California’s permanent cannabis regulations were reportedly finalized on Monday, December 3, although operators may not be privy to the new regulations until January 2019. State officials have decided not to make the rules public until the Office of Administrative Law (OAL) has finished conducting its review.
The news is frustrating, but it also makes it hard to prepare your business for the potential impact of the permanent cannabis regulations. Here’s what we know about the most recent draft of California’s permanent marijuana business regulations – and how you can prepare for 2019.
What are California’s permanent cannabis business regulations?
The permanent business regulations related to the cannabis industry are joint effort of California’s Bureau of Cannabis Control, Department of Food and Agriculture, and Department of Public Health. The regulations cover a variety of issues related to cannabis, including delivery, packaging, and events.
Experts who have studied the proposed regulations warn that these rules will hurt current operators. Here are a few of the key changes that may affect your business.
End to Contract Manufacturing
All licensed companies could be barred from doing business with a commercial cannabis company lacking a license.
Contract manufacturing, commonly known as white labeling or co-packaging, is a way for licensed manufacturers to produce and package products for those businesses that are still unlicensed. We see this partnership commonly with celebrity-endorsed brands or an established cannabis company that has a production facility located in a municipality which does not allow for commercial cannabis. This is simply the best way to do business for many operators who are hamstrung by the varied cannabis allowances from county to county. If this rule ends up as part of the final regulations, it could put many contract manufacturers out of business.
New Delivery Regulations
The proposed rules reduce the amount of cannabis product a single delivery vehicle can transport from $10,000 to $5,000.
The economics of this rule change could have big implications for licensed cannabis operators. Currently, the $10,000 limit allows for drivers to leave for their delivery window with one order for $100 and $9,900 in additional product to fulfill orders as they come in. However, the rule change forces drivers to leave with at least $2,000 in product designated for orders already placed. This leaves just $3,000 available for fulfilling orders while on the go.
Obviously, this severely restricts the sales opportunities for delivery operators and damages the customer experience. Slower service is bad for business, and the higher overhead of making more trips to and from the delivery hub could put some companies in the red.
New Disclosures for Business Owners
If you have a cannabis business license or own a financial stake in a cannabis venture in California, you will be reclassified as a “salesperson” or “consultant” under the proposed California cannabis business regulations. Why is this important?
The key to this rule is the part where any employee who has a say in what the business should sell, manufacture, or cultivate will be considered an owner. More individuals will therefore have to file state disclosure paperwork. Logistically, this becomes a bureaucratic nightmare. What’s even more concerning is this provision could amount to a ban on silent partners, with big implications for those ventures still seeking funding.
How to Prepare for California’s New Regulations
Until January, we won’t know which of these proposed regulatory changes made it into the permanent bill. However, it’s prudent to start preparing your business now. Talk to your silent investors to make sure they’re aware of the changes in disclosures. If you need to find a new investor for your cannabis business, it’s better to start now.
If you run a delivery service, take a look at your operating budget to see if you have space to hire extra vehicles and drivers. You can also prepare your customers by asking for minimum orders or changing up the checkout process in incremental changes. Minimize the disruption to the user experience by making small adjustments to your delivery service ahead of time.
Finally, if you’re working with a contract manufacturer, protect your business by seeking a plan B partner. Lock up relationships with other licensed operators now, as competition is only going to get steep.
For more on the proposed regulations, get in touch with our experts today.
One of the elements of a good business plan is performing market research to determine your target customers. Pricing, marketing, and product selection all depend on who your key consumer groups are – and what they’re interested in purchasing in the adult-use legal cannabis market.
In some ways, consumer data is extremely limited due to the government’s classification of cannabis as a Schedule I drug. Government research that is typical of other industries is simply not performed on the cannabis market. As a result, most data we have about cannabis consumers is limited to gender, residence, and spending amounts. This can be useful in valuing your cannabis business for investors, but is less helpful for cannabis marketers hoping to build a customer persona.
While the demographics vary among cities and districts, some early trends have emerged that can help inform your cannabis business offering. Here’s what you need to know about the key cannabis consumer groups in 2018.
Who is the typical cannabis customer?
In a survey conducted by the Cannabis Consumers Coalition, the majority of respondents were between ages 21 - 35, which is not necessarily surprising. Interestingly, the second biggest group of cannabis consumers was 45 years or older, meaning cannabis consumers are likely to be professional adults. In fact, the study discovered that more than 58% of cannabis consumers are between the ages of 21 and 55. The perception that cannabis consumers are college age, unmotivated stoners is likely misguided. Cannabis customers are more likely to be working professionals, parents, and with some level of disposable income.
Aligned with the shift in age toward older cannabis consumers, the average household income of a cannabis customer has also risen. The Cannabis Consumers Coalition research indicates that cannabis consumption transcends economic class, with customers at all income levels partaking in cannabis consumption on some level. Inform your product pricing with the following data from their survey: the majority of cannabis customers have combined household incomes of $26,000 - $55,000.
What do we know about the gender of cannabis consumers? While movies like Dazed and Confused have widely popularized the impression that most cannabis consumers are male, this survey suggests the gender gap is much more narrow. Companies like Whoopi & Maya have popularized cannabis as an alternative therapy for women. Women hold nearly 30% of executive leadership positions in the cannabis industry – a significantly higher percentage than the nationwide average. When designing your marketing material, take into consideration that women make the majority of household purchasing decisions, and in the cannabis market, they will be a powerful consumer group.
Medical v. Adult-Use Cannabis Users
Though recreational cannabis is only legal in about half of the states, it’s an important trend to track for new cannabis entrepreneurs interested in entering the market. This statistic can help you understand the deeper motivation behind your customer: are they making a purchase because it’s a medical necessity, or for recreation? How frequently can you expect someone to make a repeat purchase? Diving into your customer behavior has implications for inventory management, loyalty programs, and pricing.
Data from the National Institute of Health reveals that the majority of customers partake in cannabis use for recreational reasons. Their national sample showed that among those consumers who lived in states with medical cannabis legislation, 17% used cannabis for medical reasons and 83% used it recreationally. However, those who do use cannabis medically do so with more frequency and regularity than those customers who purchase cannabis for recreational use. A good business practice would be to take medical consumers’ needs into your marketing plan, even if your primary target customer is a recreational user.
California’s Key Cannabis Consumer Groups
California has the potential to become the world’s largest cannabis market, making it a good bellwether for understanding developing consumer trends. Early studies by market research firm BDS Analytics indicates there are three key consumer groups across the state. Primary consumers in California are 39 years old and have used cannabis or cannabinoids in the past six months. A secondary group deemed “acceptors” by the study are 49 years old, and while they haven’t recently used cannabis, they would do so in the future. California’s “rejecter” group is an average of 56-years-old and are not likely to consider cannabis use.
It’s worthwhile to note that while rejecters and acceptors aren’t recent users of cannabis, that doesn’t correlate with disapproval of legal adult-use cannabis. The study showed that tolerance and acceptance of cannabis is becoming more common, and in fact, Californians are becoming more interested in the potential health benefits of cannabis use. This further reinforces the case for continuing to include medical-use customers as part of your business plan and marketing strategy.
For more insight into how to build your cannabis company, get in touch with one of the experts at GreenGrowth CPAs.
Cannabidiol (“CBD”) products have emerged on the market in several states with various claims, including the treatment of specific illnesses, reportedly backed by scientific research. CBD is a non-psychoactive component of both marijuana and hemp. While products containing this substance have been permitted in certain states, marketing CBD oils and related products as treatments for specific conditions has been disallowed by the FDA.
For companies that market CBD related products, having an understanding of the federal and state regulations that are applicable to their businesses is crucial. Here is a brief guide on the current regulations regarding the marketing of CBD related products.
The Federal Food, Drug and Cosmetic Act, also known as the FD&C Act, requires scientific information to demonstrate that a drug is safe. The FDA has made it clear that CBD products cannot be sold as dietary supplements because CBD is “authorized for investigation as a new drug,” a classification that disallows products from being sold as dietary supplements while under clinical investigation.
With clinical trials generally lasting several years followed by the FDA’s 10 month goal for standard new drug approvals, it could be several years until the status of CBD is changed from its current classification as a “new drug.” As a result, the FDA has also prohibited the use of CBD in food.
The FD&C Act defines a dietary ingredient as a vitamin; mineral; herb or other botanical; amino acid; dietary substance for use by man to supplement the diet by increasing the total dietary intake; or a concentrate, metabolite, constituent, extract, or combination of the preceding substances. Unlike drugs, dietary supplements are not intended to treat, diagnose, prevent, or cure diseases.
The FDA also requires all companies that plan to market a dietary supplement that contains a new dietary ingredient, and the new dietary ingredient has not been present in the food supply as an article used for food in a form in which the food has not been chemically altered, to submit to FDA, at least 75 days before the dietary ingredient is introduced or delivered for introduction into interstate commerce, information that is the basis on which the company has concluded that a dietary supplement containing the new dietary ingredient will reasonably be expected to be safe.
In addition, the FDA has some stringent requirements for the labeling of products including:    
●The FD&C Act prohibits the listing of a drug as safe and effective for specific uses on product labeling unless it has been recognized by the FDA as such. Until then such drugs are considered as “new drugs.”
●Products may not be labeled for use or with directions for use for conditions that can not be self-diagnosed and treated by individuals who are not medical practitioners 21 CFR § 201.100(c)(2).
●CBD Companies should not try to circumvent these rules by using scientific publications to prove the validity of a product’s use for the treatment of specific medical ailments as this is also disallowed under 21 CFR 101.93(g)(2)(iv)(C).
●Products should include adequate directions for use under which a layperson can follow to use the product as intended   [21 CFR § 201.5]. However, this regulation is being arbitrarily applied to CBD products given the fact the the manufacturers of the products are not permitted to make claims about CBD as treatments for specific illness.
Labeling for CBD Related Products
In the states where cannabis-derived CBD products have been permitted, including Washington, California, Illinois, Connecticut, and New York, the packaging for all CBD products must list CBD as an active ingredient with the amount of CBD that the product contains.
Given the FDA’s stance on CBD as a new drug, it is a good idea to avoid using the labeling of the packaging to make medical claims about the benefits or denoting specific uses of the product. The FDA has already issued warnings to several CBD companies about the mislabeling for violation of FDA regulations.
In addition, many CBD companies are violating FDA regulations by marketing CBD products as dietary supplements when they have not been awarded that classification by the FDA. As a result, while the sale of CBD products have been permitted in certain states, the regulations set forth by the federal government, namely the FDA still take precedence over state laws. This means that the federal government can go after CBD companies even if the state in which the company is located has decided not to.
Things to Consider When Marketing CBD Products
Given the myriad of federal and state regulations that CBD product manufacturers must comply with, CBD companies should take extreme care when marketing CBD products. Most importantly, the product should make mention of the fact that it has not been approved by the FDA.
Secondly, the products should never be labeled for use in conjunction with specific medical conditions, given CBD’s status as a new drug. CBD companies should also review applicable state laws carefully to determine whether or not the labeling for their products are in compliance.
The FDA has also made it the responsibility of the companies to comply with all of the requirements of federal law and FDA regulations. While the FDA may take steps to notify a company that it is violation of the law, it is the company’s responsibility to review the law in order to determine if its products are in compliance and resolve any violations.
For Online Sellers of CBD Products
Online sellers of CBD products need to take special precautions when selling CBD products online. These sellers need to be aware that:
●Cannabis is still illegal under federal law.
●Even in states where cannabis products are legal, it is not legal to ship the cannabis products from state to state, or to leave the state with such a product.
●For CBD products that are the result of CBD extracted from hemp, the sellers should make it very clear to customers that its products come from imported hemp and not marijuana.
●In all cases, online sellers should avoid making claims about the medical benefits of using CBD products.
While this is not an exhaustive list of the regulations that CBD companies face, these findings highlight the fact that many CBD companies are operating in a legal grey area when it comes to the sale of CBD products online.