California's top cannabis regulator says crackdown needed on unlicensed businesses
Cannabis has been recreationally legal in California since January 2017, but a conference Wednesday in the burgeoning commercial hub of the industry highlighted how in key areas — licensing, compliance, insurance and banking — there are still some issues.
The Business Journal's second annual Cannabis Industry Conference drew more than 200 regulators, insurance experts, key industry executives and other professionals to the Hyatt Regency Sonoma Wine Country hotel in Santa Rosa.
'Was I wrong!' said Lori Ajax, chief of the Bureau of Medical Marijuana Regulation. She is heading California's efforts to license the cultivation, distribution and sale of cannabis, a process set into motion when the state's voters approved adult-use cannabis starting in 2017. The regulations require local approval for license holders as well as the state.
She told the audience she thought going in implementation would be easier. Instead, 'it's no fun being a pioneer.'
While she said the objective is to get as many people licensed by the state as possible, the bureau still has many more 'temporary' licenses issued than annual or permanent ones — about 1,800 versus 560 annual license applications received. Two other state agencies also issue temporary licenses: 3,621 for the Department of Food and Agriculture and 751 for Department of Public Health.
Regulations outlining requirements for a permanent license are expected this summer. Meanwhile, there is a movement to extend the life of the temporary licenses.
'We still have work to do,' she said.
Still on the horizon, too, is how to make everyone in the industry play by the rules with many more growers and others who were part of the once-illegal business not coming forward to be regulated.
Ajax said those who have a license and submitted to regulation are going to eventually ask, 'Now that I have followed all the rules, what are we going to do about all those who are not licensed' to cultivate, distribute and sell cannabis.
So far, the state has been spending time educating, sending letters to those who are operating without licenses, including those advertising on the internet. 'About 22 percent of the companies we notified pulled their ads and applied for licenses,' she said.
Eventually tougher tactics will be needed. 'The state needs to be protective of the licensing process and to say, 'Get a license, or we put them out of business,'' Ajax said.
The federal government considers cannabis an illegal drug. As a result, the banking industry mostly takes a hands-off approach to establishing relationships with the industry. Todd Kleperis is CEO of HardCar, which provides armored car services to the industry, and chairman of the National Cannabis Industry Association Legal and Banking Committee.
He said he believes one answer are credit unions. They could face scrutiny from the federal government, which requires significant tracking of large amounts of cash, like those in the cannabis industry. But in states like Colorado, where has been legalized cannabis since 2014, the industry has thus far used a credit union to do banking, without problems.
'Banking is coming for the industry,' Kleperis said, adding he's working with credit unions in California in the hopes of establishing banking opportunities for its industry.
Any business faces the challenge of buying insurance. It is challenging enough to get product-liability or general-liability insurance — even harder with crop insurance — but the cannabis industry has further to go, said two people in the industry, Al Fine, head of risk for Emergent Risk Insurance Services, and Michael Rosenthal, CEO of Rydel Insurance.
Rosenthal said that at a similar cannabis conference recently he asked for a show of hands for how many were having trouble getting insurance. 'Everyone in an audience about 120 raised their hands,' he said.
'Yet insurance companies might say there are 40 companies offering coverage. It is just a tremendous disconnect.'
While cannabis is in many ways like the food industry — 'an organic product' — there are things that make insurance companies nervous, Rosenthal said. Regulations on packaging and required testing of the products are among them. Then there is the all cash nature of the business because of the federal prohibition on cannabis. 'An all-cash business makes it (the industry) high risk for insurers,' he said.
Fine said the industry is still developing comprehensive coverages that are not layered with exceptions. There's also a need for companies to protect intellectual property — trademarks and patents — or policies to protect against hacking or holding data for ransom.