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Since joining Harris Bricken in 2010, Hilary has earned a reputation as a fearless advocate for local businesses. Hilary’s clients—start-ups, entrepreneurs, and companies in all stages of development—value her bold approach to business strategy.

Los Angeles cannabis regulations
Los Angeles just came out with new cannabis regulations

California has lately been on its game with progressive changes to is cannabis laws. Last week, AB 133 passed, making needed technical fixes to the Medicinal and Adult Use Cannabis Regulation and Safety Act (“MAUCRSA” a/k/a SB 94). And then last Thursday, California’s Bureau of Cannabis Control publicly revealed details behind its temporary licensing program (see here for the Bureau’s brochure on that process). And now the City of Los Angeles just released its 42-page revised draft regulations under Proposition M and they contain some interesting, comprehensive, and important changes from the original draft (if anyone forgets what Prop. M is, go here).

Here are some of the highlights from the revised ordinance if you’re looking to have a cannabis business in Los Angeles:

  1. Remember the controversial certificates of approval? Those have been eliminated in favor of a straight licensing program that includes provisional and permanent City licenses. This new licensing program will give applicants greater and better-protected rights to operate within the City’s borders. Upon initial approval, you will receive a provisional license and once you get your state license to operate, the City will issue you a permanent City of Los Angeles license.
  2. Under the original Prop. M draft regulations, certificates of approval were set to issue in four waves in this particular order: Prop. D-compliant existing medical marijuana dispensaries (EMMDs), non-retail registrants (i.e., growers and manufacturers), the social equity program, and then the general public. Formerly, non-retail registrants were only eligible for a certificate of approval in that second wave if they could show they were operating in the City before January 1, 2016. That’s all changed as there is no longer any non-retail registry priority.
  3. The City of Los Angeles Department of Cannabis Regulation will still give first priority in processing EMMD applications that “demonstrate to the Department the EMMD has operated in compliance with the provisions of the limited immunity and tax provisions of Proposition D.” Note that in the previous draft rules, the City required “substantial compliance” with Prop. D. Once applications become available, these EMMD applicants will have only 60 days to get their applications in and, after that, that application window closes indefinitely. And, just like in the original rules for EMMDs, “any mitigating circumstances due to gaps in operations, location change or involuntary closure, ownership, tax payments, etc. must be described in detail for the Department to consider eligibility.”
  4. EMMDs will only be allowed to apply for Retailer Commercial Cannabis Activity (including delivery), which may include on-site cultivation as allowable under Prop. D. On-site cultivation in this scenario may not exceed the size of the EMMD’s existing canopy or square footage of building space as documented by a lease or Certificate of Occupancy prior to January 1, 2017. A maximum of three Licenses per EMMD with a valid Business Tax Registration Certificate will be allowed–the example the City gives is: One Type 10 (retailer), One Type 10 (retailer with delivery) AND one Type 2A OR Type 3A (on-site cultivation if applicable).
  5. One of the biggest boons for EMMDs (and for any cannabis applicant in the city of L.A.) is that “changes in ownership status from non-profit status to for-profit status are allowable.” Now is the time for all LA operators to get away from their precarious non-profit mutual benefit corporations and other bizarre corporate setups and convert to a legal, for-profit business entity that lines up with the California Corporations Code.
  6.  The City of Los Angeles is still working on its social equity program. It is expected that will be finalized and made part of the Prop. M rules sometime in October.
  7.  The general public will be allowed to apply for licenses at the same time as the social equity program opens up. The most positive change for the general public is that they are no longer limited to the number of licenses that will issue in the social equity program. Without a doubt, the general public now has a much better chance to participate in L.A.’s cannabis scene.
  8. Here’s the deal on license caps in the City: all retailers and microbusinesses in the City will be limited to three licenses at the most. There are no license caps for cultivators so long as a given business does not have more than 1.5 acres of plant canopy within the City. Type 7 volatile manufacturing is now allowed (previously it wasn’t), and there are no set caps on manufacturing licenses within the City. There also is no licensing cap for distributors.
  9. As part of the application process, applicants must provide a site diagram to the City. The premises must be a contiguous area and may only be occupied by one business. However, multiple businesses may be located on the same property (as established by an assessor’s parcel number) if each premises has “a unique entrance and immovable physical barriers between unique premises.” Our cannabis lawyers have dealt with these sorts of restrictions in other states and they are usually not a problem and should be dealt with in your lease.
  10.  Applicants must provide a detailed description and plan for hiring “local residents, including making an ongoing good-faith effort to ensure that at least 30 percent of hours of their respective workforce be performed by residents of the City of Los Angeles, of which at least 10 percent of their respective workforce shall be performed by Transitional Workers whose primary place of residence is within a 3-mile radius of the proposed Business.”
  11. An applicant with ten or more full-time equivalent employees must enter into a labor peace agreement.
  12. On the M & A front, neither the City licenses nor the businesses are transferable once a provisional or permanent license issues, but you can still apply to the City to change the business structure, which does allow for you to sell the business so long as the City of Los Angeles approves the sale. See here for more on buying cannabis businesses in Los Angeles.
  13. No licensed retailer of alcoholic beverages or tobacco products can apply for a City of Los Angeles cannabis license.
  14. Foreign companies from outside the U.S. are not allowed in the City, but the City specifically states that this prohibition “does not preclude out-of-state investment in a Business proposing to conduct Commercial Cannabis Activity.” If you are thinking about investing in a California cannabis businesses, you should be sure to join us at our September 28th California Cannabis Investment Forum in San Francisco. But do NOT wait because we must limit the number attendees to 250 and we are getting dangerously close to that already.
  15. The City is still discussing what to do about zoning for cannabis businesses and changes to that proposed ordinance are sure to affect your ability to secure an eligible property.

All in all, Los Angeles is finally starting to embrace comprehensive cannabis control and oversight with a regulatory system that should catapult it into its rightful place as a cannabis powerhouse with serious operators.

California cannabis Having begun my cannabis legal career in Washington State, which is a cannabis marketplace that started with a loose collective model and then morphed into the heavily regulated medicinal and adult use marketplace it is today, I know firsthand that it will be no small task to get right on cannabis regulation here in California now. As we all know by now, cannabis regulations are constantly changing and in California such changes seem already to be hitting us nearly every month. California seems hellbent on getting revising (and re-revising) its regulations so as to get a strong regulatory grip over what will soon be the most profitable and dynamic legal cannabis market in the world (by far).

Cue AB 133, which is the most significant and realistic technical fix bill to California’s cannabis marketplace since passage of SB 94 this summer. SB 94 represents a regulatory union between medical and adult use cannabis from the get-go. Most other states that have legalized recreational cannabis already had a robust (though unregulated) medical cannabis market that they let remain for a while to the detriment of regulated operators, but California has decided from the outset that the two cannabis industries (medical and recreational) would be combined under one regulatory regime. However, there are flaws in SB 94 and a lot of gaps and ostensible impossibilities when it comes to logistics and operational standards. Though regulating agencies (like California’s Bureau of Cannabis Control) might normally be expected to interpret and fill in the blanks on legislation via rule-making, California isn’t leaving anything to chance with its proposal of AB 133.

If passed, AB 133 would make SB 94 even more business-friendly for operators and consumers. AB 133 would do the following:

  • Cannabis deliveries would allowed by a retailer using any technology platform owned, leased, or controlled by the retailer. Currently, retailers can only use technology platforms they own and control to undertake deliveries.
  • Holders of multiple cannabis licenses would no longer be required to keep their licenses “separate and distinct.” This likely will mean you can combine your multiple licenses or your adult use and medical operations on a single “premises.”
  • AB 133 would repeal the requirement that licensed medicinal cannabis manufacturers only manufacture cannabis products for sale by a medicinal cannabis retailer.
  • Verification of local approval would change for applicants that voluntarily provide proof of such approval to the state during the licensing process. Essentially, if you provide this proof to the State of California, it will presume you’re in compliance with local laws unless otherwise notified by the city or the county.
  • If you’re a cultivator and your water source stems from diversion, you will have until October 31, 2017 to get that use authorized and to disclose that diversion to the state (rather than the July 31, 2017 deadline that’s already come and gone).
  • If you’re under 21, you can be on the premises of an A-licensee so long as the A-licensee also holds an M-license at the same location. And if you’re over 21, you can be on the premises of an M-licensee so long as that licensee also holds an A-license at the same location.
  • Caregivers would be allowed on premises to purchase medical cannabis for verifiable qualified patients, but the Bureau of Cannabis Control would set forth the specific rules around these purchases.
  • Cannabis cooperatives would be barred from undertaking contracts, etc. with other cooperatives in other states.
  • The unlawful possession of concentrated cannabis amounts would be increased from 4 grams to 8 grams.
  • The cannabis cultivation tax would apply only to harvested cannabis that “enters the commercial market” and cannabis that “enters the commercial market” would re redefined to be cannabis or cannabis product that completes and complies with a quality assurance review and testing, except immature cannabis plants and seeds,
  • You won’t pay your cannabis excise taxes directly to the Board of Equalization anymore; you will instead pay them to the California Department of Tax and Fee Administration.

Though passage of AB 133 is not a cure-all for all that ails us in SB 94, it is a good start toward ensuring that some of the wider gaps in California’s existing cannabis legislation are headed off at the pass of rule-making. Most importantly, California is still on track to be one of the most business-friendly regulatory states, but we’ll see what future rule-making (and local restrictions) do to that status as fall approaches.

California cannabis
When it comes to cannabis, Cali is the lead penguin.

Cannabis legalization inevitably leads states and local governments to at least discuss the impact of cannabis tourism. In your standard legalization regime, adults 21 and older from anywhere in the world can (and absolutely do) come to certain U.S. states to buy and consume cannabis from regulated storefronts whose cannabis products come from regulated cultivators, manufacturers, and (sometimes) distributors. Most state governments have put at least some kibosh on cannabis tourism for fear of incurring the wrath of the federal government. This is why cannabis cups with product on site are on the decline and why we don’t see states rushing to legalize cannabis lounges or clubs. Washington State has pretty much outlawed any form of meaningful cannabis tourism and Colorado has effectively done the same, with a only a few individual cities there pushing for consumption sites/rights under local laws.

There is though a bright and shining light at the end of the tunnel when it comes to cannabis tourism — California. With California’s passage of SB 94 (a/k/a the Medicinal and Adult Use Cannabis Regulation and Safety Act) we may actually see cannabis tourism take off and sustain itself here in the Golden State. It certainly does not hurt that cannabis is an entrenched cultural phenomenon here,

In addition to its SB 94-sanctioned event permit, California immediately stands out for two reasons: its legalization of on-site consumption hosted by licensees in certain scenarios and its creation of microbusiness licensees.

SB 94 will allow for cannabis consumption at retail and microbusiness establishments:

a local jurisdiction may allow for the smoking, vaporizing, and ingesting of cannabis or cannabis products on the premises of a retailer or microbusiness licensed under this division if all of the following are met:
(1) Access to the area where cannabis consumption is allowed is restricted to persons 21 years of age and older.
(2) Cannabis consumption is not visible from any public place or nonage-restricted area.
(3) Sale or consumption of alcohol or tobacco is not allowed on the premises.

For a state to out and out permit on-site consumption at a licensed business is pretty novel at this point. Of course, the catch is that the local government must approve such a set up (which will be a tough sell in some places), but California has fully opened the door on the conversation. Being able to consume in a store or microbusiness will undoubtedly drive consumers (and tourists) to these locations, giving retailers and microbusinesses the chance to have that Amsterdam-style coffee house feel that has so far been mostly lacking in every other cannabis-legal state.

And the microbusinesses themselves will be able to operate in a sort of winery type setup where you have smaller, more craft vertically integrated operators making everything (or nearly everything) in-house. If California can create winery like experiences for cannabis it will absolutely change the way cannabis is admired and enjoyed, which will assuredly capture the interest of locals and tourists alike. This opening up for public consumption will also go a long way in reducing the cannabis stigma.

Then there’s the question of whether we can expect California to embrace things like canna-crawls, bud and breakfasts, etc. In our experience, most state departments of transportation will not sanction licensing or permitting anything related to a canna-crawl and cities and counties are mostly turned off by the concept of cannabis-friendly hotels. Again, though, because cannabis is such a big part of California’s existing economy, such ideas hold less of a taboo here. Indeed, for just a few examples, Humboldt County just proposed an ordinance to allow for cannabis farm stays (i.e., bud and breakfasts), the City of Nipton will apparently (allegedly) turn into a “pot paradise” hospitality destination, and Coachella will have at least one cannabis cultivation-adjacent hotel in its future.

California cannabis is going to be huge — by many accounts, more than ten times bigger than Washington State, Oregon, and Colorado combined. If California successfully provides for public consumption and benefits from cannabis tourism (even if only in select cities and towns) the reverberations from this will be felt nationwide.

Get your marijuana product recall plan in place. Now.
Get your cannabis product recall plan in place. Now.

Time and again I have warned cannabis industry participants that federal prohibition means nothing when it comes to liability created by defective products. Colorado is a prime example of the threat and the power of cannabis product recalls. And though for years now we’ve seen various cannabis businesses in Colorado pull their products from the shelves for illegal pesticides and/or manufacturing under unsanitary conditions, we have yet to see an official product recall for cannabis in the State of California. And why would we? The state hasn’t had any legitimate, enforceable, or uniform regulations to corral cannabis operators into worrying about consumer safety (other than self-imposed best practices). Though it’s pretty clear recalls should already be happening in California based on some of the available product in the state’s medical market, they haven’t yet, but they will.

With the passage of the Medicinal and Adult Use Cannabis Regulation and Safety Act (“MAUCRSA” aka SB 94), medical and adult use cannabis in California will soon be under one regulatory regime. Outside of MAUCRSA’s mandatory quality testing and packaging and labeling thresholds, what will California’s ultimate quality assurance and consumer protection operational standards look like? MAUCRSA regulations will fill in the baseline blanks and that will happen this fall, according to the state.

I’ve practiced law in enough regulated cannabis states to know that quality assurance, testing, and protecting the public through total product perfection isn’t going to be easy or cheap and it’s going to be mandatory if you want to keep your cannabis license. Still, even with your best quality assurance game face, you may not (more like never) escape the toe catch that is products liability. And with California being such a litigious state, as the Wall Street Journal editorial board recently pointed out, it’s only a matter of time before even more plaintiffs start suing cannabis operators alleging defective, dangerous, or mislabeled products and Prop. 65 violations.

If you’re not familiar with product liability, the most important thing you need to know is that the cannabis industry is not immune from it just because cannabis remains federally illegal. And now that you know that, I suggest you read at least some of the following to better grasp how product liability laws can impact or even derail your cannabis business:

Just the mere fact that my firm’s cannabis attorneys have written so many blog posts and articles on cannabis safety and cannabis product liability ought to tell you how truly important this issue will be in California once things truly get rolling here.

What then should you as a California cannabis business owner do to protect yourself from product related lawsuits and government actions? Again, the MAUCRSA regulations will no doubt create a baseline of what operators need to do if their products are defective, but you’ll need to go above and beyond that to ensure you’re ready to take on a recall situation or to defend yourself in the event of a product liability lawsuit.

Oftentimes, one of the best ways to mitigate against product liability claims is by instituting a product recall. In most industries, recall standards are dictated by either federal or state law or both. But since cannabis is federally illegal, neither the Food and Drug Administration (FDA) nor any other federal agency has rules or guidelines on how to undertake a cannabis recall.

However, since the federal government “tolerates’ only the cannabis regimes of states with robust marijuana regulations, it is not surprising that most states with commercial marijuana laws require their licensed marijuana businesses have a recall plan in place as a condition for receiving state licensing — and California will probably be no different. But few states have much in the way of specifics on what should go into a cannabis business’s recall plan. When our cannabis attorneys draft marijuana licensing applications for our clients, we are careful to make sure the recall steps we map out in the licensing application recall plan can actually be fairly easily accomplished. A gold-plated grandstanding recall plan may sound great when you are working to secure your cannabis license, but if you can’t execute on or afford that plan, you are only creating trouble for your cannabis business down the road.

In crafting a realistic cannabis product recall plan, you should, at minimum, consider or do the following:

1. Create an overall recall strategy.

2. As part of your recall plan, create definitions and standards for classes of recall and the depth and scope of any given recall. If your state or local laws do not provide basic recall standards for cannabis businesses, check out the FDA’s website under Guidance for Industry: Product Recalls, Including Removals and Corrections.

3. Appoint a recall committee within your company, to be led by experienced personnel capable of evaluating and investigating product complaints to determine if a recall is warranted. This also entails your developing a product complaint form that will be utilized by customers. It is better to learn about product problems early.

4. Develop a complaint receipt and evaluation method to ensure your product complaint processing and investigations are logical, efficient, and comprehensive. There are few things worse than receiving product safety complaints and then ignoring them until the situation is out of control.

5. Truly ponder what your product complaint investigation will entail. What facts should your recall committee be gathering when seeking to determine if a product complaint is valid or if a recall is warranted? What should your recall look like, as based on the facts and circumstances and the threat your product may pose to consumers and vendors?

6. Create a distribution list so your product recall committee can quickly and easily identify all affected products and product lots for disposition and potential destruction. The distribution list should — at minimum — include the names of all affected consumers and vendors, their contact information, and the dates on which the products were sold to them or consumed by them, and it should also include any side effects, injuries, or illnesses resulting from product use. Time is of the essence here. My law firm had a regional food client that inadvertently failed to issue a recall notice to one of many supermarket chains to which it sold its food. This supermarket chain was so angry about having been kept out of the loop that it refused ever to purchase our client’s product again. Then other supermarket chains learned of our client’s failure to notify this one supermarket company and they too ceased all of their purchasing. Needless to say, our client company no longer exists. Don’t let this sort of thing happen to you.

7. Institute a method of stock recovery so all tainted product in inventory is effectively quarantined from sale and distribution.

8. Generate your recall notice and be very careful with your wording in how you alert vendors and consumers to the recall. You want to effectively communicate that a product has been affected and how to deal with that, but you also want to minimize whatever liability your product problems may create for the company. On a case by case basis, consideration should also be given to drafting a press release to help the company’s PR. For this you absolutely need attorney help.

9. Make sure to as quickly as possible (preferably in advance) alert your outside advisors (your lawyers, your insurance broker, etc.) regarding your recall.

10. Set out in your recall plan your options for product disposition. Will you destroy a product? Cleanse and then repurpose it? Lay out your options in your plan now so you are not scrambling to try to figure out your possible options later, when you have no time to do so.

11. Record everything you do. Document every effort you make and record all your communications with consumers and vendors. If there is a legal action later, you will want to be able to show the court that you took all reasonable steps to ensure consumer safety.

In addition to formulating a solid and reliable recall plan, you also might want to consider conducting a mock recall to ensure your recall systems will work when the real deal occurs. Compliance audits can also be a big help in shoring up loose ends on a recall.

Cannabis product recalls are only going to increase in California as robust regulations under MAUCRSA hit all cannabis operators, so get your cannabis product recall plan in place now.

 

California cannabis lawyer
When it comes to California’s cannabis laws, you cannot afford to live in a dream world.

Since moving to Los Angeles, I have non-stop been reviewing the work of other “cannabis attorneys” from all over California that were working for their clients under Proposition 215, and I have to say that far too much of what I’ve seen has disturbed me when it comes to corporate formation, financing, and entity structures. What seems to have occurred under Prop. 215 (which is a terrible piece of law if you’re looking to be a real cannabis business) is that many self-proclaimed industry attorneys in and out of California abandoned any semblance of helping their clients comply with the corporations code, federal and state tax laws, and various basic transactional laws and standards. All of this is coming to light now because many Prop. 215 “collectives” want to start for-profit companies to pursue licensure under the Medicinal and Adult Use Cannabis Regulation and Safety Act (“MAUCRSA“) and/or merge their collective into a for-profit entity for the same reason. Unfortunately, this kind of transition is going to be legally impossible because of how these collectives were originally structured (combined with their failure to comply with corporate laws) or it will be rife with liabilities because of straight-up bad legal advice.

In defense of California, I have to say that this sort of off-the-cuff lawyering is always par for the course in states where cannabis businesses had to operate in the grey. In those situations, few successful corporate lawyers are willing to risk their law license and so what happens instead is that criminal lawyers (whose business is on the decline due to decreased arrests) and new lawyers step in to fill the void. From this the problems arise. Now might be a good time for you to check out Seven Keys to Choosing Your Cannabis Business Law Firm.

Below then is my top five list of the worst legal advice our California lawyers have seen given to Prop. 215 collectives here in the Golden State.

  1. Your bylaws aren’t that big of a deal. The majority of operators in California are non-profit mutual benefit corporations (“NPMBC”) because a 2008 California State Attorney General memo interpreted Proposition 215 to permit only non-profit entities to “collectively or cooperatively” produce and distribute cannabis medicine by and among qualified patients. Many lawyers (apparently unfamiliar with California’s corporate laws) failed to draft corporate bylaws or provided only boilerplate bylaws for the directors and members to control the entity. A very specific portion of the California corporations code deals with NPMBCs and if your NPMBC does not have proper bylaws in place, its operations will be controlled by statute and you may be legally prohibited from acting on behalf of the entity. What’s even worse though than having no bylaws are boilerplate bylaws that are not followed by the corporation’s directors. I’ve seen bylaws that focus on essentially made-up compliance with Prop. 215. and that ignore every other facet of actually running the NPMBC and I’ve heard multiple times of lawyers who claim that the only reason to have these bylaws at all is to show to the police in an event of a raid. This is obviously a problem when it comes to what happens on wind-up and dissolution, where assets go upon dissolution, how the entity is managed, and who has authority to do what, and these corporations are having to learn this now, in their hour of  need.
  2. Membership voting doesn’t matter. This ties in to having poorly written or no bylaws. Member voting absolutely matters. Most NPMBCs were never told that they vested corporate voting rights in their entire patient membership, which means they cannot do anything without putting it to a vote of their entire collective. We have also seen many NPMBCs set up where their directors vote on day-to-day decisions but all members get to vote about dissolution, dissemination of assets, etc., which is not what you want to see if you want to do a for-profit merger. To make matters even worse, many of these NPMBCs require a vote of their entire membership to amend the bylaws to address these sorts of situations. Some even require this vote be unanimous for anything to happen. Just imagine for a minute finding and getting hundreds of people to vote your way; not going  to happen.
  3. The IRS won’t care about relationships between collectives and their management companies. Some lawyers told collective operators to start a parallel management company along with their NPMBC so that they could get bank accounts, run payroll, and provide various “management services” to the NPMBC. Their real plan though was to strip out cash from the NPMBC (which can’t otherwise make a profit).  Unfortunately, astoundingly few of these lawyers gave a thought to how the IRS would view all this for income tax purposes. Fast forward just a bit and we now have the IRS applying Section 280e to these management companies that are managed or controlled by the same people who sit on the board of the NPMBC. In many instances, the IRS sees these as “designed to hide” relationships set up as a front set up to allow those who control the NPMBC to get paid large amounts. And no surprise, the IRS is not liking what it is seeing.
  4. Don’t document anything. Is cannabis still illegal at the federal level? Yes. Is there criminal liability for doing pretty much anything related to cannabis? Yes. But if you are going to run a cannabis operation that complies with state law you need to  document what you are doing, especially your compliance efforts. And if you ever want legitimate relationships with future financiers, handshake deals and fly-by-night dealings are not going to cut it, especially now that MAUCRSA has passed. The number of collectives that have told me that they can’t now operate properly under local law requirements or that they’re getting hung up on negotiations with a financier because of a lack of documented operating history or a lack of vendor or other contracts is staggering.
  5. Merger is a collective’s best option under MAUCRSA. Definitely not true for most collectives, and don’t even get me started on the stupidity of selling your collective. In California, many collective operators want to merge with for-profit entities using the same management, name, and assets as the non-profit entity. But mergers, even those done purely as a reorganization, can be complicated beasts. For many collective operators, their relationships with amorphous management companies, their outstanding tax liabilities, their lack of any written operating history or contracts, and their prior general corporate incompetence would make merging a poor choice. The corporate, tax, tort, contract, and debt liabilities of the nonprofit would transfer to the surviving entity — and those liabilities can be countless for businesses that have worked outside the bounds of the law for years. Unless your collective has followed California’s corporations code, reported its income to the IRS and paid its taxes to the Board of Equalization, documented its arm’s length transactions with third parties, and has transferable assets of real value,  a merger will probably not be the way for you to go unless you want to carry all of your Prop. 215 baggage with you.

California cannabis distribution lawUnder California’s now-repealed Medical Cannabis Regulation and Safety Act (“MCRSA”), would-be distributors would have had a field day (which became the subject of great debate industry wide). Under the MCRSA, California’s cannabis cultivators and manufacturers would have had to sell their products to licensed distributors who would then sell those products to licensed retailers. MCRSA distributors had to be separately owned from other licensees and the MCRSA draft rules mandated that distributors take title to all product. All of that has changed with passage of the Medicinal and Adult Use Cannabis Regulation and Safety Act (a/k/a MAUCRSA, SB 94, or the Governor’s Budget Trailer Bill), which combines medical and adult use cannabis laws and rules, repeals the MCRSA, and forces withdrawal of the MCRSA draft rules.

Under MAUCRSA, cannabis licensees can vertically integrate and even act as their own distributor. This ultimately means California cannabis distributors won’t really act as distributors as we know them from the alcohol model. Instead, cannabis distributors will mostly help transport product and be the arbiters of product quality assurance.

Under the common three-tier system of alcohol distribution in the U.S., you have three main actors: importers or producers, distributors, and retailers. Essentially, producers (brewers, winemakers, importers, etc.) sell their products only to wholesale distributors who then sell to retailers (bars, liquor stores, grocery stores, etc.). Only retailers can sell to consumers. The alcohol distributor is crucial to the distribution chain and therefore immensely powerful. The distributor is solely responsible for setting up the relationship between retailers and producers and it does this by negotiating prices and providing brand selection between the two. Why have this three tier model? The main reasons for doing this in the alcohol industry were to limit consumer overconsumption with high taxes (you have more taxable events by having a middle man) and by giving profit access to more players.

California’s version of a cannabis distributor under MAUCRSA seems to have all of the obligations of an alcohol distributor but not really any of the benefits of exclusivity or control between licensees. MAUCRSA defines “distribution” as the procurement, sale, and transport of cannabis and cannabis products between licensees. As of now, distributors are the only licensees that can transport inventory between licensees and the only licensees that must make sure third-party testing is completed and that all product packaging and labeling meet state requirements. Interestingly though, cannabis licensees are not required to sell their cannabis or cannabis products to a distributor and may directly sell to any licensee authorized to sell cannabis and cannabis products to purchasers. Despite this, all cultivation and manufacturing licensees must go through a distributor for testing and packaging and labeling quality assurance and distributors can charge fees for these services. Distributors will also be the ones to collect and remit taxes on behalf of cultivators and retailers and they must secure a Board of Equalization permit (in addition to state licensing) to do so.

Under the MCRSA, it seemed existing alcohol distributors and those acting like distributors under Prop. 215’s medical cannabis collective model were well-positioned to become power players in California’s cannabis industry. But now with passage of the MAUCRSA, it’s likely California will issue a slew of cannabis distributor licenses to actors of all sizes and these distributers will become one-stop-shops for mandatory quality assurance and little more. If California wants to avoid the same sort of distribution problems that befell Nevada in the early days of its adult use sales, it will need to issue a large number of distributor licenses. There may end up being some market for a distribution only model (in the alcohol sense) for distributors that can help their cultivator and manufacturer customers expand their markets and gain market share or that can help retailers secure top quality products and brands at good prices. But now that it will be so easy for cultivators, manufacturers, and retailers to get around distributors to forge their own relationships with each other, the role of cannabis distributors in California is far from the alcohol model.

To help you better understand what is going on with California cannabis and what MAUCRSA means for your cannabis business, three of our California attorneys will be hosting a free webinar on Tuesday August 8, 2017, from 12 pm to 1 pm PT. From our Los Angeles office, I will be moderating two of our San Francisco-based attorneys (Alison Malsbury and Habib Bentelab) in a discussion on the major changes between the MCRSA and the MAUCRSA, including on vertical integration and ownership of multiple licenses, revised distributorship standards, and what California cannabis license applicants can expect more generally from California’s Bureau of Cannabis Control as rulemaking continues through the remainder of the year. We will also address questions from the audience both during and at the end of the webinar.

To register for this free webinar, please click here. We look forward to your joining us.

California cannabisThough we very much want states (and our clients) to follow the federal government’s “robust regulation” directives in the 2013 Cole Memo, we can’t help but bemoan when “robust” state cannabis regulations take the fun and creativity out of cannabis business operations.

Over the years, clients and potential clients have come to the cannabis lawyers at my firm with a bevy of business proposals that in federally lawful world would make sense and probably even be profitable. Unfortunately, we have to nix most of the “creative” business models and product proposals we see in California, Washington, and Oregon (the cannabis states in which we have our offices and in which our lawyers do most of their work) because these states rarely tolerate or permit unique business models or ideas.

In the spirit of the innovation that we have had to quash, the below are the five best/most interesting business proposals killed (or suffering a slow death) from comprehensive cannabis business regulation:

  1. Delivery. It’s a small miracle when a state allows cannabis delivery to customers by dispensaries. And even those few states that permit this typically put it under such serious restrictions you’d think the driver is moving millions in gold or a high level federal prisoner. Washington State doesn’t allow delivery, which helps the illegal market there. Oregon didn’t permit home delivery by retailers until February of this year. Even California’s proposed MCRSA retailer regulations (which will be withdrawn in full, but probably re-issued in similar form in the near future) restrict deliveries to retail licensees that have complied with a massive amount of security procedures.
  2. Fresh food manufacturing and manufacturing certain other products. States do not generally like cannabis manufacturers processing fresh foods or potentially hazardous foods or foods that might appeal to kids. The list of prohibited products varies by state, but the following fresh food items nearly always make the list: heated food, refrigerated food, anything with alcohol for drinking, pies, fruits, vegetable butters, dairy products, meats and seafoods. California planned to ban caffeinated products in its draft MCRSA manufacturer rules. And good luck trying to find any legally sold cannabis-infused gummy candies (or really any traditional candies other than chocolate and fruit chews) in California, Oregon or Washington.
  3. Cannabis events. We’ve previously written about how state cannabis regulations tend to be the death knell for the kinds of cannabis events that were immensely popular just a few years ago. Many states prohibit any gifting of cannabis and that has led to far fewer cannabis cups and cannabis parties.
  4. Marijuana online exchanges and marketplaces. Cannabis-legal states just aren’t ready for cannabis businesses to sell online or through exchanges of any kind. Whether it’s because of a lack of transparency or trust, or just the potential logistical nightmares, states pretty much force in-person transactions within the cannabis chain of distribution, all the way down to the consumer. California may be the one hope here since MAUCRSA retailers can use “technology platforms” they own and control for customer deliveries.
  5. On-site consumption and branded merchandise. No state allows public consumption of cannabis and most also prohibit their cannabis licensees from selling branded merchandise. Though some cities (Denver and Portland) have made a push for social, on-site consumption, most states loathe this as well, which is a real shame since consuming with others in a social setting normalizes cannabis and would likely boost tourism. California is another bright spot here as MAUCRSA will allow for consuming cannabis on the premises of retailers and micro-businesses, but only if the cities and counties in which those businesses sit also allow for this. As far as sales of branded merchandise, the majority of states prohibit cannabis businesses from selling any branded merch. from their licensed premises. For example, Washington State bans that practice (but Oregon does not). California is trying to take it a step further by stopping the sale of all branded merchandise by any cannabis businesses whatsoever.

California cannabis eventsOn July 26th, California’s Bureau of Cannabis Control emailed its listserv to let everyone know the following:

Earlier this spring, the Department of Consumer Affairs’ Bureau of Cannabis Control, Department of Public Health and Department of Food and Agriculture released proposed regulations for the Medical Cannabis Regulation and Safety Act. These licensing authorities held public hearings and accepted written comments regarding the proposed regulations. However, in late June, the Legislature passed and the Governor signed into law, the Medicinal and Adult-Use Cannabis Regulation and Safety Act [“MAUCRSA”], which creates one regulatory system for both medicinal and adult-use cannabis. As a result, the licensing authorities will withdraw the proposed medical cannabis regulations noticed for public comment on April 28 and May 5, 2017. The withdrawal is likely to happen early next month.

The three cannabis licensing authorities are each developing new proposed regulations based on the new law for the commercial medicinal and adult-use cannabis industries. During this process, the licensing authorities will consider the robust and valuable public comment received regarding the proposed medical cannabis regulations.

The licensing authorities will use the emergency rulemaking process for the new proposed regulations. The emergency regulations are expected to be published in fall 2017. The implementation date for the issuance of commercial cannabis licenses remains the same: January 2, 2018.

Want to gain better insight into MAUCRSA and its differences from the now repealed MCRSA? Want to know what California’s future regulations will probably look like and the corresponding issues they will raise? Want to become better informed on policy and law in California’s ever-evolving cannabis industry? If you answered “yes” to any of these questions, don’t miss out on the following two events at which some of our lawyers will be presenting:

On August 4, 2017, from 9 a.m. to 5 p.m. at UCLA Extension’s Gayley Center, at a seminar titled Cannabis Policy, Commerce and Science: Impacts on You and Your Community, our lead Los Angeles attorney, Hilary Bricken (just named by the American Bar Association as one of the top 40 young lawyers in the country!) will be presenting. According to the flyer for this event, attending this seminar will arm you with how to deal with California’s new rules:

Cannabis is changing our community and big decisions must be made before California becomes a fully legal recreation adult market in January of 2018. Learn about the benefits and risks from cannabis legalization for you, your city, your business, and your family. No matter your involvement with cannabis, this symposium is designed to leave you with pertinent facts and access to the subject matter experts who can provide real-life context and research to empower you by clarifying the expansion of use and production around this psychoactive substance.

In addition to Hilary, this event will include the following top speakers:

• Rosalie Pacula, Co-Director of the RAND Drug Policy Research Center
• Dr. Jeffrey Raber, Co-founder and President of The Werc Shop
• Mark Kleiman, NYU professor of Public Policy and author of Marijuana Legalization: What
• Reginald Jones Sawyer, California Assemblyman
• Jeffrey Chen, Co-Director at UCLA Cannabinoid Affinity Group
• Brad Rowe, CEO of BOTEC Analysis and UCLA lecturer on Public Policy for Crime
• Hilary Bricken, Attorney at Harris Bricken

• Rosanna Smart, Associate Economist at RAND
• Dr. Timothy Fong, Director of UCLA Addiction Psychiatry Fellowship

Then, on August 8th, to help you better understand what MAUCRSA means for your cannabis business, three of our California attorneys will be hosting a free webinar from 12 pm to 1 pm PT. Hilary Bricken  will moderate as two of our San Francisco-based attorneys (Habib Bentaleb and Alison Malsbury) discuss the major changes between the MCRSA and MAUCRSA, with a focus on vertical integration and ownership of multiple licenses, revised distributorship standards, and what California cannabis license applicants can expect more generally from California’s Bureau of Cannabis Control as rulemaking continues through the remainder of the year. We will also address questions from the audience both during and at the end of the webinar. To register for this free webinar, please click here. We look forward to your joining us!

Bay Area Cannabis LawyersWith California’s recent passage of its Medicinal and Adult Use Cannabis Regulation and Safety Act (“MAUCRSA” a/k/a the Governor’s Trailer Bill, a/k/a SB 94), California has combined government oversight of its medical and adult use cannabis industries into one master regulatory regime. MAUCRSA is almost guaranteed to make California’s cannabis industry more business friendly and less bureaucratic and protectionist, but questions remain about how the California Bureau of Cannabis Control (and its sister agencies) will fill in the gaps posed by the MAUCRSA legislation. Though we have 200 plus pages of proposed regulation under the now repealed MCRSA, those rules will need to go back to the drawing board to accommodate MAUCRSA’s changes stemming from Proposition 64 (one of San Francisco attorneys attended a state stakeholder meeting this past Monday, and that was pretty much confirmed). The big question is whether California will significantly revise the rules already proposed under MCRSA.

The short answer is nobody really knows, but there’s a good chance that many of the operational standards from MCRSA will remain.

We say this because regulators knew it was pretty much inevitable MAUCRSA would pass. We also say this because California’s regulators are on a tight timeline to begin accepting applications for licenses in January 2018 and slashing and burning MCRSA proposed regulations is not a good way to finish by that date. We expect the proposed MCRSA rules will not change much regarding the application process, except where necessary to make them better line up with MAUCRSA.

In turn, here are the top ten issues (among many others) we see with which California regulators will have to grapple when revising MAUCRSA rules:

  1. “Premises” and Multi-Tenant Operations. MAUCRSA defines premises as “the designated structure or structures and land specified in the application owned, leased, or otherwise held under the control of the applicant or licensee where the commercial cannabis activity will be or is being conducted. The premises shall be a contiguous area and shall only be occupied by one licensee.” MAUCRSA’s definition of premises is pretty much the same as in the proposed MCRSA rules, but it is not clear whether MAUCRSA rules will permit multi-tenant operations on the same parcel of land. Proposed MCRSA cultivator rules explicitly allowed for multi-tenant cultivation, but the MCRSA retail and manufacturing rules were silent on it. We’ll now have to see if the revised draft MAUCRSA rules will continue to permit multi-tenant operations.
  2. Local Approval Process. Under MCRSA, proof of a “local permit, license, or authorization” was required before you could receive your California state operational license. Though this has changed under the MAUCRSA, you still must be in compliance with local laws to secure your California state cannabis license. Among other things, the state of California will notify relevant local governments when a license applicant applies from within their borders. California’s cities and counties will then have 60 days to tell the state whether the applicant is in compliance with local laws. If the applicant is not in compliance, the state will reject the license application. If the local government stays silent, the state will presume the license applicant is in compliance with local laws, but will still not renew the license if the local government at any time notifies the state that the licensee is out of compliance with local laws. What we don’t know is how active local governments will be in communicating with the state about local law compliance. We expect litigation will emerge against local governments that “allow” cannabis operators to proceed via their silence, but then later object to those operations because of changes in local laws.
  3. Prohibited Products and Potency. The California Department of Health’s proposed manufacturing rules had a pretty aggressive list of prohibited products and everyone wants to know whether that list will change. Under MCRSA, California was not going to allow cannabis-infused alcohol, caffeine, or nicotine products and no cannabis product made of “potentially hazardous food.” Potentially hazardous food means any food “capable of supporting the growth of infectious or toxigenic microorganisms when held at temperatures above 41 degrees Fahrenheit.” This would mean products that must be refrigerated at less than 41 degrees and any dairy or meat products would not be allowed. MCRSA edibles also can’t contain more than 10 milligrams of THC per serving or more than one hundred 100 milligrams of THC per package of finished product. And, for non-edible manufactured cannabis, no finished package can contain more than 1000 milligrams of THC. Unfortunately, the consensus among our California cannabis attorneys is that it is unlikely MCRSA regulations will ease up on these restrictions.
  4. Advertising. Though MCRSA said nothing about cannabis business advertising other than that state agencies would generally regulate it, MAUCRSA heavily restricts it — there’s also bill in the California legislature to kill off cannabis business branded merchandise of all varieties.  What we don’t know is if regulators will further tighten advertising rules now that they have a roadmap from the state to do so. Specifically, under MAUCRSA both medical and adult use cannabis operators must:
    • Accurately and legibly identify the licensee responsible for advertising content.
    • Use a method to confirm age if involving direct, individual communication by the licensee.
    • Be truthful and appropriately substantiate their factual claims.
    • Not advertise or market cannabis in any of the following ways:
      • On billboards located on an Interstate Highway or State Highway that crosses the border of any other state;
      • In a manner intended to encourage people under 21 to consume marijuana;
      • With symbols, language, music, gestures, cartoon characters or other content known to appeal primarily to people under 21;
      • On an advertising sign within 1,000 feet of a day care center, K-12 school, playground, or youth center; and
      • Through free giveaways of marijuana or marijuana accessories as part of a business promotion.
  5. Non-Storefront Retail Delivery. Pursuant to MAUCRSA, “delivery” means the commercial transfer of cannabis or cannabis products to a customer and the retailer’s use of any technology platform it owns and controls. The MCRSA retailer rules required retailers to have brick and mortar storefronts from which to deliver cannabis product to patients. MAUCRSA on the other hand allows California cannabis retailers to “conduct sales exclusively by delivery” from a physical location that doesn’t have to be open to the public. Since the MCRSA regulations didn’t contemplate such a model, California cannabis regulators will need to craft rules regarding such operations, which will have huge ramifications for those delivery-only retail operators.
  6. Anti-Competitive Behavior. MAUCRSA zeroes in on preventing anti-competitive behavior between licensees, probably because, unlike MCRSA, MAUCRSA currently allows for near total vertical integration for almost all licensees and doesn’t yet limit the number of licenses a person can have in a given category (outside of Type 3s, see below). Specifically, MAUCRSA states that, it “shall be unlawful for any person to monopolize, or attempt to monopolize, or to combine or conspire with any person or persons, to monopolize any part of the trade or commerce related to cannabis. The Attorney General shall have the sole authority to enforce the provisions of this subdivision.” Though the Attorney General’s office will be the one to enforce here, there’s nothing to stop California’s regulating agencies from creating additional rules to prevent exclusive or long term contracting between licensees or to prevent cannabis licensees from exerting undue influence over each other. We have yet to see those rules, but they’re bound to arise as they have in other states with highly regulated cannabis regimes.
  7. State Due Diligence on “Owners.” MAUCRSA slightly changes and consolidates the definition of owner. “Owner” now means a “person with an aggregate ownership interest of 20 percent or more in the [entity] applying for a license or a licensee, unless the interest is solely a security, lien, or encumbrance; the chief executive officer of a nonprofit or other entity; a member of the board of directors of a nonprofit; and an individual who will be participating in the direction, control, or management of the person applying for a license.” MAUCRSA requires owners go through increased vetting (as opposed to those considered “non-owners”), but the consensus among our California cannabis attorneys is that the state will up the ante on background checks during the application process for those considered non-owners.
  8. Self-Distributorship. The MCRSA mandated cannabis cultivators and manufacturers go through separately owned third party distributors to get their products to market with retailers. MAUCRSA undoes this standard, for better or worse as I told L.A. Weekly, by allowing cannabis licensees to be their own distributors — with the exception of Type 5 licensees (i.e,. large scale growers), which won’t exist for the first five years of the program. The proposed MCRSA rules thoroughly covered how distributors could interact with licensees and operate. We don’t yet know whether those comprehensive regulations (like being able to take title to cannabis products and mandating separate storage facilities for inventory) will remain under MAUCRSA regulations now that almost all licensees can distribute their own products.
  9. Continuing Operations. The proposed MCRSA rules all had the following “continuing operations” standard: “All applicants that were in operation prior to January 1, 2018 . . . may continue to operate while their application is pending if a completed application is submitted to the Department no later than 5:00 p.m. Pacific Standard Time on July 2, 2018, and the continuing operations of the applicant are the same activities in which the applicant is seeking licensure.” MAUCRSA does not have this standard, which is somewhat problematic for those securing local permits, licenses, and approvals right now–though it does have a temporary licensing standard that will likely fill the gap here to make sure there is no shortage of product or access to cannabis when 2018 rolls around, but the procedures around securing those temporary licenses need to be fully created.
  10. Limitation on Type 3s and Total Plant Canopy. The MCRSA required the California Department of Food and Agriculture (“CDFA”) to limit the number of Type 3 cannabis licenses. Type 3s are mid-size grow facilities between 10,001 and 22,000 square feet of plant canopy. MAUCRSA has this same limitation requirement. Under the proposed MCRSA cultivation rules, the CDFA limited “a person … to one Medium Outdoor, or one Medium Indoor, or one Medium Mixed-Light license., and all cultivation licensee applicants to no more than 4 acres of total plant canopy statewide. It is not yet known whether the CDFA will keep these limitations in place.

To help you better understand what MAUCRSA means for your cannabis business, three of our California attorneys will be hosting a free webinar on August 8, 2017 from 12 pm to 1 pm PT. I will moderate San Francisco-based Alison Malsbury and Habib Bentaleb in a discussion on the major changes between the MCRSA and MAUCRSA, including on vertical integration and ownership of multiple licenses, revised distributorship standards, and what California cannabis license applicants can expect more generally from California’s Bureau of Cannabis Control as rule-making continues through the remainder of the year. We will also address questions from the audience both during and at the end of the webinar.

To register for this free webinar, please click here. We look forward to your joining us!

Buying a Los Angeles Cannabis dispensary
Buying a Los Angeles cannabis Dispensary? Due diligence is key.

With California’s recent passage of the Medicinal and Adult Use Cannabis Regulation and Safety Act (“MAUCRSA“), we finally know California will be combining its regulatory oversight of medical and adult use cannabis. We also know potential licensees no longer need to prove prior compliance with local laws to receive a state cannabis — which was the case under MCRSA, which has been repealed. This does not mean state licensees get to violate local laws. Instead, MAUCRSA lays out a sort of local vigilance program where the state notifies local governments of incoming licensees and the local governments then have to let the state know whether those licensees are complying with local cannabis laws. Local law is still king in California.

If you’ve been following the situation in Los Angeles, you know LA has an embattled history with its medical marijuana dispensaries. In addition to other enforcement measures, one of the City’s biggest battles has been enforcing Proposition D (a mere immunity-from-prosecution ordinance), which was essentially replaced this past March with ballot initiative Measure M that will finally regulate cannabis businesses within the City’s borders. Among other directives, Measure M ensured that Proposition D-compliant dispensary collectives would receive “priority” status for whatever local approval mechanism the City would design under Measure M. Despite the passage of Measure M, the question remained as to whether the City would increase the number of dispensaries and how exactly the City would regulate its cannabis operators.

Last month, Los Angeles released proposed Measure M regulations. Under those regulations (which are in a 60-day comment period), dispensaries that can prove “substantial” compliance with Proposition D will receive priority processing in the first round of the City’s issuance of “certificates of approval.” Though there has already been a fair amount of stakeholder dissent surrounding the use of certificates of approval and backlash against the proposal of a non-retail registry for cultivators and manufacturers, what has not been discussed as much is whether Proposition D-compliant dispensaries can essentially “flip,” or partner with third parties on, one or more of their certificates of approval (which include delivery and cultivation).

Even before institution of Measure M, folks were looking to “buy” Proposition D-compliant dispensaries, but ever more so now that owning such a dispensary gets priority processing from the City and because L.A. may not actually increase its number of dispensaries based on some restrictions in the proposed Measure M regulations.

If you are looking to get in on a Los Angeles cannabis dispensary you need to be thinking about due diligence. Due diligence on Los Angeles dispensaries is difficult because California’s existing MMJ laws under Prop. 215 do not require much operational or corporate accountability or tracking on either the state or local level. Also, because most of these entities are non-profits, there’s no equity to buy or sell. So you need to check the entity’s bylaws to make sure you can either take over the entity by paying a membership fee or that you can do some kind of director swap with an attendant asset purchase and that the entity will not need to give notice to thousands of patient members for you to do so. Given the unregulated nature of existing operators on a state level, you also need to make sure that the dispensary has been paying its taxes to the IRS (under 280e) and that it has been paying the Board of Equalization. Lastly, many Los Angeles dispensaries are not compliant with Proposition D and this too could cause you all sorts of problems. What makes for a compliant Proposition D dispensary? This is not entirely clear. Some believe that being on the 2013 City-issued list (which shows 134 dispensaries) proves compliance. Others believe the June 2017 map of dispensaries issued by the City Controller is the proof you need. Proposition D says that to prove compliance, a Los Angeles dispensary must show the following:

1. Was operating as a medical marijuana dispensary in the City by or before September 14, 2007;
2. Had a business tax registration certificate (“BTRC”) or tax exemption from the City by or before September 13, 2007;
3. Was registered as a medical marijuana dispensary with the City Clerk by November 13, 2007 pursuant to the then existing pre-interim control ordinance number 179027;
4. Notified the City Clerk by February 18, 2011 of its intention to register under the city’s Medical Marijuana Ordinance 181068, as amended by temporary urgency ordinance 181530;
5. Has not ceased operations at its identified location for any of the following reasons: (1) court or government enforcement order to shut down or (2) lack of a lease or utilities (in the name of the dispensary or one of the managers/directors of the dispensary for the benefit of the dispensary) to the property. There are exceptions to this requirement if the dispensary ever relocated (which they were allowed to do) or if it temporarily closed down because of a shutdown letter from the Feds or the City prior to the temporary urgency ordinance 181530 but then re-opened;
6. Obtained its BTRCs for 2011 and 2012 (and has continued to renew those BTRCs with the City);
7. Has no outstanding or unpaid tax liability with or to the City (including any fines, penalties, etc.). There are some exceptions here on payments during the 2011 and 2012 tax years, and settlement agreements with the City are also exempt;
7. Has continuously complied with the various operational requirements in Proposition D;
8. Has had all dispensary managers over the years submit to the City livescan checks; and
9. From property line to property line, is at least 1,000 feet away from any schools and at least 600 feet away from any parks, churches, child care facilities, public libraries, youth centers, rehab facilities, and other dispensaries.
Under Measure M proposed regulations, the City will allow the dispensaries to explain any mitigating factors for non-compliance with Proposition D, but that’s definitely not a guarantee the dispensary will receive a certificate of approval.
If you are contemplating buying into or joining as an owner in any Los Angeles dispensary business, due diligence will be key. Proposition D compliant-dispensaries are valuable as they may end up being the only dispensaries in Los Angeles for a number of years. But don’t get sucked into investing in a Los Angeles dispensary that will not be able to prove its immunity under Proposition D–avoid this problem by doing proper due diligence.