L.A. Cannabis Update: Little Fires Everywhere

25 May L.A. Cannabis Update: Little Fires Everywhere

The City of Los Angeles is no stranger to change and struggle around its local cannabis industry. Since the passage of Proposition M back in 2017, the City has made great strides but also suffered significant setbacks in building its licensed cannabis marketplace. Even through the COVID-19 pandemic, this trend continues for Los Angeles and its Department of Cannabis Regulation (“DCR”),

We’ve written a lot over the past three years about L.A.’s journey with licensed cannabis after the passage of Prop. 64 and the Medicinal and Adult-Use Cannabis Regulation and Safety Act (see here for a significant series of posts dedicated to the City of L.A). A very brief summation is that the DCR developed licensing regulations, with the approval of City Council, that ended up producing three phases of licensing:

• Phase 1 was exclusively for Existing Medical Marijuana Dispensaries (“EMMDs”).
• Phase 2 was only for those non-retail cannabis operators that could prove certain criteria to the DCR for licensure.
• Phase 3 was split into two rounds of retail licensing as well as a general public round. The first round was dedicated to only licensing retail applicants on a lottery basis that qualified as Type 1 or 2 social equity candidates pursuant to the City’s social equity program.

Today, we’re waiting on phase 3, round 2 to commence, and the City is only accepting retail license applications under Public Convenience Notices for those areas in the City that are already at capacity because of Undue Concentration.

Unless you haven’t been paying attention, you know that round 1 of phase 3 underwent an audit by the City to ensure fairness and legitimacy across the board for Phase 1 applicants. After the first round was over, L.A. City Council member Herb Wesson alleged in a letter to DCR that:

Over the last couple of weeks, including at the Cannabis Regulation Commission meeting last Thursday, allegations have been made that multiple applicants had access to the application portal prior to the announced start time of 10 am on Tuesday September 3rd. Unfortunately these allegations have been substantiated by the Department at the Commission meeting and the Phase 3 Retail Round 1 process was compromised. While it was always understood that not every applicant would get a license, it is paramount that the application process have the utmost integrity, be transparent, and fair. There appears to be no scenario in which the Retail Round 1 process can meet those three principles currently.

Wesson’s letter went on to state:

I am recommending that the Department: 1) suspend all Retail Round 1 applications; 2) refund all monies paid by Retail Round 1 applicants and cancel all invoices; and 3) prepare a full audit and report by an independent third party not involved in the process – unless there are other options like processing every application that would provide the necessary assurances that the process was not compromised. These are the only options that will provide the clarity and time we need to ensure that the Phase 3 Retail process is fair, transparent, and has integrity.

In the wake of Wesson’s letter and other complaints, the external audit was conducted and it concluded in a report, issued in late March 2020, which states that:

The Auditor found that errors in the DCR process allowed certain applicants early access to the application system. The DCR then created a “normalization process” to level the playing field and eliminate any advantage given to these early applicants. The Auditor determined that the DCR’s “normalization process” was a reasonable way to address the errors and specifically was NOT making a recommendation that DCR use a different “normalization process.” Finally, the Auditor found that that the DCR conducted the Phase III Round 1 licensing process in good faith, and that there was no evidence of bias or unfairness.

On last count, the City was proceeding with continuing to process the first 100 phase 3, round 1 applicants. Out of the audit came comprehensive recommendations from the DCR to overhaul the City’s entire social equity program going forward. See here for those recommendations.

If these recommendations are adopted by the City Council and made law, we will see major changes to the City’s social equity eligibility criteria including commencing with round 2 of phase 3 licensing. These changes include, but will not be limited to:

• mandating that all social equity eligible applicants own at least 51% of their subject companies; and
• eliminating the concept of “Disproportionately Impacted Area” and replacing it with proof of residency for ten years (cumulatively) in certain Police Reporting Districts.

These recommendations went to Council in early April and the coronavirus has put on hold any progress regarding these proposed changes. I can only imagine there will be mixed reactions from stakeholders on these proposed changes and  lots of discussion once Council gets back to business.

In the interim, on April 21, 2020, the Governor’s Office of Business and Economic Development announced that DCR was awarded over $6 million n grant funding from the California Cannabis Equity Grant Program for local governments with qualifying social equity programs pursuant to the California Cannabis Equity Act of 2018. According to DCR:

[t]he City of Los Angeles will be utilizing this funding to provide verified Social Equity Program Applicants various resources including Workforce Development and Business Development Services as well as a loan/and or grant program.

A specific report with how these funds will be allocated will be released in early July of this year. The DCR also pushed back the deadlines for paying fees around Temporary Approval and pre-licensing inspections to secure Temporary Approval for Phase 1 and 2 applicants to June 30 and July 3, respectively and accordingly.

The audit of the City’s phase 3, round 1 licensing program was a hiccup in the City’s progress on licensing but it’s helped to birth serious considerations around reforming the City’s social equity program. All of that will breed and continue to breed delay in getting people licensed under Proposition M. At the same time, the DCR is clearly trying to work with applicants in a positive way to account for COVID-19 collateral damage in giving those with, or those seeking, Temporary Approval more time to pay their required fees and to undertake their mandatory facilities inspections.

As the City continues to go forward and backward on licensing, other cannabis oddities in L.A. rage on. Recently, there was a massive explosion in downtown L.A. (at Smoke Tokes in Little Tokyo) that involved the fiery explosion of a wholesaler’s stock of butane and other volatile materials used to manufacture cannabis products. Note that this is not necessarily a business that requires licensing by the California Department of Public Health or DCR because, allegedly, this company is just a wholesale supplier to those who make cannabis products with volatile solvents. (The manufacture of solvents requires a Type 7 cannabis license; investigation is still ongoing into whether Smoke Tokes was illegally making hash oil or not). The Feds are looking into this terrible fire that took a serious toll on the L.A. Fire Department. The city. itself promises that it will try to locate other businesses like Smoke Tokes to ensure that they’re following health and safety regulations around the storage of volatile chemicals and solvents.

We’ll continue to update readers as L.A. moves along in its licensing regime, for better or worse. Stay tuned.