Cannabis is growing.
So are the legal issues surrounding the sale of pot.
The pot industry is seeking counsel in a variety of issues: where they can sell the products, how they can safely transport thousands of dollars in hard cash and questions about product liability.
The regulatory maze is complex, the language confusing and the process onerous, according to Wolfgang Kovach, a Laguna Niguel attorney helping clients navigate the still evolving law.
“Regulations are so voluminous,” Kovach said. “They’re almost incomprehensible.”
This whiff of legal opportunity is a Wild West world with OC as O.K. Corral. To top it off, illegal dealers can skip the paperwork and undercut those who follow the law.
Behind the scenes, plenty of OC investors are studying whether to jump into the field, from those who want to invest in banking services to THC-related products. A full day of panels on cannabis opportunities will be held Tuesday, March 19 at Roth Capital’s annual investment conference at the Ritz Carlton in Laguna Niguel.
Cities
About 57% of Californian voters in 2016 approved the legal sale of recreational marijuana, beginning in 2018.
“Since California passed adult recreational use, the amount of business we’ve seen related to cannabis has grown substantially,” said Dennis Baranowski of Irvine-based Geraci LLP, where eight of its 19 attorneys provide advice on cannabis-related issues, making it one of the biggest such firms in California.
While banks don’t want to lend to pot-related companies for fear of violating federal law, private investors see an opportunity such as giving loans secured by property, which is what Geraci specializes in, Baranowski said.
“They might not walk into a dispensary to buy the products, but they want to invest in it,” Baranowski said. “When it comes to money, it goes a long way. People see a lot of opportunity in a growing industry. It’s really exciting to see what’s going on.”
Even though implementation leaves a lot of room for legal interpretation, it’s not like the OC legal industry is rushing into this field. For one thing, there’s the stigma of dealing with a popular yet controversial drug.
For another, lawyers must get up to speed on a maze of regulations on the local, state and federal levels, Baranowski said.
“It’s a little bit of risk if you don’t have the clientele to back it up,” Baranowski said. “An attorney has to have an ongoing knowledge of each locality. It’s not an easy thing to learn a new trade.”
Only one of Orange County’s 34 incorporated cities—Santa Ana—allows the legal sale of recreational marijuana from stores there.
“Orange County is a cannabis desert in a lot of ways,” said Amanda Ostrowitz, an attorney who founded Denver-based CannaRegs Ltd., which tracks and disseminates marijuana-related rules and regulations from state, county, municipal and federal sources.
“There’s no county that has more prohibitions in it by percentage” than OC, Ostrowitz said.
Big Demand
While most OC cities don’t want cannabis operations in their neighborhoods, the demand is there.
OC and San Diego had California’s most products per purchaser—about 25% higher than the statewide average—and its highest regional ticket average per purchase—$133, compared with $92 statewide—last year on the website of Jane Technologies Inc., which operates a Santa Cruz-based online marketplace for cannabis products.
“Southern Californians were bigger cannabis consumers … than their northern counterparts,” buying more often and spending more money, Jane Technologies said in a statement.
Distributing the pot to buyers in these cities is another issue lawyers must be aware of.
The Bureau of Cannabis Control in January endorsed a rule allowing marijuana deliveries anywhere, regardless of whether a city bans retail sales. But a week earlier it banned membership-based and nonprofit “co-op” collectives for medical marijuana dispensing, an early distribution system in which growers and processors provided pot to patients.
Kovach had helped clients in more than 75 cases to establish such groups; now he’s tasked with helping the organizations transform into for-profit entities and acquire licenses from state and local municipalities, a requirement for all cannabis businesses in California. In some cases, cannabis businesses have to get more than a dozen licenses and permits, costing hundreds of thousands of dollars.
Budding Firms
While often known for its conservative roots, OC also has a libertarian bent that’s resulted in a surprising epicenter for cannabis startups and innovation.
Irvine is home to one of the industry’s most popular applications—Weedmaps Media Inc., which shows users the locations of dispensaries and delivery services.
C4 Distro is a cannabis distribution channel began by former California Attorney General Bill Lockyer and former OC Register President Eric Spitz. The pair said they know the cannabis law intimately because they helped craft it. The company’s based in Costa Mesa, which doesn’t permit cannabis storefronts but allows manufacturing, distribution and testing companies.
A half-dozen pot-related public companies are in Orange County. The largest is Garden Grove-based KushCo Holdings Inc. (OTC: KSHB), a distributor of paraphernalia for the industry. It reported fiscal 2018 sales more than doubled to $52.1 million and now has a $500 million market cap.
KushCo has to deal with a variety of compliance issues in many different states, which is the reason it has two in-house attorneys and also contracts the Boston-based Burns Levinson, a 125-attorney firm that has a cannabis business advisory practice.
High Finance
Cannabis businesses must also adhere to requirements that mandate separate security, inventory and raw product rooms, as well as 24-hour video surveillance.
“I’m training people where the land mines are,” Kovach said.
On the funding side, a patchwork of federal guidelines exist in theory to let banks work with cannabis businesses, argued Andy Kaver, a Redondo Beach attorney who represents OC cannabis businesses.
Lenders have been unwilling to take this risk because marijuana is illegal at the federal level, a ban which exposes them to prosecution, Kaver said.
That’s left operators in the 10 states and District of Columbia that have legalized marijuana for recreational use—more than half do so for medical-related or other approval—at a crossroads. Since they are unable to access banking services, they must conduct business in cash, which increases the risks of robberies and other crimes.
“Banking is a problem,” Kaver said.
Proponents of the industry in the past several years have been studying ways to alleviate the problem. The latest effort is a state Senate bill filed in December to create a self-contained banking system for the cannabis industry.
Kovach is “highly optimistic that in 2019 you’re going to see more cities allow cannabis businesses” and there’s also already a taste for increased investment in OC.
Baranowski added, “I’m coming across a lot more attorneys that are representing clients in one form or another who are touching the industry.”
