California Cannabis Licensing. Get Ready.

At the end of 2015, our California attorneys handled an influx of clients looking to whip their cannabis companies into regulatory shape to meet the MMRSA’s deadline for obtaining “priority” licensing status. If you recall, AB 266, at Article 4, Section 19321, states that:

In issuing licenses, the licensing authority shall prioritize any facility or entity that can demonstrate to the authority’s satisfaction that it was in operation and in good standing with the local jurisdiction by January 1, 2016.

Operators of California collectives and dispensaries spent a frenzied December attempting to incorporate as non-profit mutual benefit corporations and to ascertain what exactly would be required to be considered in “good standing” with their local jurisdictions. And many operators did not meet the January 1st deadline. Corporate filings with the state take time, and local permitting takes even more time. So many operators opted, without that priority incentive, to abandon the path toward compliance and to continue operating as they always had: clearly outside the confines of the law.

But everyone seems to be overlooking the next opportunity for Californians to nab priority licensing status: the “Control, Regulate and Tax Adult Use of Marijuana Act” (more commonly referred to as the AUMA Initiative). The AUMA Initiative, at Article 4, Section 26054.2(a), contains the following very similar “priority” language to the MMRSA:

A licensing authority shall give priority in issuing licenses under this division to applicants that can demonstrate to the authority’s satisfaction that the applicant operated in compliance with the Compassionate Use Act and its implementing laws before September 1, 2016, or currently operates in compliance with Chapter 3.5 of Division 8.

And with respect to local law compliance, AUMA, at Article 4, Section 26054.2(b), provides as follows:

The bureau shall request that local jurisdictions identify for the bureau potential applicants for licensure based on the applicants’ prior operation in the local jurisdiction in compliance with state law, including the Compassionate Use Act and its implementing laws, and any applicable local laws.

What this means is that California marijuana operators still have every incentive to get their corporate affairs in order, pay their taxes, and comply with local law. If the AUMA Initiative passes this November, it won’t be too late to take advantage of prior experience running a collective or dispensary, but only if your entity was compliant with state and local law as of September 1st of this year.

This takes us back to the issue of what exactly “priority” means, and what your entity must do to qualify. Although the AUMA Initiative, like the MMRSA, does not define that word, we know from various other states in which we have handled licensing applications that it will almost certainly mean those with priority status in California will be the first to obtain California cannabis licenses. Being the first to market in California, where the number of marijuana license applicants is sure to be astronomical, will have major long term benefits for any licensee. And perhaps even more importantly, we expect many California cities and counties to limit the number of cannabis businesses that may operate within their jurisdiction. The state may do the same, meaning that getting a license early could be the only way to get a license at all.

Let’s also recall that defining terms like “operated” and “in compliance” will be left to the State during the rule-making period set to take place until, like the MMRSA, the AUMA becomes effective in January 2018. However, and again based on our extensive licensing experience in other states, we are convinced that California will tie “compliance” to a marijuana entity’s ability to show it is registered with the California Board of Equalization, and that it has paid (and is paying) all applicable state and local taxes.

Though there is some ambiguity surrounding what the language of the proposed AUMA will translate to in practice, there are some obvious meanings that reveal what California marijuana operators should be doing now to meet the September priority deadline. First, all marijuana operations should be registered with the California Secretary of State as non-profit mutual benefit corporations or statutory cooperatives, keeping in mind that articles of incorporation, bylaws, and the treatment of “membership” should be carefully drafted to make the transition into for-profit operation down the line a smooth one.

And then there is the issue of local law compliance, which is a hang-up for so many California cannabis businesses. Since California cities and counties are able to create their own regulations for medical marijuana, each city and county has varying medical marijuana regulations, many of which are incredibly difficult to locate or decipher. Depending on where your business is located, you will want to be able to show the state that you meet all local permitting and/or licensing requirements. Obtaining these local approvals is always time consuming, so if you haven’t begun the process with your local authorities, start now.

New operators looking to secure priority status will have their work cut out for them in the next five months. Newcomers will, at a minimum, need to find and secure a properly zoned location, execute an appropriate leasehold or purchase and sale agreement for the property, choose an appropriate corporate entity, form that entity and draft bylaws, articles of incorporation, patient agreements, etc., register with the Board of Equalization, and abide by all local laws and regulations, obtaining licenses and permits where needed. Just because the January 1, 2016 MMRSA deadline has passed, doesn’t mean cannabis businesses should sit back and forget about state and local compliance. If the AUMA Initiative passes, adult use licensing priority could still be up for grabs.