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The Future of California’s Regulations: Q&A with Josh Drayton

By Aaron G. Biros
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Josh Drayton, deputy director of the California Cannabis Industry Association, has an extensive career in local and state-level politics, with his origins in Humboldt County as a political organizer. As a coffee shop owner about ten years ago in Humboldt, he let city council candidates use his space for community engagement, which eventually steered him towards a career in politics. As a heavily involved resident of Northern California and an advocate in local and state matters, he came to understand cannabis as a strong economic driver for the region and beyond.

Drayton saw firsthand how local economies benefit from cannabis as a source of income, economic activity, and providing occupational opportunities for many families in Humboldt County. After running a handful of local campaigns in the Humboldt region, Drayton served as deputy director for a state senate campaign in Riverside.

Josh Drayton, deputy director of the CCIA

Towards the end of his tenure with the Democratic Party in California, the state legislature began working on medical cannabis regulations. “As we saw those regulations moving through, cities and counties began to ban cannabis throughout the state, which was a very unintended consequence,” says Drayton. “The goal was to put regulations forward that would create a framework for the industry to survive and function under, but they were not very fond of cannabis at the time. It was clear that we had a lot of work to do.” Politicians shying away from cannabis issues and a lack of real representation in the legislature for those stakeholders drove him to leave the state’s senate for the California Cannabis Industry Association (CCIA).

In January of 2016, he jumped on board with the CCIA as their deputy director. Ahead of the California Cannabis Business Conference, September 21-22 in Anaheim, we sit down with Drayton to hear his take on the future of California’s cannabis regulations.

CannabisIndustryJournal: Give us a quick update on the regulatory framework in California and the changes we should expect.

Josh Drayton: One of the biggest challenges that California has faced has been the reconciliation of medical regulations with adult use regulations. Although California had medical cannabis legalized in 1996, we did not get those regulations put forward until 2015. That was called the Medical Cannabis Regulation and Safety Act. That was approved by the state legislature and signed by the governor into law. It was created in the legislature. When Prop 64 passed, the Adult Use of Marijuana Act, in November of 2016, it was passed through by a voter initiative. Any time that a piece of legislation goes to the voters, it trumps any legislation or regulations written by the state legislature. The real work has been to reconcile these two pieces of legislation into one regulatory structure. With that being said, we saw the initial trailer bill, attempting to reconcile these regulatory structures. That trailer bill is meant to address the new framework. Currently, we are waiting for the second viewing of the updated trailer bill SB 94 with all current amendments. Then we are anticipating those in the next couple weeks and we will see the regulations that will affect all these changes by November.

CIJ: How strong will local and municipal control be in the future?

Josh: It is incredibly strong and it is meant to be. I will say that California is like its own country. In Northern California, what they are willing to accept is very different in comparison to Southern California. Every city and county still has the ability to fully ban adult use and they can create and draft their own ordinances and regulations as long as it doesn’t go above state requirements. They can craft an ordinance to fit the needs of their city or county. Lets say you are in a rural area, delivery services might be important for patient access. Some areas might not allow brick and mortar dispensaries, and all that control lies in the cities and counties.

CIJ: Will there be a dosing limit for patients buying infused products? What about for adult use?

Josh: For adult use, there is going to be a limitation. Every edible has a maximum potency of 10mg of THC. For example, a chocolate bar can have a maximum of 100mg [of THC] but must be perforated in to 10mg pieces.

We have been advocating for, and what has been a priority for CCIA, is a lift of any sort of limits on medical infused products. Many patients have a higher threshold or tolerance and they may need 100mg and we don’t want them eating an entire chocolate bar to get that. We are anxiously awaiting the new trailer bill to see if we have been able to lift that concentration limit.

CIJ: Some have said the first draft of lab testing rules is extreme and overreaching. Can you speculate how those have been modified?

Josh: The lab testing is a huge educational issue for the industry and regulators. No state right now has been able to fully analyze the effects of different pesticide levels for a product that is smoked. We are basing all of our standards currently on food consumption. A lot of testing labs are concerned they are unable to test at the state’s threshold for some of these contaminants and pesticides; the detection limits seem very low. The testing portion will take years to work out, I am sure we will remove and add different pesticides and contaminants to the list. But again, the data and research isn’t fully there. There is a big push across the board that we will be able to do more research and testing so that the future of regulations can reflect reality, and ensure that consumer safety is priority.

CIJ: What do you think of the lack of residency requirement? When Oregon lifted it, outside investors flocked to the market. How might that impact local, California ownership and smaller businesses?

Josh: Well I do think that is a concern across the board. That is something that cities and counties have been adding to their requirements for the matrix of items needed to get a license. I think there is a very gray area when looking at investors opposed to operators. At what threshold does an investor become an owner? And if that person is from outside the state, how will that reflect on the evolution of the industry? It is a concern. Keeping limitations on the size of outdoor cultivation might help limit folks from outside the state coming into that arena. After living in Humboldt County for years, and living next to Mom and Pop growers for a long time, I don’t want to see them displaced by businesses coming from another area. We have been doing this a long time and I believe we have the best operators in the world.

CIJ: How is the CCIA helping businesses gear up for changing regulations?

Josh: Well one of our biggest areas of focus is education. Educating our own industry is one of the biggest parts in making sure the industry will be successful in this regulated market. Our legislative committee will take a position of support or opposition, which goes to our board, and those recommendations go to the state. The manufacturing committee has worked very closely with Lori Ajax [director of the Bureau of Cannabis Regulation] and her office, to educate on a variety of areas, guiding the way for state departments on how to properly regulate the industry. We have a Diversity and Inclusion Committee, Retail/Delivery, Testing, Distribution and Agricultural committees; across the board our committees create white papers that we submit to the regulatory departments of the state. We take regulatory officials on tours of facilities to get a hands-on view of what they are regulating. They have been speaking with scientists and growers, who often have a better understanding of current industry standards. We see these tours as very helpful. We have brought groups of regulators from LA County, Long Beach, Napa, Alameda and many others on tours of Bay Area commercial manufacturing facilities, dispensaries and nurseries. They have a lot of questions and we want to make sure we are a resource for them. Putting folks in touch with the right people and, in moving forward with this process, in an educated manner. Cannabis is a foreign language to many people and I get that.

CIJ: If you have one recommendation for regulators, what would that be?

Josh: My recommendation to regulators: do not over-tax this industry. Do not make taxation the priority for regulation. Over-taxation will strengthen the illicit market and that is not the goal. We need to make sure the taxes are reasonable to encourage businesses to operate in this market, not in the illegal one. If cities decide to ban, they need to know they can be hubs for illicit activity. Cities with bans might draw the illicit market because illegal operators won’t have to pay taxes or license fees. It is a long play, but responsible taxation is the best path to draw people out of this illicit market. We want to help protect public safety and health, safe medicine, safe products and keep cannabis out of the hands of children.

Election Day Results for Cannabis: California, Nevada, Massachusetts, Maine Legalize Recreational Cannabis

By Aaron G. Biros
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Update: With 100% reporting (589 of 589 precincts), voters in Maine passed Question 1, legalizing recreational cannabis by a very narrow margin of 50.2% to 49.8% (378,288 in favor and 375,668 against is a margin of only 2,620 votes)


Voters in California, Massachusetts, Maine and Nevada passed ballot initiatives legalizing the recreational use of cannabis, creating huge new markets for the cannabis industry overnight. Voters in North Dakota, Florida, Montana and Arkansas passed ballot initiatives to legalize forms of medical cannabis. Voters by a margin of 52.2% to 47.8% rejected Arizona’s Proposition 205, which would have legalized recreational cannabis.

With 100% of the votes in for Maine’s Question 1, voters narrowly passed legalizing recreational cannabis, the polls show it won by a very slim margin, less than 3,000 votes.

newfrontier_logo_finalNew Frontier Data and Arcview Market Research released an Election Day update to their growth projections for the cannabis industry by 2020. The release projects: “The legalization of cannabis in California, Massachusetts, Nevada, Florida, Arkansas and North Dakota will result in new markets that account for $7.1 billion in sales by 2020. We project the overall U.S. cannabis market will exceed $20.9 billion by 2020.” Those numbers include overall cannabis sales and assume the markets are all fully operational by 2018.

Giadha DeCarcer, (photo credit: CNN Money)
Giadha DeCarcer, founder and CEO of New Frontier (photo credit: Frontierfinancials.com)

According to Giadha DeCarcer, founder and chief executive officer of New Frontier, there is overwhelming support for medical cannabis and a majority of Americans are in favor of legalizing recreational cannabis as well. “The ten initiatives on the ballot reflect the accelerating public debate on legal cannabis access,” says DeCarcer. “The passage of California’s adult use measure and Florida’s medical initiative expand legal access into two of the country’s most populous states.” The market potential is notably enormous in California, it currently being the 6th largest economy in the world. “Additionally, the passage of the measure in Massachusetts opens the first adult use market in the Northeast extending the reach of legal adult use access from coast to coast,” says DeCarcer. “The passage of the measures in Arkansas and North Dakota shows that public support on this issue is not solely confined to urban, liberal markets but extends into conservative rural states as well.”

According to the release, by 2020 California could reach a total market size of $7.6B and Massachusetts could grow to $1.1B. Massachusetts being the first mover in the Northeast to legalize recreational cannabis will be watched very closely by a number of surrounding states that appeared bullish on cannabis legalization previously.

Leslie Bocskor, president and founder of Electrum Partners
Leslie Bocskor, president and founder of Electrum Partners

Leslie Bocskor, president and founder of Electrum Partners, believes the Election Day results will bring an influx of investing opportunities to the industry. “We are going to see a diverse approach from the irrationally exuberant to the sophisticated and experienced investor and entrepreneur getting involved, creating businesses and investing in the industry that will create innovation, jobs, wealth and tax revenue far beyond the consensus expectations,” says Bocksor. “The cannabis industry is more than one industry; it is an entire ecosystem, impacting so many verticals, such as agriculture, industrial chemicals from hemp, pharmaceuticals, nutraceuticals and more. We see the funding of innovation that might have been absent without the velocity and heft that has come from this phenomenon,” adds Bocksor. As these newly legalized markets begin to launch, it will require a considerable amount of time to see the industry flesh out in each new state.

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Tom Lohdan, Flickr

Donald Trump winning the presidential election and the GOP retaining control over the House and Senate could mean a lot of uncertainties for the future of the cannabis industry on a national scale. President-elect Trump has previously flip-flopped on the issue of cannabis legalization, but has said in the past he favors leaving the issue of medical use up to the states, advocating for access to medical cannabis, while recently saying he opposes regulating cannabis for adult use, according to the Marijuana Policy Project. The MPP gave him a C+ grade for his views toward cannabis.

On The O’Reilly Factor in February 2016, Trump told the conservative political commentator that he supports medical cannabis while opposing the recreational use. “I’m in favor of it [access to medical cannabis] a hundred percent. But what you are talking about [recreational use], perhaps not. It’s causing a lot of problems out there [in Colorado],” says Trump. It is still unclear at this time exactly what Trump’s policy will be for the now 28 states that have some form of legal cannabis.

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Aaron Smith, executive director of NCIA

Aaron Smith, executive director of the National Cannabis Industry Association (NCIA), appeared optimistic regarding the outcomes of Election Day. “More than 16 million voters, including in two of the three most populated states in the nation, chose legal, regulated cannabis programs that promote safety, boost the economy, help sick patients and address social injustices,” says Smith. In the press release, the NCIA spelled out their priorities for congressional action on cannabis policy: Opening up bank access for state-compliant cannabis businesses, ending the effects of federal tax code Section 280E on cannabis businesses and removing cannabis from the Controlled Substances Act via descheduling. “Last night’s results send a simple message – the tipping point has come,” says Smith.

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How Cannabis Can Positively Impact California’s Drought

By Lukian Kobzeff
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As the drought in California persists and quickly becomes the new hydrological norm, many within the state have embraced efforts to find ways and means to live within the drought forced water “budget.” Because of the importance of water conservation, the cannabis industry should embrace its socio-ecological responsibility and seize the opportunity to help shift the perception of cannabis cultivation into that of a sustainable, high-value agricultural crop that can be grown in an environmentally safe manner, while using water efficiently.

The intersection of Prop 64, MCRSA and the drought provides the cannabis industry with a unique opportunity to positively impact water conservation. Because legal cannabis cultivators are just now designing blueprints for grow sites, these cultivators are in a position to build infrastructure and systems specifically designed to achieve permanent, sustainable water conservation.

By embracing and championing water conservation, the cannabis industry will achieve two goals: being a collaborative player in the larger community working towards sustainable water use and enhancing the overall perception of the cannabis industry in the conscious of the general public. For an industry seeking legitimacy, there is no better way to put cannabis in the mainstream conscious than by embracing environmentally responsible philosophies. Here are a few measures the cannabis industry should embrace:

Measure

The current drought has generated a state-wide conversation about tracking and recording water usage. Some commentators believe California is suffering from a water data problem. Recently passed AB 1755 is a step by California to address that shortcoming by creating a technology platform to aggregate and share water data. Cannabis cultivators should get onboard with measuring water usage. One method is to install sensitive flow meters in each drip station to precisely measure water used during each grow cycle. First, this provides the cultivator with a precise data set. Precise data sets are extremely important, especially when trying to achieve the two-part-goal of conserving water and maximizing crop yield. Second, having precise data sets allows the cultivator to determine, from harvest-to-harvest, increasingly precise ratios of input (water) to output (flower). Most likely, this input:yield ratio is subject to diminishing returns at the margin; that is, adding additional water will not proportionately increase crop yield. For instance, 50 units of water could produce 50 units of crop, but 75 units of water might only produce 55 units of crop. By measuring the input (water), the cultivator is able to identify the precise threshold where diminishing returns set in and can therefore reduce the “diminishing returns” water usage, saving money and conserving water.

Collaborate

Building on water-usage data collection, cultivators can then collaborate with each other and with water agencies. By sharing data sets, cultivators can quickly develop ideal input:yield ratios, can better understand how water usage fluctuates within each discreet grow cycle and can develop methods such as deficit irrigation and real-time soil moisture measurements. This collective industry knowledge will help each individual cultivator to reduce water-usage. In collaborating with local water boards, the boards will better understand how much water is being used and conserved by the industry. Additionally, if the boards have a more precise understanding of the expected usage per season or per specific period in a grow cycle required by cultivators in their jurisdictions, those boards can better plan for the peaks and troughs in water demand. Besides data sharing, agencies and cultivators can collaborate in developing “fill stations” (offering free, non-potable recycled water for irrigation), or help fund development of direct potable water technologies and other recycled water technologies. Collaboration amongst growers and with water boards will lead to greater water conservation.

Energy Saving

An ancillary benefit to water conservation behaviors is the reduction of energy consumption. It takes an immense amount of energy to pump and transport water to end-users, such as cultivators. Reducing water usage in turn reduces energy consumption, because less water used means less water transported and disposed of. This is one method for indoor cultivators to offset energy consumption. In addition to reducing energy usage by conserving water, cultivators can follow Irvine Ranch Water District’s example of implementing an energy storage system to reduce costs and ease energy demand during peak hours. Indoor cultivators should adopt the same basic structure and mechanics: install Tesla battery packs to store energy for use during peak hours (when electricity is more expensive) and recharge the batteries at night when demand is low (and electricity is cheaper).

Opportunities Abound

This is an exciting time in California’s history, with the pending election of Prop 64, the passage of MCRSA, and the opportunities present in the water-energy nexus. The $6 billion cannabis industry has an incredible opportunity to have a far-reaching impact on water-conservation. By being an active collaborator conserving water, the cannabis industry can position itself as a trendsetter and private sector leader in sustainable and eco-conscious methods, technologies, and processes.

Exploring Opportunities in Emerging Markets

By Aaron G. Biros
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This November 8th, voters in five states will head to the polls to decide on legalizing recreational cannabis and another three states have ballot initiatives that would legalize medical cannabis. If any of those five states pass a measure for recreational legalization, including Massachusetts, Maine, Nevada, Arizona and California, (which are all leading in the polls) they could potentially create massive new market opportunities for cannabis brands that have their eye on expansion.

Nancy Whiteman, co-owner of Wana Brands and chair of the Cannabis Business Alliance Infused Product Committee, sees great potential in capitalizing on those markets early. Whiteman has been working with Wana Brands since 2010 in Colorado, starting out in the young medical market there.

Nancy Whiteman holding a batch of cannabis gummies
Nancy Whiteman holding a batch of cannabis gummies

After expanding to the recreational market, Wana Brands saw its sales skyrocket. From January to August 2016, Wana had the best-selling candy brand in Colorado with 21% dollar share, according to BDS Analytics. Wana Brands has already expanded to Oregon and will launch in Nevada on November 15th, with agreements signed to expand in other states as well. “The model we are pursuing is a licensing agreement where we partner with existing or new license holders in their state,” says Whiteman. “In many ways they are doing the heavy lifting, but we are providing an enormous lift by licensing our intellectual property to them.” That model for growth is becoming increasingly common in some of the more established brands, like Steep Hill Laboratories, GFarma Labs, Dixie and others. Whiteman says that Wana Brands also has a partner in Illinois, Massachusetts and a number of other states they hope to reach.

Mark Slaugh, CEO of iComply
Mark Slaugh, CEO of iComply

According to Mark Slaugh, executive director of the Cannabis Business Alliance and chief executive officer of iComply, a compliance services provider, brands from Colorado expanding to other states need to ask themselves if their reputation is on the line with these new operators. “If you are licensing to companies that are not compliant, the penalties could be huge and they vary state to state- that could potentially hurt the overall brand image nationally,” says Slaugh. “People doing the licensing that are operating with full compliance really need to look at controlling that risk and mitigating that as much as possible.” With brand trust on the line, there are substantial risks that come with expansion. “We help clients ensure quality is consistent so, for example, an edible product would taste the same in Colorado as it would in Nevada or Arizona. They need to follow the intellectual property consistently but more importantly follow those specific regulations in that state to stay afloat.” Managing ongoing compliance in different states requires monitoring regulatory updates across multiple markets, which can get incredibly complex.

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Processing SOPs vary widely stae to state

“Six years ago, it was much easier to get into the market in Colorado,” says Whiteman. “There were no capital requirements, no limits on the number of licenses, but there was still a lengthy application and vetting process- as long as you met those minimum requirements you could get a license.” Other new states put stringent limits on the number of licenses granted and some have extraordinarily cost-prohibitive capital requirements, up to a million dollars, as is the case for New York. “Anyone who becomes a license holder in Massachusetts has to be prepared to embark on three separate business models, which is a massive undertaking,” says Whiteman. Massachusetts requires license holders to cultivate, process and dispense in a vertically integrated model.

In other states, Wana Brands is working with exclusive partners who will have the capabilities to manufacture and distribute throughout the entire state, but in Massachusetts that won’t be the case. “To cover the state, we need several partnerships; the partner we are working with is a little south of Boston,” says Whiteman. But all that could change if voters in Massachusetts legalize it recreationally, opening a much larger market than the current medical program. “With no legislation drafted yet, the regulatory environment is still up in the air in Massachusetts so there is no way of telling what the recreational market will look like.” In terms of ongoing regulatory compliance, Whiteman believes that Colorado still has some of the most stringent rules. The universal symbol printed on every individual edible product serving is one example. “Every state has different lab testing and licensing requirements, but Colorado looks like the most stringent currently,” says Whiteman. “Colorado requires a full gamut of lab testing including homogeneity, potency, residual solvents, contaminants and soon pesticides too.” According to Mark Slaugh, Nevada’s lab testing regulations are fundamentally different from Colorado’s with regard to sampling procedures, but the broader inconsistencies in lab standards need to be addressed. “The lack of laboratory standardization state to state with regard to methods creates a big challenge to get consistent, proficient lab testing across the board,” says Slaugh.

Wana's edibles come stamped with the universal symbol (THC!)
Wana’s edibles come stamped with the universal symbol (THC!) in Colorado, as required by law.

A big differentiator between Colorado and other states is that it was a first mover. “When Colorado came online there were not any established brands to speak of anywhere in the country- we were all pioneers,” says Whiteman. “Because it is so difficult to get a license in another state, either the organization or investor groups are looking to partner with established brands.” The advantages to this business model are many. Expediting your entry to market gets you the advantage of being a first mover. Working with an established brand also minimizes risks and the learning curve. “Bigger players understand that building a brand from scratch is time consuming and expensive so I think we will see a lot of these partnerships.”

As those new states come online, similarities in their regulations might appear in the form of standard operating procedures (SOPs) or good manufacturing practices (GMPs). “We might start to see a standardization from state to state that models FDA GMPs or USDA GAPs, [good agricultural practices] moving toward a framework that is more consistent with the possibility of federal regulation,” says Slaugh. Another commonality among a number of states is the implementation of a statewide tracking system. According to Slaugh, California has no such mandated system in place yet. “They will probably have one eventually but the market is so localized there- we will see if California will be ready with a statewide compliance system for tracking by 2018,” says Slaugh. “With such a weird patchwork of local governments allowing or not allowing certain operations to exist, it is a tough business to be in and it’s getting tougher every day.”

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Election Day is a Decisive Moment for the Cannabis Industry

By Aaron G. Biros
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In less than two weeks on November 8th, voters in five states will head to the polls to decide if they want to legalize recreational cannabis. California, Nevada, Arizona, Massachusetts and Maine all have initiatives on the ballot that could legalize recreational cannabis for adult use. Polls in each state show a majority of voters support the initiatives.

This New York Times article suggests that November 8th could be a major turning point in the movement to legalize cannabis in the United States. Even if the initiatives fail in most of those states, California’s initiative, which is expected to pass, could be the linchpin for federal legalization. California’s giant economy, coupled with its ability to drive national policy on social issues, sets the stage for rapid industry growth.

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Matt Karnes, founder of GreenWave Advisors

According to Matt Karnes, founder of GreenWave Advisors, the significance of California’s measure also lies in the merging of medical and recreational regulatory schemes. His firm sees a trend where “initially bifurcated marijuana markets will merge under a shared regulatory system into substantially larger enterprises.” Karnes believes the California market will conservatively reach $2.6B in 2016 and grow to $6.7B by 2021, which represents a 5-year compound annual growth rate of roughly 21%. “Should California vote to legalize recreational use this November, we expect implementation of a combined regulated market as soon as 2018,” says Karnes. “A combined California market is significant, not only because of its sheer size (~55% of the U.S. market), but it would also mark the first state to implement regulations for a fully legal market without initial oversight of medical use purchases.”

The presidential election is equally as important for the future of the legal cannabis industry. According to Hillary Clinton’s campaign, if she is elected into office then she will “reschedule marijuana from a Schedule I to a Schedule II substance.” This would have a dramatic impact on the growth of the industry, most notably by easing banking and financing restrictions. Whether she will actually follow through with her plans, if elected, to reschedule cannabis is yet to be known. Regardless, this is the first time in history that a candidate with a majority of the country’s support is introducing this concept. That represents a serious shift in mainstream attitude toward cannabis. That represents the normalization of cannabis.

Jane West, CEO of lifestyle brand Jane West and co-founder of Women Grow
Jane West, CEO of lifestyle brand Jane West and co-founder of Women Grow

Jane West, chief executive officer of the lifestyle brand Jane West and co-founder of Women Grow, believes this represents the country finally taking cannabis legalization seriously. “Given the poll results that have been publicly available, it seems likely that three or more of the initiatives will pass,” says West. “By November, about 20% of Americans will be living in states where it is legal to consume cannabis. This will accelerate the process of bringing marijuana out of the shadows, and more adults will be comfortable using this enjoyable, relatively benign substance socially and openly.” Normalizing cannabis can look like a lot of things, but mainly it takes away the counterculture stigma and puts it in a light where its regular use is not frowned upon, which could be instrumental in gaining public support.

Leah Heise, CEO of Women Grow
Leah Heise, CEO of Women Grow

Leah Heise, chief executive officer of Women Grow, agrees with West’s prediction that at least three of those states will vote to legalize recreational cannabis, citing Maine, Massachusetts and California as favorites. “Additionally, with the likelihood that more than half the states in the United States support some type of cannabis program within their boundaries, a clear message is being sent to the federal government regarding legalization on a federal level,” says Heise. “I don’t think the federal government will be able to continue to enact its cannabis policy through executive orders and funding bills. Real legislative attention will have to be given to the issue.” That legislative attention could come in the form of the CARERS Act, which would reschedule cannabis.

If you are in favor of legalizing cannabis and want to see some change within your lifetime, what can you do to help? Vote. There has never been a more important election year for legal cannabis.

California Poised to Make Huge Advances in Market Expansion and Regulation

By Chuck Epstein
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California’s tradition of social and political experimentation has made it the national leader in areas ranging from environmentalism and social justice to technology. Now it is poised to make the same far-reaching transformations in the cannabis industry.

As one of the world’s top ten economies and the nation’s most populated state (having a population of 38 million), California could propel the decriminalized recreational cannabis industry to $6.5 billion in 2020, according to a report by ArcView Group and New Frontier.

At the same time, California is in the process of moving from state to local zoning control, as far as issuing the OK to become licensed, effective Jan. 18, 2018. This means collectives and dispensaries have to obtain local approval before they receive a state license. It also puts greater pressure on gray market operations to become licensed.

On the regulatory front, the state is also heading toward a historic vote in November 2016 in the form of Proposition 64. This will open up the customer base to all Californians. It has a similar licensing path as the medical regulations the Governor signed last year, except it allows vertical integration between growers and dispensaries, which is not allowed under the medical regulations, except in very limited circumstances.

Credit: cannabisbenchmarks.com
Credit: cannabisbenchmarks.com

“My bet is the demand will outweigh the supply for a while and the legal cannabis businesses that are licensed by the locals and have their supply chain in place will end up profiting,” says Andrew Hay of Frontera Accounting, a cannabis-focused CPA firm based in California under the umbrella of the Frontera business group.

A Huge Market Awaits

If the Adult Use of Marijuana Act passes and is enacted by 2018, the state’s legal cannabis sales are projected to hit $1.6 billion in their first year, the ArcView and New Frontier market report said. Even without the new expanded legislation and working amid a fractured medical cannabis regulatory environment, California now accounts for about half of all the legal cannabis sales nationwide, according to the report.

At the same time, the state is well positioned to capitalize on new technology and financing from Silicon Valley in terms of human talent, money and the applications of new technology in both the medical and recreational sectors. One driving force will come from the Adult Use of Marijuana Act, which mandates that 10 percent of sales tax collected on cannabis sales be re-directed towards medical research and drug abuse programs.

In addition, according to Marijuana Politics, the expected tax windfall is slated to be divided up among a variety of programs: $10 million to public universities, $10 million to business and economic development, $3 million to California Highway Patrol and $2 million for medical cannabis research at UC San Diego. The remainder will be divided between youth drug education and prevention (60%), environmental protection (20%) and law enforcement (20%).

This flow of new funds is expected to propel research into biomedical and applied research, as well as nutraceuticals, or products derived from food sources with extra health benefits in addition to the basic nutritional value found in foods. The driving new ingredients in these products will be derived from cannabis.

Consolidating the Recreational and Medical Markets

Californians will vote in November 2016 to legalize the sale of recreational cannabis. This vote will have serious repercussions since it could mean that the delineation between medical and recreational markets will disappear.

“Should California vote to legalize recreational use this November, we expect implementation of a combined regulated market as soon as 2018,” says Matt Karnes, founder of GreenWave Advisors. Karnes says a merged California market is significant, not only because of its sheer size (it represents about 55% of the U.S. market), but also because it “would mark the first state to implement regulations for a fully legal market without initial oversight of medical use purchases. This could serve as a catalyst for similar action in Nevada, Arizona, Massachusetts and Maine which will also vote to fully legalize cannabis this November.”

In the report, “Mid Year Update: The Metamorphosis of the U.S. Marijuana Market Begins,” the firm said it projects cannabis sales in the U.S. to hit $6.5 billion for 2016. The firm forecasts that by 2021, revenues should reach about $30 billion. This assumes that marijuana will be legal in all 50 states to various degrees. The firm also notes that this year’s election choices can potentially generate $4.2 billion in incremental retail revenues by 2018 and $5.8 billion by 2021.

The Impact on Branding, Music and Culture

As the nation’s culture manufacturing center for films, TV and music, the cannabis business is also expected to shape artistic direction for years to come. Jeff Welsh is a partner at Frontera, a business group that holds a suite of services including the Frontera Law Group, Frontera Advisors, Frontera Accounting and Frontera Entertainment, which is headquartered in Sherman Oaks with a specific focus on the cannabis industry. Welsh says he sees more partnerships between the cannabis industry and mainstream entertainment outlets. Welsh recently signed Chris Sayegh, the herbal chef who uses liquid THC to create elegant restaurant-quality food, in a deal with the United Talent Agency. This marks a cultural breakthrough that links the cannabis and culinary industries.

Because Los Angeles is the largest market, this cultural nexus is expected to contribute more new alliances between celebrity branding and cannabis products.

Luke Stanton, founder and managing partner of Frontera, also said less stringent regulations in the cannabis legal environment could find their way into the regulations and laws of other states that often adopt California laws as templates for their own state. “We have seen this happen in other areas, such as environmental and criminal justice, so it would not be surprising to see our state regulations and policies being enacted in states nationwide, and even in some countries outside of the U.S.,” Stanton says.

California has also been the site of innovative marketing efforts between cannabis patients and growers. The Emerald Exchange held in Malibu, was the first event in cannabis that allowed a direct conversation between Northern California cultivators and the Southern California patient community. According to Michael Katz of Evoxe Laboratories, a California cannabis product manufacturer, “Often the farmers don’t have a chance to really engage with patients, and we wanted everyone to be able to come together, discuss practices, provide information and ultimately support the entire ecosystem of the cannabis community.”

Caveats for Investors

While the California market looks very attractive, it may be the siren’s call for investors until issues related to finding solid companies and taxation are settled.

Since more operations will have to become fully compliant with state regulations, these businesses will face more significant expenses to meet security, taxes, licensing fees, accounting and reporting operations requirements. This could drive smaller operations out of business or force them to become more efficient.

In addition, California’s huge potential and changing regulatory environment is attracting large growers into the state that will compete with smaller, established operations. According to Jonathan Rubin, chief executive officer of Cannabis Benchmarks, these regulations affecting commercial growing vary greatly by municipality. For instance, Mendocino and Humboldt counties have enacted measures to protect local growers, while other counties have not, Rubin says.

Credit: https://www.cannabisbenchmarks.com
Credit: cannabisbenchmarks.com

In addition, cannabis wholesale prices have been falling due to changes in cultivation methods and variations in supply.

Andrew Hay, a CPA at Frontera Accounting, believes investors should make sure there is a solid plan behind any cannabis company investment. “I’ve seen significant money thrown behind ‘cannabis brands’ with no substance,” Hay says.

“In these cases, the winners are the growers, manufacturers, distributors and dispensaries that are licensed (or are in the process of getting licensed), who pay their taxes and have a successful track record. I wouldn’t invest until you see the underlying operational structure, their tax/regulatory compliance and financials that prove there have been sales,” he says.

Another major problem for investors lies in the IRS accounting regulations. “The biggest hurdle I see facing the California cannabis business is the IRS / IRC 280E, which only allows cost of goods sold deductions. Every cannabis business should be planning their operations around IRC 280E, as there is no way to legitimately survive in the cannabis industry without doing so,” according to Hay.

“IRC 280E is here to stay regardless of California legalization. It is up to the Federal government to fix this issue, which I don’t see happening any time soon. Every cannabis business should hire a CPA and business attorney that work well together to devise a cost accounting strategy to minimize IRC 280E and its impact. Without this, an investor’s profits can go up in smoke to the IRS,” Hay says.