Virginia Cannabis Legalization - Part 2
Written by CMG News Contributor, Sebastian Wicker
Breaking Down Virginia's Cannabis Legalization
At the beginning of April, three states legalized cannabis, with Virginia being the first southern state. It has been a rollercoaster getting here and ultimately came down to closed-door deals and a tie-breaking vote made by our Lieutenant Governor, Justin Fairfax. It's a moment worth celebrating, and with it has come personal cultivation starting July 1st. But actual store sales won't start until January 1st, 2024, and everything is subject to reenactment next session. This means that if there aren't enough votes in 2022, it could all go out the window. Will it? It's pretty unlikely. But given the number of loopholes in the current language, Virginians should expect a fair amount of that language to change. November will be telling with elections as all 100 seats in the House of Delegates are up for grabs, plus the Governor's seat, Lieutenant Governor, and Attorney General offices. This breakdown is focused on areas related to licensing and personal cultivation, so we won't touch on expungement.
As of July 1st, Virginians can grow up to four plants at their main residence. This is per household, not per person, and you won't be able to use your summer home, mountain hut, etc., to double-dip. Most states that allow for personal cultivation cap it at six plants per person and twelve per residence, but given Virginia's most conservative history, this is a pretty big win. If you decide to take advantage of this new right, you'll need to make sure of three things: (1) Each plant needs to be tagged with your name, driver's license or id number, and a note that it is being grown for personal use under section 4.1-1101. (2) It has to be out of public view, but growing it outdoors is fine. Just keep it discreet. (3) Keep it away from kids. These requirements aren't very enforceable unless a landlord, cop, or social services comes into your home for a different reason. So, as a rule of thumb, it's always better to be safe than sorry.
Something to keep in mind, seeds are considered cannabis, and moving cannabis across state lines is still illegal as that falls under federal jurisdiction. How is anyone supposed to get seeds, you ask? Well, until dispensaries open in 2024, the General Assembly is just not addressing it. While this may seem strange to the general public, this is a pretty common tactic that states take when legalizing. Legislators don't like acknowledging the greyness of the transitory stage to a legal market, but they'll be more than happy to crack down on the black market when it gets in the way of their taxes.
I have seen an enormous amount of chatter about what people think is allowed when it comes to sharing your harvest. Unfortunately, most of it is based on what people think should be allowed, not what is. To avoid any confusion, here is the exact language from section 4.1-1103:
A. For the purposes of this section, "adult sharing" means transferring marijuana between persons who are 21 years of age or older without remuneration. "Adult sharing" does not include instances in which (i) marijuana is given away contemporaneously with another reciprocal transaction between the same parties; (ii) a gift of marijuana is offered or advertised in conjunction with an offer for the sale of goods or services, or (iii) a gift of marijuana is contingent upon a separate reciprocal transaction for goods or services.
This language means home grower associations and groups looking to pool together their monthly harvest or genetics for trade are not going to fly. Groups offering to grow for you in which they provide or help buy the seeds, also a no-go. Keep something in mind: those who write the laws are not the ones who have to enforce or prosecute them. Legislators who interpret this loosely put their constituents at risk through sheer misinformation. If our next Governor and attorney general are not friendly toward legalization, enforcement over the next two years could get aggressive. If you're unhappy about how the law is written, then I encourage you to pick up the phone, call your state senator and delegate, and tell them (respectfully) exactly how you feel. The answer to fighting the black market is not delaying personal rights for home cultivation; it's to accelerate having legal sales through a regulated market.
Licensing: Social Equity and Corporate Loopholes
When it comes to the social equity provisions related directly to licensing, I'm giving it passing marks. It is some of the strongest languages I've seen across the country. Just keep in mind that there hasn't been a single state with a social equity program that is considered "successful." It's a hard thing to create and even harder to enforce. When it comes to the glaring loophole created for our out-of-state, corporately owned pharmaceutical processors (our medical market), it gets an "F." Let me explain.
Virginia will issue a maximum of the following licenses for our adult-use market:
If you own a license, you will only be allowed to hold equity or interest in that license and no other. There is talk of creating a Microbusiness license in which your sales or production is capped, but in return, you can perform multiple license functions (e.g., cultivation and manufacturing at the same site). Regardless, preference will be given to individuals who qualify as Social Equity Applicant (SEA). In addition, they will have access to government-provided technical/licensing assistance (typically very basic) and access to a fund for low or no-interest loans if they win a license. To qualify as a SEA, you must be someone "who has lived or been domiciled for at least 12 months in the Commonwealth and is either:
an applicant with at least 66 percent ownership by a person or persons who have been convicted of or adjudicated delinquent for any misdemeanor violation of § 18.2-248.1, § 18.2-250.1, or subsection A of § 18.2-265.3 as it relates to marijuana;
an applicant with at least 66 percent ownership by a person or persons who are the parent, child, sibling, or spouse of a person who has been convicted of or adjudicated delinquent for any misdemeanor violation of § 18.2-248.1, § 18.2-250.1, or subsection A of § 18.2-265.3 as it relates to marijuana;
an applicant with at least 66 percent ownership by a person or persons who have resided for at least three of the past five years in a jurisdiction that is determined by the Board after utilizing census tract data made available by the United States Census Bureau to have been disproportionately policed for marijuana crimes;
an applicant with at least 66 percent ownership by a person or persons who have resided for at least three of the last five years in a jurisdiction determined by the Board after utilizing census tract data made available by the United States Census Bureau to be economically distressed; or
an applicant with at least 66 percent ownership by a person or persons who graduated from a historically black college or university located in the Commonwealth;."
Keep in mind, if you are qualifying under a misdemeanor charge, you'll want to go off of the statute of the year in which you were convicted and not the new law moving forward since many of those statutes have now changed.
The glaring loophole I mentioned earlier is that the one-person, one license rule doesn't apply to our existing medical operators (Dharma, Beyond/Hello, gLeaf, and Columbia Care). Strangely enough, it doesn't apply to our hemp operators either. Under the medical program, they were required to be vertically integrated and regionally restricted, meaning they can cultivate, manufacture, deliver, and sell all from the same site. In addition, they were recently authorized to have five additional dispensary sites in their region. Under the recently passed legalization bill, they will also be allowed to apply to participate in the adult-use market and have any combination of licenses. All they have to do is pay one million dollars and submit a "diversity, equity, and inclusion plan." Given that most social equity programs across the country have failed, this doesn't amount to much. Especially when you consider that a multi-state, out-of-state group owns the majority stake for each operator, they may have Virginia "owners and operators" with a minority stake to check the boxes, but they fall insultingly short of the new standard set out by our social equity provisions. Make no mistake, a one-million-dollar fee for them is a drop in the ocean for the amount of capital they have access to and the profit they will make in the first year alone. (e.g., Jushi/Beyond-Hello and Columbia Care have $94M has $61M cash on hand, respectively, at the end of 2020.)
To make matters worse, there is now discussion about allowing these medical operators to start adult-use sales before the rest of the licenses are issued and operational. The prevailing argument is that the state needs someone to help meet the initial supply until the entire market is up and going. What this actually does is create a time-locked monopoly with no competition, allowing them to generate enormous amounts of revenue that should be going to social equity license holders. The best example of this issue is the Illinois market. Medical operators have been allowed to participate in adult-use sales while the 75 retail licenses set aside for social equity applicants have been stalled for over a year. Not only that, but those applicants have also had to sit and pay for unused real estate the entire time. At least in Virginia, you don't have to preselect real estate to apply for a license.
License Types: Pros and Cons
If you're thinking about going after a license, you'll want to take some of the following into account. Retailers/dispensaries are limited to 1,500 square feet. That's pretty small when you consider how much space storage, security, offices, bathrooms, and a break room takes. Retailers are not allowed to have vending machines, drive-throughs, curbside pickup, internet-based sales, delivery, and no more than one ounce per transaction. You'll also have to record the name and address of every person who purchases from you. On the plus side, in addition to selling flowers, concentrates, edibles, etc., you'll be allowed to sell seeds, clones, and cuttings. Many states don't allow for that, and it can be a pretty big market, but when you consider the fact that the black market will have a two-year lead time, it's a bit of a moot point.
For manufacturing licenses, you'll be allowed to make just about anything—edibles, infusions, tinctures, beverages, etc. Unfortunately, there is no room to combine your manufacturing license with an existing business. Meaning if you hold a manufacturing license, you can only manufacture cannabis products to be sold at dispensaries. Additionally, edibles (including beverages) are capped at 5 mg per serving and 50 mg per package. It's best to think of this in terms of a chocolate bar. Each square would be considered a serving and must have some mark to identify it as such.
Cultivation licenses are a bit vague right now since the legislation didn't dictate canopy or production maximums, so we'll have to wait on the draft regulations from the Virginia Cannabis Control Authority. What we do know is that both indoor and outdoor cultivation is allowed; this includes greenhouses. If the JLARC report from before legalization is any indicator, then the maximum canopy size could be 30,000 square feet. This is based on Washington's model, but most states these days put the cap at 100,000 square feet. Interestingly enough is that the current language allows for cultivators to sell seeds and immature plants/clones directly to consumers, but not flowers. I don't expect this direct-to-customer model to last since it adds a risk factor for product diversion, but you'll still be able to get it at a dispensary.
Wholesaler licenses are a bit of an oddball since their original function has been bypassed. Wholesaler licenses were capped at 25 and originally intended to be the only operators allowed to move products between license holders. It was an attempt at creating a privatized version of the Alcoholic Beverage Control Authority (ABC) and, as you can imagine, did not sit well with most people. The final bill language allows for any license holder to move products between one another, but they kept the wholesaler license in the bill. Under the new law, they simply operate as distributors and transporters, which could be beneficial for cash-strapped operators who don't want to spend money on maintaining transport vehicles.
Testing licenses are exactly as they sound. They test the product before it hits the market. Most people don't go after testing licenses since they require a fair amount of technical knowledge, certifications, and expensive equipment, but the revenue stream is stable compared to other license types. In states that allow for license holders to own more than one license, testing licenses are the exception to prevent conflict of interest, but this doesn't come into play in Virginia since you can only own one at a time.
Until the draft regulations by the CCA become available, there isn't too much to be added that hasn't already been discussed. Based on my experiences winning licenses in other states, the expectations for how you describe your business will be the same as other states; so you can expect at minimum to prepare the following documents:
Product Safety Plan
Odor Control and/or Air Quality Control Plan
Packaging and Labeling Plan (Cultivation and Manufacturing)
Pest Management Plan (Cultivation)
Employee Benefits Plan
Community Impact and/or Diversity Impact Plan
The application will be broken up into exhibit sections, which may involve a combination of the above documents. Most states have moved toward setting page counts to lower their review burden, and this can range from 5 pages to 100 pages per section (including graphics and datasheets). Each exhibit will be worth a set number of points, and how many points you score will depend on how accurately you answer the application questions and speak to your knowledge of the regulations. Missing one point can make or break an application, so do your homework and be thorough. Once applications have been scored, those who receive enough points will go into a lottery. From there, licenses will be issued by the license type they have applied for.
Because of how the language has been written, I also expect there to be a geographical component (i.e., if you accept a license, it has to be located in the region you designated). If you don't win the lottery, you won't be considered for another region's lottery. This expectation is based on how Illinois approached its licensing, and Virginia has relied heavily on Illinois's regulatory authorities to provide insight and guidance on shaping our own laws. It is not a bad model to go off of once you adjust for a few mistakes.
As a final note for preparing an application: every point counts. I mean it. Don't leave any point to chance or expect others to be unable to fill a requirement as well. In most competitive licensing scenarios, it's a perfect score or bust. Virginia may be less rigid on this than other states because of the final lottery system, but if you're going to spend time and money going after a license, you need to go in with a perfect-score mentality.
There are three things to consider when choosing your host community. First, towns can ban retailers, but they can't ban other license types. In order to ban retailers, they need to first hold a referendum. If you think your town is going to push for this referendum, best to get ahead of the curve and start talking to your town administrator/council/mayor/etc. Now.
Second, how receptive your town going to be your business be located there? If the answer is not receptive, you need to start thinking about how to make your business as attractive as possible for the community. How are you going to positively impact that community in a way that makes them say, "you know what, if you do that, then I can't really complain." A big selling point is local hires; how many people (as a percentage) do you plan to hire from the immediate area? Additionally, take a look at your local non-profits and public amenities that could benefit from direct financial support. As the saying goes, put your money where your mouth is.
Lastly, how are you going to mitigate risks or side effects? For cultivators, this is odor control and waste disposal. Be considerate of your environment and the fact that not everyone wants to smell a harvest in full bloom for days on end. For manufacturers, it's hazardous waste disposal and fire safety. This really only applies when you are working with hydrocarbon manufacturing (such as butane or propane), but dumping biowaste down a grease trap is also a big no. For retailers, it's both security and odor. Retailers like those prime real estate locations in the heart of traffic, so having an odor control problem is going to get you into trouble faster than a cultivator out in the country. Another big concern for communities is ample parking and exterior security. Per license restrictions, you can't have people loitering around your store, so how will you safely enforce that?
If you haven't gathered it by now, winning a license in a competitive market is hard. Statistically, the odds are against you from the beginning. But I want to assure you, it is not impossible. Read the legislation, read the regulations (when they become available), and plan in advance. When it comes to the application itself, leave no stone unturned and follow the instructions. If you have access to professional help, take it. Otherwise, it will come down to concise writing and due diligence. For those who plan to undertake this challenge, I wish you the best of luck.
Sebastian is a Regulatory Compliance Specialist and Technical Writer. He is the Founder and CEO of LTF Consulting, a company that provides project management, licensing, and compliance services to the legalizing cannabis industry. If you would like to contact him directly, you can reach him at email@example.com.