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All eyes are on California as it regulates, for the first time, its 21-year-old medical marijuana market and prepares to kick off a regulated adult-use marketplace. And the stakes are high. Not only are other states looking to see the path California takes to regulate a market in the world’s sixth-largest economy and how it plans to deal with serious environmental issues, but California’s cannabis market is home to 50,000 to 60,000 farms, according to various estimates. Many of these are small, family farms with fears of being forced out of the market they helped to build, by big investors developing conglomerates.

Regulations surrounding the medical market have been laid out in the Medical Cannabis Regulation and Safety Act of 2015 (MCRSA), but full regulations for the adult-use market have not yet been established. A possible wrench was thrown into the mix when, in April, California Governor Jerry Brown proposed the alignment of MCRSA and Proposition 64, the Adult Use of Marijuana Act (AUMA)—which was legalized via Prop. 64 in November 2016—under one regulatory system. It will be interesting to see how this potential merge plays out.

Cannabis Business Times Editor Noelle Skodzinski talked with attorney Nicole Howell Neubert, of the California-based cannabis-industry law firm Clark Neubert LLP, about the nuances of the existing and forthcoming regulations, and what cultivators can do now to prepare themselves for success in what promises to be the largest marijuana market in the country.

Noelle Skodzinski: In early May, three state agencies rolled out a plan for medical marijuana businesses, regarding everything from how much cannabis a patient can buy in a day to how big farms can be. Are there any parts of this plan that you have heard or think are going to be contentious among growers?

Nicole Howell Neubert: We’ve been anticipating limits on total cultivation canopy [per] owner. From the beginning, in the text of the statute, MCRSA had a 4-acre cap on the total amount of cultivation one vertically integrated operator could hold and a mandate that the state regulators limit the total number of Type 3 licenses issued statewide. So these rules that limit total cultivation per licensee were expected. These limits are key to ensuring that as many individual operators as possible have opportunities to get licensed, which makes for a more successful regulated system. State and local governments need more people in than out.

Caps on the amount patients can buy in a single visit to a dispensary or in a one-month period are not new; dispensaries have had such limits all along. The state law default is 8 ounces per month per patient.

Three important and very positive developments in the regulations include: One, a definition of “Canopy” as “the area containing mature plants,” as opposed to including all propagation and processing areas as well; two, a definition of “Premises” as “the area one licensee occupies” with specific authorization to house more than one “Premises” ([in other words], more than one operator) per parcel, so long as there is a separate entrance and an “immovable barrier” between premises; and three, the definition of “Owner” that gives excellent clarity as to who is considered an “owner” of the license, a distinction between “owner” and “applicant” that was unclear in the statute, and direction about who else needs to be disclosed.

Nicole Howell Neubert
Photo courtesy Nicole Howell Neubert

These three definitions are crucial for our clients in planning for next year and licensing. We’ve been waiting for this clarity, so the CDFA [California Department of Food and Agriculture] CalCannabis Program regulations (and those of the Bureau and Department of Public Health) are very much welcome.

NS: One of the biggest issues in the California market is the fear that the tens of thousands of small, family farms will be supplanted by large conglomerates moving into the market. Do you think this is a serious risk? Are there parts of the regulations (such as the tiered licensing and five-year moratorium on large-scale facility licensing) that will ensure protections for these growers? Do you think those protections will remain in place as the regulations are finalized?

NHN: Without limits on the total cultivation canopy one owner can hold, I think this is a legitimate concern. As I mentioned, the MCRSA’s limits on cultivation area help to ensure that more individual operators are able to become licensed, which is key to moving in the direction of a fully regulated cannabis market and the state’s ultimate goal. We have also seen local governments limiting the total cultivation one operator can hold, so where the state does not regulate this, local governments might include their own limits.

The Type 5 (unlimited canopy) cultivation license does not exist in the MCRSA. That license was created by Proposition 64 (AUMA). Since the CDFA’s current rule set only addresses the medical rules, the Type 5 license has not yet been tackled by the regulators. But I think it’s clear that until California gets a good sense of how much licensed canopy the California medical and adult-use market needs, it is impossible to judge whether and to what extent unlimited canopy licenses are necessary. I think the regulators will keep a close watch on those considerations.

NS: In April, the Governor issued a proposal to merge regulations for the medical and recreational markets. We have heard that, among growers, some points of contention exist in the proposal, such as the removal of restrictions on size and types of licenses that exist in the current medical regulations. What have you heard about this, and what do you think the end result will be?

NHN: Governor Brown’s administration has expressed an intention that we have one system of rules and regulations applicable to both medical and nonmedical with two tracks of licensure. To accomplish this, the Governor’s current Budget Trailer proposal would repeal the MCRSA and replace it with the provisions of AUMA, for the most part, and apply them to medical operations.

In one exception to this, the proposal retains MCRSA’s limitation on the total number of Type 3 licenses the state can issue. As we’ve seen in legislative hearings, legislators have serious concerns about the proposal overall, and there are ongoing and intense discussions among lawmakers and in legislative committees about how to reconcile the points of disagreement. We will see within the next month how things are going as the budget must be voted on by mid-June.

NS: Are there any updates or other proposed regulations that cultivators should know about regarding the adult-use market?

NHN: The currently proposed regulations only cover medical; adult-use regulations will come later. It’s also important to understand that if the MCRSA is repealed, as currently proposed, the draft regulations that are out now for comment will be revoked, and the regulators will have to issue new proposed regulations based on whatever the new statute looks like. My understanding is that all comments submitted between now and the end of the comment period would still be considered by regulators, but they may need to technically draft new rules, and then there would be a new comment period.

NS: The state is planning to start accepting medical license applications on Jan. 1, 2018. What advice would you give now to California medical marijuana growers looking to get a license?

NHN: Engage with your local government to get your local permit; get your water discharge permit waiver; get any water rights permits or documentation of your water sourcing; make sure you’re straight with Fish & Wildlife and CalFIRE; make sure you have done an analysis of grading and building permits you might need in order to get licensed.

There is a ton you can do between now and 2018, all of which has to do with local and state agencies around water and environmental issues. These can be big hurdles if you don’t start addressing them now. Try to get yourself ready to hit the ground running when they open applications by having all your underlying permits and documentation ready. And try to take a deep breath. This can all be very daunting, but it really can be accomplished if you are focused on what can be done today and what you know you need to do rather than future-tripping too much on all the “what ifs.” There are lots of “what ifs,” but we can’t let them paralyze us.

NS: What about to medical marijuana growers who are looking to also secure a recreational license, which the state is supposed to start issuing Jan. 1, 2018?

NHN: Those operations will still need to be authorized first by the local government. So if the locals allow adult-use cultivation at some point, you will need to get that authorization first. Then, apply for state licensing next year. Again, the adult-use regulations have not come out yet, but they should look very similar if not largely the same as the current operational rules. The Governor’s current proposal would only allow one type of license (medical or nonmedical) per location, so also keep that in mind as you are planning—that you may not be able to grow both medical and nonmedical at the same farm or operation.

NS: For startups looking to the California market, or even for existing businesses, what are three main things of which they should be aware?

NHN: Local governments. Environmental requirements. Cultivation limitations.

NS: Municipalities can issue municipal cannabis business permits and create moratoriums. Do you anticipate that much of the regulation of the adult-use market will be handed down to the municipalities? And if so, to what extent?

NHN: AUMA requires the state to confirm that an operator is not violating a local ordinance or that their location is not eligible for the commercial cannabis activity they want to conduct. So ultimately, I think the degree of local control is basically the same for adult use as for medical under the MCRSA. It’s a difference of how the state determines that local authorization.

AUMA, however, created an excellent incentive for local governments to issue licenses, by tying funds to local authorization. So if a locality bans operations in their jurisdiction, they do not get access to funds allocated by Proposition 64. Hopefully this will encourage more communities to see that licensing and regulating truly is the best way of controlling cannabis activity in their area.

NS: Do you think the state will be ready for issuing licenses for recreational sales by Jan. 1, 2018, as outlined in Prop. 64?

NHN: The regulators have been on track so far and have expressed their confidence that they will be ready to go. They’ve done an amazing job so far of meeting these deadlines. The big caveat is what happens with the reconciliation process. If we end up with a repeal and replace [of MCRSA], the regulations and comment periods will have to be re-done. If nothing happens, and we continue on the path of having two sets of laws, then I think we see medical rolled out on schedule with adult-use possibly at the same time or close behind.