New Market: California awaits regulations before unleashing huge industry

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This is the seventh article in a series looking at the potential cannabis market in each of the eight states that approved recreational or medical marijuana initiatives in the 2016 election. Check back each week through mid-January for new entries. Click here for previous installments.

California’s recreational marijuana market has the potential to dwarf all others as long as workable statewide regulations are ironed out, municipalities allow adult use and legal businesses can supplant the state’s thriving black market.

In November, 57% of Californians voted yes on Proposition 64, the Adult Use Marijuana Act (AUMA), to establish an adult-use industry in the nation’s most populous state.

According to Marijuana Business Daily estimates, California’s recreational cannabis market could generate between $4.5 billion and $5 billion in annual retail sales within a few years of the program’s launch, bringing in more revenue than the nation’s entire legal cannabis industry did in 2016.

In addition to laying the groundwork for a statewide regulatory system, AUMA creates two cannabis business taxes: one on cultivation and one on retail sales.

AUMA allows for adult consumption and growing of cannabis for personal use now. But recreational marijuana won’t be sold or taxed until Jan. 1, 2018, at the earliest. The state will begin accepting applications for recreational marijuana licenses on that date.

Industry experts anticipate sizable opportunities for plant-touching companies, including cultivators, retailers and manufacturers, as well as wide-ranging possibilities for ancillary businesses, from cannabis attorneys to tech-related ventures.

But pitfalls abound. Local opposition, a behemoth black market and an uncertain regulatory structure could slow the industry’s rollout. California lawmakers and regulators must finalize a statewide regulatory scheme for the new adult-use industry. Mid-2018 is the earliest rec sales are likely to begin.

The adult-use industry’s rollout comes as regulators are drafting new statewide medical marijuana regulations.

In 2015, California lawmakers and the governor approved legislation creating the Medical Cannabis Regulation and Safety Act (MCRSA) to regulate the state’s MMJ industry, which has been governed by a patchwork of local rules. The MCRSA took effect in January 2016, and the government has until Jan. 1, 2018, to develop statewide rules.

Licenses under the MCRSA will not be issued until 2018. The rollout of the newly regulated MMJ industry will set the tone for the implementation of the adult-use industry under AUMA.

“Those two laws open up tremendous opportunity to gain licenses, whether it’s dispensaries or cultivation or distribution or manufacturing,” said Aaron Herzberg, a dispensary owner and attorney with CalCann Holdings, in Santa Ana. “We’re seeing hotbeds throughout the state in various cities or localities that are allowing for licensing.”

Business opportunities

Amanda Conley, a cannabis attorney in Oakland and co-founder of the National Cannabis Bar Association, noted that any technology concept in the non-cannabis world, such as Yelp or Foursquare, can be applied to cannabis.

“We’re seeing more and more proliferation of these apps,” she added. “There are so many opportunities here.”

Industry watchers expect Silicon Valley companies to apply their innovative talent to the marijuana industry.

Culinary-related opportunities also are surfacing in a state known for its cuisine, chefs and restaurants. In Northern California, Conley is seeing cannabis events companies, cannabis-based food pairings and marijuana spinoffs involving a wide range of “foodie” products, including gluten-free and paleo-diet edibles.

Avis Bulbulyan, a California-based cannabis consultant, said, “California is ripe for the picking” for ancillary businesses because of the gray MMJ market that currently exists in the transition to statewide regulation.

Those gray-market businesses will need to consult experts to meet the regulations and compliance standards of the state, he added.

“So whether you’re in the tech space or the management space, there are a lot of opportunities,” Bulbulyan said.

California-based companies developing seed-to-sale tracking technology also confront a lucrative opportunity.

“That’s going to become incredibly important,” Conley said. “Someone’s going to get the primary government contract for that, presumably in California, since we’re requiring that.”

Despite widespread local marijuana industry bans, business opportunities are expected to arise across the state.

In Southern California, Herzberg has seen MJ-related business activity in the Los Angeles County cities of Lynwood and Maywood – not to mention Los Angeles’ huge MMJ industry. Southern California’s Coachella Valley, including the city of Desert Hot Springs, has seen a proliferation of grows and other businesses.

In San Diego County, La Mesa and Lemon Grove have passed laws allowing marijuana cultivation and manufacturing. And the city of San Diego has already signaled it will permit rec sales.

Licenses, timeline

Under the MCRSA, localities can draw up their own medical cannabis regulations. The MCRSA created 17 different license categories – at least until the statewide adult-use regulations are implemented. The MMJ licensing structure will likely change once the AUMA is fully implemented, depending on the new adult-use rules.

For now, aspiring marijuana business owners should try to secure an MMJ license at the local level if they ultimately want a state medical or adult-use license, Herzberg said.

“The opportunity is to grab the licenses now,” he added.

But those local MMJ licenses are limited.

“A vast majority of counties and municipalities are still banning marijuana,” Herzberg said. “I think you’re going to see many cities ban recreational.”

Industry officials don’t expect to see licensed recreational marijuana stores open until mid-2018, if not later. Because there is so much work to be done in developing statewide regulations for both the medical and recreational markets, a delay is expected in the issuance of rec licenses.

“It’s going to be quite awhile,” Conley said. “We have no idea how long the application process will take.”

One potential wrinkle: Local business licenses might ultimately have different requirements than the statewide MMJ and rec permits. That could create problems for companies that first manage to secure a local permit.

Vertical integration won’t be allowed, unless an existing vertically integrated MMJ business was grandfathered in before 2015.

Medical and recreational

Industry watchers don’t anticipate California’s medical marijuana industry will dry up once the recreational program is rolled out.

“There’s truly enough of a demand for the medical market here,” Conley said. “And I think there’s truly enough of a demand for nonmedical cannabis. They both can be pretty well-supported.”

However, many inconsistencies exist between the medical and recreational laws, Herzberg said.

Both he and Greta Carter, a longtime cannabis entrepreneur, expect the legislature to create one regulatory system for both markets. Gov. Jerry Brown’s budget for 2017 includes combining the two regulatory bodies.

Carter, who has operations in California and Nevada, is fearful the medical market could be lost in the shuffle.

“There’s a perception from the non-cannabis public, ‘Why do you need medical when you have adult-use now?’ And that’s a big step backward for our patients,” she said.

Biggest challenges

The fight between the black market and the regulated market is “going to be an all-out war,” Herzberg said.

“Literally, blood will be spilled,” he predicted. “There are unsavory characters in marijuana in California, and it’s going to be a huge uphill battle for the state, which has allowed a virtual free-for-all.”

For entrepreneurs, the shaky regulatory framework also could make it difficult to attract investors.

“Until we get closer to the regulations really being clear,” Herzberg said, “we’re not going to have the funding to get a robust, vibrant legal market.”

Bart Schaneman can be reached at