In With SB837 and Out With Vertical Integration

Posted by Meital Manzuri, Esq. | Jul 20, 2016 | 0 Comments

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The vertical integration model that LA MMJ businesses follow has been redefined by SB837. Read on to find out what this means and how it could affect the cannabis industry going forward.

Definition: Vertical integration is when a business does not get its products from a wholesaler or distributor but sells what it produces. In terms of the cannabis industry, vertical integration is cultivation and distribution by the same business.

Profitable? Arguably yes. Acceptable business model? Not so much. Come 2018, when licensing under the Medical Marijuana Regulation and Safety Act (the MMRSA) becomes available, vertical integration will be no more. The MMRSA does not provide for vertical integration unequivocally. The MMRSA does however permit vertical integration if the MMJ business was operating before July 1, 2015, under a local ordinance that required or allowed a vertical integration. Cue the uproar.

Then Governor Jerry Brown signed Senate Bill No. 837 (SB837) into California law on June 27, 2016, the future of the cannabis industry's vertical integration landscape shifted seismically. SB837 changed the MMRSA's vertical integration clause by deleting the word “allow,” effectively mandating that there be a local ordinance that “requires” vertical integration and pushing the July 1, 2015 date for vertical integration cultivation back six months to January 1, 2016.

The Problem With No Vertical Integration in LA

Much to our dismay, or not – Prop D did not qualify under the MMRSA nor does it qualify under SB837 for vertical integration. Current LA law provides that MMJ businesses operating in compliance with Prop D must grow, manufacture, produce and sell at one location – in essence, Prop D has a required vertical integration clause. Moreover, under Prop D, which became effective June 20, 2013, the City of Los Angeles did not require a Pre-ICO dispensary to cultivate. That means that an amendment of Prop D – Prop D “2.0” cannot include vertical integration provisions either because, under the MMRSA it would automatically be invalid.

Herein lies the problem. Los Angeles requires vertical integration and new California law restricts it significantly. The happy medium – currently, the MMRSA will only authorize a Pre-ICO Dispensary to cultivate if an amended Prop D (Prop D – “2.0”) contains language expanding medical marijuana businesses in the City of Los Angeles. Expansion is achieved by specifically authorizing CA to issue a Type 10A (producing dispensary license that allows for up to 3 retail Type 10 general dispensary licenses), simultaneously with Type(s) 1 – 4 Cultivation License and/or a Type 6 or 7 – Manufacturing License.

Los Angeles's Next Move

Proposition D requires that any change to the operation of medical marijuana businesses in the City of Los Angeles be approved by the voters since Prop D was a voter initiative to begin with. According to California, under the MMRSA, any change to Prop D must specifically provide for the expansion of MMJ businesses in Los Angeles so as to allow for a state issued Type 10A license – discussed above. If not, the ability for a Pre-ICO dispensary to cultivate medical cannabis will go up in smoke.

About the Author

Meital Manzuri, Esq.

Managing Partner.

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