Co-Author: Meital Manzuri, Esq.
It has been two years since California began licensing yet operators still struggle with compliance and are all still de facto, breaking one law or another. To kick us off, hemp was legalized at the federal level, and we entered into unchartered territory, navigating uncertain waters of the newest arm of the cannabis industry with a lack of regulation or guidance. Meanwhile, the state was experiencing a severe bottleneck in its own licensing process. With the states, the feds, and the locals all making up their own rules for hemp and cannabis operations and prohibitions, the illicit market continued to thrive - creating financial hardships for licensed operators and a safety crisis for consumers. Here's a look back at 2019 and a projection of what's to come in 2020 Cannabis Law.
TOP Defining Moments in Los Angeles Cannabis
At the outset of 2019, LA had just finished with the craze of Phase 2 non-retail applications, and all was quiet on the local level as everyone was rushing to get their State annuals submitted. In hindsight, the lull was much needed as this year turned out to be the most highly controversial year in LA licensing with the development of Phase 3 Retail processes, applications and now the incredibly heated response to DCR's processing of the applications and the top 100 invoices. With that, Los Angeles needs a lot of runway to continue to get licensing further off the ground. Below we've recapped LA Cannabis' year's ups and downs.
March 2019 - Development of LA's Phase 3 Retail License Application.
After Los Angeles City Council issued its newest series of recommendations for Phase 3 Retail applications, DCR announced a 60 day period for the pre-vetting process for Social Equity applicants and established two rounds of applications for Type 10 Retail Storefront licenses.
Before Round 1 began, DCR recommended Council to instruct the City Attorney to draft language suspending Phase 3 processing until the enhanced Social Equity analysis is completed - this didn't happen. In fact, the City opened and closed the Retail Phase 3 Round 1 window without finishing their Social Equity analysis.
The City was also attempting to deal with "the golden handcuffs issue" - whereby under the current ordinance, social equity operators are required to stay in their business or sell to another social equity qualified owner indefinitely. We saw no movement or resolve with this issue in 2019. It was further announced by the DCR that by Spring 2019, delivery applications were expected to be released, however, we have not seen the ability to apply for delivery just yet and are looking forward to that in 2020.
April 2019 -Budget Approval and Enforcement in LA.
A budget was approved for funding the DCR and Enforcement against unlicensed shops. The City also approved LADWP to shut off utilities, and recommended the enforcement of high fines and compensatory damages against landlords who continue to allow unlicensed shops to rent from them. Since then City Attorney has sent out a handful of letters to property owners with allegations of violating local law and the LAPD started to assist in shutting off the utilities of shops while also continuing to execute search warrants, arrests and seizures. By April, 34 illicit cannabis businesses in Los Angeles were slated for utility shutoff and 12 had their power and water cut.
May 2019 - LA released Final Ordinances.
By May, DCR developed more of the Phase3 process - announcing the availability of 100 licenses in round 1 and 150 licenses in Round 2 of Phase 3 storefront retail application processing. The DCR also gave us an update on the “golden handcuff” issue prohibiting the transfer of equity shares in a Tier 1 or Tier 2 Social Equity business until they adopt minimum standards for such transfers.
July 2019 -Social Equity Vetting.
By July, the 60 day window for Phase 3 Social Equity vetting window closed with approximately 1,800 Social Equity applicants registered for vetting with more than 1,000 applicants were verified. Thereafter, Dr. Imani Brown joined DCR as City's First Social Equity Program Manager working to develop the program further and lend support to its platform.
At the same time, Phase 2 applicants were still working towards their inspections and obtaining Temporary Approval.
Sept 3, 2019 - Marked the Opening of Phase 3, Round 1 Retail Applications in Los Angeles.
On September 3, 2019, 5-10 seconds before 10:00am, the DCR licensing portal went live for the public to apply for the 100 available retail licenses in Round 1.
To read more about this controversial process, read our most recent LA Update and stay tuned to our Instagram account, @420attorneys, for real-time updates.
2019 Defining Moments in California Cannabis Law
The End of the Collective Era. As of Jan. 9, 2019, all cannabis collectives and cooperatives must be licensed, except for (a) individual patients and (b) caregiver gardens serving NO more than five (5) patients. This also served as the end of the collective defense for those criminally charged with operating a cannabis business without a license.
Final Regulations. On January 16, 2019, the Office of Administrative Law approved the final regulations for all three State licensing agencies allowing the industry to meaningfully draft their business strategies and operations.
Licensing. We all started out 2019 with high expectations. The Bureau of Cannabis Control (BCC) had issued just under 3,000 active licenses and 15 annual licenses and CalCannabis had issued nearly 7,000 temporary licenses.
However as of December 31, 2018, according to State regulations, temporary licenses could no longer be issued or extended which created a bottleneck and a long list of applicants eager to get reviewed and approved for a provisional or annual before their license expired and they had to shut down operations.
Then, in April 2019
Most Temporary Cultivation licenses Expired. Many Cultivation operators slid in their applications before the Jan 1, 2019 deadline which resulted in an April expiration date. Due to the backlog at CalCanna, thousands of cultivators went unlicensed for a 3-6 month period while waiting in a massive traffic jam for CalCanna to review their Provisional application. Notably, this is the current source of controversy for Lowell Farms that has been sued by CDFA for operating without a license during this time period. Read the complaint here.
Enforcement Started to Ramp Up. The Bureau of Cannabis Control (BCC) sent out 2,842 cease-and-desist letters to cannabis shops and businesses suspected of operating without state licenses. State regulators announced enforcement actions all over the State which then resulted in the first round of charges against operators violating state law. Multiple rounds of raids and civil charges followed thereafter.
TOP 5 Defining Moments in Federal Cannabis
We also started 2019 with the legalization of hemp and the journey to develop what that means for CBD companies and consumers alike. That led to a frenzy of mainstream markets, coffee shops and juice bars carrying and incorporating CBD in their products only for the FDA to issue a statement bringing it all to a screeching halt.
March 2019 - FDA Takes a Stance on CBD.
CBD products started popping up everywhere and it begged the question - IS THIS LEGAL? The simple answer - probably not. The FDA thereafter reaffirmed its long-standing position that CBD products intended for human consumption are illegal unless part of an approved pharmaceutical. Thereafter, the FDA began issuing warning letters to companies throughout the U.S. that were making unproven and specific health and wellness claims about their CBD products.
April 2019 - Enforcement Started to Ramp Up.
The governor proposed that at least 150 California National Guard troops would be redeployed from the U.S.-Mexico border to join a federally funded Counterdrug Task Force.
May 31 2019 - FDA Hearings on CBD.
FDA held its first public hearing about CBD. The hearing highlighted that some CBD products make inaccurate claims, health claims and there was an in-depth discussion on how CBD was going to be regulated.
July 2019 - Hemp Cultivation Registration.
The Industrial Hemp Advisory Board, a division within the CDFA, the same agency licensing cannabis cultivation, gave the go-ahead for hemp cultivars to register to grow hemp - complete with applications and all. Now, any person who cultivates industrial hemp for commercial purposes or for seed production and development has to register to do so. However, instead of applying for a city/county license and then a state license, as done for cannabis cultivation, hemp cultivars only register with the county agricultural commissioner in the county that they intend to cultivate.
November 2019 -USDA issued interim final hemp production regulations.
The rule is “final” in that it went into effect immediately, but “interim” in that the USDA is soliciting public comments and could revise some portions of the regulations. The Interim Final Rule details the licensing process and requirements for hemp producer licenses.
You can view the USDA's Interim Final Rule on Hemp Production on the Federal Register Website here. Comments must be received by December 30, 2019. You can submit a formal comment by clicking here.
December 2019 - Federal banking regulators take steps to allow for financial services for hemp related businesses.
On December 3, 2019, FinCEN, along with others, issued a “statement to provide clarity regarding the legal status of commercial growth and production of hemp and relevant requirements for banks under the Bank Secrecy Act (BSA) and its implementing regulations.” For the first time, the federal banking regulators' statement lets banks know that they “are not required to file a Suspicious Activity Report (SAR) on customers solely because they are engaged in the growth or cultivation of hemp.” Instead, “for hemp-related customers, banks are expected to follow standard SAR procedures, and file a SAR if indicia of suspicious activity warrants.”
What Does All of This Mean for 2020?
Stay tuned for next month's article on our full forecast for 2020. We foresee a lot more changes on the horizon at all governmental levels. Federal regulators will continue to develop hemp policies, states will ramp up enforcement further, and LA will be scrambling to come out from under the debris of Phase 3, start delivery licensing and possibly start Round 2 Retail. If history is any indicator, I'm sure a few surprises will be thrown in there too.