As we enter the new year, the cannabis industry is struggling to transition from a previously-unregulated network of collectives in constant fear of criminal prosecution to a highly taxed and regulated system involving numerous state and local agencies. The rollout of the licensing system has been plagued with problems, with most of the state being extremely slow to issue commercial cannabis licenses, and many business owners losing substantial sums of money attempting to comply with burdensome regulations and taxes. Recent events in Los Angeles and Santa Barbara have brought to light common frustrations with the new licensing system, and have taught lessons that can be applied to future public policies to improve the outlook for cannabis businesses, consumers, and the state. In both Los Angeles and Santa Barbara, many operators have become disillusioned by the local licensing process and how difficult it is to obtain and keep licenses to operate their businesses. Policy makers should look at what is happening in these places, and take steps to fix the problems that have developed which are driving people toward illicit markets and away from the regulated market.
In Los Angeles, several hundred businesses secured expensive real estate in specific cannabis-allowed zones in order to apply for new dispensary licenses under the City’s “Social Equity” program. The process was intended to benefit social equity applicants who qualified for the program based on a combination of being low income, having a prior cannabis arrest or conviction, and/or living for a period of time in specific zip codes that have had the most cannabis arrests per capita. The program was meant to be a form of reparations for those harmed by the war on drugs, providing them benefits to partially make up for past injustice they have suffered. The social equity application process has not gone smoothly, and the entire licensing process has now been put on hold pending an independent audit ordered by the City of LA. Numerous rumors and allegations have been spread around, including claims that some applicants were afforded special treatment in the process, and that rules were changed in the middle of the application process to allow deep-pocketed investors to secure multiple licenses using lease “options.” Many applicants feel that they were misled by the City into making large financial investments and other commitments, with the vast majority of qualified applicants not receiving a license, through no fault of their own. Many have been holding onto expensive properties in the correct zones for months or even years in reliance on the program, with no ability to secure licenses anywhere in sight. Even for the small portion of social equity applicants who may end up obtaining licenses, critics allege that Los Angeles set up the social equity program in a way that allows all the profits intended to go to these social equity applicants to “management companies” that extract the profits as “management fees.” All of these factors have created the perception is that the social equity program is actually causing more harm to the social equity community than benefits -- the opposite of its intended goal.
In Santa Barbara last month, the Sheriff’s Department and DA’s office executed a series of search warrants, seizing over a million dollars in cannabis products, even though the business at issue had a commercial cannabis license from the County. The County apparently concluded that the business had obtained its license improperly, by providing false information in its license application. This seizure and destruction of cannabis products followed similar raids on other licensed cannabis businesses in Santa Barbara County pursuant to claims that the operators had made misrepresentations in the course of obtaining their licenses. Instead of giving licensed operators an opportunity for a fair hearing in the administrative process before taking punitive actions, as contemplated by the County’s cannabis ordinance, the County has been serving as judge, jury, and executioner, destroying new businesses and their assets before giving everyone a chance to be heard. Santa Barbara County’s war on its own licensed operators stems largely from the County’s decision in 2016 to allow existing medical marijuana cultivators in the County to continue operating by registering with the County. Most people operating commercial cannabis businesses before 2016 kept few if any records of their activities due to the lack of any licensing system and the frequent criminal prosecution of operators. In addition, the requirements for signing up for the County’s legacy operator program were vague and ambiguous, with a license applicant being required to certify only that the “Site” was operating since January 16, 2016, and that there has been continuous compliance with state law (saying nothing about whether any cannabis plants needed to have been growing at any time, or that any specific people had any involvement). Some have alleged that the County is trying to shut down all the old-time growers in order to benefit more deep-pocketed investors and companies seeking to take over the industry. Whatever the motivation, the County is actively destroying new businesses that pay taxes and provide good employment, just as the businesses are trying to get off the ground.
In both LA and Santa Barbara, there was a common perception that the local governments have set entrepreneurs up for failure, creating the illusion that they would be allowed to operate in the regulated market only to pull the rug out from underneath them after they had invested large amounts of time and money. Many in the cannabis industry are already highly suspicious of the government, due to the decades-long war on drugs and criminalization of marijuana. The actions of some local governments are creating more and more distrust, and driving many back to the illicit market after they conclude the regulated market is not a viable option.
Going forward, people need to be given reasons to trust the government, and to not believe it is actively working against them. More local jurisdictions need to start issuing licenses to qualified applicants, and the localities that do issue licenses should not stack the deck to grant unjustified monopolies to only wealthy or politically connected applicants. There is no need to artificially limit the number of licenses issued. Instead, there should be a simple and fair process for determining qualified applicants, and the economic laws of supply and demand can determine how many businesses operate, and where.
For anyone trying to navigate California’s complex and at-times baffling licensing system, it helps to have an experienced and knowledgeable law firm on your side. Our firm provides both legal and lobbying services to cannabusinesses throughout California. By lobbying local governments to adopt sensible rules allowing your business to operate, and providing legal representation throughout the local and state licensing process, we can help you take advantage of opportunities in this emerging market. Our attorneys can help ensure that your business is treated fairly, and that you are able to operate your business and exercise your rights to participate in the cannabis economy.