international trade cannabis marijuana

Recently, we’ve been getting tons of questions from clients regarding the international import and export of cannabis around the globe. 2018 was a historic year for the cannabis industry not just in the United States, but also internationally. Canada legalized recreational marijuana for the entire country. Many countries (e.g., Thailand, New Zealand, Mexico, Lithuania, U.K.) took significant steps to decriminalize or legalize medical or recreational marijuana. In December, Israel became the fifth country to pass legislation legalizing the export of medical marijuana (after the Netherlands, Canada, Uruguay, and Australia).

Despite these advances, international trade in legal marijuana currently is limited. Under a 1961 international treaty (Single Convention on Narcotic Drugs), cannabis is classified as a controlled substance with no medicinal use or value (we explored this recently here). Most countries are signatories to this and other international treaties that set forth the ground rules for the international drug control regime for controlled substances. Individual countries, however, can and have begun to make their own determinations on whether cannabis should be treated as a narcotic substance. Countries that have legalized marijuana can agree to allow trade in marijuana between those countries. Dutch and Canadian companies have gotten a head start in the global marijuana trade with medical marijuana being exported to Germany, Italy, Croatia, Australia, New Zealand, Brazil, and Chile. Currently, Israel, Australia, Uruguay, and others are also pushing to get into the medical marijuana export game.

While other countries have begun to legalize cannabis, the United States federal government still classifies “marijuana” as a Schedule I controlled substance with no medical use and a high potential for abuse. Thus, federal law effectively prohibits importation of marijuana into the United States. In September 2018, however, the U.S. Drug Enforcement Administration (DEA) granted permission for a Canadian marijuana company (Tilray) to export medicinal cannabis to University of California San Diego for clinical trial. Although DEA’s approval of this importation may be just a one-off, this one approval could signal an eventual broader opening of the U.S. market to imported marijuana.

If (or when) the U.S. finally allows the importation of cannabis products from other countries, it seems likely that some type of trade dispute will likely occur. Legalization of marijuana has often resulted in supply and demand imbalances that result in prices rising or falling sharply. In Oregon, prices for licensed marijuana plummeted with overproduction, and nearly 70 percent of the legal recreational marijuana grown has gone unsold. In Canada, medical marijuana dispensaries faced shortages as licensed producers shifted to selling to the much larger legalized recreational marijuana market. Italy faced consistent shortages of medicinal marijuana and ultimately permitted imports from Canadian companies to ease the supply shortages.

Trade disputes often result when producers in one country complain that imports from another country are being sold at unfairly low or subsidized prices and harming the domestic industry. Domestic producers can petition their government to investigate imported products and often antidumping or countervailing duties are imposed. If imported cannabis products are allowed into the U.S., it would not be surprising if U.S. marijuana producers resort to U.S. trade laws in order to fend off import competition. Which countries might be likely targets of a cannabis trade dispute?

  • Canada –Given the head start that Canadian cannabis companies already have in developing international distribution networks in a number of countries, bigger and better funded Canadian companies could swoop in and aggressively price their product to overwhelm U.S. competitors and take over a dominant market share in the United States. U.S. cannabis companies could try to seek trade protection from Canadian imports by filing antidumping or countervailing duty petitions like those filed against Canadian softwood lumber in multiple rounds going back to the 1980s.
  • Mexico – Mexico’s new President Lopez Obrador has proposed legislation to legalize marijuana. If Mexico ever legalizes exports of licensed marijuana, Mexico’s relatively lower farm labor rates could provide significant cost advantages over U.S. or Canadian licensed suppliers.
  • China – Although marijuana is illegal in China, China is nevertheless the world’s leading producer of industrial hemp cultivation. China likely will have a significant advantage in producing more cost-effective hemp fabric and medicinal products than any other country. As of 2017, Chinese companies hold more than half of the 606 patents filed around the world that relate to cannabis. These patents could trigger plenty of litigation as companies try to attack or defend the intellectual property rights of their hemp products.

It’s hard to think of international trade disputes involving cannabis when it is still illegal for marijuana to cross U.S. state borders, let alone international borders.  But as the trend of marijuana legalization continues globally, it is likely a matter of time before licensed marijuana products become treated like any other commodity subject to competitive market forces and resulting litigation over fair and unfair competition. Once imported marijuana products are allowed, it is not difficult to foresee the day when import competition in the legal marijuana markets may trigger some type of international trade dispute either in the form of an antidumping or countervailing duty petition or a patent infringement action.

california cannabis licensing rulesThe State of California finally adopted permanent cannabis regulations earlier this month. In a series of posts, we’re going to cover the highlights of each agency’s permanent rules so that you know what big changes to expect during 2019. This post will cover the main changes (in our opinion) regarding the California Department of Public Health Manufactured Cannabis Safety Branch’s (“CDPH-MCSB”) permanent regs. Without further ado:

No more Farm Bill hemp-CBD ingredients or additives. It’s no secret that the California Department of Health Food and Drug Branch (“FDB”) has an issue with hemp-CBD. Specifically, an FAQ that issued from FDB last year made clear that FDB prohibits hemp-CBD in “Food” for humans and pets. Now, CDPH-MCSB is following suit (indirectly). Pursuant to new regulation 40175(c), “a manufacturer licensee shall only use cannabinoid concentrates and extracts that are manufactured or processed from cannabis obtained from a licensed cannabis cultivator.” What this means is that using Farm Bill hemp-CBD as an ingredient or addictive to cannabis manufactured products is not allowed unless it comes from a licensed cannabis cultivator. The protections of the Farm Bill won’t apply.

Owners and financial interest holders. I recently wrote about how it’s unclear as to how far the state will now go in finding and vetting entity owners and entity financial interest holders, especially since the Bureau of Cannabis Control (“BCC”) articulates in its rules that it intends to locate and vet every human possible in pretty much any ownership structure. But what about MCSB? MCSB entity owner regulations now state that “if the owner . . . is an entity, then the chief executive officer and members of the board of directors of the entity shall be considered owners,” and for financial interest holders, MCSB rules mandate only that “financial interest holders shall be disclosed on the application for licensure.” On balance, the BCC’s owner and financial interest holder rules are much more aggressive than MCSB, and the BCC’s comments to its owner and financial interest holder rules was that all agencies would apply the same standards for vetting. However, this clearly isn’t going to be the case if stakeholders go off of a plain reading of the law. Though it will be strange, the MCSB will very likely stick to its minimal vetting requirements while the BCC goes full bore on retailer, distributor, and lab owners and financial interest holders.

Changes in ownership. Again in contrast with the BCC, the MSCB is going to be much easier on changes in ownership of licensees. Under BCC regulations, if there’s a full buy-out of all existing owners, the entity can no longer operate while the change of ownership is being reviewed and processed by the BCC. The MCSB however has no such standard, at least not one that’s codified under the new regs. Specifically, for any changes of ownership or changes to financial interest holders, the MCSB expects the following protocol:

“The licensee shall notify the [MCSB] of the addition or removal of an owner through [the agency’s online system] within 10 calendar days of the change; Any new owner shall submit the information required [by law]; The [MCSB] shall review the qualifications of the new owner in accordance with [state law] and these regulations to determine whether the change would constitute grounds for denial of the license. The [MCSB] may approve the addition of the owner, deny the addition of the owner, or condition the license as appropriate, to be determined on a case-by-case basis; An owner shall notify the [MCSB] through [the state agency’s online system] of any change in their owner information . . . within 10 calendar days of the change; and a licensee shall notify the [MCSB] through [the state’s online system] of any change in the list of financial interest holders . . . within 10 calendar days of the change.”

Labeling. Labeling is still just as intense and comprehensive as it was under the emergency regulations. Now though, manufacturers need to ensure that, if a product container is separable from the outer-most packaging (e.g., a container placed inside of a box), the product container includes the following: (1) For edible cannabis products, topical cannabis products, suppositories, or orally-consumed concentrates, all information required for the primary panel except for cannabinoid content, and (2) for inhaled products (e.g., dab, shatter, and wax), the universal symbol (which is the black triangle with a cannabis leaf and an “!” with “CA” underneath). We also now (finally) have specific labeling requirements for pre-roll and packaged flower that didn’t exist before outside of the statute, itself. Overall, there are additional technical change requirements for labeling, including the weight of the product now needing to be in metric and U.S. customary units, specific labeling for flavoring in line with federal law, and more specific labeling restrictions for cannabinoid content.

Packaging. Until 2020, manufacturers are off the hook for providing child resistant packaging (“CRP”). Until then, retailers will bear the burden of CRP through the continued use of CRP exit packaging. Once CRP for manufacturers kicks in though, they’ll need to adhere to a litany of requirements, including compliance with the Poison Prevention Packaging Act of 1970 Regulations.

New product definitions. Via the permanent regulations, MCSB has introduced a number of newly defined terms, which is ultimately better for licensees so that confusion doesn’t abound as product development continues. For example, we now have as recognized definitions like:

  • “Infused pre-roll,” which means “a pre-roll into which cannabis concentrate (other than kief) or other ingredients have been incorporated”;
  • “Kief,” which means “the resinous trichomes of cannabis that have been separated from the cannabis plant”; and
  • “Orally-consumed concentrate,” which means “a cannabis concentrate that is intended to be consumed by mouth and is not otherwise an edible cannabis product. ‘Orally-consumed concentrate’ includes tinctures, capsules, and tablets . . .”

OSHA training. Given that cannabis remains federally illegal, people often think that violating one federal law somehow gives you a license to violate every federal law, which is entirely untrue. Under the permanent MCSB regulations:

“for an applicant entity with more than one employee, the applicant employs, or will employ within one year of receiving a license, one supervisor and one employee who have successfully completed a Cal/OSHA 30-hour general industry outreach course offered by a training provider that is authorized by an OSHA Training Institute Education Center to provide the course.”

Clearly, safety and federal compliance in the workplace still applies, even to cannabis operators, which is now demoralized under the permanent MCSB rules.

Changes to operations that now require state approval. As the state moves along with licensing and enforcement, it was inevitable that certain licensee actions would first require state approval. What this usually means is that major changes to your business or SOPs can’t go down without the state’s blessing, which can take weeks or months to secure. Specifically, for the MCSB, licensees will now have to report to and clear with the state the following action items before the licensee pulls the trigger on them (all to the tune of a $700 change application fee, which is non-refundable):

  • the addition of any closed-loop extraction method;
  • the addition of any other extraction method that necessitates a substantial or material alteration of the premises;
  • the addition of infusion operations if no infusion activity is listed in the current license application on file with the [MCSB] (you’ll also have to tell the state about “any changes to the product list on file with the [MCSB] and provide a new product list within 10 business days of making any change” to the products you’re making”); or
  • a substantial or material alteration of the licensed premises from the current premises diagram on file with the [MCSB].

Importantly, a “substantial or material alteration” includes: “the removal, creation, or relocation of an entryway, doorway, wall, or interior partition; a change in the type of activity conducted in, or the use of, an area identified in the premises diagram; or remodeling of the premises or portion of the premises in which manufacturing activities are conducted.” Be advised!

marijuana civil rights

Happy MLK Day!

For our international readers, Martin Luther King, Jr. Day is a federal U.S. holiday marking the birthday of its eponymous civil rights hero. Dr. King was the chief spokesperson for nonviolent activism in the Civil Rights Movement, which successfully protested racial discrimination in federal and state law. Dr. King was assassinated in 1968, four years after the passage of one of the great U.S. laws of the 20th century, the Civil Rights Act of 1964. His death also came two years prior to one of the 20th century’s most controversial and insidious laws, the Controlled Substances Act of 1970 (CSA).

As cannabis business lawyers, we write about cannabis law topics every day of the year on this blog, but we seldom address pure social issues. When it comes to cannabis, however, it is sometimes difficult to separate law and policy. This is because the federal prohibition of marijuana in the U.S. has had a racially disparate impact on non-white individuals, especially black and Latino Americans. That should come as no surprise to anyone: It is well documented that former president Richard Nixon wanted to link marijuana use and its negative effects to black people and hippies, who he perceived to be his enemies, when he signed the CSA.

That was almost 50 years ago, but in a way, not much has changed. Although the Trump administration has instated policies that make it more difficult to track drug arrests, publicly available FBI data reveals that 659,700 marijuana-related arrests occurred in 2017, comprising 40.4% of all reported U.S. drug arrests. This is nearly 12,000 more marijuana arrests than were made in 2016 (which, in turn, saw an increase from 2015). Thus, marijuana arrests are increasing, even as more states legalize possession and sale of the plant. It is profoundly regrettable that non-white individuals are arrested for marijuana crimes on a grossly disproportionate basis to whites, today and historically, despite lower levels of consumption overall. Most arrests are made for simple possession of small amounts of weed, and are made at the state and local level.

Last year at this time, Jeff Sessions was our attorney general. Although he is gone, his retrograde policies live on as Department of Justice directives with respect to marijuana and marijuana-adjacent issues. These policies include:

  • Support of draconian federal sentences for drug-related convictions (which affect blacks and Latinos disproportionately);
  • Support of federal private prisons (which impound blacks and Latinos disproportionately);
  • Support of the police tool of asset forfeiture, a legally problematic procedure which allows law enforcement to seize property of individuals who have been suspected of, but not charged with, crimes (in violation of everyone’s civil rights, but to affect blacks and Latinos disproportionately); and
  • Rescission of the Cole Memo, which gave some cover to marijuana businesses.

Today, it seems fairly certain that William Barr will be our next confirmed attorney general. He won’t be as bad as Sessions, but he is no friend of marijuana either. Barr commented last week that although he would not use federal dollars to chase state-compliant actors, “it’s a mistake to back off marijuana.” That’s not the type of leadership we need from the nation’s chief law enforcement officer.

As to Congress, it recently passed the First Step Act, a mild reformation of the federal criminal justice system. That law is mostly a dud when it comes to marijuana, however. And none of the “straight” marijuana bills, from the STATES Act on down, have made it to a floor vote. All the while, marijuana arrests continue to increase, despite the facts that: a) two in three Americans now support legalizing marijuana, and b) new adult use and medical marijuana states are coming online in waves.

The War on Drugs started out as a war on minority groups, and not much has changed in 50 years. If Dr. Martin Luther King Jr. were alive today, it is almost certain that he would be advocating for an end to the War on Drugs, starting with removal of marijuana from Schedule I of the CSA. Until that happens, and in honor of Dr. King, here are some ways you can pitch in to reverse the racist, immoral and counterproductive state of federal law with respect to marijuana:

Dr. King died 50 years ago, but his legacy continues to resonate and expand. On this day honoring one of our greatest leaders, it is important to remember all of the reasons we strive to put an end to prohibition, including the most important ones.

Let’s hope to finally see some meaningful progress on marijuana and civil rights in 2019, particularly at the federal level.

california cannabis final regulations

Yesterday afternoon, on January 16, 2019, the California Office of Administrative Law (“OAL) finally approved the sets of final regulations under it had been reviewing after submissions from the California Department of Public Health (“CDPH”) which regulates cannabis manufacturers, the California Department of Food and Agriculture (“CDFA”) which regulates cultivators, and the Bureau of Cannabis Control (“BCC”) which regulates distributors, retailers, event organizers, and testing laboratories. You can find the final regulations here.

The three sets of regulations follow on the heels of final proposed regulations that the CDPH, CDFA, and BCC submitted to the OAL for its review in December. We will be providing some overview of the key components of the final regulations shortly, but it looks upon initial review like these regulations adopted most or all of what was submitted for review in December.

These regulations are “final”, meaning cannabis operators and applicants no longer need to worry about discrepancies between emergency regulations (which as of now are no longer effective per the OAL’s statement) and whatever version of proposed regulations were then out in the ether. But though these regulations are “final”, we’re pretty positive that there will be changes and modifications—probably on a more incremental level—in the future.

Stay tuned to the Canna Law Blog for further insight and analysis into these final regulations and any final regulations that will come.

california cannabis license merger saleOur California cannabis lawyers are seeing a major spike in mergers and acquisitions (M & A), and it’s time to discuss what’s on the horizon for changes of ownership for some California cannabis businesses. In every cannabis state, M & A is no breeze because the regulators almost always require pre-approval of the transaction or of the new buyer(s). In California, it’s going to be more of the same in the red tape department in the future, as per the proposed permanent rules that will (likely) take effect at the middle of this month.

As you all know, multiple agencies in California run point on licensing. The Bureau of Cannabis Control (“BCC”) is the lead agency though when it comes to the implementation of the Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”). Under the BCC’s proposed permanent rules (which are still under review by the Office of Administrative Law), we now have a revised change of ownership process for distributors, labs, and retailers. (The California Department of Public Health the California Department of Food and Agriculture both have new change of ownership rules that significantly differ from the BCC in certain ways.)

First, and most importantly for all licensees, state licenses are not transferable. What this means then is that buyers have to purchase the companies that hold those licenses. Second, to accomplish a change of ownership under the new rules, would-be sellers of BCC-licensed businesses will need to submit a “Notification and Request Form” (see here) and check the box entitled “Change in Ownership” or “Change in Financial Interest Holder.” Specifically, for changes of “owners,” under the proposed permanent rules at section 5023(c),

If one or more of the owners of a license change, the new owners shall submit the information required for . . . each new owner be submitted to the [BCC] within 14 calendar days of the effective date of the ownership change.”

This timeline is almost the same as what was set forth under the emergency rules–it’s no surprise that the state has a deadline on disclosure for changes in ownership, as it affects licensure. However, this is the new curve ball for the M & A crowd pursuant to section 5023:

The business may continue to operate under the active license while the [BCC] reviews the qualifications of the new owner(s) in accordance with [MAUCRSA] and these regulations to determine whether the change would constitute grounds for denial of the license, if at least one existing owner is not transferring his or her ownership interest and will remain as an owner under the new ownership structure. If all owners will be transferring their ownership interest, the business shall not operate under the new ownership structure until a new license application has been submitted to and approved by the [BCC], and all application and license fees for the new application have been paid . . . In cases where one or more owners leave the business by transferring their ownership interest to the other existing owner(s), the owner or owners that are transferring their interest shall provide a signed statement to the [BCC] confirming that they have transferred their interest.”

In my experience, most business buyers in cannabis are looking for a full buy-out. And your typical cannabis M & A deal will (hopefully) have as a condition to closing that the state and/or local government(s) approve of the transaction/new buyer(s) prior to closing. However, in California, retailers, labs, and distributors will not be able to operate during a complete buy-out while the state is processing not only all of the new owners (including their background checks) but also an entirely new license application, which could take weeks or months to complete. Without a doubt, buyers will want the business to keep operating during the transaction so this is going to be problematic for a complete buy-out, and it’s pretty much unprecedented that the business shuts down during the transition.

What we’re now very likely to see then is that at least one of the original selling owners will always stay on the licensed entity as part of the transaction and only after the state clears the new license application will that person finally be able to transfer all of their equity (once they provide that written statement to the BCC). What this means is that buy-outs of cannabis businesses in California just got that much tougher and risk-laden for buyers as these transactions will now certainly drag out and become even more complicated.

And if you’re not looking at a full buy-out, life is somewhat easier in that “[a] change in ownership does not occur when one or more owners leave the business by transferring their ownership interest to the other existing owner(s),” and changes to financial interest holders (i.e., anyone who holds less than 20% of the business’s equity) don’t constitute a change of ownership that warrants a new application, etc.

You may be thinking that there’s a silver lining here in that these new rules may only apply specifically to annual licenses. However, regulators ensured that the change of ownership standards apply to those who hold a “License,” which is defined statutorily as “a state license issued under this division, and includes both an A-license and an M-license, as well as a testing laboratory license.” In turn, these standards should apply to those companies that hold temporary, provisional, and annual licenses.

California has certainly set itself apart as a very mixed place when it comes to cannabis business friendliness. And these recent BCC-imposed changes of ownership, at least in my opinion, help bring the state closer to more arbitrary barriers to entry than necessary.

california cannabis packaging labeling
You simply must reconsider your packaging and labeling.

In early December, California’s cannabis regulators released their proposed final regulations. If the regulations aren’t changed, it’s expected that they will take effect at some point this month, or shortly after. These regulations have some pretty important changes from the current readopted emergency regulations. One of the notable areas of change is the packaging and labeling requirements. In spite of some of the changes, there is almost no grace period for compliance. If the regulations go into effect as is, requirements could change overnight.

For some background, the regulations between the agencies permit manufacturers to package and label manufactured cannabis products such as vape cartridges or edibles, and distributors to package and label cannabis flower. Retailers are not permitted to do any labeling. In large part, this will remain unchanged. But the requirements for different license types will change significantly.

First is child-resistant packaging, which is the only major packaging change that has any kind of transitional period. The proposed final regulations of the California Department of Public Health (“CDPH”), which regulates manufacturers, postpone the child-resistant packaging requirements until January 1, 2020. The Bureau of Cannabis Control (“BCC”), which regulates a number of license types including distributors and retailers, likewise will not require distributors to package cannabis goods in child-resistant packages. However, retailers are forced to ensure that any products sold on their premises are in child-resistant exit packaging until 2020, at which point the manufacturers will need to start providing child-resistant packaging.

Second, the specific labeling requirements will change, and most dramatically for manufacturers. There will be a number of specific changes, including:

  • For manufacturers, if product containers are separable from the outermost packaging (i.e., a product container is inside of a box), then the product container must also contain certain information that would be required on the outermost layer. For edibles, topicals, suppositories, and orally consumed concentrates, all primary panel information—with the exception of the cannabinoid content—must be on the product package. For inhaled products (i.e., dab, shatter, or wax), the Universal Symbol must be stamped on the product package.
  • The manufacture regulations include specific primary and informational panel label requirements for pre-rolls and packaged cannabis flower that are similar to the requirements for manufactured cannabis goods, which must provide certain information, have the universal symbol and government warnings, and identify the cultivator of the flower.
  • For packaged manufactured goods, the DPH will no longer require primary paneling to include THC and CBD content. Instead, the proposed rules state that cannabinoid content “may” be placed on the primary panel packaging. The DPH will allow distributors to label packaging with the correct cannabinoid content after required laboratory testing. Cannabinoid content labeling will include very specific requirements that will vary from product to product.
  • The DPH is prohibiting labels for edibles to contain pictures of the food product inside the packaging, and from making false or misleading claims that products are organic.

Crucially, other than the child-resistant packaging requirements, there will be no transition period in these proposed final regulations. The packaging and labeling rules in earlier emergency regulations included explicit transitional periods for prior modifications, but the proposed final regulations of both the CDPH and BCC specifically delete these transitional period requirements.

What the lack of transitional periods means is that these proposed regulations will change labeling requirements overnight if they are implemented. This will create major issues for distributors and retailers who have products in their possession that suddenly don’t conform to the new final regulations.

For example, retailers cannot accept or sell products except as they will appear in their final form and cannot do any packaging or labeling themselves. This means that products must be labeled in accordance with BCC and CDPH standards. If a package or label is suddenly insufficient, then retailers may be prohibited from selling those products.

Distributors may be in a similar bind. While distributors can package and label cannabis flower, their ability under these proposed final regulations to package or label manufactured cannabis products is very limited: They essentially can only correct labels’ THC content if testing confirms it was inaccurate. The regulations don’t seem to allow distributors, for example, to add required warnings that are not present on packaging.

In sum, if these regulations become final, there may suddenly be a host of products that overnight are not compatible with the regulations. And because these regulations may become final very soon, getting products into compliance now is critical.

marijuana cannabis M & AWe handle a lot of cannabis M & A in our Los Angeles, San Francisco, Seattle and Portland offices. Over the years, it’s become pretty clear that in robustly regulated cannabis states, the secondary market for buying and selling businesses really peaks (after initial legalization) as local and state governments finally begin to settle their local control entitlement processes, and once the state rules governing cannabis businesses are less volatile. In California specifically, our cannabis business attorneys have worked on a good amount of cannabis M & A deals since the implementation of the Medicinal and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”)–  especially in Los Angeles, Long Beach, Santa Ana, Santa Barbara, San Diego, San Francisco, the Emerald Triangle, and Oakland.

Lately though, there’s been a massive uptick in our firm’s M & A practice for cannabis businesses in a multitude of states. Below is an outline as to why this is happening.

  1. Limited number of licensed businesses.

Securing a cannabis license in any state is no picnic. Setting aside the federal illegality of cannabis (which has its own business and legal risks), licensees not only have to deal with the shifting state regulatory landscape, but they must also constantly navigate local control from city to city and county to county. Licensees also have to meet numerous strict local and state requirements for their location, daily operations, finances, owners, financial interest holders, true parties of interest, and their employees. To further complicate things, certain states (mainly on the east coast) only allow a limited number of licenses for which applicants compete, and the expense of the application process in those states can force an applicant to expend six figures or more with no guarantee of licensure. Other states have become so saturated with applicants that they’ve suspended their licensing window indefinitely (see Oregon), or they only had a limited licensing window in the first place (see Washington). Even in California, where the barriers to licensing are very low on the state level, the majority of cities and counties still ban commercial cannabis activity.

All of these human, political and regulatory factors have had one practical effect on industry: The number of licensed cannabis entities existing today is very limited and will be slow to grow and expand in states with legalization. In turn, just by virtue of holding a license, your cannabis business holds inherent value to strategic and financial buyers.

  1. Survival plan.

Getting a cannabis license is a bit of a hollow victory because no matter how difficult the road to licensure has been, your entity now faces the far greater challenge of securing revenues and turning profits. Many licensees underestimate this side of the game, and they truly believe that cannabis will just sell itself with no tactical thinking or business effort. Oftentimes, due to poor planning or general lack of sophistication on the business side, cannabis partnerships break up and businesses run out of money. Sometimes, licensed businesses go belly up before operations really commence.

Some cannabis operators are happy (even eager) to abandon the business at this stage of great stress. Depending on the market, they may find buyers willing to pay hundreds of thousands or even millions for their newly-minted cannabis businesses that’s slowly becoming distressed (though it’s no secret that most cannabis business valuations are still squirrelly at best). On the other hand, other cannabis businesses in this situation will look around and find similarly-minded peers to potentially combine with them on a cash-free basis via a share swap, thus increasing their licensing portfolio and the likelihood of finding new finances and surviving the start-up stage– exponentially increasing their valuation.

  1. Growth plan.

After surviving the start-up phase, cannabis businesses should start evaluating themselves against their peers and competitors, thinking about ways to increase their market share. Here, businesses may begin thinking about acquiring a competitor or an entity that can add to a vertical integrated structure, improve the supply chain, add to the brand portfolio, ultimately expanding the geographical reach of the business and brand. Purchasing an operational entity will likely be cheaper than starting new operations and applying for a very hard-to-get license for those operations. Therefore, existing cannabis entities that actually sustain operations will likely be approached with an offer of an acquisition, a share swap, or some other offer of an acquisition or a combination transaction. In addition, in preparation for the larger corporate players entering the cannabis industry, some cannabis companies will choose to merge to make themselves a more attractive target for a liquidity or an exit event.

  1. Exit/liquidation plan.

The holy grail of most entrepreneurs is an “EXIT.”  The basic formula is: Create it, build it, grow it, capitalize on it, rinse and repeat.  It’s no different in the cannabis industry. Many cannabis businesses do not intend to compete in the marketplace or create a lasting legacy. Instead, the usual goal is to sell the business off to a larger corporate player. Some of these cannabis businesses are beginning to realize that vision after witnessing multi-million dollar acquisitions by Acreage and investments by Altria. As a result, many licensed cannabis businesses will likely go through some kind of M & A transaction in the next year or two. Because of the clear race to the bottom for cannabis on pricing, we have no doubt that bigger companies will quickly start to eat up distressed cannabis operators for better or worse (which is already happening in certain states).

In my upcoming blog posts, I’ll be detailing what buyers and sellers need to do and consider regarding deal mechanics for state and local licensing ownership changes, defaults, closing covenants, and indemnities and liabilities for successful M & A in cannabis.

For now, and for more on cannabis M & A, check out the following blog posts:

cannabis marijuana 2018
By any measure, cannabis had a banner year in 2018.

We had a blast celebrating all of the big wins for cannabis on this blog this past year. Looking back, it was a monumental year for cannabis reform, both in the United States but also internationally. At this point, it feels like there is no realistic scenario in which prohibition carries the day: Federal legalization of marijuana, at least in the United States, feels like a fait accompli. Below are the ten biggest developments in cannabis law and policy over the past twelve months.

  1. California commenced its adult use marketplace.

California is the fifth largest economy in the world. It was the first U.S. state to pass a medical marijuana ballot initiative, back in 1996, and given the interim developments in states like Colorado, Oregon and Washington, adult-use legalization in the Golden State has been a long time coming. There are still a ton of unknowns about California’s cannabis regulations (it also passed a hemp law), but the size, scope and influence of this program on other states—and even other countries—will be staggering. Our Los Angeles and San Francisco cannabis business lawyers will continue to report on these exciting and complex developments every step of the way.

  1. Canada legalized marijuana federally.

Canada did it right. Instead of mucking around with local referenda, Canada took charge of the matter by legalizing cannabis nationwide through its federal legislature. This approach should result in more coherent, organized policy on everything from banking to taxation to supply chain structure. The Canadian government is also taking progressive steps that are not feasible in the U.S., like earmarking funds for hospitals and universities to study the effects of legalization. All of this has resulted in an early competitive advantage for Canada, which is well deserved.

  1. The U.S. legalized hemp.

This happened just last week, and it was about damn time. Hemp is a cultivar of the cannabis plant that doesn’t get anyone high. Instead, it has a vast array of industrial uses, from textiles to paper to building materials. It also may be used to source cannabidiol (CBD), which now has federally approved medical applications. The U.S. hemp industry generated $820 million in nationwide sales in 2017, and that was well before the recent federal action. By 2022, that number is expected to approach $2 billion.

  1. The midterms: Michigan, Utah and Missouri forged ahead.

In the 2018 midterm elections, Michigan voters decisively voted to legalize adult use marijuana statewide, with a 56% approval rate. Michigan is the first midwestern state to fully end prohibition, demonstrating that the will to legalize is not confined to “liberal” western or New England states. In Utah and Missouri, the approval of medical marijuana programs was also big news. In fact, it would have been nearly unthinkable for either state to have taken such action just a few years ago. Given these and other developments, we expect more state dominoes to fall in 2019.

  1. State legislatures began looking carefully at legalization.

This is an under-reported but very important development. Historically, state legislatures have lacked the political courage to tackle marijuana legalization (medical or otherwise). Instead, everything was done in “direct democracy” states via ballot initiatives. In January, Vermont broke this barrier, becoming the first state to legalize marijuana use through the legislature. That approach should result in a more orderly roll-out, and give legislators a chance enact policy proactively (i.e., do their jobs), rather than reactively (which, in the cannabis context, often means re-writing ballot provisions down the line). Look for the New York, New Jersey, Illinois, Connecticut, Minnesota and New Mexico legislatures to each take a hard look at legalization in 2019.

  1. The international community began looking carefully at legalization.

In August, we covered the United Nations’ movement to take a closer look at cannabis prohibition under international law, and the World Health Organization’s (“WHO”) recommendation that CBD no longer be controlled. These developments continued in December, with the WHO declaring that it will make a formal recommendation on the international legal status of cannabis (and not just CBD), next month. Sensible drug policy at the international level will make actions taken in Canada, the U.S. and elsewhere even easier. We are very excited about this overdue development.

  1. Civil rights were in focus.

With the never-ending stream of cannabis industry developments, it can be easy to forget that cannabis is also a civil rights issue. In 2018, the federal government cast an inadvertent spotlight on cannabis and civil rights, due to the regressive actions of Jeff Sessions and others. Those actions gave increased momentum to marijuana civil rights legislation, from sweeping federal proposals like Corey Booker’s Marijuana Justice Act, to social equity programs at the state and municipal levels. In 2019, expect discussion around cannabis racial and social equity to continue to amplify, particularly at the federal level.

  1. Sessions (and Sessions) got the boot.

When the definitive story of cannabis legalization is finally written, the tenure of Jeff Sessions as U.S. Attorney General will likely go down as the death rattle of prohibition. A footnote to Sessions’ failures will be those of similarly minded legislators, including Pete Sessions, who single-handedly blocked countless marijuana reform efforts until he was ousted from Congress last month. In 2019, discussion around enforcing federal prohibition will be a non-starter for the first time in 50 years. The only question now is how legalization happens.

  1. The industry got so much bigger.

Legal marijuana was a $10.4 billion industry in the U.S. in 2018. Looking at the U.S. and Canada together, investors poured another $10 billion into cannabis, or twice the amount invested over the past three years combined. Reflecting this trend, our cannabis business lawyers in Seattle, Portland, San Francisco and Los Angeles were up to their ears in investment deals and new client requests over the past 12 months– more so than at any period going back to 2010. We don’t expect things to slow one bit in 2019.

  1. President Trump voiced support for ending marijuana prohibition.

President Trump says a lot of things. He says so many things that his comment of “really” supporting a marijuana bill didn’t make a lot of waves, but he did become the first sitting president to embrace legislation to end federal prohibition. The bill endorsed by Trump is knowns as the STATES Act, and it amends the federal Controlled Substances Act to exempt state-legal marijuana from its parade of horribles. Trump is just one of many prominent national politicians to embrace the end of prohibition. Let’s hope it finally happens in 2019 or 2020.

On January 1, 2019, the City of Pasadena in Northeastern Los Angeles County will open up its 30-day window to apply for one of six retail, four cultivation, or four testing facility permits. These 14 licenses will be highly coveted and sought after, and the winners will not be derived from a lottery system, but selected instead on scored applications. For anyone looking to get licensed in Pasadena, it’s going to be a busy month and an uphill battle.

Licensing in Pasadena is based on the June 2018 approval of local ballot measures CC and DD, which allow these limited permits and establish local taxing regimes. These ballot measures set hard caps on the license types as noted above. Unless Pasadena elects to allow more license types or licenses at later dates, this one-month window will be the only time to apply for commercial cannabis licenses in this city. And where the majority of California cities and counties still ban commercial cannabis activity, having Pasadena come online is a big win for overall legalization.

Notably, section 17.50.66 of the Pasadena Municipal Code precludes businesses from being licensed within the same building or even within 500–1,000 feet of one another, depending on the license type. In other words, Pasadena won’t be allowing combined license types in the same building or even anywhere near one another (which is much stricter than applicable state laws). Nor will it allow manufacturing or distribution, so there won’t be complete vertical integration for businesses in the near future in Pasadena.

Pasadena’s official screening information can be found here. To summarize, Pasadena will require information about owners of the business and about the proposed business generally. This includes detailed operations and security plans, statements of the owners’ previous experience, and statements of how the proposed business would be compatible with the surrounding community. The paper applications will have a hard cap of 100 pages. If you tried for a license in West Hollywood earlier this year, this should all sound very familiar.

Every aspect of these written plans will be reviewed based on scored criteria (found here). This scoring, in combination with the detailed plan requirements and page limitations mean that applications will need to be both comprehensive and polished. Pasadena will be evaluating these applications for owner experience, and if the applications are not well done or formatted properly, they may be dead on arrival.

Applicants may be tempted to approach this like a lottery as there are relatively few spots open. But this process will be very different from a lottery, where putting together a quick application or using a lot of the same boilerplate materials from other applications may be in the applicant’s best interest. Here, Pasadena has made pretty clear that it wants to see top-shape applications from folks with business acumen and industry experience. It’s even more important to ensure that applications are as perfectly formatted and complete as they can be, as the fee is a whopping $13,654 per permit.

Our L.A. cannabis business attorneys expect many Pasadena applicants, as there were with other popular L.A. cities with very limited license openings, and which awarded on a merit basis. For anyone who is applying in Pasadena, sharpen your pencils. January’s going to be a busy month.