Want to Get Into California's Legal Pot Market? Expect a Regulatory Morass

The country's largest retail cannabis market will be covered in red tape.


An employee packages cannabis-infused chocolate bars at Kiva Confections in Oakland, Calif. Photo Source: Anda Chu/Bay Area News Group/TNS

There was never a question that California would have a huge retail marijuana industry. It's the most populous state in the U.S., and it has either the sixth or 11th largest GDP in the world, depending on whether you factor in the high cost of living. The state's medical marijuana industry has been so locally and loosely regulated that some places have had de facto legalization for years. So: lots of money, lots of people, and a big customer base.

In less than five months, the state will begin granting retail marijuana licenses. In a new report issued this week, the California Bureau of Cannabis Control (CBCC) says it expects to grant 11,500 licenses across the medical and retail marijuana industries in just the first year.

For comparison's sake, Colorado—which began licensing medical cannabis businesses in 2010 and retail cannabis businesses in 2013—had 2,932 license holders across both industries as of June 2017.

And because this is California and marijuana is a federally prohibited substance, the CBCC has also announced that red tape is coming. While the particulars have yet to be hammered out, the bureau released an outline of the emergency regulations it plans to implement before January 1, 2018. These are broad strokes and subject to change, but they suggest California's pot regulations—like those in Colorado and Washington—will be dense, intermittently arbitrary, and exacting.

Just for groans, let's take a look at the kinds of hurdles businesses will have to clear in order to receive and maintain one of the four major California cannabis licenses.

So you want to be a cannabis distributor!

Cannabis distributors will be the California pot industry's biggest middlemen. They're slated to be the only licensees that can legally move cannabis between the various points on the supply chain, from cultivators and manufacturers to retailers. They're also responsible for making sure all cannabis products are tested by licensed labs. They "can act as wholesalers or may charge other licensees a fee for conducting distribution on their behalf."

Distributors can package/repackage and label/relabel whole-plant products (which California regs refer to as flowers) but not manufactured products, which must remain in the original packaging and labeling. Distributors will need to either buy or lease commercial shipping vehicles. Said vehicles must be equipped with GPS tracking units. Distributors must transmit a manifest for each shipment to the CBCC and the recipient before delivery, and enter the shipment's information in the state's track-and-trace database.

"Transportation may not be done by aircraft, watercraft, rail, drones, human powered vehicles, or unmanned vehicles." The container for the cannabis must be lockable and opaque.

Distributors will be responsible for storing cannabis products at specific temperatures and returning faulty products to cultivators and manufacturers.

So you want to be a marijuana testing company!

If you love the chemistry of marijuana, I hope you also love doing paperwork, because you're going to be swimming in it.

Labs will have to test all cannabis products—both medical and retail—for tetrahydrocannabinol (THC), tetrahydrocannabinolic acid (THCA), cannabidiol (CBD), cannabidiolic acid (CBDA), cannabigerol (CBG), and cannabinol (CBN). Tests for other cannabis components, such as terpenes, are optional. Labs will also be required to test for heavy metals, pesticides, mycotoxins, processing chemicals, solvents, microbiological impurities, pathogens, water activity, moisture content, hair, poop, bugs, and stray bits of plastic. The CBCC will set thresholds for each category. All test results must be reported to the distributor and entered into the track-and-trace database. High levels of dangerous substances must be reported to the CBCC within 24 hours.

Plant samples that exceed the water content can be returned to the cultivator for additional curing and drying, but will need to be completely retested. Manufactured products that fail testing will have to be destroyed, though the CBCC suggests some products can be repurposed and then retested.

There are, of course, other ways for product samples to fail testing: if they are stored at the wrong temperature, if chain-of-custody forms are missing or incomplete, or if the shipping container is damaged.

Every test will conclude with a batch of paperwork containing the "identifying information about the laboratory and the personnel that performed the analysis, sample and quality control sample results, raw data for each sample, instrument test method with parameters, instrument tune report, calibration data, test method worksheets, quality control report, analytical batch sample sequence, field sample log and chain?of?custody forms, and certificate of analysis." The lab director must review and approve each sample batch's paperwork.

Labs must maintain seven years' worth of records concerning testing practices, employee names and qualifications, equipment maintenance, disciplinary actions, lab cleaning, and data prepared during testing. Future regulations will detail the licensing and certification requirements for laboratories and their employees. Every lab must submit a detailed floor plan.

So you want to be a retailer!

Maybe you want a customer-facing role, chatting about the merits of CBD over THC or the terpene profile of your favorite strain. I hope you also like rules, because there will be a lot of them.

The CBCC will determine your hours of operation at a later date. Cannabis products cannot be accessible to customers without assistance, and they may not be displayed in such a way that they are visible to people outside the store. At a later date, the CBCC will determine how much product can displayed in areas of the store accessible to customers. Stores may not offer free samples, or modify packaging or labelling. Cannabis products can be opened for customer inspection, but then must be destroyed; stores may not sell products they have taken out of the distributor packaging pre-sale.

Retail shops may still deliver cannabis products, but they can no longer do so using bicycle, scooter, or pedestrian couriers. Delivery workers will have to use an alarm- and GPS-equipped enclosed motor vehicle (i.e., something with a roof). There will be limits on how much cannabis a courier can carry at any one time. Retailers must keep records of all deliveries, and delivery drivers must be over 21. Retail shops may only admit customers who are over 21; medicinal shops may admit customers 18 and up who have the proper paperwork.

Retail and medicinal shops "must keep records of all sales transactions, including the names of the sales employee and the customer, the list and quantity of products sold and their price, and the date and time of the transaction." This data must be entered into the track-and-trace database.

Any discrepancies in inventory or sales records must be reported to law enforcement within 24 hours of discovery and to the CBCC. Retailers will be allowed to sell untested cannabis products obtained before January 1 during a grace period of undetermined length. All such goods must come with a label that says, "This product has not been tested under the Medicinal and Adult?Use Cannabis Regulation and Safety Act."

So you want to be a grower!

Cultivators and microbusiness licenses—the latter are vertically integrated businesses similar to the breweries that retail their own beer—will allow for commercial marijuana growing, though they will be governed by two additional California agencies: the California Department of Food and Agriculture (CDFA) and the California Department of Public Health (CDPH).

The CBCC document released this week is light on cultivation details because it expects the CDFA and the CDPH to issue their own rules. But here's a taste of what to expect:

Applicants for cultivation licenses must provide a premises diagram that identifies various specific spaces, some of which are specific to certain license types and cultivation practices (e.g., lighting diagrams for indoor and mixed?light cultivators); a pest management plan; the proposed water source and/or irrigation methods; a waste disposal plan; and defined propagation areas. In addition, licensees must comply with environmental protection measures contained in the CDFA regulations, which are expected to include requirements related to water use, lighting, generators, pesticides, provisions for accidental discovery of human remains, and renewable energy requirements for nurseries, mixed?light cultivators, and indoor cultivators.

Growers, like every other licensee, will have to submit floor plans to the CBCC and information to the track-and-trace database. Microbusinesses will be spared the expense of working with distributors, but they will be constrained by a 10,000 square foot floor space maximum.

Heavy regulation is (probably) the future of cannabis legalization.

Colorado and Washington cannabis businesses operate under extensive regulations, many of them similar to the rules California is poised to adopt. Their labs are required to conduct similar tests, their shops also have to use opaque bags, their packages must be covered in similarly stern warning labels. In part, these rules are designed to limit diversion and to discourage teen use, both necessary to keep the federales at bay. But they also reflect a bureaucratic mindset that says preventative measures should be taken for an entire universe of potential calamities, regardless of how unlikely they are.

For instance, I've found only a handful of documented cases in which smoked marijuana was a vector for aspergillosis, a fungal infection caused by the aspergillus mold, which is ubiquitous and harmless for most humans. The worst cases of the disease affect transplant recipients and other immuno-compromised people. In a cost-benefit analysis, does it make more sense to test every batch of marijuana for four different strains of aspergillus (and destroy ones that test positive) in order to avoid a handful of annual aspergillosis deaths, or to advise immuno-compromised cannabis users to stick with edibles and other manufactured products? I honestly don't know. I suspect the answer is the latter. Heck, California could require aspergillus testing for just medical marijuana products, and then encourage immuno-compromised patients to use those instead of retail. But I suspect these arguments would fall on deaf ears.

As of now, regulatory compliance costs aren't high enough to keep retail marijuana prices anywhere near prohibition levels. Marijuana in Washington state retailed at more than $20 a gram back in 2014; now it goes for less than $10. Steve Davenport of RAND projects that marijuana prices will fall 25 percent per year for the foreseeable future. Is overregulation an acceptable tradeoff for avoiding the horrors of prohibition? As someone who's purchased retail cannabis in Colorado and black market weed in a variety of other states, I certainly find that tradeoff acceptable. But I wouldn't surprised if California's incumbent cannabis entreprenuers feel differently.