Prop D prevails: New L.A. cannabis regs will have many business implications, positive and negative

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A measure to regulate the medical marijuana industry in Los Angeles and limit the number of dispensaries to 135 beat out two competing proposals by a landslide, ushering in a new era for the nation’s largest MMJ market.

More than 60% of voters cast ballots in favor of Proposition D – a measure crafted by the LA City Council as a way to rein in the industry – according to initial returns. A competing measure calling for tighter regulations but no cap on the number of dispensaries failed to resonate with most locals, with just 41% of voters casting ballots in favor of it, while a third proposal fell by an even wider margin (click here for an overview of all three proposals).

The passage of Proposition D will alter the Los Angeles MMJ landscape in many ways. Here are several possible business implications, keeping in mind that the exact impact is still hard to gauge at this point because there are many unknowns:

Dispensaries: Some will get hammered, and some will benefit immensely. Proposition D essentially outlaws all dispensaries that cropped up after a 2007 moratorium took effect, meaning an estimated 600 or more dispensaries will have to close, at least on paper.

But it might not play out this way in the real world.

Whether all these dispensaries close or not will depend on how well LA can enforce its new law. The city doesn’t even know how many dispensaries currently exist (estimates range from 700 to more than a 1,000), meaning it also doesn’t know where many of them are located. At the same time, it’s unclear how the city will ensure the law is being followed. Other cities and states have struggled to enforce medical cannabis laws – in part because of a lack of time and money – and in some cases just look the other way. Los Angeles will no doubt attempt to close down dispensaries, but it could be a long, drawn-out process. Some (and perhaps many) centers could sneak through the cracks by laying low, while others will most certainly try to stave off closure by filing lawsuits.

On the other side of the token, roughly 135 dispensaries that were open before the 2007 moratorium are allowed to continue operating if they meet the new regulations, which are pretty light. Most of these dispensaries will be able to capture a much bigger piece of the MMJ market, and therefore increase sales, if many of their competitors go out of business.

Additionally, they can breathe a little easier now that the city actually has some type of regulations in place. The last few years have been extraordinarily turbulent for the LA cannabis industry, reaching a climax last year when the city council passed a ban on all dispensaries but then rescinded it. The passage of Prop D will create a more predictable climate. Most dispensaries in Los Angeles have remained fairly small given the lack of regulations, butt could change going forward. Some centers will no doubt look to expand now that they can start planning for the future.

“This offers some of the earliest dispensaries in LA some form of protection, as long as we follow certain guidelines,” said Aaron Justis, president of Buds and Roses, a longstanding medical cannabis dispensary in Los Angeles that will be allowed to stay open if it meets the regulations. “It does not mean that all the dispensaries in LA that do not qualify will close voluntarily or successfully be shut down by the city. It does mean, however, that the qualifying dispensaries can run their businesses with less fear and with more respect in the community.”

MMJ Growers: With fewer dispensaries, wholesale growers that sell cannabis to dispensaries will have to compete aggressively. Many of the smaller players with sub-par medicine that served the more questionable dispensaries will go out of business quickly. The more professional, established cultivation operations with quality medicine will have an easier time maintaining their market share and could even grow if remaining dispensaries expand.

Edibles manufacturers: Companies and individuals that make edibles and other infused products will see a big part of their market evaporate. Those making edibles out of their home kitchen and wrapping their goods in plastic wrap will have the hardest time competing going forward, while the bigger players with streamlined production and professional packaging/labeling will have an opportunity to consolidate the market.


Ancillary businesses: Companies that provide equipment, products and services to LA dispensaries – from legal and accounting firms to packaging and software providers – will take a hit. Additionally, any business that run ads from dispensaries, such as the MMJ industry portal WeedMaps, could see revenues decline in that market. Other companies focused more on patients and end-users won’t see as big of an impact, as the overall market for medical marijuana should hold up (more on this a little bit further down).

Workers: Hundreds and potentially thousands of workers in the medical marijuana industry could lose their jobs as a result of the new regulations. This includes those who work directly in the industry – at dispensaries, ancillary companies, etc. – as well as those who work at companies supported by those jobs.

Local MMJ market: While there will still be plenty of dispensaries to choose from, some patients will no doubt turn to caregivers, go to the black market or grow their own – particularly card-holders in locations without a nearby center and those who can’t travel very far. That means the overall patient market will decline to some degree, though how much is anyone’s guess. Still, overall dispensary sales will likely remain strong, as the vast majority of patients in general are willing to drive at least 15 minutes to visit a dispensary, according to the Marijuana Business Factbook, which should put them in reach of a center.

Local MMJ business climate: Many industry watchers feel that the new rules will help create a more stable business climate for dispensaries over the long-term. As mentioned above, dispensaries now have some form of local protection, and that could help prevent the types of crackdowns common in other parts of California and the country.

“While I certainly would have preferred to see the passage of an initiative that didn’t include an artificial cap on the number of collectives, I still consider this victory a step forward for Los Angeles and for California, where regulations and legal recognition have been desperately needed,” said Aaron Smith, executive director of the National Cannabis Industry Association, adding that the local industry should now help push through statewide regulations to further stabilize the market.

But others say the measure could have a detrimental effect on the industry. An attorney representing a competing ballot measure even said that Prop D will invite federal raids and could lead to a ban on every dispensary in the future.

From a statewide perspective, this further erodes California’s position in the medical marijuana industry. While it still has the biggest overall MMJ market in the country, it could fall into second behind Colorado in another area: number of dispensaries. More than 200 cities across the California have banned dispensaries, leading to hundreds of closures in recent years. Several hundred more dispensaries are expected to close in the coming weeks in the wake of a key Supreme Court ruling upholding the bans. That, coupled with the expected closure of most centers in Los Angeles, could leave California with just a few hundred remaining dispensaries vs. the roughly 520 currently operating in Colorado.

National medical cannabis industry: On one hand, the loss of so many dispensaries will hurt ancillary companies across the country with business in LA, and the overall market base for MMJ businesses could shrink if many patients end up bypassing dispensaries for the black market. On the other hand, this is a big win for the industry in general, as regulations specifically covering dispensaries help reduce volatility and further legitimizes the medical marijuana business.