Los Angeles Cannabis Regulations Commission Announces Recommendations for Phase 3 Processing

Posted by Margolin & Lawrence on March 11, 2019

The Cannabis Regulations Commission met on March 5th and presented their recommendations to the City Attorney that would establish policies for processing phase 3 applications. Phase 3 would begin with a 60-day pre-vetting process of social equity applicants to verify Tier 1 or Tier 2 qualification. Verified Tier 1 or 2 applicants will then be eligible to move forward into the first phase of the licensing process. The DCR will issue 100 licenses in this initial phase allocating 75 to qualified Tier 1 applicants. Qualified Tier 1 applicants would receive priority receiving 75% of the available licenses during this initial phase so long as all basic application requirements are met including:

 

  • A signed lease with proof of payment or deposit, or a property deed
  • Meet all sensitive use requirements, including undue concentration
  • Payment of required license fees
  • Ownership organizational structure
  • Financial information
  • Proposed staffing plan
  • Indemnification
  • Complete and detailed diagram
  • Proposed security plan
  • Radius map
  • Labor peace agreement
  • Current Certificate of Occupancy
  • Compliance with the Equity Share Rules

 

Second phase 

The second phase will allocate an additional 100 licenses establishing no priority between Tier 1 or Tier 2 applicants. The second phase will establish a “first-come, first-serve” process that will allow the first 100 qualified applicants will move forward. Basic qualifications required to be met are payment of the required license fees or deferment approval; ownership organizational structure; financial information; indemnification; and, labor peace agreement. The remaining qualifications mentioned above would be required within 90 days.

 

The Commission also recommended the implementation of a pilot program for Type 9 Retail Non-Storefront delivery services. A total of 40 licenses would be available allocating 20 licenses to pre-vetted Tier 1 Social Equity applicants. The pilot program will also allow verified applicants who could not obtain a Type 10 retail license due to undue concentration limits will receive priority for a Type 9 delivery license. This will allow licensees to remain in their building and operate as a non-storefront retailer in lieu of having to locate and secure another compliant location. Eligible phase 2 applicants will also have an opportunity to amend their application to include delivery so long as they are compliant with the city’s zoning and regulatory requirements.

Phase 3 Licensing Estimated Timeline


 

Phase 3 Application Processing

60 day Pre-Vetting Period

  • Basic Tier 1 or Tier 2 qualification
  • Indemnification

 

 Phase 3A:

14 day application window

  • Qualified Tier 1 or Tier 2 applicants will be processed for 100 retail licenses (75% reserved for Tier 1 applicants). Pre-vetted applicants will receive 15 days notice of when the first phase application window is to open.
  • Deficient applications will have 5 days from the start of their application to rectify insufficiencies or issues with the basic qualifications.

 

 Phase 3B:

30 day application window

  • Pre-vetted Tier 1 or Tier 2 applicants who meet basic qualifications (see above) on a “first-come, first-serve” basis.
  • Applicants will have an additional 90 days to submit the remaining application requirements
  • Deficient applications will have 5 days from the start of their application to rectify insufficiencies or issues with the basic qualifications

 Delivery Pilot Program:

  • Pre-vetted Tier 1 or Tier 2 applicants will receive 15 days notice for when Type 9 delivery licenses will become available
  • Pre-vetted Tier 1 or Tier 2 applicants subjected to undue concentration limits will have priority
  • Eligible phase 2 applicants will have opportunity to amend their application to include delivery
  • Deficient applications will have 5 days from the start of their application to rectify insufficiencies or issues with the basic qualifications

CA Cannabis Retail Update

Posted by Margolin & Lawrence on March 7, 2019

Contra Costa County

On February 14th, Contra Costa officially issued a Request For Proposal form for new cannabis businesses, including storefront retailers. The number of retailer licenses (with or without delivery operations) will be capped at four.

The county’s deadline for letters of intent is April 4th, while full proposals will be due (by request only) on June 27th. Additionally, the county has released a zoning map showing the proposed areas that will be eligible for cannabis business locations.

City of Fresno

On December 12th, 2018, Fresno voted to allow up to seven medical cannabis retail licenses for the following year, with seven additional retail licenses to follow upon city approval in 2019. The current ordinance limits the number of cannabis retail businesses within the city to fourteen, but seven more may be allowed by a city council resolution.

Fresno limits cannabis retail businesses to locations zones DTN, DTG, CMS, CC, CR, CG, and CH. Additionally, no more than two cannabis retail businesses may be allowed in any one council district.

City of Martinez

On February 26th, the City of Martinez’s Planning Commission met to discuss the city’s newly released draft ordinance for cannabis businesses. The draft regulations would allow for a maximum of two storefront retail licenses, along with a maximum of two delivery licenses (to be associated with a storefront retail business). Retail cannabis businesses would be limited to commercial and light industrial zones. According to the Martinez Gazette, the Planning Commission sent these proposed regulations to the City Council, including a suggestion that the city raise the proposed number of licensed delivery services to three.

City of Pomona

On March 5th, the Pomona City Council met for the first reading of the city’s new cannabis ordinance. The draft regulations provide for licensing of both storefront and delivery-only cannabis businesses. However, the proposed caps on licenses and zoning/location restrictions for cannabis businesses have yet to be released.

City of South Lake Tahoe

On February 5th, the City of South Lake Tahoe released a new cannabis ordinance, allowing up to two retail operations and two microbusiness operations with on-site retail. Cannabis businesses will be restricted to the locations indicated on the city’s buffer map. The city has released its application form and guidelines: the submission period will last from March 11th to April 5th.

City of Ventura

On January 1st, new regulations from the California Bureau of Cannabis Control took effect, allowing delivery of adult-use and medical cannabis anywhere in the state. This overturned Ventura’s past cannabis ordinances, which had restricted retail cannabis activities within the city to deliveries by a maximum of three licensed businesses located outside of city limits. At a City Council meeting on March 4th, the city discussed new policy measures to bring Ventura’s policies in compliance with California law. Among the items on the agenda was the possibility of taxing and permitting cannabis activities within the city, an indication that Ventura is becoming more open to cannabis business.

Mergers & Acquisitions in the Cannabis Industry

Posted by Tiffany Carrari on January 18, 2019

As the cannabis industry grows, businesses at every level are participating in mergers and acquisitions, despite regulatory hurdles. Some of the biggest players in cannabis are continuing to consolidate their holdings, while smaller operations and entrepreneurs are also seeking a way forward.

2018 saw massive expansion in the cannabis industry, led by both U.S. and Canadian industry frontrunners such as Cronos Group, MedMen, and Aurora Cannabis.

  • Aurora Cannabis

Canada’s Aurora Cannabis is now the largest producer of cannabis following its acquisitions of CanniMed and MedReleaf in 2018, as well as funding construction projects to expand production facilities. Aurora is one of many companies funding consolidation and infrastructure development projects by raising funds from investors through publicly traded securities  and bought-deal offerings.

Aurora became one of the first cannabis companies listed on a stock exchange after completing a reverse takeover to join the Canadian Securities Exchange (CSE) in 2014 and started trading on the Toronto Stock Exchange (TSX) in 2017 before having its shares listed on the New York Stock Exchange (NYSE) in October 2018. Canadian firms like Aurora Cannabis that do not have cannabis assets within the U.S. are able to list on the TSX and NYSE – both of which have restrictions against listing cannabis companies operating in the U.S. for as long marijuana remains federally illegal. Meanwhile, cannabis companies with U.S. operations such as MedMen have been listing on the more receptive CSE which does not restrict firms with U.S. operations.

In a world where traditional financing methods remain scarce, the reverse takeover model (RTO) has been a popular vehicle for both Canadian and U.S. cannabis companies looking to tap into public markets to raise capital. A reverse takeover is an attractive alternative to an initial public offering (IPO) because it allows a private company to bypass the lengthy and complex process of going public by taking control of and merging with a dormant company that is already publicly traded.

  • MedMen 

MedMen is one of several U.S. based companies now listed on the CSE following a reverse takeover last May. MedMen’s CSE listing was the company’s quickest route to access liquid capital– a move that has inspired droves of U.S. firms to seek out reverse takeover deals as a way to raise money. MedMen was steady in its efforts to raise money and consolidate throughout 2018, entering into a $120 million bought-deal financing and making the largest ever U.S. cannabis acquisition when it purchased medical-marijuana retailer PharmaCann in a $682 million all-stock transaction  that gave the firm access to 79 retail and cultivation licenses in 12 states. The acquisition of PharmaCann effectively doubled MedMen’s footprint, now the largest U.S. cannabis company.

Bought-deal financings occur when a company sells common stock, convertible debt, stock options, and/or warrants to an investor or group of investors to raise cash. Stock options, warrants and convertible debt allow an investor to purchase shares for a certain price at a later date. For instance, MedMen’s $120 million bought-deal financing deal saw the Company sell Units comprised of Class B Shares and Class B Share Purchase Warrants. Each warrant entitles the holder of such warrant to purchase one Class B Share for $10.00 for a period of three (3) years following the deal’s closing.

MedMen’s expansion sees no signs of stopping in 2019. Just this month, the company announced a new plan to raise capital by spinning its real estate out into a newly formed Real Estate Investment Trust (REIT) created in partnership with Venice, CA investment firm Stable Road Capital. The REIT has raised $133 million dollars to purchase cannabis real estate owned by MedMen and others. The REIT will then lease back retail stores, production and cultivation facilities to MedMen who will use sale proceeds for funding the company’s continued growth.

  • Cronos Group

In addition to mergers and acquisitions, we are seeing partnerships and joint ventures between companies such as Canadian cannabis producer Cronos Group, Inc. (Cronos) and MedMen. The two companies intend to form a jointly-owned third company (MedMen Canada Inc.) to bring Cronos cannabis to Canada’s retail market via MedMen branded stores.

Last month, Cronos announced that it has entered into a subscription agreement with Altria Group, Inc. pursuant to which Altria will make a $2.4 billion equity investment in exchange for common shares and warrants, resulting in Altria holding a 45% ownership interest and a total potential ownership position of 55% dependent on exercise of the warrants. Marlboro maker parent Altria’s investment in Cronos marks the dawn of big business entering the cannabis space in 2018.

Growing Pains

With so many mergers and acquisitions, both at home and abroad, there is much conjecture about which “pot stocks,” if any, are an investor’s best bet going into 2019. U.S. federal illegality has created an interesting situation where cannabis companies with U.S. based operations cannot list on NASDAQ so instead list on the CSE. Conversely, Cannabis companies with Canada based operations are able to list on the TSX and NASDAQ. Therefore, companies like MedMen have the advantage of developing operations in both countries and still list on the CSE, despite not having access to mainstream securities exchanges. While companies like Cronos and Aurora have the advantage of listing on the TSX and NASDAQ, they cannot expand operations into the U.S. – where consumer spending on legal cannabis  is expected to climb to nearly $21 billion by 2021 as compared to only $4.5 billion in Canada.

A general criticism applicable to pot stocks using bought-deal financing to fuel growth is that the continued issuance of new stock, convertible debt, stock options and warrants can result in long-lasting share dilution. Shares are diluted when outstanding share counts balloon leading to a substantial reduction in  per-share profit. The impact of dilution isn’t always immediate since convertible debt, stock options and warrants can build up for years, leading to unanticipated increases in share counts down the road. However, until access to non-dilutive forms of financing and basic banking services for cannabis companies becomes readily available, bought-deal offerings will continue as the preferred method for raising capital.

M&A Locally

Meanwhile, smaller industry players and hopeful investors are jockeying for position at the local level, focused on securing licenses, building out facilities, expanding operations and developing brands - presumably in a bid to position themselves as acquisition or partner targets for larger groups like MedMen.

Like most jurisdictions throughout California, the City of Los Angeles is still in the process of reviewing commercial cannabis license applications for cultivation, manufacturing, distribution and retail operations within the City. Many of the applicants are persons and pre-existing businesses already in operation, having been “grandfathered” in and protected as part of LA’s Social Equity Program which also mandates priority consideration in favor of applicants who meet certain criteria.

Investors are chomping at the bit to acquire existing cannabis businesses and take advantage of the priority consideration afforded to social equity applicants in Los Angeles. Likewise, applicant-operators and social equity applicants are enthusiastic about the prospect of cashing in on their advantageous position. However, investors and applicants face challenging regulatory hurdles because applicants (even those already in operation) are just that – applicants.

So long as an application for licensure is pending at the local or state level, there is no “asset” to transfer because no license has issued. The local authorizations and state temporary licenses issued by licensing authorities are not “transferable” and neither is any pending application or the right to pursue licensure as a social equity candidate. Despite these roadblocks, investors, applicant operators and social equity candidates are looking to negotiate pre-licensing agreements to bring investor capital and management support to ‘authorized’ operations, as well as financial and business development support while applicants await final licensure and until those licenses become transferable.

Furthermore, LA’s Social Equity Program mandates that some social equity candidates are required to retain certain ownership percentages in a licensee business. While these regulations are intended to protect the interests of social equity candidates, practical business considerations related to capital contributions and operating capital are more likely to dictate profit distributions among investors and social equity owners in a licensee business. Further, such regulations could inhibit social equity candidates from selling their ownership stake in a business license. Until permanent licenses are issued and become transferable, investors and applicants negotiating pre-licensing deals will need to exercise high-risk tolerance and accept that all parties will be obligated to participate in the business and license application process until the licenses become transferable assets.

Peculiarities associated with license transferability issues are giving rise to various work-around solutions and complex deal structures emphasizing the rights and obligations of investors and applicants during the period of non-transferability. For instance, in the case of an investor who desires to purchase the assets and pending license of an applicant-operator’s business, a deal may involve an initial ‘closing’ and the parties’ execution of ancillary agreements setting forth terms associated with transferring the license at a later date. Such ancillary agreements generally require an applicant to continue directing business operations, as well as remain engaged in prosecution of license applications. The applicant is then required to cooperate in transferring permanent license(s) once they become transferable. Obligations of the investor(s) include financial and management obligations during the interim period between the closing and ultimate transfer of the license. One tricky issue to deal with is how payments are made to managing parties. Such payments must be reasonably related to the work being performed and any payments based on a percentage of profits must be disclosed to both local and state authorities. Furthermore, only an applicant/licensee can direct or control the licensed activity and therefore must remain in charge of business operations pending transfer of the license(s).

Not only is the enforceability of these agreements questionable, but they also require investors and applicants to perform obligations and remain “in bed” with one another for an indeterminable amount of time. Despite inherent risks, investors are more than willing to engage in pre-licensing deals as a way to get in at the ground floor in California – the world’s largest cannabis market.

California Jurisdictions Open for Cannabis Retail

Posted by Margolin & Lawrence on January 8, 2019

Despite all the talk about cannabis retail in the news, it can be difficult to tell exactly when and where it's possible for businesses to apply for a cannabis retail license. Here are a few jurisdictions where applications for cannabis retail are either currently open or planned to open in the near future. 

Riverside County

Per the county planning department, Riverside is planning to give out a maximum of 19 retail licenses. While no date is currently set, the proposal process is scheduled to begin later this year.


Santa Barbara County

County is currently accepting cannabis permit applications. Storefront retail permits are limited to eight countywide, with no more than two in any supervisorial district.


Cathedral City

Applications for retail businesses are currently open, with an application form available on the city website.


City of Chula Vista

The city’s application for cannabis businesses will open on January 14th and remain open until the 18th (for Storefront Retail, Non-Storefront Retail, and Cultivation businesses) and the 25th (for Manufacturing, Distribution, and Testing Laboratory businesses.)


City of Desert Hot Springs

Conditional use permits for cannabis activities, including Cannabis Sale Facilities, are available on the city’s website.


City of Goleta

Goleta is currently accepting applications for up to 15 total storefront retail businesses.


City of Jurupa Valley

Jurupa Valley will accept priority applications for cannabis retail from January 22nd to February 6th, with non-priority applications opening on April 1st. The number of retail businesses permitted will be linked to the city's population, with 1 license given for every 15,000 residents. This currently means that the number of licenses given will be capped at 7. 

 

City of Lompoc

Lompoc is currently accepting cannabis retail license applications.


City of Moreno Valley

In December, the city raised its cap on dispensary licenses from 8 to 23. In addition to admitting qualified applicants from the last round of applications, the city will make proposal forms for new applicants available online.


City of Pasadena

The city will license up to 6 retail establishments. The permit application process is open on the city website through January 31st.


City of San Diego

The city is currently accepting applications for cannabis outlets with retail sales, up to a limit of four businesses per council district.


City of San Luis Obispo

Applications for 3 storefront retail businesses and an indefinite number of delivery-only retail businesses are open on the city website through January 29th.


City of Vista

Per the ordinance released in December, the city will be granting 3 delivery-only (non-storefront) retail licenses this year.

What the First Step Act Means for Criminal Justice Reform

Posted by Tom McMahon on December 21, 2018

On Tuesday, the First Step Act passed the Senate with overwhelming bipartisan support, 87-12. If it passes the vote in the House of Representatives, as experts predict it will, then President Trump has pledged to sign it into law.

Proponents of the Bill praise it as sensible criminal justice reform. Among its provisions, it will offer a number of changes aimed at inmate rehabilitation: more good-time credits to federal prisoners, more training and work opportunities, and the chance to earn money for escrow accounts that would service post-release expenses. There are a number of sentencing reforms as well, including giving judges more flexibility on “mandatory minimums,” where the conviction is for nonviolent drug crime. Importantly, estimates are that this relaxation could result in the reduction of sentences for 2,000 people every year. SB3649 also addresses the disparity in charges for crack and powder cocaine offenses which have historically disproportionately targeted black Americans – finally making the 2010 Fair Sentencing Act retroactive for 2,600 inmates. In addition, it also promises to ban the shackling of pregnant inmates.

However, the Bill is not without its criticisms. Backed by the Koch brothers, the Bill is designed to benefit the private prison companies, such as the multibillion-dollar giant GEO that currently runs the detention facilities warehousing immigrant families in Karnes City and Dilley, Texas. By increasing the use of electronic monitoring  of those released, it will increase their bottom line. The bill also prevents sentence reduction for those sentenced for violent crimes, excluding them from participation in the same rehabilitative programs. And though the bill would reduce mandatory minimum sentences prospectively, it does not have any retroactive effect on those already serving such sentences. Finally, excepting extreme circumstances, the shackling of pregnant women has been banned in federal prison since 2008. The bill's promise to solve this 'problem,' is disingenuous. Indeed, according to the Marshall Project, many of the provisions in the act are merely attempts to enact policies that are already in place – but have simply been ignored by the Bureau of Prisons. 

There are also significant limitations to the scope of the Bill as well. It does not remove the threat of federal prosecution in states where cannabis is legal, or lift restrictions on federally insured banks, currently barred from working with cannabusinesses. Senator Cory Gardner had worked diligently to add such an amendment, but he was blocked by Majority Leader Mitch McConnell. It is also worth nothing that the roughly 2 million prisoners in local and state custody will not be affected because it only addresses the federal inmate population of approximately 181,000Ultimately, the bill may indeed be a good “first step,” but meaningful criminal justice reform still has a long way to go.  

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This blog is not intended as legal advice and should not be taken as such. The possession, use, and/or sale of marijuana is illegal under federal law.