The webinar will be starting soon... LA Phase 3: Updates Derek - - PowerPoint PPT Presentation

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Lauren Estevez, Esq. Attorney and Founder, LME Law

LA Phase 3: Updates

Derek Davis CPA and Founder, GreenGrowth CPAs

GreenGrowth CPAs

About Us:

• 1000+ Prepared Annual Tax Returns for cannabis operators spread across all verticals: dispensary, distribution,

cultivation, manufacturing, delivery and testing.

• 350+ Cannabis Business Clients
• 11+ States that our clients are spread across (CA, OR, WA, CO, MI, OH, OK, DC, HI, AZ, FL)
• 12+ Audit-related and valuation projects in 2018
• 7 Digits in revenues in our second full business year (2018).
• Thorough and deep understanding of tax, compliance and assurance related requirements for the cannabis

industry

Lauren Estevez, Esq.

Lauren is an attorney who has been advising U.S. and international cannabis companies since 2017. She is nationally recognized as a subject matter expert in cannabis law and her work has been featured on CNBC, Cheddar, and in

• Law360. Lauren has completed over 100 legal matters for cannabis clients including brands, investors, and operators

and she also advises on CBD and The Farm Bill. Lauren founded her own practice, LME Law, in 2018. Prior to her career in cannabis, Lauren graduated from Harvard Law School and worked at an AmLaw100 global law firm in London & New York in the Capital Markets and Banking groups, and at a start up, where she managed a multi-million dollar book of business and her clients included emerging and Fortune 500 life sciences and technology companies.

Disclaimer

The information contained in this webinar presentation is for informational purposes only and is not professional legal or tax advice. Further, it does not give personalized legal, tax, investment,

• r any business advice in general.

Agenda

• Background on LA Commercial Cannabis Permitting Process
• Phase 1, 2, and 3
• What is LA’s Social Equity Program
• Programs and Incentives the DCR is required to establish for SEP
• Problems that may occur in Phase 3
• Proposed Options for Phase 3
• Proposed Application Processing Methods
• Processing Restrictions for Proposed Processing Methods
• Applications Deemed Preliminarily Complete
• Additional Recommended Amendments

LA Commercial Cannabis Permitting Process

The Department of Cannabis Regulation (DCR) is the regulatory body that oversees the City’s Commercial Cannabis Regulatory Program. This month, DCR proposed a series of amendments to the regulatory program that would make the licensing process more efficient, transparent, and equitable.

Background of LA Commercial Cannabis Permitting Process

In March 2017, the voters of the City of L.A. passed Measure M, which authorizes the City to license, regulate and enforce commercial cannabis activity. The City Council Established the Department of Cannabis Regulation and the Cannabis Regulation Commission to implement and administer related laws and requirements as they were being established. The Established commercial cannabis licensing procedures require DCR to process application in a specified order, beginning first with two (2) phases of Priority Licensing.

Phase 1 and Phase 2 - now closed

Phase 1:

• Required DCR to administer applications to determine eligibility for Proposition M Priority

Processing (Existing Medical Marijuana Dispensaries or EMMDs - sometimes known as pre-ICOs) Phase 2

• Required DCR to administer applications to determine eligibility for Non-Retailer Commercial

Cannabis Activity prior to January 1, 2016 and to participate in the Social Equity Program.

• DCR processed eligible applicants and gave priority to those applicants that qualified for both

Phase 1 and 2.

Phase 3 - New Cannabis Retail Applicants

Phase 3

• Phase 3 is the final licensing phase contemplated in LA’s commercial cannabis ordinance and will

allow for new retail applicants to apply for licenses.

• Under the current proposal, Phase 3 will open first for social equity applicants.
• General applicants will be able to apply in a later phase, after the social equity licenses have been

granted.

• If you yourself do not qualify for social equity, you can partner with a qualified applicant to
• btain the status and priority licensing in Phase 3.

What is LA’s Social Equity Program (SEP)?

• SEP was created to promote equitable and employment opportunities in the cannabis industry in
• rder to decrease disparities in life outcomes for marginalized communities and to address the

disproportionate impacts of the war on drugs in certain communities affected by it.

• It aims to provide priority and certain benefits to qualifying program participants, including:

○ Equity ownership in licensed cannabis companies (33.3% for Tier 2 and 51% for Tier 1) ○ Business, licensing, and compliance assistance ○ Expedited renewal processing ○ Program site-specific conditions ○ Potential for fee deferrals from the City Council upon adoption of such a program ○ Access to and Industry Investment Fund, if established

Programs and Incentives DCR is required to establish for SEP

1. Recruitment and outreach support 2. Business, licensing, and compliance assistance 3. General Business Assistance 4. A registry for Incubator Projects that offer education and training to qualifying program participants

Problems That May Occur if Phase 3 Regulations Are Not Amended

• 1. Competition
• a. Another applicant within 700 feet gets licensed first
• 2. Over-Saturation
• a. Community Plans in which applicants are located reach undue

concentration

Problems That May Occur if Phase 3 Regulations Are Not Amended

1. Underdeveloped SEP Program a. SEP MUST be fully established before most of the opportunities to participate in storefront retail licensing is awarded to General Public Applicants i. The DCR must identify vendors who can provide a suite of Business, Licensing, and Compliance support to Tier 1 and 2 applicants, whose services will be available to SEP applicants no earlier than July 2019 2. Total Number of Storefront Retail Permits- 200 a. If Phase 3 opens up in Spring 2019, and BLC services will not be available until July 2019, then many SEP applicants will not be able to obtain a permit.

Proposed Options for Phase 3

1. If Phase 3 opens up in the Spring, then DCR will issue 100 permits and process applications according to one of the following proposed methods in conjunction with a Pre-Application Verification Process to determine whether the applicant is Tier 1 or 2 2. Applicants will have to provide documentation that demonstrates that it has an individual owner, who meets either Tier 1 or 2 qualifications

Proposed Application Processing Methods

Merit Based System a. Applications will be reviewed and scored based on criteria that the DCR will use to determine how viable and capable an applicant is to operate a commercial cannabis storefront retail business b. This system may take upto nine (9) months before any applicants can be selected to apply for an annual license.

First Come, First Served (Tier 1 and 2 Applicants)

In order to determine applicant priority for processing, the DCR will require applicants to submit the following:

a. Letter of Intent, Lease Agreement, or Property Deed at an address within the City, and Landowner Authorization, if possible b. Complete Premises Diagram c. Detailed radius map, including horizontal lines and labeling of any sensitive uses d. Complete ownership and financial interest disclosure form

Date and Time Stamp: The DCR will provide a date and time stamp that will resolve any location conflicts once an application is received. Incomplete Applications: If an application is deemed incomplete, the DCR will provide the applicant with 10 days to provide the necessary missing documentation

Lottery for Verified Tier 1 and 2 Applicants

• After closing the verification window, a lottery drawing will be held for processing numbers.
• Applicants with processing numbers 1 through 100 will be part of the processing group.
• Any conflicts with the 700-ft. Buffer and undue concentration will be resolved by selecting the

applicant with the earlier processing number.

• Applicants in the processing group with the numbers that were later will be given an opportunity

to select another location.

• Each applicant will only be able to register with ONE location.
• Applicants not in the processing group will be placed on a waitlist and will replace any applicants

who are denied a license.

Processing Restrictions for First Come, First Served and Lottery Methods

The following restrictions would apply to the first come, first served and lottery methods of processing:

• A verified Tier 1 or Tier 2 applicant may only be associated with one application and may only

apply at ONE address.

• The same address may not be associated with more than one verified Tier 1 or Tier 2 applicant. If

two applicants produce a letter of intent from a landowner at the same address, then an executed lease agreement will be required before one of the applicants can move forward.

• The individual owner who allowed the applicant to be verified as Tier 1 or Tier 2 applicant must

remain on the application with the requisite Equity Share during the entirety of licensing process; that individual owner may not sell or transfer his or her place in the application.

• The applicant cannot re-locate its application at any point during the licensing process.

Delivery Non-Storefront Retail Delivery Pilot Program

• By the Spring 2019, DCR expects that its application processing capacity will only be large

enough to handle a limited number of delivery applications.

• DCR proposes a delivery pilot program in which it will process 40 Tier 1 or Tier 2

applications and 20 non-social equity applications (to adhere to the 2:1 ratio).

• DCR recommends processing Tier 1 and Tier 2 applications through the lottery or first

come, first served method described above, and nonsocial equity applications in the first come, first served method.

• DCR further recommends that an applicant shall not be eligible to apply in the pilot

program if any of its owners are owners of:

○ Phase 1 applicant with Temporary Approval ○ Phase 2 applicant ○ Has applied or will apply for a storefront retail license in Phase 3.

• If DCR determines that a Phase 3 storefront retailer applicant meets all the requirements for a

license and passes a pre-license inspection, it can only recommend that the Cannabis Regulation Commission issue a license.

• Given the public notice period requirements and the Commission’s expected heavy licensing

workload, an applicant may have to wait several months after DCR makes its recommendation before the Commission decides whether to issue the annual license.

• DCR finds it is important that the Phase 3 retailer applicants, who at this point will be exclusively

Tier 1 and Tier 2 applicants, be given the opportunity to operate during the period of time they are awaiting Commission action on DCR’s licensing recommendation.

Allow DCR to grant Temporary Approval Upon Making a Licensing Recommendation to the Commission to Phase 3 Storefront Retailer Applicants

• The current differing requirements for SEP applicants limit individuals’ options for participating in

the program, cause confusion among applicants, and create application processing inefficiencies for DCR.

• DCR recommends that the qualification requirements, besides Equity Shares, be made uniform

such that an individual qualifies as either a Tier 1 or Tier 2 applicant if the individual:

○ is Low Income and has a California Cannabis Arrest or Conviction; ○ is Low Income and has resided in a Disproportionately Impacted Area for at least 5 years; or ○ has resided in a Disproportionately Impacted Area for at least 10 years

Set Uniform Qualifications for Tier 1 and 2 Applicants

Require Tier 3 Applicants with Temporary Approval to Enter into Social Equity Agreement at Time of Submitting an Annual License Application

• A Tier 3 applicant is required to enter into a Social Equity Agreement with the City to provide

support and assistance to Tier 1 and Tier 2 applicant as a condition of receiving a license.

• However, the SEP does not specify when exactly the Tier 3 applicant must enter into the

agreement and when it must start providing the support and assistance.

• DCR recommends that the City Council amend the SEP to require a Tier 3 applicant with

Temporary Approval to enter into a Social Equity Agreement at the time it submits an annual license application.

Key Takeaways

• Phase 3 will heavily prioritize Social Equity

Applicants

• Anyone can participate in the program by

finding a business partner who qualifies and granting the required company equity to them

• You will need (or go into business with

someone who has) a compliant property to ultimately get a license

• City Council is considering issuing temporary

approvals for Phase 3 to speed up the process

• DCR may use a lottery, first-in-time or merit

based system to determine who gets the first 100 retail storefront licenses

• Under the proposal, a delivery program will

allow for 40 social equity and 20 general delivery licenses

• Phase 3 is estimated to start Spring 2019