banned commercial marijuana.

“This was written in such an excessively broad manner that it may capture more than what regulators intended when it’s read under a legal lens,” said Pamela Epstein, founder and CEO of Los Angeles-based Green Wise Consulting and founder and managing shareholder of Green Wise Legal.

Some business owners interpret the proposed rule as the end of contract manufacturing. Here’s what you need to know:

  • Contract manufacturing is also referred to as white labeling, or co-packaging.
  • Contract manufacturing allows a licensed maker of edibles or concentrates to produce and package products on behalf of an unlicensed business.
  • Moving to a new location could prove costly for an unlicensed MJ business in a locale that has banned commercial cannabis. To get around the ban, the unlicensed company will strike a deal with a licensed business to manufacture its products.
  • The arrangement has been a boon for licensed companies that profit from making and selling such products.

The proposed rule, if adopted, could put those contract manufacturers out of business, according to industry sources.

One contract manufacturer, who requested anonymity, said his licensed business would lose 40%-50% of current and future sales over the next three years.

2. Less efficient delivery?

The draft rules would slash the amount of product a single delivery vehicle could carry, from the current $10,000 to $5,000. Under current regulations, licensed retailers operate their own delivery services.

At least $2,000 of that product would have to be destined for a retailer’s customers that already have placed orders – before a driver has even left the store.

That means delivery drivers would have only $3,000 in loose, available product to fulfill orders they receive while on the road.

By contrast, the current $10,000 ceiling would mean drivers could leave a delivery hub with one order for $100 and $9,900 in additional product to fulfill orders while on the road.

According to industry sources, here’s how the proposed change could affect the industry:

  • Delivery operators wouldn’t be able to fulfill as many orders or cover as much territory, and that could lead to less reach for businesses and long wait times for customers.
  • Extended wait times could hurt customer retention and a delivery company’s ability to deliver longer distances because drivers would have to return to an inventory hub to restock. “People want fast service, and if they can’t get it from a licensed retailer, there are plenty of illegal delivery services to fill demand,” David Mack, senior vice president of communications and public affairs for Eaze, a technology delivery platform, wrote in an email to Marijuana Business Daily.
  • The proposed rule could also increase overhead for delivery businesses because they’d have to hire more drivers to cover more territory and fulfill more orders.

3. More disclosures, more problems?

The proposed rules would reclassify the owner of a marijuana business license – and those individuals who have a financial stake in the company, such as a salesperson or a consultant.

Under the draft rules, any executive or employee who has a say in what a business should cultivate, manufacture or sell would be considered an owner.

In short, the draft regulations would classify more individuals as owners or people with a financial interest in a business.

That means more people would be required to file state disclosure paperwork. The additional paperwork could overwhelm regulators and slow the licensing process, industry experts said.

Under the draft rules, any executive or employee who has a say in what a business should cultivate, manufacture or sell would be considered an owner.

Even lawyers, consultants and landlords who take a share of the profits – and salespeople who earn commission – would be considered individuals with a financial interest in the business, according to industry sources.

This would have an “immediate logistical impact” on the industry because more people would be required to complete forms that disclose ownership and financial interests in a licensee, said Max Mikalonis, a legislative advocate at Sacramento’s K Street Consulting.

“It raises questions that go beyond the disclosure,” he said. “Will the wait for these ownership and financial interest forms delay the application process for licensees?”

Joey Peña can be reached at [email protected]

6 comments on “Proposed rule changes could have big impact on California’s cannabis businesses
  1. mike on

    does the term SNAFU mean anything. at first i thought the gov wanted to confuse and set the bar so high to force all little guys out so that only their wealthy big business donors could be legal to cash in on big profits. but after watching the state fumble around for a couple of years it more probably follows the adage dont account for malice or design what is just plain stupidity.

    Reply
  2. Pat on

    No, you’re right with your first thought. The gov. is just making what they started with, worse. That pathway isn’t going to change. They know exactly what they’re doing.

    Reply
  3. William Graham on

    People, it’s not like that. rules First, how many of you participated in the rule development workshops that toured the state the year before Prop 64 was proposed? Or go to any of the BCC Emergency Rules Committee meetings held around the state every six to eight weeks? Lori, Alexis, and Sonya go to great effort to crete rules fair to all in a transparent environment, discussing and voting in open meeting rooms and on camera. It is not so different as your local City Council or County Supervisors meetings except that they travel around CA at the invitation of citizens and not back at Sacramento.

    I grew and put my freedom at risk for nearly 35 years, all while working for legalization. The BCC and Consumer Affairs has done the best job possible to create rules fair to small and larger businesses alike, all citizens, incorporated entities, taxpayers and employers. Now, the CDFA and local governments have done a poorer job of applying those rules. Monterey County asked for too much money, almost all of San Mateo County has not allowed cannabusinesses, and the CDFA sidestepped the 22,000sf limit by allowing multiple permits by the same holders in the same space and defying the spirit of the law.

    The panel just travelled to Las Vegas to meet the MJBiz attendees in a meeting free to all and will be in Santa Rosa for Emerald Cup. They described the new proposals, the intent of the proposals, and adherence to the law. As state agents, Prop 64, the law, and the added rules are a contract that all sides agree to, with the good and bad as a compromise. I have seen firsthand that every rule starts as loose, inclusive, supportive of incorporating the black market as possible. Unfortunately, richer applicants and dirtier lawyers are always trying to exploit loopholes to their clients’ benefits. They are the reason the rules become more strict sometimes.

    I also wish the author, Joey, didn’t write this in such an uncertain tone. The BCC is available by phone every day to answer questions and and dissolve fear of uncertainty. Thank you and work with your local government to legally permit your cannabis business. Contact your city manager, city attorney, and council through email, participate in council meetings, and prepare your two minutes at the microphone. As questions, give compliments where deserved, give proposals, and ask questions and be courteous.

    Reply
    • Pat on

      William Graham on November 19th, 2018 – 12:19pm: “People, it’s not like that.”

      Oh, yes it is Bill. Sounds like you were able to get yours. That makes you a fraction of !% of those that were doing it correctly ( including other’s like you whom been at it longer ). You’re not in a position to deny the 99%+ their reality. There is no standardization. How is it that you ( you presumably got yours..) and others…many other’s like you or better than you, didn’t?? Because there are tons of people out there with clean records who played by the rules prior to this b.s. The bottom line is: Most of these regulations are not evidenced based; they’re good ‘ol boy based. And their purpose is to bar entry into the market place. Not much to do with those agencies purported declarations for the sake of public/environmental/public health safety.

      Reply
    • Fed Up on

      I’m in the industry as well. The BCC released this statement AFTER the public comment period ended. Every time a new line of regulations come out they exclusively target small business owners. Big Business can keep up no problem. They’re just riding the wave until the rest of us empty our warchests. Then they’ll slash regulations and ride off into the sunset. This is California, they do this every time a new industry pops up.

      Reply
  4. Marshall Haze on

    I mean, this wold have been much better to release DURING the public comment period. It seems a little odd to post it 10 days after the comment period ended.

    Reply

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