Drug Policy Alliance Sunset Review Report Recommendations

Date: July 12, 2018 (Revised from July 2)

Re: Recommendations for the Colorado Retail Marijuana Code and Medical Marijuana
Code Sunset Review Report
To: Brian Tobias, Director, Colorado of Policy, Research & Regulatory Reform and
Sunset Advisory Committee Members

The following organizations endorse the recommendations below:

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Industry Access Recommendations for the Colorado Retail Marijuana
Code and Medical Marijuana Code Sunset Review Report

Background
In 2010, the Colorado Legislature adopted first-in-the-nation regulations for the commercial
cultivation, production, and distribution of (medical) cannabis products. The dual license scheme
carried license suitability requirements and inherent capital costs due to the complexity and
dynamism of the regulatory scheme, including required vertical integration (repealed for retail).
The result of the passage of HB10-1284 was the reduction of the at-the-time medical cannabis
industry by approximately 40% due to consolidation required by vertical integration and previous
business owners becoming ineligible under the new suitability requirements.

The rationale for a tightly controlled initial marketplace was a balance favoring a limited
marketplace for a limited consumer (patient) base. This rationale superseded general regulatory
principles in the state, specifically establishing the least restrictive form of regulation consistent
with the public interest, whether the agency stimulates or restricts competition and whether the
disqualifications serve public safety or commercial or consumer protection interests.

The premise of these recommendations is that the current code does not serve public safety as
there is a rationale disconnect in disqualifications, nor does it serve commercial interests by
creating an industry with extremely limited profitability and incentivized consolidation, which is a
disservice to consumer protection. This is evidenced by an industry that while fairly
homogenous in background ownership and capital position remains financially challenging even
for those who can participate,

After the passage of Amendment 64 commercial viability became a more important

consideration, however, tight controls were still favored over equity. The result in the estimation
and practical experience of the organizations referenced above is that the current code presents
regulatory, equity, and capital challenges. These challenges, while protective of public safety
beyond demonstrable necessity, frustrate the viability of existing industry participants. At the
same time the code naturally obstructs the communities most negatively impacted by prohibition
from benefiting either directly or indirectly from the profits of our regulatory system.

The recommendations in this document consider the criteria for the sunset reviews and in that
context offer policies that will expand opportunity generally via regulatory relief consistent with
public safety. We also offer a reconsideration of policy that has a disparate impact on
businesses, with a focus on specific opportunities to increase diversity in the industry, building
on the experience of existing licensees and policies adopted in other states that have legalized
cannabis.

1. Demographic data of employees/licensees

While ensuring the privacy of licensees, the Department should maintain demographic data of
active licensees, across the myriad license classes, as well as improve collection data to

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provide demographic information on license denials. This information should be publicly
available.

2. Repeal 5/10 rule/general expungement

Colorado’s medical marijuana code had a permanent ban on any licensee with a felony drug
conviction. This provision was amended in the retail code to allow a person with a discharged
felony to apply for a license after 10 years, beginning in 2018, although any other violent or
financial crime is eligible 5 years after disposition. The legislature has passed a bill to streamline
the sealing of records for marijuana misdemeanors, and a consideration of similar legislation for
felonies would increase opportunity in the industry significantly. A more efficient way of dealing
with this issue is to amend the current law to treat all offenses the same with a 5 year review.

California’s Proposition 64, for example, has self-enacted sentencing reductions. This has not
only removed collateral consequences that would have proved a barrier to entering the industry,
the provision also had the effect of releasing current prisoners. As it is demonstrated that it is
lower income and communities of color who are most likely to be charged with a marijuana
offense and those same communities are often least likely to have the legal resources to
address the charge, the current policy has a clear disparate impact on those communities
without a true rationale in public safety. For example, in an industry that is heavily reliant on
cash transactions and non-traditional sources of capital, a conviction for embezzlement or
money laundering would be more predicate threats to public safety as a non-badged Chief
Financial Officer of a management company than a vetted licensed cultivator whose felony was
for distribution.

While removing the “5/10” rule simply creates parity in the ability to apply for licensure, it may
prove to remove the single most disparate non-capital regulation. Although not germane to a
sunset bill, the legislature should also consider further expungement and record sealing
legislation to reduce collateral consequences and the attending recidivism thus creating greater
opportunity in all industries.

3. Remove the requirement for vertical integration

A single commercial cannabis code would address capital costs, which remain the fundamental
access concern. However, if parallel codes remain, removing the requirement of vertical
integration across all license classes can allow for small, specialty companies to enter the
market at an appropriate scale.

4. Establish a Cannabis Commission

After the passage of Amendment 64, the Governor established a task-force to make
recommendations to the General Assembly for implementation. The state maintains several
standing boards and commissions to give policy guidance to the executive and legislative
branches. We recommend a temporary appointed commission that would: on an ongoing basis
during its charter analyze the code for areas of excess regulation; assess any disparity in
enforcement practices; discover opportunities to increase diversity and to award grants to
licensees for community engagement projects (see Recommendation 7). The commission will
serve to audit the efficacy and equity of the regulatory system.

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5. Analysis of violations for efficacy/necessity of regulation
The objective of regulation is consumer and public safety. A Cannabis Commission should
analyze and make recommendations to the General Assembly as to the necessity of and equity
of enforcement of distinct aspects of the code. Thorough and qualitative analysis beyond merely
the frequency of a violation is critical to ensuring a regulatory system that remains efficient and
credible. For example, licensees have been cited for an owner being on the licensed premises
without his or her employee badge. While the requirement is clear, why an owner, who has a
vested interest in the security and compliance is a threat to public or consumer safety without a
card is less clear. Like law, unnecessary regulations serve as an opportunity for a capricious or
deliberately discriminatory enforcement. This is particularly sensitive in the instance of drug
policy, where disparate enforcement is a historical problem. At best, the complexity of the code
places a smaller operator with fewer resources at a much greater risk of ongoing costs for non-
safety violations as a result of human error. The recent annual report from the Department of
Revenue shows a slightly higher rate of violations among medical licensees vs. retail. Analysis
into the disparity may result in reforms of both to remove the disparity.

6. Establish a conduit program for local community/non-profit engagement (MCTF)

We recommend the Cannabis Commission also be charged with allocating marijuana tax cash
fund dollars to assist the industry in partnering with the communities they serve to promote
meaningful community development. While there is no legal barrier for the industry to engage in
philanthropy and the industry is active, there remains concern in various communities in the
state that neither industry philanthropic efforts nor state disposition of tax revenue directly
benefit the communities that are home to these businesses, or that the projects funded are not
consistent with actual community need. We recommend that on an annual basis there be an
opportunity for licensees, partnered with qualified community organizations and non-profits to
submit competitive bids to fund community projects. These projects could use tax cash fund
dollars as the sole source or bridge funding, but the important thing is that these projects be
developed for and by the community in which they will be implemented. Creating this bridge
between the state, licensees, and communities should be awarded on a competitive basis in a
manner similar to the medical marijuana research awards funded by patient fees.

7. Incubator License
A comprehensive review to remove extraneous regulation will yield significant costs savings for
the industry and translate to increased economic activity generally. Compliance is a primary
cost-driver in each sector of the industry as compared to practices of similar scale in other
industries. However, it is certain that before such an analysis is complete, and likely after its
recommendations are implemented, that the cannabis industry will remain capital-intensive.
Access to traditional capital is an issue the legislature cannot resolve in all instances. Therefore
we recommend the establishment of an incubator license class. An incubator license provides
smaller new operators the opportunity to enter the market when original capital costs or lack of
scale would otherwise make it impossible.

An incubator license is most appropriate for the Cultivation and Manufacturing license classes.
The operator of the incubator would create a licensed premises with sub-units to house micro-

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licensees and, having absorbed the capital construction costs, could provide a low capital entry
point for the micro-licensees. The program would have clearly defined severed-liability to ensure
the ability of all participants to benefit from scale and common resources where appropriate to
allow their business to grow, while ensuring all participants are held to compliance standards
and are isolated from compliance failures of peers.

The incubator program should be flexible to allow incentives for incubators to participate (to
offset amortizing the capital costs with the micro-licensees), protect the intellectual property of
the micro-licensee, and provide a clear off-ramp when a micro-licensee has achieved sufficient
revenue to become an independent licensee.

8. Micro-license
Several states have created opportunities for marginalized communities through a micro-license
program. States that have followed Colorado in legalizing have addressed the criminal
background component proactively, therefore micro-licenses do not carry exemptions to
background check criteria but rather, in exchange for reductions in license fee and priority in
application processing, impose a production limitation. We recommend the establishment of a
micro-license class. This class of license could be operated in an incubator facility or
independently. A micro-license should have the ability to convert to full licensure on an annual
basis. If license suitability requirements are not addressed in other areas of statute, this license
class should provide the department with the ability to have discretion on criteria based on
evidence of rehabilitation. Additionally, incentives should be considered for store licensees to
carry micro-license products.

9. Analyze license fees- create different structures for “less-plant touching” or “multi-
party verification” example “distributor” license classes
State licensing policy considers that licensee fees should be “cost-recovery”. A general analysis
of license fees is warranted, however, a specific focus should be on whether certain license
classes, due to their reduced access to plants or inherent multi-party verification (i.e. a
distributor would have the accuracy of the products verified by both the vendor and end retailer)
should have significantly reduced – or in some cases – eliminated fees and suitability
requirements.

10. DOC Re-entry training badge?

Qualification and vetting of persons who work in a licensed facility extends far beyond persons
“touching the plant” and even beyond persons employed directly by a licensee. However, over
time the legislature has begun contemplating “who is actually a threat to public safety.” For
example, the prohibition on out-of-state ownership has been removed. Legislation has also
been adopted to allow a non-resident to have a temporary employee badge to participate in
training. Following the rationale that a person engaged in training is inherently supervised and
therefore a lower threshold may be appropriate, we recommend that if employee badging is
retained as a universal practice, that a class of badge be established that waives the 5 year
post-disposition requirement for persons participating in a qualified Department of Corrections
re-entry training program. A cannabis company, spanning agriculture, retail, and manufacturing

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requires skills inmates receive or may have possessed prior to incarceration and the skills
required in the industry are applicable to myriad industries. For industry participants who wish to
create such programs, they may be a powerful anti-recidivism tool while providing the cannabis
and other industries with skilled labor.

11. Remove or limit employee badge requirement

There are approximately 40,000 badged employees currently. This does not necessarily
indicate active employment and the Department has indicated significant turnover. Additionally
for efficiency in administrative staff, some licensees have a commonly owned management
company, comprised of non-badged staffed doing non-plant touching and non METRC functions
for multiple facilities that a single facility company may handle onsite. This creates a competitive
disadvantage for the smaller operator, whose employee pool is limited to persons having an
occupational badge, while larger operators can benefit from the entirety of the workforce,
including task-qualified individuals from other industries who either lack the desire or
background to get an employee badge. Therefore we recommend removing the badge
requirement for all employees and limiting badges to only those performing plant or METRC
touching functions or persons who would be on the “licensed” premises unattended as a regular
function of their employment. Alternatively, new classes of employee badge could be
established with certain time-based, criminal, or financial background criteria. Precedent has
been established, again in the instance of “training” badges, as well as in recently passed
legislation authorizing a court to waive time restrictions for residency in appointing a receiver for
a marijuana business.

12. Rational basis for parallel municipal regulation (time, place, manner)
Current statute provides local governments the ability to license marijuana businesses and
impose time, place, and manner restrictions that exceed the state restrictions. Local
governments have created local requirements that exceed and in some instances conflict with
state law. Additionally jurisdictions have imposed additional capital requirements (Aurora) or
operational requirements (Boulder’s carbon offset fee) that while testing the limits of “manner”
also serve to exclude entities who cannot manage the, in some instances significant, pre-
application capital requirements or additional operating costs. These provisions limit access to
economic opportunity but do not serve a clear public interest, as they place additional barriers to
entry in various communities, creating disparities between licensees.