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

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California permanent marijuana business regulations, 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