When California’s state legislature passed the Medical Cannabis Regulation and Safety Act (MCRSA) back in 2015, it was the first time that California enacted a statewide licensing and regulatory regime for commercial cannabis businesses. Prior to the passage of the MCRSA, cannabis collectives and non-profits in California were operating under the Compassionate Use Act of 1996 (Prop 215), Senate Bill 420 a/k/a the Medical Marijuana Program Act (passed in 2004), and the California Attorney General guidelines that were issued in 2008 (bonus points if you knew that current Governor Jerry Brown was the AG at the time).

The pre-MCRSA landscape allowed collectives, co-ops, and non-profits to proliferate throughout the state with no real oversight. That all ended with the enactment of MCRSA and passage of the Adult-Use of Marijuana Act (AUMA) by California voters in November of 2016. Then, in June of 2017, the California State Legislature passed the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA) to create one regulatory system for both medicinal and adult-use cannabis businesses. Under MAUCRSA, cannabis businesses are regulated and licensed mainly by three state agencies: the Department of Food and Agriculture (regulates cultivators), the Department of Public Health (regulates manufacturers), and the Bureau of Cannabis Control (regulates distributors, laboratories, retailers, delivery-only retailers, and microbusinesses). These three governing bodies have since released hundreds of pages of regulations (which we recently covered in a webinar). Just like that, cannabis operators had to deal with a whole new playing field.

For many of the collectives, co-ops, and non-profits that existed prior to MAUCRSA, making the transition from an unregulated industry to a tightly regulated one has been difficult. In order to receive a cannabis license, a cannabis business has to meet regulations issued by its local jurisdiction as well as the state’s. For many in the cannabis industry, the cost of compliance is a barrier too high for them to meet. These businesses and individuals are not able to satisfy zoning restrictions, environmental regulations, and security requirements, or manage a draconian tax burden. If the goal of cannabis regulation in California is to take cannabis production and sales out of the illegal market and into the regulated market, the initial results are concerning.

It’s under this backdrop that the California Growers Association (CGA) recently released a report detailing the difficulties that cannabis operators are facing with coming into compliance with local and state regulations. In its report, the CGA estimates that less than one percent (yes, you read that correctly) of California’s cultivators have obtained temporary licenses from the state as of February 7. The CGA asserts that it’s not operational inefficiencies that will prohibit small cultivators from competing in the regulated market, but the cost of compliance and land-use restrictions that prevent them from entering the legal market in the first place. Many cannabis operators–some whom have been in the industry in one way or another for over twenty years–may be forced to close up shop. Others may decide to stay in the illegal market because the cost of compliance is too burdensome, contrary to the stated intent of the MCRSA and AUMA.

Let’s be honest: the illegal market will never disappear entirely, but that doesn’t mean regulations should allow the illegal market to thrive. A burgeoning black market will negatively impact the bottom line of cannabis businesses that have gone through the process of obtaining a state license. A crackdown by law enforcement and state regulators (and potentially the federal government) will become inevitable. The BCC recently released a number of cease and desist letters, and local jurisdictions, such as San Luis Obispo County, are gearing up to pursue non-compliant operators. Although enforcement is a necessary tool, state and local governments need to explore more options to bring a larger number of cannabis operators into the regulated market. In that vein, the California state legislature is looking into new avenues for cannabis businesses to thrive– one example is the introduction of Assembly Bill 2641 (which we recently covered here). AB 2641 would allow cultivators and manufacturers to sell directly to their customers at temporary cannabis events. This is definitely a step in the right direction, but California needs to do more to ensure that cannabis operators are able to participate in the new legal marketplace generally.

The AUMA allows the state legislature, by a majority vote, to make amendments that will reduce the barriers of entry into the legal cannabis market. The CGA report lists a number of actions that California can take: allowing small cultivators and manufacturers to continue to operate while they obtain licensure, encouraging local governments to enact more lenient zoning requirements, and lowering the insurance requirements for smaller cannabis businesses are just a few of the actions the report highlights.

In the end, the public, the environment, and law enforcement will all be better off if California refines its regulations so that more cannabis operators can participate in the legal market. Because of California’s size and history, how the state handles cannabis regulation will have an enormous influence on the future of the cannabis industry throughout the United States. Let’s hope that California can lead the way.