Month: December 2017

There seems to be much confusion on how much weed a person or organization can grow for recreational purposes in California starting on January 1, 2018.  The most recent “law”, not regulation (see my recent blog on “What is the Difference Between Proposed and Binding Regulations”), that is binding on this issue is SB 94 which was enacted into law on July 15, 2017.

This law reads in pertinent part:

SB-94 Cannabis: medicinal and adult use.

SEC. 49.

Section 26061 of the Business and Professions Code is amended to read:

(2) Type 5A, or “indoor,” means for indoor cultivation using exclusively artificial lighting greater than 22,000 square feet, inclusive, of total canopy size on one premise.

(3) Type 5B, or “mixed-light,” means for cultivation using a combination of natural and supplemental artificial lighting at a maximum threshold to be determined by the licensing authority, greater than 22,000 square feet, inclusive, of total canopy size on one premise.

(c) No Type 5, Type 5A, or Type 5B cultivation licenses may be issued before January 1, 2023.

This law seems to indicate that until January 1, 2023, people cannot obtain Type 5 licenses, so the maximum amount of  land an individual or organization can use for the cultivation of cannabis is the limits proscribed by the medium (type 3) license delineated in SB 94 which only allows a maximum growth of 22,000 square feet.

The Cannabis regulations that were released on November 16, 2017 reconfirmed that only small and medium-size grow licenses will be issued between 2018 and 2023 (for up to quarter-acre and one-acre grows, respectively).  This statement should be of no surprise to anyone because state regulations cannot overturn state law; such regulations can only clarify state law.

However, according to the article; “California’s Limit on Big Growers Just Vanished. Here’s Why” published by Leafly on December 8, 2017, (https://www.leafly.com/news/politics/californias-limit-on-big-growers-just-vanished-heres-why) asserts that the regulations did say that while medium-size licenses are limited to one per person or organization, there is now no limit to the number of small-size licenses any person or commercial entity may obtain.  In other words, you can only apply for one medium sized license (or type 3 license) which will allow you to grow up to 22,000 square feet and are prevented from obtaining a large (Type 5) license which would let you grow beyond 22,000 square feet.  However, according to this article, you can apply for more than one small (Type 2) license that allows you to grow up to 10,000 square feet.  Therefore, if you apply for ten small (Type 2) licenses, you could theoretically develop 100,000 square feet of Cannabis.

This situation begs the question: why have medium (Type 3) or large (Type 5) licenses at all, when you can simply apply for multiple small licenses that would allow you to surpass any size restrictions medium (Type 3) or large (Type 5) license could place on your grow.  In addition, the limitations of just being able to obtain one medium (Type 3) license and no large (Type 6) licenses until 2023 are absurd because you can get as many small (Type 3) licenses as you want.  Under this system why would anyone ever even apply for a medium (Type 3) or a large (Type 5) license at all?

There is clearly something rotten in the State of Denmark (or California in this case).  If what the above quoted article is saying is accurate, then medium (Type 3) licenses and large (Type 5) licenses should be eliminated because they serve absolutely no purpose.

One issue that I think keeps everyone concerned is what is the story about these new cannabis regulations?  Are they binding or not?  Some Regulations, unlike laws, can merely be issued by a regulatory body and have the force of law although they have never gone through the legislative process.  As most people are aware, on November 19, 2017 three California regulatory bodies came out with three sets of regulations concerning cannabis that are scheduled to go into effect on January 1, 2018.  Here they are:

Bureau of Cannabis Control regulations

CA Department of Food and Agriculture regulations

CA Department of Public Health regulations

What people should keep in mind is that these regulations are binding in that they will have the full effect of law come January 1, 2018.  In other words, if you don’t comply with them, such non-compliance will have the same repercussions as violating the law.

Lori Ajax, the Chief of the BCC, says that these regulations will be reviewed and adjusted depending on how the regulations fair through the licensing scramble and legalization of recreational cannabis that the whole state is about to face.  If all goes smoothly, she may adjust them slightly and if the next month proves totally disastrous there will probably be major changes to the regulations.

But don’t let this discussion make you think that these regulations are not binding.  Even though they can be changed rather quickly, don’t think they are not binding.  These are not proposed regulations as many in the press have called them.  The people in the press and on the blogs referred to them as “proposed regulations” because they can be changed rather easily.  However, most of these bloggers, reporters and even lawyers are wrong because the November 19, 2017 regulations delineated above are binding regulations.  Proposed regulations are regulations that have been proposed for further discussion but are NOT BINDING.  Therefore, unless a regulatory body that has issued a “proposed regulation” turns such regulation into a binding regulation, the proposed regulation will never have the force of law.  To be clear, as stated, the regulations issued on November 19, 2017 by the three agencies of the state of California are binding regulations.

Much of the confusion surrounding this issue is that most of us were taught in civics class that in order for a bill to become a law, at the federal level at least,  the bill would have to pass the U.S. House of Representatives, the U.S. Senate and then be signed by the President.  On the state level, for a bill to become a law, it would have to pass the California State Assembly, the California State Senate and then be signed into law by the Governor.  Those statements are true but there is another way for a proposed rule to become an enforceable rule.  That is when the State legislature creates a law that has vague portions and then the legislature delegates their law making power to a state regulatory agency to clear up the vague sections of the state law.  In these situations a law is passed and then the regulatory agencies must pass regulations that fill in the parts left vacant or vague by the original law.

As an example, if under state law it states that cannabis products are not to be enticing to children, then it is up to a regulatory agency to decide what enticing really means: does it have to look like candy, does it have to have a name similar to a piece of candy already on the market etc. etc. etc.

The most important point to remember here is that these state regulatory agencies can never pass a regulations that violates state law.  The people of California have already decided that cannabis should be legal.  Therefore no regulatory body can ever overturn that law.

The bottom line is that even though Lori Ajax says these current regulations will be discussed and changed in the upcoming months; don’t forget that these regulations issued by the three state agencies delineated above will be binding and enforceable come January 1, 2018.

Most people will tell you that the fact that marijuana and cannabis are illegal under federal law is a real problem for most California cannabis entrepreneurs.  However, I would argue the federal laws are a blessing in disguise for most California cannabis entrepreneurs.  There is no question that the fact of federal cannabis illegality makes life difficult for anyone involved in the cannabis business.  This illegality makes it difficult for cannabis companies to find a bank (as most banks are registered with the federal government and don’t want to get involved with a federally illegal product), find insurance (as with banks most insurance companies are federally regulated) and many other services that are regulated by the federal government.  There is also the fear, no matter how remote, that the DEA or some other federal agency could swoop in any time and shut down your business because it violates federal law.

However, I feel all these negative issues attached to federal illegalization are far outweighed by the fact that federal illegalization seriously cuts down on the competition.  Just imagine if Archer Daniels Midland, General Mills or something other food or agribusiness conglomerate entered into the recreational cannabis market in California?  With their resources and experience in the market, they could crush any recreational cannabis company in the market today.  So why don’t they?  Because all these companies are listed on national stock exchanges which are regulated by the federal government.

I could be wrong here, but it is my strong believe that any company that is listed on any national exchange i.e. NASDAQ, the NYSE, the Pacific Stock Exchange etc. may not get into the Cannabis business.  That is a huge advantage for any entrepreneur.  In almost any other industry one would have to worry about big conglomerates pushing their small or medium start ups out of business.  But in the recreational California cannabis business, we only have to worry about unlisted conglomerates pushing us out.  I believe that is just one of the reasons why the California recreational cannabis business is such a prime market for small entrepreneurs to enter.

Many people are concerned that the stigma surrounding cannabis as an illegal drug that is harmful to the body and could be a gateway to harder drugs is harmful to  business.  I would argue that such a stigma is a blessing in disguise.  The stigma, I believe, is not going to discourage someone who is already interested in cannabis from using cannabis.  The people that already believe the fallacy that cannabis is a gateway to harder drugs were never the kind of people that were going to use cannabis anyway.

However, for California cannabis entrepreneurs this stigma is a blessing in disguise.  Many companies that could make a large splash into the cannabis market are prevented from doing so because of the stigma.  Tobacco companies and alcohol companies would seem to be a perfect fit for entering into the California cannabis industry.  Both of these products are stigmatized as being harmful, addictive and a gateway to harder drugs.  The industries that produce these two products, alcohol and tobacco, are already familiar with a business that is controlled by significant regulation and is taxed heavily.  These organizations are also used to making products that are consumed by the customers and therefore are familiar with issues that surround selling a product that is ingested.  Therefore, the alcohol and tobacco conglomerates would be the perfect companies to move into the California cannabis recreational market.

However, these companies have enough heat on them that they don’t need to incur any more heat by getting into cannabis.  As you will notice, in general tobacco companies and alcohol companies don’t enter into each other’s markets.  I believe this is the case because they are so stigmatized by being in one of these industries that they don’t need any further stigmatization.

This stigmatization also prevents many other small companies and individuals from venturing into cannabis.  There are many people that don’t want to get involved in the “drug business” no matter how lucrative it is.  It is my conclusion that this stigmatization cuts seriously down on the amount of companies and individuals that but for the stigma would otherwise enter the market.  Therefore, I would argue that the stigma of cannabis seriously cuts down on the supply of recreational cannabis products by reducing the number of players that are willing to enter the game.  On the other hand, I don’t believe the stigma significantly reduces the number of people who are going to purchase cannabis products.

Before cannabis goes fully legal in California, there are still plenty of people that have already tried cannabis and certainly want to purchase more.  Especially now that it is completely legal and it will be very easy, come January 1, 2018 to simply walk into a store to purchase it.  Therefore, for California cannabis entrepreneurs the stigma means less competition but the same demand.

After yesterday’s post, a lot of people asked me how I could be so sure of federal obstinacy to legalizing marijuana. I realize now that as someone who has been heavily involved in politics for over thirty years, what seems like conventional wisdom in political circles, in most other circles seems crazy. The question usually is, if twenty nine states out of fifty have legalized marijuana in some way, how can the federal government  be so abstinent in choosing not to legalize the sale of marijuana even for medical use?

For this situation to change, either the Supreme Court of the United States would have to say that the federal law is unconstitutional because the Constitution does not give the federal government power to declare marijuana illegal, or a law would have to be passed by the U.S. Congress overturning cannabis criminalization.

Articles X of the Constitution states that: “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.” One place the Constitution says that the U.S. Government (the federal government) has power over the state and the people is when the issue in question concerns interstate commerce.

When the issue of Civil Rights came up before the U.S. Supreme Court, and more specifically, how and when could the US Government force a local diner to desegregate, the U.S. Supreme Court said that the US Government has jurisdiction over the segregation issue as it relates to a local diner (where the seating is segregated because of race) because the diner probably serves such items as Chicken which in all probability was transported over state lines to the diner; and thus invoking the Interstate Commerce Clause of the U.S. Constitution (and other excuses). What is called the interstate commerce clause is also called the loop hole so big; you could drive a truck through it. If the constitutionality of the federal government in outlawing marijuana is ever brought before the U.S. Supreme Court, then it is this loophole call “Interstate Commerce Clause” that will probably save the law.

In addition, the U.S. Supreme Court is the most “politicized court” in the land, and most of the court was nominated by Republican Presidents who were all very much in favor of the war on drugs. In any case, even though Republicans are supposed to be the party of strict-constructionism, which means the party that is for limiting federal power to only those powers delineated in the Constitution, it is still the party that favors keeping the federal anti-drug laws intact.

Right now the big “anti-drug” party is in control of all the law making branches of government. To abolish the federal laws that outlaw marijuana, you would have to pass such a law through both the U.S. House of Representatives and the U.S. Senate and then your would need the President of the United States to sign it. Almost every Republican that runs for political office anywhere runs on a tough anti-drug platform and this anti-drug fever seems to override any Republican sympathy for libertarianism or bringing power “back to the states”. The bottom line is that as long as there is republican control of  the House, the Senate or the Presidency, the federal anti-marijuana laws will remain in force. Therefore, don’t count on a reversal of federal law when making strategic business decisions about marijuana.

(Author’s note: there are not a lot of citations in the article because most of it came from the top of my head. It never occurred to me that there was a chance for federal reversal on this issue. I really would like it if my conclusions on this issue were wrong. So if you disagree with me, by all means tell me. I would love to hear it).

Almost every intelligent person residing in California is aware there is some problem with the marijuana or cannabis laws in California. However people are not truly aware of how deep and dysfunctional the legal framework around Cannabis truly is.

To fully understand the cannabis legal environment in California you would have to take the equivalent of a one year  law school class focused on California Cannabis Law. That is ninety hours of class time. The problem is there is currently no one in California today that could truly teach such a class. The reason for this problem is threefold.

First, the law surrounding cannabis in California is so fluid and new that no one truly comprehends the whole picture. On November 16th, 2017, three California state agencies released 272 pages of regulations that will go into affect on January 1st 2018.  Below are the regulations divided by the agencies that released them.

• Bureau of Cannabis Control regulations
• CA Department of Food and Agriculture regulations
• CA Department of Public Health regulations

When commenting on these regulations. Lori Ajax, The Chief of Bureau of Cannabis Control,  commented in the Orange County Register  about the current regulations:  she said they plan to continue taking public comment into 2018 and fine-tuning the rules as needed.

“I think they’re good, but I think there are improvements that can be made,” she said. “I think we’re going to get a better idea once we start issuing licenses and see how implementation is going.”

Therefore no one knows, except for maybe some divine presence, what the final California regulations are going look like even four months from now.

Second, there is a direct confrontation and contradiction between California Republic’s State law and the government of the United States Federal Law. Federal law should always trump state law. However, the reason that the contradictory system is allowed is because of the federal tradition in this country.

This federal system is not a problem for France or Poland. Unlike those other republics, our Constitution clearly states that the federal government is restricted to making only certain laws. And any laws outside of the federal purview, and this purview is clearly delineated in the US constitution, should be struck down by the federal courts. Ever since the founding of the current federal republic in 1789, the federal government has been slowly expanding the federal purview to the point where the U.S. Congress felt comfortable in outlawing cannabis nationally in 1917. There are many experts and layman still today that think the federal laws on cannabis are unconstitutional. It is this history that has prevented the federal government from imposing the federal will on the states. Without the federal government imposing its will and if California state laws don’t change, this contradiction will continue. A similar conflicting and contradictory legal situation between one or more states was solved by the US Civil war from 1861-1865 and by the Civil Rights Movements in the 1960s.

Third, if anyone tells you that the Supreme Courts may soon say such federal laws are unconstitutional or anyone tells you that “the federal law will soon change” are completely ignorant of the current political climate. I can say without a doubt it will be at least ten years (and probably much longer) until the federal government changes the law. In business, such a delay might as well be three lifetimes. If the federal government refuses to impose its will, and at the same time refuses to change its own laws, (and I assume the state of California will not decide to go back to criminalizing the sale and use of Cannabis) then there is no easy fix for this conflict of laws.

However, where there is Chaos there is opportunity. At the end of prohibition huge profits were made by people who were ready to jump into the game. I was talking to my friend Marco Robert and we were discussing how Josef Kennedy Sr. jumped right into the legal market at the end of prohibition and turned his family into one of the richest families in the world.

Fortune favors the bold and he who is afraid to travel where angels fear to tread will seriously regret not taking the road less travelled.