The wait is over – Maryland is finally rolling out its medical cannabis program. On December 9, 2016, the Maryland Medical Cannabis Commission released its final round of license pre-approvals for dispensary applicants – only 11 months past the date the Commission was originally projected to announce which entities will be the first allowed to dispense medical cannabis in Maryland. The Commission received over 800 dispensary applications, issuing only 102 pre-approvals. Now, these fortunate few deemed ‘pre-approved’ must begin the more difficult second stage of what has become a licensing marathon. Each successful applicant has 365 days, until December 2017, to ensure its dispensary is in full compliance with the myriad Maryland regulations. And if past is prologue, the Maryland rollout will continue to have some unexpected hurdles in the second stage of the licensing process. The Commission’s apparent dysfunction, along with the inherent riskiness of the cannabis industry, should prompt pre-approval recipients to be cautious not to cut corners in compliance in an effort to gain first-to-market advantage.
This article will focus on dispensary applicants and the the next steps required for final licensure. It will also examine some of the hurdles that may arise for applicants as they move toward going concern.
Get Ready for the Rush
Dispensary applicants had no time to waste once their application was greenlit by the Commission. These applicants were required to pay a $4,000 Stage 2 fee, as well as the steep $40,000 annual licensing fee by December 30, 2016, just 21 days after receiving notice of pre-approval. Before the ink even dries on these assessment checks, applicants must begin to navigate the gauntlet of requirements in Stage 2 of the licensing process, which include obtaining criminal background checks and audited financial statements, gaining zoning approval from the local municipality, drafting standard operating procedures, registering and training all dispensary agents and establishing relationships with growers and processors.
Dispensary applicants should consider hiring employees and assembling investors as early as possible, because each will be investigated by the Commission. Each applicant should ensure that everyone on its team has submitted the appropriate information that will allow the Commission to access their criminal history records. This includes two sets of fingerprints and the fee required to release each team member’s criminal record to the Commission. The Commission may deny final licensure if any team member is found to have a criminal record or delinquent tax obligations in any jurisdiction. The Commission will begin conducting background checks in early 2017, and is likely to be flooded with requests. Therefore, dispensary applicants should begin to gather and submit this information to the Commission as soon as possible.
Applicants must provide an audited financial statement for each investor with an ownership interest of 5% or more. These statements must be prepared by a CPA who is either licensed or has practice privileges in Maryland. The audit process is lengthy and, depending on the number of investors, it can be even more prolonged. Like criminal background checks, completing these financial audits should be among each applicant’s first priorities in Stage 2.
Locating and securing property that is properly zoned for a cannabis entity will be one of the more challenging steps. A majority of Marylanders have welcomed access to medical cannabis. However, some municipal governments are more hesitant to rollout the red carpet for cannabis entities, enacting restrictive zoning regulations that may relegate cannabis entities to a far flung corner of the county. Because municipal zoning can be a sensitive subject, applicants should be familiar with local zoning regulations that apply to their dispensary premises. Dispensary applicants will also need to be aware of all local fire and building codes, and should have proper permitting in place for any build-outs or additions to their property, whether leased or owned.
A critical element of Stage 2 compliance is drafting thorough Standard Operating Procedures (SOP). These procedures should be designed to provide guidance to dispensary employees about compliance with the Maryland regulations and industry best practices. Each SOP must include procedures for inventory management, storage, packaging and methods for dispensing and handling medical cannabis products. An applicant’s inventory management procedures should include a control system that tracks the dispensary’s inventory of medical cannabis from ‘seed-to-sale’. Applicants should be prepared to present the SOP to the Commission upon inspection prior to final licensure.
Dispensary applicants must register and train all prospective employees prior to licensure. These employees, known as dispensary agents, must be 21 years or older and cannot have a prior felony drug conviction. After each agent is registered, he or she must complete a comprehensive training program, which includes a review of the SOP and provides information about the following: (1) federal and state cannabis laws; (2) security and safety procedures for the dispensary premises; (3) the most recent pharmacological data on medical cannabis; (4) administrations and ingestion methods for medical cannabis; and (5) the potential therapeutic and adverse effects associated with medical cannabis. An applicant should plan to conduct trainings on this information, as well as any amendments to its SOP, on an annual basis, and document attendance for inspection by the Commission.
A shopkeeper cannot turn a profit without a product. A dispensary applicant must obtain its cannabis product only from licensed medical cannabis growers and processors. Due to this limited supply network, it will be important for each dispensary applicant to establish relationships with multiple growers and processors. These entities were issued pre-approvals in August 2016, and have 365 days from the date of pre-approval to become fully compliant and operational. So take caution not to put all your seeds in one pot, as growers and processors may not be issued a final license until as late as August 2017; and are not permitted to distribute medical cannabis to dispensaries until they are licensed.
Applicants must also develop a detailed security plan and ensure their security system complies with regulations. Applicants who are not familiar with preparing and implementing a security plan should work with a private security firm or consultant to guide them through this process. Dispensary security is subject to close scrutiny by the Commission and should not be addressed at the eleventh hour. Applicants should also be mindful of security, especially video surveillance requirements, when selecting a location.
Supply and demand considerations in an emerging market.
As discussed above, a dispensary is dependent on the licensed growers and processors that supply it with medical cannabis products. Dispensaries are also directly dependant on the demand from registered patients. The Commission will not release the registration form for patients and caregivers, which allows them to legally purchase medical cannabis, until later this year. Until this form is released, the patient demand will be unknown to dispensary applicants. Doctors have been slow to register as medical cannabis certifying physicians, though the number of certifying physicians is expected to increase as patient registration begins.
Despite the red tape and slow rollout, the Maryland medical cannabis market is very attractive to investors. These investors, largely comprised of unsuccessful dispensary applicants, are now seeking equity opportunities with the remaining successful applicants. Many of these failed applicants are ready and waiting to invest the funds previously earmarked for the Stage 2 fees and operational expenses. As the cannabis entrepreneurial spirit becomes more infectious, applicants who successfully navigate the second stage of licensing are sure to reap the benefits of their highly coveted licenses.
