RegTalk: DC's Recreational Cannabis Act Is A High Risk, Small Business Act For Cannabis

By Susan Ameel, co-founder and partner of Global Regulatory Risk Advisors.

The Mayor of DC, Muriel Bowser, revealed the city’s legislation to legalize and tax the sale of recreational cannabis. DC’s legislative act is designed in a way that only small businesses will be able to comply with its provisions.

The legislation is similar to those introduced by many states and cities entering into the cannabis industry. Legislatures want local residents to own the majority of future revenues. In DC’s instance - 60%. Given DC’s small size, applicants may have difficulty finding the capital they need to operate. DC should consider the fact that local applicants’ need capital, expertise, operational assistance, and product brands to become successful. A successful cannabis business generates more revenue and taxes for the states and cities.

DC’s strict local ownership legislation will impede growth and produce unintended consequences for capital-starved licensees that lack access to traditional financing, Applicants’ need money to hold out the long time period required to obtain regulatory approval, which could be even longer if the US Congress decides to become involved and stall DC’s efforts.

An alternative approach may be to partner capital providers with local residents to produce a win-win situation for applicants, capital providers, and the DC government. This would also prevent the forced sale or shut down of these businesses when they run out of money as we see now in other states. States such as Colorado are recognizing the public company money is needed for the industry to meet demand, pay for high operational overhead created by the regulations, and to pay for legal and compliance services. Otherwise, the black market will continue to offer competitive pricing that the regulated market is not able to match due to overhead.

The legislation also poses a high regulatory risk for future applicants and licensees. Although application and license fees are low, the high real estate costs in DC, and even higher real estate costs for the cannabis industry, requires a level of certainty that the DC government will not arbitrarily revoke a license or fine the business for technical violations. In our review of the legislation, we noted eleven items that create a high level of risk of doing business in DC (we could have added more), and only four positive attributes.

Anyone interested in applying for a license should pay close attention to the provisions that allow DC to revoke or cancel a cannabis establishment license. The high risk posed by DC’s Cannabis Act, coupled with the volatility in Congress and low barriers to entry, could prevent DC from attracting the capital providers that could help the market grow in a professional and responsible manner.

Cons:

• The Mayor has public emergency power to, without prior notice, prohibit the sale of cannabis or cannabis products.
• Applicants and licensees may only hold a limited number of licenses.
• The legislation requires 60% of the owners to be residents of DC who must receive a return on investment and incur the same financial obligations and risk as other owners.
• The legislation requires 60% of cultivation, manufacturer’s, or off-premises retailer’s licensee employees to be DC residents. Can you fire an employee that decides to move?

• Licenses will be revoked if the licensee falls below the 60% ownership or 60% local hiring threshold. The Act does not account for the death or other act of god that accounts for a sudden, unexpected piercing of the threshold.
• Transfers may be rejected by the board if the sale would result in going below the 60% local ownership threshold.
• Medical marijuana license holders receive license priority for the first 6 months.
• The owner or the board designated manager must be at the cannabis establishment’s premises during all hours of operation. The Act’s language does not appear to permit more than one board designated manager, which leaves 2 persons to manage the day-to-day operations. There will be no company off sites!
• The security plan must include a guard that is carrying a gun.
• Testing standards do not provide for retesting or remediation.
• A manufacturer is allowed to “process” cannabis, which is undefined. It is not clear whether manufacturers will be allowed to perform extraction or infusion functions.

Pros:

• Licenses are issued for 3 years instead of 1 year as required by most cities and states.
• The fees are low
  • $1,000 application fee
  • An annual fee ranging from $3,000 - $10,000
• On-site consumption, temporary events and social lounges including hotels are allowed after 24 months of the Act’s effective date.
• Storefront retailers will be allowed to deliver cannabis to consumer’s homes.

Related Links:

RegTalk: Illinois' Proposed Recreational Retail Marketplace - 6 Things You Really Should Know

RegTalk: Washington State To Revise Marijuana Product Label Rules, Favor Education Over Enforcement