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Additional findings

market structure - california

  • Vertical integration is allowed among most cannabis license types in California, except for testing.
  • There is no difference in the market structure for medical and recreational ("adult-use" in California).
  • Distributors under a full distribution license are responsible for distributing, testing, handling packaging and labeling quality control, as well as collecting and remitting taxes for cultivators and retailers.
  • Only licensed distributors can transport cannabis from one licensee to another.
  • Given the burden on distributors, there is speculation that cultivators, manufacturers, and retailers will mostly obtain their own distribution licenses so they can control their supply chain costs.
  • Existing medical licensees will have priority in applying for (recreational) licenses through December 2019.
  • Large cultivator licenses will not be available until 2023.
  • Once enacted, large cultivators will not be allowed to hold testing, distribution or microbusiness licenses. They will be allowed to concurrently hold retail and manufacturing licenses, however.

Key players in california cannabis

  • MedMen is an LA-based company that has invested in cultivation operations and dispensaries in California, Nevada and New York. They have raised $99.2 million and plan to continue making strategic investments in the cannabis industry.
  • Other key competitors in the California cannabis financial market are Casa Verde and the Arcview Group.
  • Casa Verde is a venture capital firm investing in various B2B aspects of the industry.
  • The Arcview Group has invested over $115 million in 141 companies in the industry.
  • Additionally, Cannabis Science is a biotech company in Irvine developing cannabinoid-based therapies. Their 2017 market cap is an estimated $253 million.
  • Medical Marijuana Corp, from San Diego, has many subsidiaries that are producers, manufacturers or retailers of cannabis products. Their market cap is $480 million.

legal overview - us

  • Federally, all marijuana use and sale is banned and is in the same legal category as heroin (Schedule 1). Possession in federal-owned space, like parklands, inside a "legal" state is still not allowed.
  • Under the Controlled Substances Act, doctors are prevented at the federal level from prescribing cannabis, but they are allowed to "recommend" its use under the First Amendment.
  • On January 5, 2018, President Trump (via Attorney General Jeff Sessions) issued a memo advising federal prosecutors to be more aggressive in prosecuting marijuana cases, effecting undermining state law.
  • However, the Rohrabacher-Farr amendment prevents the federal prosecutors from spending money on "the implementation of state medical cannabis laws".
  • The DEA responded stating that they felt fighting opioid trafficking was a higher priority for their department.

legal overview - california

  • The California Legislature passed the MAUCRSA bill in June 2017 that legalized adult-use (recreational) cannabis.
  • Both medical and recreational cannabis in California are now governed under a single regulatory system.
  • The possession, use, and sale of recreational cannabis became legal for adults over 21 on January 1, 2018.
  • Possession is capped at 28.5 grams for private use.
  • Taxes for cannabis are set at 15% for "excise and cultivation".
  • The latest developments in cannabis regulation in California has been the progress in local authorization (at the city level) of on-site consumption. West Hollywood, San Francisco, Oakland, Alameda and Palm Springs are the only cities issuing permits for on-site consumption.

upcoming federal legislation impacting cannabis

current political atmosphere

  • Federal interference in marijuana prosecution is protected by a larger debate on states' rights set forth in the Constitution's Tenth Amendment.
  • Some recent discourse has called for the federal government to get out of the issue entirely.
  • There are several proposed bills in Congress regarding marijuana, some calling for full legalization, some more mildly just asking for more research.
  • Top Democrats that are quietly being considered as contenders for the 2020 Presidential race are backing proposed bills discussed above that would decriminalize marijuana.
  • Although he has previously taken a tougher line on marijuana, President Trump announced last week (on June 8, 2018) that he supports Congress in ending the federal ban on marijuana. This would then allow states to fully and completely decide on legalization.

your research team applied the following strategy:

In order to examine the market structure of legal cannabis in California, we used several sources that described the various parts of the supply chain following the enactment of MAUCRSA.

When looking at key players, there are many facets to the market where companies could dominate. As MedMen was given as one to focus on, we used the market space they operate in, financial, to find other major investors in the industry. We then sourced other lists of the biggest cannabis-related companies in the US and found those that were operating in California to provide a broad overview of some large cannabis companies in California.

For the legal overview of cannabis, we first researched the state of regulations on cannabis in California, including the latest regulatory progress for the state. We then looked at how cannabis is regulated at federal (US) level, including any upcoming, proposed legislation and the most current political atmosphere.

  • "California has approved adult-use cannabis. The state has had some form of medical cannabis laws since 1996, but until now there has been no state regulatory oversight."
  • "The California State Legislature passed a bill in June 2017 that integrated MCRSA with AUMA to create the Medicinal and Adult‐Use Cannabis Regulation and Safety Act (MAUCRSA)."
  • "Under MAUCRSA, a single regulatory system governs the medical and adult use cannabis industry in California."
  • "The sale of recreational cannabis became legal in California on New Year’s Day (2018). Just four days later, the Trump administration acted in effect to undermine that state law by allowing federal prosecutors to be more aggressive in prosecuting marijuana cases."
  • "Although medical marijuana is legal in some form in 29 states and recreational marijuana is sold in six states, it remains banned by the federal government and is classified in the same category as heroin. "
  • "Adult use of cannabis is legal in California under Prop. 64, the Adult Use of Marijuana Act (AUMA), approved by the voters on Nov 8, 2016. In general, AUMA allows adults 21 and over to possess, privately use, and give away up to one ounce of cannabis, and to cultivate no more than six plants for personal use at their residence. "
  • "It also legalizes the commercial sale, distribution and production of cannabis for adult use at state-licensed facilities beginning January 1, 2018, under terms spelled out in the Medical and Adult Use of Cannabis Regulation and Safety Act (MAUCRSA) approved by the legislature in 2017. Local city and county governments can restrict or ban cannabis businesses in their jurisdiction."
  • "(under 'federal law') AUMA does not apply on federal property. Possession in national parklands including Golden Gate Recreation Area is illegal. Marijuana, including both THC and CBD, remains an illegal Schedule One substance under the U.S. Controlled Substances Act. Federal charges are typically brought only in large cases where commercial distribution is suspected "
  • "California legalizes marijuana for recreational use Monday (Dec 2017), but that won’t stop federal agents from seizing the drug — even in tiny amounts — on busy freeways and backcountry highways."
  • "Marijuana possession still will be prohibited at eight Border Patrol checkpoints in California, a reminder that state and federal laws collide when it comes to pot. The U.S. government classifies marijuana as a controlled substance, like heroin and LSD."
  • "State and federal marijuana laws have conflicted since California became the first to legalize marijuana for medical use in 1996."
  • "California marijuana laws changed drastically with the decriminalization of possession (under 28.5 grams) and legalization of medical marijuana in 1996."
  • "The state's marijuana laws were drastically relaxed once again in 2016 after voters approved Proposition 64, the Adult Use of Marijuana Act. Under this law, adults 21 and over may purchase, possess, and consume up to 28.5 grams of marijuana in their private residence or in an establishment licensed for marijuana consumption."
  • "While most criminal sanctions for marijuana were lifted immediately after the general election, licensing to legally sell and produce recreational marijuana began in January 2018. There are also new cannabis taxes: a 15% excise and a cultivation tax."
  • "Under the scheduling system, the federal government classifies marijuana as a schedule 1 drug, meaning it's perceived to have no medical value and a high potential for abuse."
  • "The schedule is not something the president could change alone, but the administration, through the attorney general or secretary of health and human services, can begin a review process for the current schedule. "
  • "There have been many calls to reschedule marijuana, but they've run into a serious hurdle: To date, there have been no large-scale clinical trials on marijuana. Those kinds of studies are traditionally required to prove a drug has medical value to the federal government. But these studies are also much more difficult to conduct when a substance is strictly regulated by the federal government as a schedule 1 drug."
  • "Trump administration has taken a tougher line, allowing federal prosecutors to crack down on marijuana even in states where it's legal — which could let federal law enforcement shut down state-legal pot businesses."
  • "The result is that even as several states and public opinion move in favor of marijuana legalization, the federal government often finds itself standing in the way of a reform that many voters want after seeing the longstanding struggles and failures of the war on drugs. "
  • "Members of the Alaska House of Representatives recently passed a resolution asking the federal government not to crackdown or interfere in any way with states that have legalized marijuana of which, of course, Alaska is one. Voters there have approved cannabis for medical and recreational use."
  • "States that have legalized marijuana are embolden to defy the federal government by the Constitution's Tenth Amendment, which declares states have authority over any matter that the Constitution has not specified is a matter for the federal government. That amendment, the last of the Bill of Rights, is central to the debate over whether state's can make marijuana legal if federal law declares it illegal."
  • "Public discourse on marijuana legalization at the federal level has only seriously considered the options of Congress making it legal or, conversely, empowering some sort of crackdown. But some are now arguing for a more streamlined approach: simply have the federal government get out of the issue entirely. It’s a notion that has brought together people on both sides of the political fence."
  • "The Marijuana Justice Act -It would tackle a core problem in the marijuana debate––getting caught with even small amounts of the drug can ruin the lives of young people in many states, and this prosecution has often targeted black communities in the United States. "
  • "Respect State Marijuana Laws Act of 2017-This bill would amend the federal law that prohibits marijuana (the Controlled Substances Act) to say that penalties for owning or being involved with the production of marijuana do not apply for those following their state laws, essentially bringing power to states in a way that's more permanent than previous methods"
  • "Ending Marijuana Prohibition Act of 2017- It would remove prohibitions on marijuana at the federal level, taking it off the list of prohibited substances in the Controlled Substances Act, and it would also create restrictions on interstate transport to states where the drug is not legal. "
  • "Medical Marijuana Research Act of 2017-This bill, introduced by Republican Congressman Andy Harris of Maryland (a former anesthesiologist), makes marijuana accessible to qualified researchers. "
  • "Marijuana Effective Drug Study Act of 2017-This bill was introduced by Republican Senator Orrin Hatch of Utah to allow for more research into the efficacy of medical marijuana. "
  • "An upcoming Elizabeth Warren-led Bill-Democratic Senator Elizabeth Warren of Massachusetts has been hinting at new, bipartisan legislation to "roll back the changes that the attorney general has made so that the states can make their own determination about their marijuana laws and how they want to enforce them"
  • "In a significant political shift, several top Democrats considered to be possible contenders in the 2020 presidential race are backing legislation that would decriminalize marijuana."
  • "The latest signal came when Sen. Bernie Sanders, a 2016 Democratic candidate who is widely considered a top contender for the nomination in 2020, signed onto The Marijuana Justice Act on Thursday. "
  • "The bill, proposed by Sen. Cory Booker, himself a 2020 contender, would effectively end the federal crackdown on marijuana by removing the drug from the Controlled Substances Act. It was also backed by Sen. Kirsten Gillibrand, another possible 2020 hopeful."
  • "The courts have ruled that Congress has the power under the Commerce Clause to criminalize marijuana. But nothing in the Constitution requires Congress to do so. Unlike the great rights of free speech or freedom of religion—which Congress has no power to deny or terminate—Congress could pass a law tomorrow abolishing the criminalization of marijuana and giving it a protected legal status."
  • "With more than half of the states favoring legalization, there is now talk in Congress of passing a new law that would send the issue back to the states and let each state decide for itself how to regulate marijuana. "
  • "President Trump said he likely will support a congressional effort to end the federal ban on marijuana, a major step that would reshape the pot industry and end the threat of a Justice Department crackdown."
  • "Trump’s remarks put him sharply at odds with Atty. Gen. Jeff Sessions on the issue. The bill in question, pushed by a bipartisan coalition, would allow states to go forward with legalization unencumbered by threats of federal prosecution. Sessions, by contrast, has ramped up those threats and has also lobbied Congress to reduce current protections for medical marijuana."
  • "Even though most lawmakers now represent areas where pot is legal for at least medical use — and public opinion polls show majorities of Democratic and Republican voters nationwide favor legalization — congressional leaders have shown little appetite for loosening restrictions. "
  • "On May 8, 2018 H.R. 5520, The VA Medicinal Cannabis Research Act of 2018 was reported favorably out of the House Veteran Affairs Committee. The bill, while limited in scope (it codifies the VA's ability to do research on medical cannabis) marks the first time a stand-alone cannabis bill has been reported favorably by a committee since the introduction of the Controlled Substances Act. The bill is currently awaiting being scheduled for a vote in the full House. "
  • "Despite medical cannabis laws in 46 states, cannabis is still illegal under federal law. The federal government regulates drugs through the Controlled Substances Act (CSA) (21 U.S.C. § 811), which does not recognize the difference between medical and recreational use of cannabis. These laws are generally applied only against persons who possess, cultivate, or distribute large quantities of cannabis."
  • "Under the CSA, cannabis is classified as a Schedule I drug, which means that the federal government views cannabis as highly addictive and having no medical value. Doctors may not "prescribe" cannabis for medical use under federal law, though they can "recommend" its use under the First Amendment."
  • "States that have legalized thus far use a commercial, competitive, but regulated market structure modeled after the alcohol industry; California’s medical marijuana industry is also structured this way. If policymakers seek to move quickly to allow recreational marijuana, they might choose to maintain this market structure. "
  • "Cannabis may soon be just as normal to U.S. markets as alcohol and tobacco, but that doesn’t mean old market inefficiencies should be yoked onto this new industry. As more states legalize recreational use and new cannabis markets emerge, many parties are vying for control by influencing the drafting of legislation and rulemaking of regulations. This has already happened with the licensing of cannabis wholesalers, where state governments may mandate that a small number of entities be allowed to act as wholesalers where all cannabis must pass through them between grower and retailer."
  • "A slightly different situation occurred earlier this year when adult-use marijuana became available in California. Under the state’s Medicinal and Adult Use Cannabis Regulation and Safety Act (MAUCRSA), distributors would distribute, arrange for testing, and handle packaging and labeling quality control as well as collecting and remitting taxes on behalf of cultivators and retailers. This regulatory scheme not only adds extra time and costs at multiple points of the supply chain but it also creates a system that can easily be dominated by a few companies."
  • "When California’s Medicinal and Adult Use Cannabis Regulation and Safety Act (MAUCRSA) was passed last year, marijuana licensees were given the go ahead to vertically integrate cultivation, distribution, and sales. As Hilary Bricken of Above the Law pointed out, distributors in California’s medical and adult-use marijuana industry wouldn’t be acting in the distributor role most people are familiar with from other regulated industries, such as alcohol. It’s this change that had people wondering in late-2017 whether the passing of MAUCRSA would bring significantly more distributor licenses to California in 2018. To be clear, distribution under MAUCRSA refers to the procurement, sale, and transport of cannabis goods between licensees. Only licensed distributors can transport marijuana from one licensee to another. MAUCRSA established that distributors would also be responsible for arranging testing, packaging quality control, and labeling quality control as well as collecting and remitting taxes on behalf of cultivators and retailers."
  • "The effects of MAUCRSA are far-reaching, and already, consumers are seeing those effects in the form of high marijuana product prices. For distributors, smaller players are being forced out of the market entirely despite the fact that MAUCRSA was intended to give small businesses an opportunity to enter and compete effectively in the state’s combined medical and adult-use cannabis market. The California Growers Association included dozens of recommendations in its report that could help solve some of the problems of MAUCRSA. Only time will tell if any of those recommendations are considered and implemented."
  • "One of the companies leading the way in the upscaling of pot is MedMen, a Los Angeles-based company with 700 employees that manages and owns nearly a dozen cannabis shops and cultivating and manufacturing operations in California, Nevada, and New York (where only medical cannabis is sold). Later this year, the company’s expansion plans even include a Fifth Avenue flagship in Manhattan."
  • "Bierman saw a parallel between marijuana and gambling, believing that there was simply too much demand for pot, and too much economic incentive, given the potential tax revenue, for it to remain illegal for very long. So he and Modlin opened a medical marijuana dispensary and eventually expanded into cultivation and manufacturing. Their initial model was to pair up with marijuana license holders and then come in and operate and manage (and in most cases totally revamp) their stores, but today they both own and manage properties."
  • "The September 2015 state law, the Medical Cannabis Regulation and Safety Act (MCRSA), requires an independent third party to distribute a grower's or manufacturer’s product to stores. Hilary Bricken, a Hermosa Beach–based cannabis business attorney with the firm Harris Bricken, says the rule blocks the biggest growers and manufacturers from controlling the whole supply chain and, by extension, from becoming too dominant, what Bricken called the "Walmart-of-weed model." (Third-party distribution is how California’s booze market works.)"
  • "The three “tiers” of the system consist of: The producer (a.k.a. manufacturer or supplier) tier. For beer – breweries that brew, ferment, and/or package beer. Every packaging brewery from the vast Anheuser-Busch/InBev to the smallest nano falls into the producer tier. Most observers also place importers into the producer tier, although the line between importer and distributor is very thin, especially among smaller importers of specialty beers. The distributor (a.k.a. wholesaler) tier — These companies can range from “mom and pop” businesses operating a small warehouse and a few trucks to large multi-state operations selling millions of cases per year. The retailer tier — This includes a wide variety of businesses, often sub-divided into “off premises” retailers (i.e., the alcohol is consumed off the premises of the retailer), like liquor stores, supermarkets, convenience stores and the like, and “on premises” retailers (i.e., the alcohol is consumed on the premises of the retailer), like bars, restaurants, hotels, and the like."
  • "In a three-tier distribution system, the producer tier (brewery) makes beer, sells it to distributors, and the distributors deliver and sell that beer to retailers. We, the beer-loving public, then buy from the retailer."
  • "MedMen was founded in 2010 by cofounder and Chief Executive Officer Adam Bierman and Andrew Modlin and has raised $99.2 million including $60 million raised through the MedMen Opportunity fund that closed in April. With this money, the MedMen Opportunity Fund has invested in seven projects that span from dispensaries in California and New York to cultivation facilities in California, New York and Nevada. They also have a stake in MedReleaf in Canada. The group recently hosted its first Institutional Capital and Cannabis Conference in San Jose that sold out. MedMen plans to keep launching more investment vehicles to deploy in strategic markets."
  • "Casa Verde is best known for the experience of its four partners. The most famous is Calvin Broadus (better known as Snoop Dogg), Evan Eneman (a former director at PricewaterhouseCoopers), Karan Wadhera (former Goldman Sachs executive) and serial entrepreneur Ted Chung. Eneman said, “We not only bring capital but also operational experience in the cannabis industry across our various sister companies (Merry Jane, Flower Shop and ELLO), which tie in the mainstream experience that we also have from outside of the world of cannabis.” The company has invested in delivery service Eaze, media site Merry Jane, B2B e-commerce platform Leaflink and CapitalG among others. The company typically invests $250,000-$500,000 into a new company. Casa Verde's focus at the moment is on becoming the preeminent venture partners for early stage companies. Eneman said, “We believe in venture and ancillary markets because technology, software, hardware, products and services are scalable and will help to build the backbone of this burgeoning industry for decades to come.”"
  • "Want to be a little more hands on? The ArcView Group is the best choice. The group was founded in 2010 by Troy Dayton and Steve DeAngelo, who is the Chief Executive Officer of Harborside Health Center in San Francisco. DeAngelo is a longtime activist and once a member of the Youth International Party or the Yippies during the 60's so it doesn't get more legit than Steve. Companies like Mass Roots, Eaze, MJ Freeway and Medicine Man came to Arcview for their early capital. They vet and present companies that are looking for investment with people wanting to invest. Their investment members get access to a private portal to evaluate and collaborate on deals. With over 625 members, they have funded 141 companies and invested $115 million."
  • ""In January 2018, California’s Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA) will make production, sale and possession of cannabis for adult recreational use legal in California. MAUCRSA classifies cannabis licenses into cultivation, manufacturing, testing, distribution, microbusiness and retail licenses, and allows vertical integration among most of the license types, except testing.""
  • "For example, cannabis cultivation licensees will be allowed to also hold manufacturing, distribution or retail licenses for adult-use or medical cannabis or both. In an attempt to protect existing small medical cannabis businesses, existing medical cannabis licensees in good standing will have priority in obtaining licenses through December 2019.[6] Furthermore, large cultivator licenses will be unavailable until 2023, and large cultivator licensees will be restricted from holding testing, distribution or microbusiness licenses but will be allowed to hold manufacturing and retail licenses.[3][6]"
  • ""Labelled as a biotech company and based out of sunny and science-forward Irvine, California, Cannabis Science Inc. primarily focuses on the development and production of cannabinoid-based therapies, so that those in need may achieve a greater quality of life. They mostly sell marijuana-based recreational and pharmaceutical products, and are constantly expanding their locations and product development techniques. With a 2017 Market Cap of $253 million, CBIS is expected to achieve amazing things in both the short and long-term, and are highly regarded to reach new, previously-thought impossible heights. Some of the most brilliant minds in biotech are employed by this corporation, and they serve in all facets of its rapidly expanding laboratory locations.""
  • "The City of West Hollywood is the only city in the Los Angeles area that allows for on-site consumption. The City plans to permit eight (8) on-site consumption businesses for smoking, vaping, and ingesting, and it will also allow 8 on-site consumption businesses for edible ingestion only. The window for submission for on-site consumption applications (and for other commercial cannabis businesses) is expected during the month of May, so we may see on-site consumption up and running for the busy summer months. "
  • "Other California cities that have explored the idea of cannabis lounges are Cathedral City and South Lake Tahoe, but nothing official has happened in either city as of yet. Over time, as legalized cannabis becomes more normalized (and socialized) in the state, California will likely see an increase in cities that allow cannabis lounges. For now though, on-site consumption is a rare occurrence and a political hot potato. And for the few on-site consumption lounges that exist, we expect nothing but success and increased tourism."