Are cannabis startups legal in California?

For medicinal purposes, cannabis has been legal since 1996, but recreational could have its day soon

Note: The CannaVator accelerator, which includes a 10-week online and in-person program, is accepting applications until August 15, 2016 for its Fall 2016 cohort. More details about the program and how to apply here.

Though cannabis remains illegal as far as the U.S. federal government is concerned, laws regulating the drug on state and municipal levels have been rapidly evolving over the past several years.

Dozens of states have legalized cannabis for limited (typically medicinal) use cases. A few states have decriminalized it, and four states (Colorado, Washington, Oregon, and Alaska) have legalized it for recreational use. All told, 40 states have legalized cannabis in some form, according to the 2016 U.S. Cannabis Investment Report by Ackrell Capital. (The latest report only cites 39 states, which was the figure at the time. But Ackrell informs me that, since the report was published, Pennsylvania has legalized medical marijuana.)  

Even the federal government has taken a somewhat less restrictive approach. Though committed to enforcing the Controlled Substances Act (CSA, which makes cannabis illegal in the U.S.), the Department of Justice in August 2013 issued the oft-cited "Cole Memo," effectively admitting that it wouldn't intervene with state laws except in specific cases, for example the selling of drugs to minors, the funneling of revenue to gangs and cartels, or in cases where substances cross into border states with stricter rules.

Given all the complexity in U.S. law governing cannabis, things can be a bit confusing for your average cannabis consumer, not to mention for entrepreneurs hoping to capitalize on the emerging cannabis market.

The purpose of this series is to help demystify the legality of starting and growing a cannabis startup in various U.S. states. My last segment in this series focused on Alaska. This segment is on California.

The law: In 1996, California voters passed Proposition 215 ("Compassionate Use Act"), making it legal for patients and caregivers to possess and cultivate cannabis for medical use if the patient received a recommendation from their physician. In 2003, California Senate Bill 420 was passed to clarify certain details of Prop 215 and to establish a voluntary state ID card system to be run by county health departments. (Example of a "Medical Marijuana Identification Card" is shown in the above photo.) At a high level, California's Department of Public Health regulates cannabis in the state.

Though cannabis for recreational use is still illegal in California, the state successfully passed SB 1449 in 2010, reducing possession of less than an ounce of marijuana to an infraction, punishable by a $100 fine and no arrest. Additionally, Proposition 64 ("Adult Use of Marijuana Act") has been approved for California's ballot this November, giving voters the chance to legalize the possession, cultivation, and sale of cannabis for recreational use.

Buying/selling: Cannabis is still illegal to possess or cultivate for non-medical uses.

And even though medical dispensaries have cropped up by the hundreds across the state, a 2008 memo from the state's attorney general said that, "Although medical marijuana 'dispensaries' have been operating in California for years, dispensaries, as such, are not recognized under the law." (This partially fueled the federal crackdown on cannabis storefronts in California during 2012.) The state only recognizes "cooperatives" and "collectives," which can only acquire cannabis products grown by qualified patients or caregivers. Additionally, these organizations cannot operate for a profit and have strict guidelines for how they are structured and registered.

The only people that can legally purchase (or, as in some cases, freely acquire) medical marijuana are those in possession of a "Medical Marijuana ID card." These qualified patients (or their primary caregivers) can possess up to 8 oz. of dried cannabis and may maintain no more than six mature or 12 immature plants per patient.

Using: In California, the only restrictions on where medical marijuana can be consumed are:

• Where smoking is prohibited by law,
• At or within 1,000 feet of a school, recreation center, or youth center,
• On a school bus, or
• In a moving motor vehicle or boat.

That's fairly notable since, the usage rules are even stricter where recreational marijuana is legal: In Colorado, Washington, Oregon, and Alaska, it is illegal to even consume cannabis in view of the public, largely leaving private households as the only designated place. California's attorney general makes no such restriction for medical marijuana consumption.

Business licenses: N/A

Examples of cannabis companies in California

In spite of existing restrictions on cannabis for recreational purposes, a wide variety of cannabis-based businesses have flourished in California. There are producers of cannabis concentrates, dispensaries, lab-testing companies, on-demand delivery services, software platforms, vaporizer technology manufacturers, and more.

Here are a few examples of these companies:

CW Analytical

• Based: Oakland, CA
• What it is: Cannabis lab-testing company.
• Funding: N/A
• How would your business change if cannabis were made legal nationwide? Robert W. Martin, Ph. D. (co-founder and COO of CW Analytical) wrote: "Perhaps the most significant possible change would be legal accessibility to the banking industry.  The laboratory industry has been surviving without any banking support and the opening of financial structuring would assist all the laboratories in establishing business plans while maintaining the proper standards and practices necessary for a safe industry.  While other changes will most certainly be implemented I believe the banking issues will be the most significant change felt by the industry upon legalization."

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HelloMD

• Based: San Francisco, CA.
• What it is: A healthcare platform and community for medical cannabis consumers.
• Funding: N/A
• How would your business change if cannabis were made legal nationwide? Larry Lisser, SVP of Business Development at HelloMD, wrote: "Either way, this is an evolution we welcome. The medical cannabis market is held back by many things (the law inclusive), but perhaps by nothing as important as the stigmas attached to it. There are millions of Americans who qualify as in-target to benefit from medical cannabis, be it the 100M who suffer from chronic pains, or the millions that have fought the shackles of pain medication addictions."
  
  "In too many cases – we see it every day – patients are either misinformed, (ie. people think you have to get ‘high’ to feel better), or simply too afraid of being judged by society to try it."
  
  "Legalization will drastically reduce the stigma and simplify access to education, leading to tremendous opportunity for HelloMD as it cements its position as the most trusted online destination for new and existing medical patients."

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PyroTree

• Based: Antelope Valley, CA.
• What it is: Provider of software for cannabis business owners to manage patients, finances, employees, inventory, and website.
• Funding: N/A
• How would your business change if cannabis were made legal nationwide? Christopher Dellolio, CEO and co-founder of PyroTree, wrote: "First and foremost it would finally allow for a 'finalized' structure. Up to this point we have only see incremental growth in each state's legalization process, but if cannabis were legalized nationwide then licensing and traceability platforms would be more defined and matured in each state. It would also allow for a company like ours to raise capital and find successful strategic partnerships with bigger companies looking to enter the industry."
  
  "It’s been a problem because the industry is growing fast but in order for a company like ours to scale we need capital to keep up with the demand. There are always potential investors in the space, but even for an ancillary business like ours, the fact that we provide services to dispensaries that don’t know if upcoming laws and legislation will affect their operations makes it more of a struggle to raise capital than your 'typical' software company. However, we have already seen this trend start to change as states have been requiring traceability and we have seen the entrance from big companies such as Microsoft."

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WeedClub

• Based: Headquartered in Washington state but has an office in San Francisco for design, development, marketing, and events.
• What it is: An online community of dispensary managers, cannabis professionals, suppliers, vendors, and consumers. 
• Funding: $250K-500K
• How would your business change if cannabis were made legal nationwide? Evan Horowitz, co-founder and CEO of WeedClub, wrote: "At WeedClub, we view legalization as a procedural thing that will open up clearer guidelines for the industry. This will enable more underground producers and professionals to step out of the shadows and develop long term business plans. Brands become more important because customers will look for consistency from their favorite providers."
  
  "The biggest change for us at WeedClub.com will be related to the ability for us to reduce friction within our community. We built our platform during Prohibition and use sophisticated tactics to protect the contents of our Members' communications. We also make it very difficult for outsiders to connect with people who touch the plant. With legalization, we are making WeedClub more social, more mainstream and are very much looking forward to the normalization of our industry."