As the Californian cannabis industry gains momentum, an increasingly number of people are expressing interest to participate in the cannabis movement. This is especially true in the new normal, where cannabis businesses were deemed “essential” in era of Covid-19. The truly unfortunate reality, however, is that there are many potential barriers to entry and factors to consider, precisely because participating businesses are so strictly regulated. It’s vital that all individuals looking to participate in the industry, whether as a license owner, investor, ancillary service provider, etc., are at least somewhat aware of the regulatory framework. Therefore, this article discusses the answers to some of the most common questions received by those looking to get in on the cannabis action. It is not an exhaustive list of questions by any means, but it does touch on the most encountered questions, as a firm dedicated to cannabis. As with any blog post from Cultiva Law, this is not legal advice and should not substitute for legal advice. However, this is a constantly shifting legal landscape and it is best to talk to an experienced lawyer in your jurisdiction.
Know the Terms
A-Type – used for businesses that are applying for a license to engage in recreational commercial cannabis activities.
Adult-Use – legislation, licensure, and regulation all this term to mean recreational cannabis.
BCC – the acronym for the Bureau of Cannabis Control, this is the regulatory state body that oversees the following commercial cannabis activities: (1) Retail; (2) Microbusiness; (3) Distribution; (4) Testing; and (5) Event Organization. The BCC handles all licensing and compliance enforcement for those listed activities.
Canopy – The square footage of area that will contain mature cannabis plants at any time. If a shelving system is used, the square footage of all levels must be included in the calculation of total canopy.
CDFA – the acronym for the California Department of Food and Agriculture, this is the regulatory state body that oversees commercial cannabis cultivation. The CDFA handles all licensing and compliance enforcement for cultivation.
CDPH – the acronym for the California Department of Public Health, this is the regulatory state body that oversees commercial cannabis manufacturing. Specifically, the Manufactured Cannabis Safety Branch of the CDPH handles all licensing and compliance enforcement of cannabis manufacturing.
Commercial Cannabis Activity – any time a person engages in the business of cannabis, such as selling, growing, processing, packaging, transporting, this all falls under “commercial cannabis activity.” Commercial cannabis activity encompasses both adult-use and medicinal cannabis businesses.
Licensee – An individual or entity that holds a commercial cannabis business license.
M-Type – used for businesses that are applying for a license to engage in medicinal commercial cannabis activity.
MAUCRSA – the Medicinal and Adult-Use Cannabis Regulation and Safety Act. Also known as Prop 64.
MCSB – the acronym for the Manufactured Cannabis Safety Branch, this is a branch of the CDPH that handles all licensing and compliance enforcement of cannabis manufacturing.
Owner – At the state level, an owner of a cannabis license means any one of the following: (1) a person with an aggregate ownership interest of 20% or more in the licensee, unless the interest is solely a security, lien, or encumbrance; (2) the CEO of a nonprofit or other entity; (3) a member of the board of directors of a nonprofit; (4) the trustee(s) and all persons who have control of the trust and/or commercial cannabis business that is held in trust; (5) an individual entitled to a share of at least 20% of the profits of the commercial cannabis business; (6) an individual who will be participating in the direction, control, or management of the licensee or applicant.
Nonvolatile Solvent – any other type of solvent that does not produce a flammable gas or vapor. Examples include carbon dioxide, ethanol, water, butter, and oil.
Prop 215 – the common name for the ballot measure that legalized medicinal cannabis in 1996. California is proudly the first state to have legalize medicinal cannabis. Also called the Medical Use of Marijuana Initiative or the Compassionate Use Act.
Prop 64 – the common name for the ballot measure that made recreational cannabis legal in California. Also known as MAUCRSA.
Volatile Solvent – a solvent that produces a flammable gas or vapor. Some examples include butane, hexane, and propane.
I want to start a cannabis business….
- How do I get a license?
Unfortunately, there is no simple answer to this question. The State will not issue a cannabis license to any applicant that does not have proof of local approval. Therefore, getting a license starts with finding a city (or county, if located in an unincorporated area), that has approved commercial cannabis activity within their jurisdiction. For example, the city of Los Angles approved commercial cannabis activity within city limits, but the county of Los Angeles prohibits commercial cannabis activity in its unincorporated areas.
Once you find a place that is accepting commercial cannabis license applications, you can apply for licensure/approval with the local jurisdiction and from the state. Some local jurisdictions require the applicant to obtain state licensure within a certain period of time after obtaining local approval/licensure, so it is suggested that the local and state applications are submitted simultaneously or within a short time.
Alternatively, if you can find an entity selling their business (since licenses are attached to the business), you can buy the business, which is a very different process. More information on this found below under “I want to buy a cannabis license…”.
- Do I need city approval or county approval?
Is the business location in an incorporated city or an unincorporated area? Locations within incorporated city limits must obtain city approval. Locations within unincorporated areas need county approval. If you’d like to know whether the location is within a city or unincorporated area, you can do a simple google search of the “city” of the address. Unincorporated areas also go by the name “Census Designated Place” or “CDP.” For example, Hacienda Heights is a CDP and therefore requires Los Angeles County approval.
- What kind of license do I get?
Retailer (Storefront) – Also called a Type 10 license, Retailer (Storefront) licenses are for those that want to run a brick and mortar dispensary. However, be warned, this the absolute rarest type of license available because most local jurisdictions have either prohibited the activity altogether, or only limited the issuance of these licenses to already-existing dispensaries that were open prior to 2016 under Prop 215. Retailer (Storefront) licensees may also have a website and may engage in delivery to consumers.
Retailer (Non-storefront) – Also called a Type 9 license, Retailer (Non-storefront) licenses are for those who want to sell cannabis products to consumers via an online website or app only. This still involves having your own store, it’s just an online-only store with no physical location for customers to come to. Retailer (Non-storefront) license holders will still need a location for their business to hold their inventory and serve as a hub for their delivery driver employees.
Distributor – Also called a Type 11 license, Distributor licenses are for those that want to transport cannabis products between licensees. For example, distributors may transport cannabis products from a cultivator to a testing lab or from another distributor to a retail licensee. Distributors may also: (1) arrange for testing of cannabis goods; (2) conduct quality assurance review; (3) package, re-package, label, and re-label for retail sales; and (4) provide storage-only services for cannabis accessories, licensees’ branded merchandise or promotional materials, and packaged cannabis goods as they will be sold at a retailer.
Distributor (Transport Only) – Also called a Type 13 license, Distributor (Transport Only) licensees may transport cannabis goods between licensees and is restricted to only transport cannabis goods. Type 13 licensees are not allowed to engage in any of the additional activities listed above for a Type 11 license. Additionally, a Distributor (Transport Only) license is prohibited from transporting cannabis goods other than immature cannabis plants and/or seeds to a retailer or a retail portion of a licensed microbusiness. A Type 13 licensee may additionally transport cannabis accessories and the licensees’ branded merchandise or promotional materials.
Manufacturing – Manufacturing licenses are for those that wish to extract or process cannabis. Manufacturers may also package flower and roll/package pre-rolls on their licensed premises. There are five (5) different types of manufacturing licenses:
Type 7: Type 7 licensees may manufacture cannabis using volatile solvents such as butane, hexane, or propane. A Type 7 license allows you to conduct activities of a Type 6, N, or P license.
Type 6: Type 6 licensees may manufacture cannabis using non-volatile solvents or perform extraction using mechanical methods. Type 6 licensees may also conduct activities of a Type N or P license.
Type N: Type N licenses are for manufactures that want to infuse cannabis. Type N licensees may also conduct Type P activities.
Type P: Type P licensees may only package or label cannabis products. A Type P licensee may only conduct Type P activities.
Type S: Type S licenses are for manufacturers operating on a registered shared-used facility. The shared-use manufacturing facility must be approved before Type S licensee may submit license applications.
Cultivation – Cultivation licensees are for those that want to grow cannabis. Currently, the state has 14 different cannabis licenses, differentiated by light-source and size. For more on cultivation licensing, visit the California Department of Food and Agriculture (“CDFA”) CalCannabis homepage. Cultivation licenses encompass Type 1, Type 1A, Type 1B, Type 2, Type 2A, Type 2B, Type 3, Type 3A, Type 3B, Type 4, Type 5, Type 5A, and Type 5B. Type 5, 5A, and 5B is reserved for “Large” sized cultivation operations (greater than 22,000 sq. ft. of total canopy) and will not be issued prior to January 1, 2023.
Microbusiness – Also called a Type 12 license, a Microbusiness license allows the licensee to engage in vertical integration. All microbusiness licensees must conduct at least three (3) of the six (6) possible activities: (1) Retailer (Storefront); (2) Retailer (Non-storefront); (3) Distributor; (4) Distributor (Transport Only); (5) Cultivation less than 10,000 sq. ft of canopy; and (6) Level 1 Type 6 Manufacturer.
Testing Laboratory – Also called a Type 8 license, Testing Laboratory licensees are permitted to perform testing of cannabis goods. Testing laboratories must obtain and maintain ISO/IEC 17025 accreditation; they may be issued a provisional license allowing them to operate while obtaining accreditation, so long as they meet all other requirements.
Event Organizer – This is a license required for those looking to organize cannabis events. A Cannabis Event Organizer Licensee may apply for a Temporary Cannabis Event License for a specific event the licensee wishes to hold. A Temporary Cannabis Event License is required to hold a temporary cannabis event where onsite sale and consumption of cannabis goods is authorized at the located indicated on the license. A Temporary Cannabis Event License will only be issued to an Event Organizer licensee.
- Can I do delivery to customers?
Cannabis delivery may only be performed by Retailers. If you’d like to engage in cannabis delivery, you must obtain a Retailer or Retailer (Non-Storefront) license. California regulations prohibit retailers from engaging third parties to deliver their cannabis product—delivery must be completed by an employee of the retailer. As the regulation currently stands, no, it is not possible to create a GrubHub or Postmates service for cannabis.
- How much does it cost to get a license?
Each city and county are free to decide the fee schedule for licensing on their own so there is no way to be able to give an answer to this unless you know the location you’re looking to get licensed in.
As a general matter, there are two different license fees. There is an application fee, which is the fee paid at the time of submitting the application and is the fee associated with having the regulatory body review and process the application. Then, once the application is approved, there is the actual license fee. Typically, the license fee must be paid every year for renewal.
The State license fee varies depending on the type of license you’re applying for as well.
BCC Cannabis Activities
Application Fee: $1,000
License Fee: The license fee depends on the estimated gross revenue for the 12-month licensing period of that license.
Testing laboratory license fees range from $3,000 up to $72,000.
Both kinds of Distribution license fees range from $1,500 up to $240,000.
Distributor (Transport Only/Self-Distribution) license fees start at $200 and go up to $1,000.
Both kinds of Retailer license fees start at $2,500 up to $96,000.
The Microbusiness license fees range from $5,000 up to $300,000.
Event Organizer license fees range from $3,000 up to $20,000 depending on how many events the licensee plans to organize per year.
Application Fee: Application fees vary depending on the license type. Application fees start at $135 for a Specialty Cottage Outdoor and go up to $8,655.
License Fee: License fees also vary depending on the license type. License Fees range from $1,205 and go up to $77,905.
Application Fee: $1,000 for Type 7 and Type 6
$500 for Type N, P, and S
License Fee: The license fee depends on gross annual revenue for the manufacturing premises. They start at $2,000 and go up to $75,000.
Keep in mind, these are only the fees involved in licensing at the State level. Every licensee must still pay application and licensing fees to the city or county out of which they operate.
- How much do I need to start my business?
This is a near-impossible question to answer to the satisfaction of the asker. Many think that cannabis is an easy way to get rich quick, but this cannot be further from the truth. Starting a cannabis business, in many ways, is analogous to starting a restaurant—there are tremendous up-front costs, which oftentimes means it could take years before seeing a true profit. Here are some things to consider in figuring out your budget:
- Application fees: This varies quite a bit depending on the locale you’re looking to start in.
- Licensing fees: This also varies by locale and, even at the state level, vary depending on your estimated gross revenue.
- Inventory: starting a retailer requires you to front the cost of inventory of the products to put in your store; starting a cultivation requires buying seeds, etc.
- Rent: All license applications require a physical address at which the cannabis activity will be conducted, and therefore oftentimes require the applicant to be already be in a lease agreement so that the proper security measures may be put in place for inspections. This means paying rent in a space that you may or may not be able to use for your business.
- Security: You must pay for the proper security measures—24/7 monitoring and security personnel on site during business hours at a minimum.
- Construction and build-out: Rarely are locations built and ready to go so there are build out and construction costs to consider.
- Insurance: All businesses must be properly insured, and proof of insurance is required
- Legal and/or consultation fees: Completing an application is a long process to endure, it is highly suggested to retain an attorney who is familiar with the industry to make sure the application is complete and done correctly to minimize the processing time.
The above list mentions only some of the considerations in starting a cannabis business, generally. Each license type has different startup costs. For example, a cultivation operation will have less up-front costs than a retailer (all budgeting items considered). However, the above considerations have overlap in almost all license types and in addition to these costs, cannabis businesses are notoriously taxed at high rates. This adds to the difficulty in seeing a profit for the first few years.
- I now know all that’s involved with starting a cannabis business and still want to start one, where can I get a license?
Local ordinances and regulations are changing quite frequently. It is extremely difficult to keep track of all cities and counties that are currently accepting license applications. At this point, the best way to get licensing to open up in an area near you, communicate to your local city council members and voice your desire to engage in commercial cannabis activity. Participating in local government is, probably the quickest way to get a locale to open up to commercial cannabis activity. Many cities and counties have a way to enter your email to get an alert for any changes to their cannabis regulations.
While nowhere near an exhaustive list of locales and their stance on commercial cannabis activity, click here for our running list, as of August 2020.
- I have a conviction on my criminal record, will that affect my ability to get a license?
As with most aspects of the cannabis industry, it depends. While the state does not explicitly say that a conviction will prohibit a person from holding a license, there are various types of convictions that the BCC, CDFA, and MCSB (CDPH) will consider before issuing a license. The convictions of concern typically involve violent or serious felonies such as murder, rape, robbery, arson, etc. Since background checks are conducted on all applicants, the BCC, CDFA, and/or MCSB will also see any non-violent or non-serious convictions as well. Again, while the state does not outright bar applicants with such convictions from obtaining a license, it is most certainly something they consider. They are primarily concerned with convictions that they describe as “substantially related to the qualifications, functions, or duties of the business for which the application is made.”
However, the state also requires applicants to submit a statement of rehabilitation and evidence of rehabilitation for each conviction to explain and demonstrate how the applicant has rehabilitated since the conviction. So, while a conviction does not outrightly bar an applicant’s ability to obtain a license, it could affect the likelihood of approval.
I want to buy a cannabis license…
- Can I just buy a license?
Cannabis licenses are not transferrable—they are attached to the license-holding individual or entity. In order to buy a “license,” you must buy the entire business attached to the license.
- Can I conduct business while the ownership transfer is being processed?
If none of the previous owners of the business will remain on the license, business activities must cease while the regulatory body processes the license applications for the new owner(s). If at least one previous owner remains on the license while the ownership transfer is processed, the business is permitted to continue its operations. If one or more owners is simply leaving the business and the leaving owner’s shares in the business are being redistribute to the other existing owners, the business may continue its operations while the transfer is processed.
- How do I transfer ownership of the business?
Every new owner entering into a cannabis business must submit their own application and undergo a background check. New owners must typically be pre-approved before the transfer can take place. For this reason, it is important to have the proper language in any Membership Interest Agreement, Asset Purchase Agreement, or Stock Purchase Agreement that considers the approval measures before closing the deal.
- How much does a typical cannabis business cost?
This varies greatly by locale and license type. However, the prices that seem to be going around for Los Angeles and immediate surrounding areas for a Retailer license are in the millions. Some are selling their business as low as $2,000,000, while others have set the price to $10,000,000+. These prices are likely the result of the scarcity of retail licenses available.