CalCann Holdings Inc. (714) Town Center Drive, Unit 700 Costa Mesa, California 92626

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1 CalCann Hldings Inc. (714) Twn Center Drive, Unit 700 Csta Mesa, Califrnia City Of Ls Angeles Psitin Paper February 19, 2016 By: Aarn Herzberg The missin f CalCann Hldings is t build a premier prtfli f cannabis cmpanies and brands in Califrnia that signal excellence, integrity and quality fr patients, cnsumers, cmmunities and regulatrs. We seek t educate lawmakers and will always advcate sund public plicy and transparency. We will be engaged in the cmmunities we serve, create well paying jbs as well as be a frce fr psitive change. I. Executive Summary With the passage f the Cmpassinate Use Act (CUA) in 1996, Califrnia was the first state t legalize medical marijuana. In Octber 2015, 19 years later, the State established a cmprehensive system t regulate the cultivatin, transprtatin and sale f medical marijuana with the passage f the Medical Marijuana Regulatin and Safety Act (MMRSA). Under MMRSA, Califrnia will, fr the first time, issue licenses t medical cannabis businesses. Hwever, the State will nly grant licenses t businesses that btain authrizatin frm their lcal jurisdictins. In 2014, legal cannabis sales in the United States reached $2.7 billin, nearly duble the $1.43 billin mark reached in 2013, and mre than triple the $800 millin sld in That number is expected t grw even mre, as 2015 is n pace t hit $3.5 billin, fr a 2 cmpund annual grwth rate f 65%. Estimates shw sales increasing t sme $10 3 billin by The City f Ls Angeles (City) cllects abut $3 millin annually frm medical marijuana shps, mst f which d nt cmply with the City s medical marijuana 1 1 The (Untapped) Multi Billin Dllar Market in Cannabis Cultivatin and Retail, December 8, 2015, PR Newswire; releases/the untapped multi billin dllar market in ca nnabis cultivatin and retail html. 2 Id. 3 Id.

2 4 laws. Other surces state the City cllected $4.4 millin in 2015 as f Octber f that year, 5 and $5 millin in The State Bard f Equalizatin released a statement in summer 2015 stating there are active cannabis businesses in the city f Ls Angeles. The City's Office f Finance has 7 said there are 1,122 active marijuana businesses that have registered t pay taxes. Under MMRSA and the current legal landscape in the City, n medical marijuana businesses will be allwed t perate after 2018, because the City des nt issue permits r licenses t any f its medical marijuana business; instead, the City prvides limited criminal immunity t apprximately 135 dispensaries. The City has passed n less than 16 rdinances since 2007 in attempts t regulate the medical marijuana industry within its brders. These attempts have prven unsuccessful and have lead t a nearly insurmuntable number f lawsuits. The City s marijuana laws need a cmprehensive verhaul and a new set f clear standards in line with MMRSA. The City s 2007 Medical Marijuana Interim Cntrl Ordinance (ICO) was a temprary mratrium t thrttle the massive prliferatin f medical marijuana businesses while the City develped permanent regulatins fr medical marijuana. The ICO prhibited all new medical marijuana businesses, but allwed thse that had registered t pay taxes t cntinue perating. Out f the rughly 700 dispensaries perating in the City at the time, apprximately 135 were registered t pay taxes. The 2007 ICO was revised in 2009, and later blstered by Prpsitin D in Prpsitin D banned medical marijuana businesses while granting immunity t the ban t the rughly 135 businesses that (1) perated since 2007, (2) were previusly registered with the City, and (3) wuld cntinue t meet ther requirements and peratinal standards. 4 LA Cuncilmembers Call fr Marijuana Dispensary Crackdwn, December 9, 2014, NBC Ls Angeles, city cuncil medical marijuana dispensary ta x certificate html. 5 LA City Cuncil Cracks Dwn n Medical Marijuana Dispensaries Again, Octber 28, 2015, Daily News, and plitics/ /la city cuncil cracks dw n n medical marijuana dispensaries again 6 State Aims at Pt Shps That Evade Taxes, July 15, 2015, LA Weekly, aims at pt shps that evade taxes Nbdy Knws Hw Many Pt Shps Exist in L.A., April 10, 2015, LA Weekly, knws hw many pt shps exist in la

3 Abuse f Prpsitin D is rampant. Multiple stres use ne lcatin fr tax purpses and 8 claim immunity, althugh that immunity is suppsed t cver nly ne dispensary. Accrding t City law enfrcement, sme shps with pre ICO status abandn their riginal lcatins, and split int multiple dispensaries in lcatins utside their riginal plice 9 divisins. Further, peple are purchasing pre ICO lcatins and grwing three ftball fields f marijuana. The cmbinatin f a cnfusing legal landscape and bad attrneys led peple t believe that the pre ICO immune status f these businesses was a valuable cmmdity, with many referring t the immune businesses as licensed. That is nt the case. An extremely active resale market exists in which peple buy and sell pre ICO businesses fr rughly $1,000,000 3,000,000. Hwever, the purchaser btains n vested rights in wning a marijuana business. N CUP r license is btained. Further, the act f selling these nnprfit entities is unlawful in and f itself. A nnprfit crpratin is nt wned by anyne. It is an entity frmed t administer the assets f the rganizatin. One cannt buy r sell a nnprfit crpratin. With the passage f MMRSA, it is time fr the City t take respnsibility fr the $ millin medical marijuana market within its brders. The City shuld start frm scratch and emply best practices t respnsibly implement MMRSA and attract the best peratrs. The licensing prcess shuld include a merit based applicatin t encurage the best peratrs t establish businesses in the City. Many ther states have implemented successful merit based systems that the City can lk t as examples. The apprximately 135 pre ICO businesses in the City (as well as the hundreds f ther illegally perating businesses) shuld all be required t apply under the City s new licensing scheme t ensure that, ultimately, all medical marijuana peratrs in the City meet the same standards and requirements, and satisfy a minimum level f quality and safety. Any pre ICO businesses that are gd peratrs shuld succeed under a merit based permitting system, and the bad peratrs shuld nt. Multiple lawsuits ver the years shw that the City has a large ppulatin f patients demanding medical marijuana. Rather than having t deal with further litigatin and dissatisfied cnstituents, the City shuld meet the desires and demands f its peple by implementing a cmprehensive regulatry scheme fr medical marijuana businesses. Histrically, the City has nt had gd peratrs. The City has always lacked regulatin and cmpliance. The lack f a lcal regulatry structure fr medical cannabis in the City 8 Hw Sme Dispensaries Find A Way Arund L.A. s Pt Shp Ban, April 22, 2014, LA Weekly, sme dispensaries find a way arund las pt shp b an Id. 3

4 has cntributed t an atmsphere f secrecy and lawlessness that has resulted in chas and lack f security fr peratrs and their neighbrs. In 2013, the City Attrney began cracking dwn n illegal peratrs. Like a game f whack a mle, as quickly as sme shut 10 dwn, thers pened. The City shuld d away with fruitless first aid techniques and put an effective, permanent slutin in place. Medical marijuana is a $ millin dllar business in the City with a regulatry scheme that has prven ineffective. The City shuld take this pprtunity t stp being the pster child fr chas and bad medical marijuana businesses, and implement a rbust merit based regulatry scheme that enables the City t welcme gd peratrs with pen arms. II. Factual and Legal Histry The CUA and Medical Marijuana Prgram Act (MMPA) prvide qualified patients and 11 their caregivers with limited immunities t criminal prsecutin under State law. Cmmencing in 2007, mre than 850 medical marijuana businesses pened, clsed and repened strefrnt shps and cmmercial grwing peratins in the City withut any land use apprval under the Ls Angeles Municipal Cde (LAMC). Since that time, an unknwn number f these businesses cntinue t pen, clse, and repen in Ls Angeles, 12 with n regulatry authrizatin frm the City. Accrding t the Ls Angeles Plice Department, as the number f marijuana dispensaries and cmmercial grwing peratins cntinue t prliferate withut legal versight, the City has experienced an increase in crime and negative secndary harms assciated with 13 unregulated marijuana businesses. In August 2007, the City enacted the ICO t prhibit medical marijuana businesses in the City, and t exempt frm that prhibitin 185 existing medical marijuana facilities that 14 timely registered with the City Clerk. The ICO stated that its terms were temprary, and wuld nly last until the City s adptin f cmprehensive medical marijuana regulatins. 15 In ther wrds, the City anticipated develping a cmprehensive regulatry scheme at sme pint in the future. 10 Unlicensed Marijuana Stres Grw Like Weeds in L.A., August 21, 2015, NBC News, news/unlicensed marijuana stres grw weeds la n Prpsitin D, preamble. 12 Prpsitin D, preamble. 13 Prpsitin D, preamble. 14 Prpsitin D, preamble. 15 Prpsitin D, preamble. 4

5 In January 2010, the City established a regulatry framewrk in an attempt t balance the prliferatin f medical marijuana businesses, access by seriusly ill patients t medical marijuana, and public safety, by adpting Medical Marijuana Ordinance (MMO), adding Article 5.1 t Chapter IV f the LAMC. The MMO was subsequently amended by rdinances including the 2011 Temprary Urgency Ordinance (TUO). By February 18, 2011, 230 medical marijuana businesses ntified the City Clerk f their 16 intentin t register under the MMO as amended by the TUO. 157 f thse businesses were already registered under the ICO; and 135 ut f thse 157 medical marijuana 17 businesses als registered under Measure M in either 2011 r The City s effrts t fster cmpassinate patient access t medical marijuana, which capped the number f dispensaries thrugh (1) pririty registratin pprtunities fr earlier existing cllectives, (2) a drawing, and (3) mandatry gegraphic dispersal, resulted in an explsin f lawsuits by medical marijuana businesses challenging the validity f the MMO and TUO. These actins were deemed related and cnslidated, and are nw knwn 18 as 420 Caregivers, LLC et al., v. City f Ls Angeles. The lawsuits were accmpanied by the cntinued pening and peratin f unpermitted businesses, recurrent neighbrhd cmplaints regarding crime and negative secndary effects, and an excessive drain upn 19 the City s financial and law enfrcement resurces. In July 2012, the 420 Caregivers curt reversed a preliminary injunctin rder issued against the MMO. The Curt held, amng ther things, that (1) the prvisins f the MMO that limited medical marijuana cllectives in the City t nly thse apprximately 180 that had timely registered with the City under the ICO were lawful, and (2) the MMO sunset by its wn terms n June 6, 2012, and that as f that date nly cllectives f three r fewer members were allwed t perate in the City. While the 420 Caregivers case was pending, in 2011, the case f Pack v. Superir Curt, was decided. The Pack curt determined that prvisins f the City f Lng Beach s medical marijuana rdinance (mdeled after Article 5.1, Chapter IV f the LAMC) were 20 preempted by the Federal Cntrlled Substances Act (CSA). The Califrnia Supreme Curt dismissed review f the Pack case, meaning the Curt f Appeal pinin is 21 unpublished and f n legal cnsequence. The Pack curt held that cities were preempted under the CSA frm enacting affirmative regulatins t permit r authrize medical marijuana businesses, and led the City t believe 16 Prpsitin D, preamble. 17 Prpsitin D, preamble. 18 (2013) 219 Cal.App.4th Prpsitin D, preamble. 20 (2011) 199 Cal.App.4th 1070; Prpsitin D, preamble. 21 (2012) 268 P.3d 1063; Califrnia Rules f Curt, Rule 8.528(b)(3). 5

6 that it wuld be in vilatin f federal law if it permitted r authrized medical marijuana 22 businesses. Because Pack was de published, that is nt the case. Given the similarities between the rdinance at issue in Pack and the City s MMO and t avid any pssibility f vilating federal law, the City discntinued implementing the 23 MMO. In August 2012, after failed settlement attempts in 420 Caregivers, the City sught t address the cntinued prliferatin f unregulated medical marijuana businesses in the City by enacting Ordinance (Gentle Ban) t prhibit medical marijuana businesses, with limited exceptins that included dwelling units used by three r fewer qualified persns t prcess r cllectively and cperatively cultivate medical marijuana; and hspices and licensed clinics, care facilities and hme health agencies entitled t the State s qualified 24 immunities. In respnse t cmments, bjectins and prpsals frm the marijuana cmmunity, the City Cuncil repealed the Gentle Ban n Octber 9, Shrtly thereafter, the Califrnia Supreme Curt granted review f City f Riverside v. 25 Inland Empire Patient s Health & Wellness Center and Peple v. G3 Hlistic. The Califrnia Supreme Curt held that the CUA and MMPA d nt preempt lcal bans n 26 dispensaries. In 2011 and 2012, in a case nw knwn as Peple v. Cunty f Ls Angeles Superir Curt ( Cahuenga s The Spt et al. ), the City Attrney brught civil enfrcement actins against mre than 80 marijuana businesses, alleging vilatins f the LAMC, the Health and Safety 27 Cde and the State unfair cmpetitin law. Fllwing an appeal and remand f the case, n December 1, 2015, the trial curt granted the City s mtin fr summary judgment, ruling that certain defendants vilated (1) LAMC sectin (maintenance f a structure in an area nt zned fr such use withut a permit r license); (2) Health and Safety Cde sectin (building used fr cntrlled substance is nuisance and shall be enjined and abated); and (3) Business and Prfessins 28 Cde sectin (unfair cmpetitin). The curt explained that the City was nt equitably estpped frm enfrcing the LAMC against defendants just because the City had previusly permitted brader categries f dispensaries t perate. The City is nt estpped 22 Prpsitin D, preamble. 23 Prpsitin D, preamble. 24 Prpsitin D, Preamble. 25 Prpsitin D, preamble. 26 (2013) 56 Cal.4th Peple v. Cunty f Ls Angeles Superir Curt ( Cahuenga s The Spt et al. ) (2015) 234 Cal.App.4th Peple v. Cunty f Ls Angeles Superir Curt ( Cahuenga s The Spt et al. ) (2015) 234 Cal.App.4th

7 frm making its marijuana regulatins mre restrictive and applying thse standards t 29 dispensaries that may have cmplied with previus, mre lenient standards. With the passage f Prpsitin D in 2013, the City attempted t address the cntinued prliferatin f unauthrized medical marijuana businesses in the City by granting limited immunity t thse businesses that had abided by the City s regulatins and were nt in vilatin f the restrictins in Prpsitin D. The City nted in Prpsitin D that its terms wuld be in effect nly until such time as the Califrnia Supreme Curt rules regarding what cities can and cannt regulate and the City enacts new medical marijuana legislatin 30 cnsistent with that judicial guidance. That time is nw. The Octber 2015 passage f MMRSA created a cmprehensive State regulatry and licensing system fr cmmercial cannabis activities, addressing health and safety, testing, security and wrker prtectins. MMRSA requires that all cmmercial cultivatin, manufacture, dispensing, distributin, testing and transprtatin f marijuana be licensed 31 by the State and authrized by the lcal jurisdictin where the activity takes place. The Department f Cnsumer Affairs estimates that it will begin issuing State licenses in January MMRSA des nt disturb lcal authrity t levy fees and taxes. It expressly prvides that lcal jurisdictins retain the pwer t assess fees and taxes, as applicable, n facilities that 32 are licensed pursuant t this chapter and the business activities f thse licensees. MMRSA als expressly preserves lcal regulatry authrity and prvides fr cntinued 33 enfrcement f Prpsitin D by the City. This means the City can cntinue t enfrce its prhibitin against dispensaries, but unless the City establishes a licensing r permitting system fr medical marijuana businesses, all medical marijuana businesses in the City will be illegal under State law. Because Prpsitin D des nt prvide fr the issuance f permits r ther authrizatin by the City, marijuana businesses in the City will nt be able t btain a State license and, therefre, cannt cmply with MMRSA. III. The City Shuld Implement a New Cmprehensive Ordinance Regulating Marijuana With the passage f MMRSA, nw is the time fr the City t implement a new, clear, cmprehensive medical marijuana regulatin framewrk. The rdinance shuld include a merit based applicatin system fr peratrs t apply fr licenses. The criteria shuld be cmprehensive and bjective t enable the City t select the best applicants. Pre ICO 29 See December 1, 2015 summary judgment ruling in Peple v. Cunty f Ls Angeles Superir Curt ( Cahuenga s The Spt et al. ) (2015) 234 Cal.App.4th 1360, n remand. 30 Prpsitin D, Preamble. 31 Bus. & Prf. Cde 19320(a). 32 Bus. & Prf. Cde 19320(d). 33 Bus. & Prf. Cde 19321(d). 7

8 peratrs, wh have n vested rights and have prven t be bad peratrs, shuld nt receive special treatment by virtue f their having temprary limited criminal immunity. Further, the City shuld prvide a degree f certainty in the review and apprval prcess t enable gd businesses t invest in the City withut a high risk f uncertainty. a. The City Shuld Craft an Ordinance that Cmplies with MMRSA MMRSA cnsists f AB 266, AB 243 and SB 643. It creates a cmprehensive State licensing system fr the cmmercial cultivatin, manufacture, retail sale, transprt, distributin, delivery, and testing f medical cannabis. Fllw up legislatin AB 21 was enrlled n January 28, 2016 and is awaiting the Gvernr s signature. AB 21 remves the March 1, 2016 deadline fr lcal jurisdictins t implement cultivatin regulatins. The City s rdinance shuld mirrr the 12 license categries created by MMRSA, which include the fllwing: Type 1 = Cultivatin; Specialty utdr. Up t 5,000 square ft f canpy, r up t 50 nncntiguus plants. Type 1A = Cultivatin; Specialty indr. Up t 5000 sq ft. Type 1B = Cultivatin; Specialty mixed light. Using exclusively artificial lighting. Type 2 = Cultivatin; Outdr. Up t 5000 sq ft, using a cmbinatin f artificial and natural lighting. Type 2A = Cultivatin; Indr ,000 sq ft. Type 2B = Cultivatin; Mixed light ,000 sq ft. Type 3 = Cultivatin; Outdr. 10,001 sq ft 1 Acre. Type 3A = Cultivatin; Indr. 10,001 22,000 sq ft. Type 3B = Cultivatin; Mixed light. 10,001 22,000 sq ft. Type 4 = Cultivatin; Nursery. Type 6 = Manufacturer 1 fr prducts nt using vlatile slvents. Type 7 = Manufacturer 2 fr prducts using vlatile slvents. Type 8 = Testing. Type 10 = Dispensary; General. Type 10A = Dispensary; N mre than three retail sites. Type 11 = Distributin. 34 Type 12 = Transprter. MMRSA includes restrictins t prevent vertical integratin. In general, licensees can nly hld licenses in up t tw separate categries. Small cultivatin licensee Types 1 2 may hld manufacturing r Type 10A retail licenses (limited t three dispensaries), while Type 3 4 licensees cannt apply fr manufacturing licenses. Type 10A licensees can apply fr bth manufacturing and cultivatin licenses, prvided their ttal cultivatin area desn't exceed fur acres. 34 See Health and Safety Cde sectins and 19331(g). 8

9 b. The Licensing Prcess fr Dispensaries Shuld be Separate frm that f Cultivatin Facilities and Manufacturing Facilities The licensing prcess fr cultivatin facilities, manufacturing facilities and dispensaries shuld be separate. If the City desires t limit the number f licenses, the cultivatin license limit shuld be separate frm the dispensary license limit t prmte fairness and discurage disruptin f the ecnmic equilibrium f the market. c. The Applicatin Prcess Shuld be Cmprehensive and Objective t Allw fr the Best Operatrs t Cmpete fr Licenses The City s rdinance shuld use a pint system t rank applicants based n varius criteria in rder t determine whether the applicant shuld be granted pririty in the permit prcess. Lttery systems have prven unsuccessful in the past (and have been subject t extensive litigatin), and randm selectin des nt always result in the best peratrs. The gal f a ranking system is t enable the City t make decisins based n an bjective set f criteria that will minimize litigatin risk and attract the best peratrs. d. A Cmprehensive and Weighted Ranking System Enables the City t Select Operatrs That Cnfrm t the City s Pririties The pint system used t rank applicants shuld be scred n a wide scale, and grant additinal weight t sme factrs ver thers, depending n their relative pririty fr regulatrs. Fr example, if the City wants t encurage safe peratrs, then additinal pints can be awarded t applicants with a rbust safety plan. This is cnsistent with the scring system successfully implemented in ther states where items are bjectively scred a certain number f pints, and pints are weighted based n the pririties f the regulatrs. In Nevada, fr example, financial resurces is wrth up t 40 pints, knwledge r experience in running a dispensary 50 pints, cnvenient lcatin fr patients 20 pints, and s frth. A system with weighted scres can als be used t set minimum standards. Fr example, an applicatin might require a minimum scre f 30 ut f 50 n the security plan. Further, the pints systems shuld be scaled t allw an evaluatin f merit rather than the mere existence f certain items. Fr example, awarding ne pint fr a security plan, wuld nt prvide the City with the ability t judge the merits f the security plan. The fact that a security plan exists is ne thing, but whether that security plan is strng, well thught ut, r feasible is anther thing. 9

10 A prpsed pints system is included at the end f this dcument. e. New Cmprehensive Regulatins will Limit the City s Liability and Help the City Avid Litigatin A new cmprehensive system will help clear up cnfusin, amng ther things, and will limit the City s liability. The cnfusin created with the City s 16 marijuana rdinances has been a majr factr in the massive number f marijuana lawsuits the City faces. If the City starts frm scratch and implements a fair, clear rdinance based n MMRSA that applies equally t every marijuana peratr, its litigatin risk will decrease tremendusly. f. Pre ICO Operatrs Shuld Nt Receive Special Treatment The new regulatins shuld wipe the slate clean, and all businesses, whether r nt they claim t have pre ICO immunity, shuld g thrugh the same applicatin prcess. Pre ICO peratrs shuld nt be entitled t any special treatment, grandfathering r deference under the new rdinance. If the City s gal is t attract the best peratrs, pre ICO peratrs shuld nt receive special treatment just by virtue f their pre existence. Instead, additinal pints shuld be awarded t businesses that are well capitalized, pay taxes, and have respnsible management, strng business plans, and prven track recrds. Pre ICO peratrs d nt have vested rights t perate medical marijuana businesses in the City, and many prved t be irrespnsible peratrs. Further, the cnfusin under the ICO system will cntinue if any frm f deference is given, prlnging lawsuits and skirting f the laws. Accrdingly, pre ICO peratrs shuld nt be entitled t special treatment and extra pints under the rdinance. i. Pre ICO Operatrs Have n Vested Rights Obtaining limited immunity under the ICO and subsequent rdinances des nt cnfer upn marijuana businesses a vested right t perate in the City. Nne f the pre ICO peratrs btained a permit t perate in the City. A use established withut btaining legally required gvernmental apprvals and permits is an unlawful use and even a lng perid f acquiescence by lcal authrities des nt give rise t an estppel r supprt a 35 vested right t cntinue it. The ICO did nt create a vested right t perate a marijuana business, nly limited immunity frm criminal prsecutin. Further, varius medical marijuana rdinances passed by the City make clear that btaining limited criminal immunity des nt cnvey any vested right t perate a medical marijuana business : 35 Schafer v. City f Ls Angeles, 237 Cal. App. 4th 1250, (2015); Glden Gate Water Ski Club v. Cunty f Cntra Csta, 165 Cal. App. 4th 249, (2008). 10

11 Sectin L f 2010 Temprary Urgency Ordinance N states: N registratin r building permit issued pursuant t this article shall cnfer vested r nncnfrming rights upn anyne, including but nt limited t the cllective, its wners, its management, its members, r the prperty wner f its lcatin, t the cntinued peratin f a cllective at the lcatin at any time after the expiratin f the registratin f the cllective. Sectin f 2012 Ordinance N , repealing and replacing Article 5.1 f Chapter IV f the Ls Angeles Municipal Cde, states: This Article prhibits medical marijuana businesses. Neither this Article, nr any ther prvisin f this Cde r actin, failure t act, statement, representatin, certificate, apprval, r permit issued by the City r its departments, r their respective representatives, agents, emplyees, attrneys r assigns, shall create, cnfer, r cnvey any vested r nncnfrming right regarding any medical marijuana business. Sectin f 2013 Ordinance N implementing Prpsitin D states: This Article prhibits medical marijuana businesses. Neither this Article, nr any ther prvisin f this Cde r actin, failure t act, statement, representatin, certificate, apprval, r permit issued by the City r its departments, r their respective representatives, agents, emplyees, attrneys r assigns, shall create, cnfer, r cnvey any vested r nncnfrming right r benefit regarding any medical marijuana business. Any immunity r benefit cnferred by this rdinance shall expire permanently and in full n the effective date f the City Cuncil's enactment f new medical marijuana legislatin after the issuance f guidance by the Califrnia Supreme Curt guidance, r therwise upn repeal f this rdinance. Finally, as the trial curt recently ruled in the Cahuenga case, the City is nt estpped frm implementing stricter regulatins and enfrcing them against all marijuana businesses, even 36 if sme businesses wuld have been cmpliant under previus laws. ii. Preference fr pre ICO peratrs Wuld Nt Prmte Plicy f Encuraging Gd Operatrs Many pre ICO peratrs are irrespnsible, and have take advantage f a cnfusing regulatry scheme by franchising and prliferating peratins int multiple lcatins, 37 amng ther things. 36 See December 1, 2015 summary judgment ruling in Peple v. Cunty f Ls Angeles Superir Curt ( Cahuenga s The Spt et al. ) (2015) 234 Cal.App.4th 1360, n remand. 37 Hw Sme Dispensaries Find A Way Arund L.A. s Pt Shp Ban, April 22, 2014, LA Weekly, 11

12 The City shuld encurage the best applicants t apply and prvide each business with a fair pprtunity t cmpete based n merit. The City will benefit frm ushering in a new breed f marijuana business peratrs wh use best practices and perate respnsibly. Such peratrs will bring investment and resurces t the City, purchase real prperty, clean up blight and create jbs fr lcal residents. Further, any gd and respnsible pre ICO businesses shuld succeed in a merit based applicatin prcess. This is an pprtunity fr the City t attract gd businesses and weed ut the bad. iii. Pre ICO Operatrs are Mstly Bad Operatrs Ls Angeles is referred t as a pster child fr chas, where marijuana remains relatively unregulated despite the City s effrts, with very little cntrl ver the number f 38 dispensaries that pen. In each f its many rdinances passed since 2007, the City indicated that the prhibitin and limited immunity wuld be temprary, until the State issued a new regulatry framewrk fr marijuana businesses. Althugh there may be sme gd, respnsible medical marijuana businesses perating in the City, law enfrcement and media reprts paint a picture f bad, irrespnsible, dishnest peratrs wh are gaming the system. Accrding t City law enfrcement, sme shps with pre ICO status abandn their riginal lcatins, and split int multiple dispensaries in 39 lcatins utside their riginal plice divisins. Pre ICO nnprfits are being unlawfully bught and sld fr $1,000,000 3,000,000. A simple Internet search fr pre ICO business sale reveals pages and pages f allegedly cmpliant businesses fr sale in the City. Under pre MMRSA Califrnia law, all cllectives were required t be nnprfit pursuant t attrney general guidelines and SB 420. Mutual benefit nnprfit crpratins cannt be legally bught and sld. Dispensaries that have been illegally sld shuld nt be rewarded by being grandfathered r granted pririty in a new system f regulatin. If the apprximately 135 pre ICO businesses are smehw grandfathered in r given pririty, the City will cntinue t face the same prblem f businesses that have taken advantage f a cnfusing system and prliferated all ver the City, amng ther issues. Instead, the City shuld implement an entirely new system with very clear and bjective standards and a merit based licensing system. sme dispensaries find a way arund las pt shp b an Califrnia Cannabis Cmmissin Apprved By State Assembly, June 5, 2012, HuffPst San Francisc, cannabis cmmi_n_ html. 39 Id. 12

13 iv. The City Shuld Cnsider Hw the Number f Dispensaries Affects Patient Access Accrding t United States Census data, the City s estimated ppulatin in 2014 is 3,928,864. There are rughly 135 pre ICO dispensaries perating in the City. Accrdingly, the rati f dispensaries t ppulatin in Ls Angeles is currently 1 fr every 29,103 peple. The fllwing chart reflects the crrelatin between the number f permitted dispensaries and ppulatin t shw hw increasing r decreasing the number f dispensaries will affect patient access. POPULATION PERMITTED DISPENSARIES DISPENSARIES TO POPULATION RATIO 3,928, : 15,000 3,928, : 20,000 3,928, : 25,000 3,928, (current #) 1: 29,103 3,928, : 30,000 3,928, : 35, Fr infrmatinal purpses, the fllwing chart reflects the ppulatin, number f permitted dispensaries, and ratin f dispensaries t ppulatin in varius jurisdictins in Califrnia as well as ther states: 40 Data prvided in January 29, 2016 City f Oakland City Cuncil Agenda Reprt. 13

14 CITY POPULATION PERMITTED DISPENSARIES DISPENSARIES TO POPULATION RATIO Oakland, CA 413, : 51, San Francisc, CA 852, : 30,445 Berkeley, CA 118, : 29,713 San Jse, CA 1,015, : 63,487 Sacrament, CA 479, : 15,990 Denver, CO 663, Seattle, WA 668, : 3,254 1: 3,375 v. Clear Regulatins Will Make Law Enfrcement Easier Amng the challenges law enfrcement faces in the current marijuana landscape is the fact that s many businesses claim t have pre ICO status, and s many nn pre ICO businesses use their tax registratin certificates t trick prperty wners and custmers int believing they are perating lawfully. With a new, clear set f standards and regulatins, enfrcing the law and detecting unlawful businesses shuld be much easier. Everything ICO related shuld be eliminated under the LAMC. Law enfrcement shuld participate in crafting the new regulatins in a way that will enable them t enfrce the law in a mre efficient and cst effective manner. It is easier fr businesses t skirt a cnfusing law. If the City ffers special status t pre ICO businesses under a new scheme, it will encunter the same prblems it faces nw. g. T Encurage Investment, the Ordinance Shuld Prvide Certainty in the Applicatin and Apprval Prcess An rdinance must be drawn in definite and certain terms s that enfrcement is nt 44 accmplished withut clear guidelines. T be valid and effectual, rdinances must clearly set frth sme nrm r standard by which all persns may knw their rights and bligatins thereunder. Where an rdinance cmmits its applicatin t municipal fficials it shuld set 41 In additin t 28 existing dispensaries, San Francisc reprtedly has 18 dispensary applicatins pending apprval f Denver s 204 dispensaries ffer nly medical cannabis; the remaining 143 ffer bth medical and recreatinal cannabis. 43 Seattle, WA has apprved 228 dispensaries, but has nly issued 198 dispensary permits as f this time. 44 In re Hubbard (1964) 62 Cal.2d 119, 122, verruled in part n ther grunds by Bishp v. City f San Jse (1969) 1 Cal.3d

15 45 up a unifrm standard r rule f cnduct. Regulatins prescribed by rdinance must be 46 clear, definite, and specific in their applicatin and peratin. The rdinance shuld include clear timelines fr the City t apprve licensed entities. In San Dieg, which uses a CUP prcess, ver ne year has transpired since the city first accepted applicatins, and nly three dispensaries are pen. A substantial amunt f mney and resurces are required fr a business t hld real estate and await issuance f a license. In rder fr businesses t remain slvent and prduce revenues fr the City, the City shuld implement a prcess that has a firm timeline fr apprval. It will be challenging fr reputable cannabis businesses t spend the millins f dllars and substantial time required t purchase, develp and permit a marijuana facility in the City if there is n certain timeline r prcess fr btaining a permit. The cannabis business is already risky fr investrs and cultivatrs. Prviding a clear path and timeline fr apprvals remves an element f risk and will attract investrs. If the City wants t attract investment and gd business, it shuld cnsider including an efficient prcess and clear timeline t allw fr a mre secure investment. h. The City May Amend Nn Tax Prvisins f Prpsitin D Withut Vter Apprval Prpsitin D was a referendum measure placed n the ballt by the Cuncil, nt an initiative petitin frm the vters. Any tax changes will require vter apprval, but accrding t Prpsitin D and the City Charter, the City Cuncil may amend ther prvisins f Prpsitin D withut vter apprval. i. Prpsitin D Language: Sectin 4 f Prpsitin D, Amendment and Repeal, states: As an rdinance submitted t the vters by the Ls Angeles City Cuncil, the prvisins f this rdinance, ther than the taxatin prvisins cntained in Sectin 2, shall be subject t amendment r repeal as prvided in Sectin 464(b) f the Ls Angeles City Charter. The City shall amend r repeal this rdinance pursuant t Charter Sectin 464(b) as may be apprpriate in rder t implement judicial rulings r guidance frm the Califrnia Supreme Curt regarding what medical marijuana activities and cnduct Califrnia cities can and cannt regulate. ii. City Charter Language: 45 Dminguez Land Crp. v. Daugherty, 196 Cal. 468, Hewitt v. State Bard f Medical Examiners, 148 Cal. 590; In re Peppers, 189 Cal. 682, ; In re Prterfield, 28 Cal.2d 91, ; Peple v. Yung, 136 Cal.App. 699, 702; Vaughn v. Bard f Plice Cm'rs, 59 Cal.App.2d

16 Sectin 464 f the City Charter, Amendment and Repeal f Ordinances Adpted by Initiative and Referendum, states: (a) Initiative. Any rdinance adpted by a vte f the electrs f the City pursuant t an initiative petitin cannt be amended r repealed, except by an rdinance prpsed either by petitin r by the Cuncil at its wn instance and adpted by a vte f the electrs, r by an amendment f the Charter superseding the rdinance. (b) Referendum. Any rdinance, rder r reslutin adpted by referendum shall be subject t amendment r repeal as prvided in subsectin (a). In additin, any rdinance, rder r reslutin shall be subject t amendment r repeal by the Cuncil at any time, but amendment r repeal shall nt be made within six mnths after adptin, except by unanimus vte f the Cuncil, and the amendment r repeal shall be subject t a referendary vte as prvided in this Article. IV. Cnclusin With MMRSA s cmprehensive set f regulatins fr medical marijuana businesses, the City is in a psitin t craft and implement a brand new regulatry framewrk fr marijuana within its brders. The mst successful prgram will be ne that attracts the best peratrs, and that can be accmplished with a rbust merit based applicatin system. The City shuld wipe the slate clean and prvide an equal pprtunity t all businesses in rder t eliminate cnfusin and enhance the chances fr the best peratrs t secure a license in the City. CalCann will gladly ffer its resurces in the prcess f creating the new regulatry framewrk, including crafting a prpsed rdinance if the City s leaders believe it will be helpful t the prcess. BY: Aarn Herzberg, Esq General Cunsel, CalCann Hldings Inc. (714) aarn@calcannhldings.cm 695 Twn Center Drive, Unit 700 Csta Mesa, Califrnia

17 Prpsed Pints Based System Merit Criteria Descriptive Elements These elements must be included in the respnse t the respective Merit Criteria. Applicants shuld prvide additinal infrmatin t demnstrate hw the applicant uniquely meets the specified Merit Criteria in additin t the descriptive elements belw. 1 Business Plan Business plan including descriptin f experience, management, recrdkeeping, financial infrmatin, and peratin infrmatin. Experience (25): A narrative descriptin shwing wners, fficers and bard members : Previus experience in perating ther businesses. Demnstrated knwledge r expertise with respect t the cmpassinate use f marijuana t treat medical cnditins. Resume, including educatinal achievements fr each wner, fficer and bard member. Management (25): Organizatinal chart shwing all wners, fficers and bard members f the establishment, including percentage f wnership fr each individual and a shrt descriptin f the prpsed rganizatinal structure. Recrdkeeping (25): Descriptin f the perating prcedures fr the electrnic verificatin system fr verifying medical marijuana cardhlders. Descriptin f system fr tracking purchases and denials f sale and prducts and services t be ffered, and ensuring cnfidentiality. Descriptin f the inventry cntrl system t satisfy the requirements f the Medical Marijuana Regulatin and Safety Act. Strategy fr cmmunicatin with lcal and state authrities regarding the destructin and dispsal f cannabis. Financial Plan (25): Pints Pssible

18 2 Security Plan Evidence f a minimum f $500,000 liquid assets and identificatin f the surce(s) f the minimum liquid assets. Evidence f the amunt and surce f the rganizatin's equity and debt cmmitment t ensure financial stability, including a demnstratin f the immediate and lng term financial health and resurces fr the design, develpment and peratin f the dispensary. Financial statements shwing the resurces f the applicant(s), bth liquid and illiquid. If the applicant is relying n mney frm an wner, fficer r bard member, r any ther surce, evidence that the persn has uncnditinally cmmitted such mney t the use f the applicant in the event the Divisin issues a medical marijuana establishment registratin certificate t the applicant and the applicant btains the necessary lcal gvernment apprvals t perate the establishment. Prf that the applicant has adequate mney t cver all expenses and csts fr the first year f peratin. Operating Plan (25): Timetable prviding an estimated time frm authrizatin thrugh year ne f registratin and the assumptins used as the basis fr thse estimates. Best practices fr day t day dispensary peratin and staffing. A detailed budget fr the prpsed establishment, including pre pening, cnstructin and first year perating expenses. An peratins manual that demnstrates cmpliance with applicable statutes and regulatins. An educatin plan including prviding educatinal materials t the staff f the prpsed establishment. Dcumentatin shwing integrated security plan, including safety prcedures fr emplyees, patients and caregivers and 75 18

19 3 Cnvenience t Cmmunity 4 Facility and Design Cnsideratins 5 Cmmunity Benefits APPLICATION TOTAL safe delivery and strage f cannabis and currency, specifically: Detailed flr plan f the premises f the prpsed establishment that identifies the square ftage available and describes the functinal areas, including areas fr any preparatin f prducts, and, if applicable, infrmatin fr the lcatin where marijuana will be cultivated r prducts will be prepared. Prcedures t ensure adequate building security. Prcedures t ensure adequate prduct security. Prcedures t ensure cnsumer safety including plan fr testing fr bilgical and chemical cntaminants, as well as testing and verifying medical marijuana. Dcumentatin shwing the cnvenience f the establishment t the cmmunity, including: Evidence that the applicant wns the prperty n which the establishment will be lcated r has the written permissin f the prperty wner t perate the establishment n that prperty. Evidence that the prpsed lcatin is accessible by public transprtatin, including distance frm establishment t nearest bus stp and/r train statin. An analysis f the prjected patient ppulatin and prjected need in the service area f the prpsed establishment. Dcumentatin cncerning the facility and design cnsideratins including: Building, cnstructin and architectural plans with supprting details. Plan t minimize the envirnmental impact f the prpsed establishment. Descriptin f hw the aesthetics and landscaping will enhance the surrunding neighbrhd. Descriptin f benefits that establishment will prvide t lcal cmmunity, including: Cntributing t/supprting lcal charitable rganizatins. Cntributing t/supprting children/yuth prgrams and interventin services. Any ther neighbrhd imprvements

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