3 Major Legal Hurdles You’ll Face When Starting A Cannabis Business in California

2020 was a record year for legalized cannabis, with cannabis sales in California reaching $4.4 billion for the year – up from $2.8 billion in 2019. With the cannabis industry almost universally expected to continue growing, there are certainly incentives to enter the market. But, owning a cannabis business in California comes with plenty of legal hurdles. And many of these eat away at the potential profit margins. We’ll outline 3 major legal hurdles you’ll face when starting a cannabis business and what you can do to manage them:   

1. Cannabis business licensing is expensive and complex. 

To open a cannabis business, you need to get a cannabis business license. In many states, California included, you need to obtain a local as well as a state cannabis license. 

Local licenses for cannabis businesses in California 

A major feature of the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA), which legalized recreational use of marijuana in California, is that local governments retain some control over its legal status at a local level. The effect of this is that your local government needs to legalize cannabis business operations for you to open a cannabis store in that area.  

At the time of writing, fewer than 200 of California’s 540 cities and counties permit cannabis businesses. You’ll need to ensure your proposed location is situated where cannabis businesses are permitted to operate  

State licensing for California cannabis businesses 

You’ll then need obtain the relevant licenses and approvals from your local jurisdiction before applying for your state license. . You can’t operate your cannabis business without a state license, even if it has been approved locally.  

The state licensing process is beyond the scope of this article, but you can find more information about the process on the California Cannabis website. 

2. It’s more difficult to attract investors in cannabis. 

Attracting investment in your cannabis business is more difficult than you might think – despite the booming demand for the product. There are two reasons behind this:  

First, the profit margins on legal cannabis sales are low when compared to other industries. The high costs of compliance contribute to the lower profit margin. This is exacerbated by unfavourable tax treatment at the federal level. The unfavourable tax treatment is likely to continue at least until the federal government removes cannabis from the Schedule I list of Controlled Substances. 

Second, investors must be disclosed as Financial Interest Holders or Owners to local and state regulators. Pursuant to this disclosure requirement, investors must disclose certain information to the regulators and undergo criminal background checks if they qualify as Owners under the law. Understandably, not all investors are comfortable with this process.  

3. Cannabis industry contracts require oversight by regulatory counsel.  

Standard form contracts just don’t work in the cannabis industry. Contracts written for the cannabis industry need to reflect the business operations of the business without infringing on federal law. This means that many standard clauses, including, for example, federal court jurisdiction for disputes and shipping standards, aren’t legal – and can leave you instantly in breach of the contract.  

Since the cannabis regulatory ecosystem is so complex, you need to integrate regulatory counsel into your business. Your attorney should have specific expertise in the cannabis industry. Your regulatory counsel will work alongside your corporate and/or commercial attorneys to ensure your business contracts are compliant with local, state, and federal laws.  

If you need assistance navigating cannabis-specific laws when starting a cannabis business, reach out. CGL Partner, Jennifer Gumer, is an accomplished attorney with significant experience in the cannabis industry. You can read more about her here or view her LinkedIn.  

• Cannabis