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.
All this, both men said, means proceed with caution when purchasing policies and be informed.
“You need to understand there are things out there that can hurt your business … ask a lot of questions, especially in this market,” Rosenthal said. Companies “like to see long track records” before offering coverage, a process which could take two to three years.
Said Fine, “The insurance industry moves at a glacial pace, and because there is so much confusion about cannabis, it means most insurers are not willing to touch it.”
As an example, in response to a question from a landlord renting to a cannabis business but seeking insurance coverage for the building, Rosenthal said, there are policies but when the business involves processing of cannabis, there are risks, mentioning fire or floods “and that scares a lot of people.”
And should any cannabis grower seek the same insurance protection against crop loss offered to farmers of other products, they could be in for a rude shock.
“Crop insurance in virtually nonexistent,” said Fine.
Many of those programs are underwritten by the federal government, which continues to view cannabis as an illegal drug.
Bill Silver, CEO of Cannacraft, said Proposition 63 that authorized recreational cannabis use represented “good intent by voters at the statewide level and good intentions of local officials” who along with the state are charged with establishing regulations for the industry.
The outcome has been challenged thus far, he said. As an example, he noted Sonoma County may have 5,000 cultivators but only a handful have received licenses.
“As a result, we cannot source locally,” Silver said.
Michael Steinmetz, founder of Flow Kana, which is being built into a cannabis distribution hub in Redwood Valley, said the company is helping small farmers with a central point for processing and manufacturing.
Tim Conder, CEO and co-founder of Blackbird Logistics, a player in the Nevada cannabis industry, who said in Nevada his company has regulators riding along with drivers and have gotten used to weekly visits by them to its plants, urged the industry in California to get educated about the rules. “Be an expert at what the rules are. I am amazed at how many operators don’t read the regulations from cover to cover.”
Silver said his company has a staff of five, out of 150, to deal with compliance with regulations. And he said he has to compete with “less compliant” competitors who sell to “non-compliant” stories which is creating a unfair marketplace
Many on the panel said such problems are the result of an industry which operated for decades working outside sanctions, relying on networks of growers and distributors. Now it has been asked to step up and submit to regulations and oversight. Said Steinmetz, “It’s been a mom and pop industry which now faces a tremendous task to remain compliant. We need to support and educate those in the industry.
Said Coulombe, “There are people who got us here as an industry over the last 15 to 20 years who are now not able to participate in it because of barriers.”
“We can set precedent in California in how this social experiment is going to turn out and involves everyone in this room.”
In addition to removing the barriers which still keep people from coming into the new regulated market, he said there needs nationally to be a move toward “de-scheduling” or removal of cannabis from the federal list of drugs considered still to be illegal.
Several on the panel said one answer to clearing that hurdle could be more recognition and research into the medical benefits of cannabis.
In emphasizing that point, Silver told the audience he started his day by running, mentioning that can mean aches and pains later. Then he took out a pill and took it, saying, “I just consumed cannabis. I am not high. This is a medical product. It is available in California but not available nationally.”
Demand for the product tends to be based on that, over recreational use and he said more research could lead to “one the greatest medical breakthroughs ever.
“We don’t know all that medical cannabis can do,” Silver said.
The conference was underwritten by Farella Braun + Martel.