Ep 286 – Cannabis Trends To Watch in California Regulation from a Sacramento Insider

khurshid khoja greenbridge

California is arguably the cannabis industry’s most impactful market with more and more developments taking place each month.

Here to tell us about it is Khurshid Khoja, a business attorney constantly interfacing with Sacramento regulators and politicians to help his clients see what’s just around the corner. 

Learn more at http://www.greenbridgelaw.com 

Key Takeaways:

  • Khurshid’s background in business law and how he came to start Greenbridge Corporate Counsel
  • How the California cannabis market is coping with high taxes and restrictive regulations 
  • The biggest obstacles the cannabis industry faced in 2019 and those to come in 2020
  • The Interstate Commerce Clause and how it’s affecting the cannabis market
  • How Oregon passed SB 582 and the doors it opens for licensed businesses in-state 
  • Exciting new developments Khurshid foresees taking place in 2020 as well as areas to practice caution
  • Whether or not Sacramento politicians can remedy the budget deficit and debt situation in California
  • Khurshid’s advice to those looking to enter the California cannabis market
Click Here to Read Full Transcript

Matthew: Hi, I'm Matthew Kind. Every Monday, look for a fresh new episode where I'll take you behind the scenes and interview the insiders that are shaping the rapidly evolving cannabis industry. Learn more at cannaninsider.com. That's cannainsider.com. Now, here's your program.

California is arguably the cannabis industry's most important and impactful market both in terms of cultural impact and innovation. Today's guest is an attorney interfacing constantly with Sacramento regulators and politicians to help his clients to see what is just around the corner. I am pleased to welcome back Khurshid Khoja back to the show. Khurshid, welcome back to CannaInsider.

Khurshid: Thanks for having me back, Matt.

Matthew: Give us a sense of geography. Where are you in the world right now?

Khurshid: Well, I'm often on the road, but today I'm pleased to say that I'm in my home office in what's usually sunny Sacramento and we're getting some much needed rain today in the Capitol.

Matthew: Okay. It's been several years since you've been on the show to help new listeners. Can you share a bit about your firm and your practice areas and what you do day-to-day?

Khurshid: Sure. So I'm the founder of Greenbridge Corporate Counsel. We're a business law firm representing license plant touching and ancillary businesses in multiple jurisdictions, including California, Oregon, Washington, Hawaii, and Canada. We serve businesses from startup phase all the way through advanced operations. So we represent some multi-state operators and publicly listed companies with international operations as well. You know, I think when we last spoke, we were still fairly small. You know, we've grown from 3 attorneys to a team of 21 lawyers now, and we serve clients on a broad range of business law matters, including licensing, regulatory, corporate finance, mergers and acquisitions, intellectual property, tax, and real estate matters.

Matthew: Okay. And I think, what, Southwest has a direct flight from Sacramento to Hawaii now. Is that right?

Khurshid: It does. I have not been able to take advantage of that boondoggle yet. As one of my colleagues workshops in Hawaii work, but, you know, I'm looking for an excuse.

Matthew: Yeah. Geez. You're slacking in your obligations here, Khurshid. Okay. So add a 10,000-foot level, where is the California cannabis market right now?

Khurshid: Sure. So I would say that we're still experiencing a lot of growing pains. The market is still burdened with regulations that are hard for some operators to comply with, even with the best of intentions. You know, not everything is spelled out in the regulatory regime yet. It's still new. There are still unanswered questions and the regulators themselves are overworked, understaffed, and unable to respond in a timely manner to all of the ambiguity that continues to remain out there. And, you know, that adds up to significant costs for the operators who are in the market now and hampers a lot of forward progress.

So, you know, there are dozens and dozens of different ownership transitions that have been filed with the various regulators to, you know, essentially authorize mergers, different mergers, acquisitions of companies where new owners are being added to the roster of legacy owners and trying to consolidate operations and grow market share. And that's all very difficult to do when the regulators cannot respond in a timely manner to a lot of the filings that have to be made in connection with those types of transactions.

So there's that, which seems to be kind of a drag on the market and its development. There's also the high tax burden. Taxes are slated to actually go up at the beginning of 2020. And so there's a lot of consternation justly so around that issue. Given how difficult and costly it is to operate in this market, the tax burden isn't helping things. And we're getting perhaps further away from the goal of ending the illicit market.

Matthew: Yeah. The illicit market's kind of interesting there because there's such a huge amount of cannabis that's coming through, I guess, from the Emerald Triangle, is that Mendocino, Humboldt, and Trinity counties in Northern California. There's just so much coming out of there and probably other places in California too. It's like if you're somebody that's like, "Hey, I can buy this from, you know, a local farmer and it's half the cost and, you know, come by my house," or, you know, whatever, it's like, "Why wouldn't I do that?" It's like, I know where this guy's farm is. It's, you know, sun-grown a mile away from me. Do I want to like go through all this headache and hassle and pay twice as much? And that's a legitimate issue because the regulations and the taxes and everything, just, there's no way to compete on price, the overhead. So, I mean, is that message resonating, do you think, though, in Sacramento?

Khurshid: I think so. And I think, you know, what actually also helps is the current public health scare over vapes, right? I mean, a lot of problems there are emanating squarely from the illicit and unregulated markets, right? Illicit markets for cannabis and unregulated markets for things like e-nicotine, nicotine e-juice rather, and even CBD vapes as well. So, you know, I think that that is helping legislators and decision makers to understand the value of the regulated market and why we need to, you know, we need to be deadly serious about stamping out the illicit market not only to assure the success of our licensed operators who are following the rules and paying their taxes, but also, you know, to protect the public health.

Matthew: Yeah. For sure. Yeah. The vaping crisis is kind of a tough one because it's like, if all these regulations come in, that kind of makes it so that only big players can afford and raise capital to, you know, be in the business, in the vaping business. And he would say, ''Well, I want those things. I want, you know, all those things.'' But perhaps, you know, couldn't we just have more stringent lab testing and that would allow for smaller players, so it doesn't all get consolidated? I think about these things a lot because I know people in the industry and in California and they're like, you know, "Is this all gonna go to a few huge players that can afford, you know, 10 or $20 million to, you know, check all these boxes?" I mean, what do you think about that?

Khurshid: I think that's a valid concern. You know, I think the more regulations you layer on, the more expensive you make compliance, the harder it is for less well-capitalized players to continue to compete. And especially when they have to still deal with 280E and with the lack of banking access, you know, it's very hard to raise capital in the cannabis industry. And, you know, I'm concerned for small mom and pop operators, minority-owned businesses who don't have access to those avenues for private equity. You know, are they gonna be able to do a subsist and survive? I'm not so sure.

So, you know, yes, it's burdensome, but at the same time, you know, we do have to balance the fact that there are legitimate public health concerns that we need to address including lab testing as you mentioned. So, you know, a while I think, yes, it's always burdened some and always hurts the smaller operators to have a heavy regulatory burden, sometimes it's also necessary, right? So we have to strike the right balance there.

Matthew: Yeah. Khurshid, what questions do you get asked the most from your clients and potential clients and just people in the ecosystem?

Khurshid: So, you know, we get a lot of questions currently about hemp CBD. There are a lot of folks in that market and there's still a lot of ambiguity as to what folks can do, what ingredients they can use, not withstanding repeated FDA warning letters saying, "Hey," drawing some at least some bright line rules, right, about making claims and using certain substances such as CBD isolate in foods. There are some bright line rules, but there's still a lot of ambiguity, and the fact of the matter is there's not enough enforcement there. So that leads to a lot of questions from clients asking what they can and can't do and what their potential risk is for enforcement actions.

Matthew: Okay. And, you know, looking back at 2019 and then looking forward to 2020, what do you kind of see is kind of the biggest issues both in 2019 and then the biggest to tackle in 2020?

Khurshid: So we talked about, you know, taxes, right? So, I'll guess I'll start at the state level. We talked about taxes and how that has been, you know, it's been really challenging for licensed operators in California. And there have been, you know, for the last two years, efforts in the legislature to try to roll back some of those taxes, reduce some of that tax burden to give the industry a fighting chance to get up on its feet. And, you know, especially the smaller operators and minority-owned businesses, giving them an opportunity to succeed before they have this huge tax burden.

Now, you know, those efforts haven't been successful in previous years, but given that the taxes are slated to increase at the beginning of the year, there's increased attention to that. And again, legislators who are urging action to reduce that tax burden and to help these licensed businesses, you know, get up on their feet and be in a position to continue operating.

So I think that's one huge issue at the state level for licensees under MAUCRSA. I think there's also the legislation that was introduced last year to essentially legalize the use of hemp CBD as a food additive in California and allowing regulated businesses to incorporate hemp CBD into their production and supply as well. And so that, unfortunately, did not pass last year, but it's going to be reintroduced this year in the legislature. And so I think a lot of folks are watching keenly the development of that bill, AB-228, and hopeful that it will pass this year.

So that being said, you know, the FDA just came out with a new round of warning letters on hemp CBD and kind of up the ante a bit as well with this last round of letters that are issued in the past week. And so that could complicate things. One of the things that the FDA said is, ''Hey, you know, hemp CBD is not generally recognized as safe in terms of being a food additive.'' They hadn't said that previously. And now they're saying that explicitly. They're also saying that, ''Hey, we believe that there are side effects that are from hemp CBD that are not being accounted for and could lead to things like liver injury.'' And so that's also new. And that, you know, is both a signal as to where the FDA is potentially going on hemp CBD regulation as well as an obstacle potentially to passing this legislation in California. So I think, you know, those are issues that folks who are watching keenly, in addition to...you can talk about federal as well, unless you want me to hold off on that.

Matthew: Sure, no, please.

Khurshid: Sure. So I think, you know, being on the board of the National Cannabis Industry Association and serving as their co-chair of the board, I'm really happy about the passage of the Safe Banking Act in the House of Representatives. That's something that NCIA has been working actively for for several years now. And putting an effort year after year to see this even brought up to get a vote, right, which have we not had that good fortune in the past years. And this last year we actually not only got it up for a vote, but it passed overwhelmingly in the House of Representatives, and so it's on its way to the Senate now. And so that is gonna be something that everyone watches in 2020 to see how the Senate addresses the Safe Banking Act.

The Senate committee that is gonna be first in line to review the Safe Banking Act has already indicated that they are inclined to give us a vote and they are also inclined to seriously engage with language and suggest edits that they might wanna see in order to pass this through Congress. That would be huge if we were able to do that. And that is no small part, thanks to the efforts of the NCIA staff, both our executive director, Aaron Smith, as well as our GR team Michael Correia, Michelle Rutter, and others that work diligently on this banking bill for the past several years.

Matthew: Can you summarize what the interstate commerce clause is and how you're thinking about that in the cannabis industry?

Khurshid: Sure. The interstate commerce clause, essentially, it's a clause in the constitution that gives Congress the authority to legislate in matters that affect interstate commerce. Interstate commerce, obviously, you know, commerce between states. It forms the...you know, it's the basis upon which the federal government has enforced the Controlled Substances Act even against, you know, purely intrastate operations. So there's a case called Gonzales v. Raich that was heard in the Supreme Court in the '90s, which essentially...sorry, early 2000s, which essentially stated that the DEA can and the feds can enforce the Controlled Substances Act against medical cannabis collectives that were operating solely within California. Because the entire premise of the Controlled Substances Act is that these illicit markets and controlled substances are interstate in nature. And, you know, the Congress is empowered to do anything it needs to, to effect and shut down those markets, including shutting down intrastate activity.

So, you know, it's the reason why states that are neighboring states that have legal cannabis regimes are not able to trade with one another, right? There's no trade between Oregon and Nevada. There's no trade between all these states, among all these states in the Northeast that have medical cannabis or adult use cannabis regimes because that would violate the Controlled Substances Act and it would certainly trigger some federal enforcement on those grounds. So that's why it's so critical that we see that impediment, you know, torn down as best we can.

Matthew: Okay. And Khurshid, on the topic of interstate commerce, can you talk about how Oregon passed SB582, and what that means and why that's important?

Khurshid: Sure. So SB582 was a state bill that essentially says that Oregon licensed businesses, licensed cannabis businesses, are going to be able to do business with licensees in other states as soon as there's some indication that the federal government will not enforce the Controlled Substances Act against those licensees and assuming that there's an agreement between those states regulating those types of interstate transfers. And so, you know, what SB582 is banking on is something along the lines of a Cole [SP] memo, right, that says, ''Hey, we are not going to... We, the federal government, are not going to intervene in any kind of lawful commerce that's happening between cannabis businesses in different states where they're operating legally and there's an agreement between those states.''

So, you know, if we get that type of trigger, either a memo from the DOJ indicating that that's, you know, the enforcement position or federal legislation as well, right? The Oregon delegation did introduce a companion bill in Congress that would essentially recognize interstate commerce between legal cannabis states. So if we have that type of federal trigger occurring and that condition comes to be true, then Oregon can start doing business with neighboring states that have legal cannabis. So, you know, when you think about not only Oregon, but California also potentially passing similar legislation and you think about the states in the Northeast passing similar legislation, you know, you are creating a massive interstate market that is really going to change the face of the cannabis industry in the U.S.

Matthew: Okay. Wow. So as we finish 2019 and we look to 2020, what is there to get excited about and perhaps what should we be cautious about?

Khurshid: I think we should get excited about banking. You know, it's not a slam dunk, but I think we have gotten closer than we've ever been before to actually passing the Safe Banking Act. And so I think we need to be, you know, all eyes on the Senate on the banking bill to, you know, hopefully, we will see the beginnings of equal access to the banking system for the cannabis industry. So I think that's something that's very exciting. I think the advancement of social equity in the industry, to me, is also very exciting. I serve on the board of the Minority Cannabis Business Association and as co-chair their policy committee. And so we are very much invested in seeing the advancement of social equity legislation at the local, state, and federal level. And so we're watching the MORE Act and, you know, we are very hopeful that we're going to see some movement next year in Congress. And if nothing else, I mean, we started the discussion at multiple levels on social equity and folks who are a lot more aware of how we can work to redress the casualties and injuries of the war on cannabis.

Matthew: Now, you see some states that are losing population and have some fiscal troubles. New York, New Jersey, Connecticut, these are states that have a lot of assets, intellectual and businesses, and some say perhaps they're not competitive, they haven't looked at their cost structure, and there are some huge obligations that they're kind of ignoring. California is not in the best position, but it's not in the worst position. Do you think there's the will for Sacramento politicians to really do something about making the, you know, budget deficit and debt situation in California more sustainable?

Khurshid: You know, I sure hope so. But politicians in Sacramento, as elsewhere, you know, have their own constituencies. They have folks who put them in office. And so I really hope that there is the political will to get it done. But we live in an age when politicians are constantly disappointing us. And so I'm a little more cynical than I used to be about folks acting in the best interest of the country and of the state.

Matthew: Okay. It seems like...I mean, my perception is, is that, you know, unless there's a crisis, you know, where the public says you must act now, there's really no upside for a politician to take away something from their constituencies. Okay. Because I mean, we've kind of built in this where we don't want any long term planning. Everything's gotta be short term. And that's unfortunate, but it seems to be the case everywhere.

Khurshid: Yeah. I mean, you see that with the climate change movement, right? We are in a bona fide emergency and, you know, and the world is crying out and we see, you know, the youth especially taking to the streets and that's not moving folks as quickly as it should, especially in our country, unfortunately.

Matthew: For business people that may be listening, what areas of hemp and cannabis do you really focus on for people that need some legal help? What's a good fit? You know, for some that's listening, wondering, "Hey, am I a good fit to work with Khurshid and his team or am I not?" What would be your kind of ideal client that you feel like you can help the most?

Khurshid: Well, so we work with a lot of startups, but we've also seen a lot of our startup clients grow into thriving businesses and we've taken on businesses that are, you know, a lot more advanced. And I've gone through several rounds of financing and have been operating for a while. And so, you know, the maturity of the company doesn't really matter as much to us. What we're really looking for is folks who are doing this for the right reasons, right? And that's been a consistent theme for our business because we started as...you know, we started in the Drug Policy Reform Movement back in 2012, you know, well before we had what we have today in terms of the market. And so I am, you know, used to be that I would ask businesses, you know, what their involvement was in advancing the ball, right?

And that's still very interesting to me. And I, you know, wanna know what folks are doing to actually improve market conditions for themselves and others. And so, you know, it used to be, "Hey, you know, how much money did you give to normal, or how much money have you contributed to DPA in the past or SSDP or MPP?" And today those questions are still relevant. But I also wanna know, you know, what folks are doing to advance the ball in DC, especially being on the NCIA board. I wanna see some commitment. And I wanna see businesses that are, yes, they're doing this because it's lucrative, and we're not gonna fault them for that. But at the same time, you know, they need to care about issues like social equity.

And, you know, not come to us with designs to game the system or to, you know, do things that are going to advance their interests at the expense of others, right? We're still very much, you know, while we are absolutely dedicated to our clients, you know, we are also keeping an eye on market conditions for the industry and we're very much invested in the growth and the success of the industry at large, including our clients.

Matthew: I wanna go to some personal development questions. Before we do that, you know, you work with a lot of clients. You work with a lot of people who are successful in the cannabis industry in California and probably seen a lot who have failed, too. You know, for all our listeners, most are interested in staying in California and being successful or, you know, maybe perhaps bringing their business into California and being successful, too. What's kind of the attitude and kind of game plan that one needs to be successful in California that you feel like sometimes new participants may not think about?

Khurshid: Time. Time. Everything takes a lot longer than folks expect. And I don't think that, you know, their expectations are necessarily unreasonable most of the time. Some of the times, they are unreasonable, but I think people are underestimating the amount of time it takes to get through, especially regulatory approvals in California, right, and things that should be sort of commonsensical. You know, we have to remember that the regulatory regime is still, you know, very new and still developing and staff at the regulatory agencies are still developing and still learning and still, you know, customizing the system and, you know, solving for some of those ambiguities that we talked about before.

And so I think that's one thing that you need to note is be prepared to wait sometimes, right? It's not so much getting a license is gonna be...take that long, although that can be a lengthy process as well. I mean that's a relatively, you know, short wait compared to some of the recent mergers and acquisitions that have happened in the industry where, you know, regulators have not responded yet to some of the filings that you need to file to say, ''Hey, we've changed our ownership roster and we've added a few new folks here. Here's all their info." You know, we're not seeing responses to that on a timely basis. And so if you're planning to come in and, you know, acquire a stake in a licensed business or find seasoned operators that you can do business with and integrate into their existing licensed business, you know, you are gonna be in for a bit of a wait.

And that's not something that most folks necessarily expect. They think about the licensing timelines, but they don't think about, you know, some of these filings that have to be done and the amount of time that it takes to get through with those. So that's something that... You know, and with time, I mean, if you have to wait longer to get a result that you're looking for, you're gonna lose revenue. You're going to have additional costs that pile up. You know, let's say you've got a new premise that you're trying to launch with, you may be paying rent on that for some time before you're able to actually use it, right? So I don't think most folks understand how difficult it can be in California. But that being said, you know, we want those businesses. We want to see the development of the industry in California. And, you know, I'm hoping that things improve from that perspective.

Matthew: Okay. So Khurshid, a few personal development questions. Is there a book that's had a big impact on your life or way of thinking that you'd like to share?

Khurshid: Sure. So I think that the last time I was on, you asked me this question as well. And I mentioned ''The New Jim Crow'' by Michelle Alexander, and I'd still recommend that for those who are relatively new to the cannabis industry and wanna understand the roots of the industry and the Drug Policy Reform Movement. And in that vein, I'd also recommend CBDs...Steve DeAngelo's book, ''The Cannabis Manifesto,'' and Doug Fine's book, ''Too High to Fail.'' But those are all, you know, for folks who wanna understand kind of where we came from and where we're at.

In terms of, you know, personally, what's had a big impact on me, I'm thinking totally outside of the cannabis realm. You know, I thought about this and I think I'd say Dale Carnegie's books on human relations, right? So "How to Win Friends and Influence People," "How to Stop Worrying and Start Living." I read these at age 12 because my dad was enrolled at a Dale Carnegie course. He was in food service management at a country club corporation. And so he was enrolled in these, and after he got through the course, I inherited those books and I read them cover to cover. They were the, I think at the time, the first nonfiction books that I'd read cover to cover at that age. And, you know, those lessons have stayed with me and I would certainly recommend them to other folks who want to understand how to, you know, treat yourself and others with respect, but also how to lead. So highly recommend those books.

Matthew: Do you have any morning rituals that help you, that you'd like to share?

Khurshid: Sure. So, you know, I used to read the news first thing in the morning when I got up or my emails. And after the 2016 election, that got a bit...I got a little tired of that. That was a lot of doom and gloom. You know, but what I do instead now is I watch videos of my daughter and her schoolmates singing. She goes to a wonderful public international baccalaureate school that has a bimonthly assembly where all the kids from kindergarten through third grade sing songs to welcome the morning and to start the day off with positive energy and optimism. So they sing songs like "Good Morning All Over the World" and "Jump Up It's a Good Day." And, you know, I'd never miss it when I'm at home and I'm always in the front row of parents who are attending that. I have it recorded too for those times when I'm traveling or I need a little bit of a pick me up between assemblies.

So, you know, to me, it's an antidote to all of the gloom and doom and, you know, it's a good way to start your day without kind of infecting yourself with that, right? I mean, it's not to say that the gloom and doom isn't warranted, but that watching those kids, you know, it does bring a tear to my eye and it kind of reminds me of that, you know, our country, our planet are still worth fighting for.

Matthew: Oh, that's great. You're so right too because the, you know, starting your day with, you know, whatever the news is, it's like they've got that banner in the bottom that was like... I remember when that banner, the bottom first started, it was like really only for like the worst kind of breaking news that was like really bad. So when you saw that, you're like, "Oh shit, some of the terrible has happened." But now it's there all the time, scrolling across the bottom, like, "Oh, one crisis after another." After watching the news for a little, it's like, I wanna take a cold shower and then go on a sensory deprivation tank. So I think the way you're doing it is definitely the way to go. It's like I may not be as fully as informed as I could be, but I think I can, you know, bring something more positive to the world.

Khurshid: Yeah. I think it will work watching any little kid singing, you know. So you don't have to be in Sacramento at my kid's school. It's, yeah, it's pretty amazing.

Matthew: So I'm gonna ask you a Peter Teal question here. What is one thought you have that most people would disagree with you on?

Khurshid: Interesting that you'd mentioned Peter Teal. I'm gonna say social media, especially Facebook, I feel has been a detriment to maintaining a vibrant democracy. I think it's like an anti-civics class for the world. I used to say that it was a necessary evil for kind of modern communication. And everyone's on there. Everyone's doing it. But I'm not so sure that I believe that anymore. I've been relatively quiet on Facebook. I wil,l from time to time, still go on and post things about, you know, different NCIA events or MCBA events. Once in a while when I've got an interesting quote in a story, I may post that as well. But generally like I've just stopped you know, posting to Facebook and don't really follow it very closely and I feel better for it.

I don't think it's hurt me in any way, although people would definitely disagree and say, "What are you doing? You need to be on social media platforms to do business." You know, and there are still some that perhaps are better than others. And, you know, I still like LinkedIn, but generally I'm not a fan of social media and maybe that makes me a bit of a dinosaur.

Matthew: No, I definitely hear you. Okay. Well, Khurshid, this has been very informative. Can you let listeners know how they can find you and connect with you and, for potential clients, how they can reach out to you?

Khurshid: Sure. So my email is khurshid@greenbridgelaw.com. And our website has my bio and contact info as well, and that's greenbridgelaw.com. We have our full bench listed there and including our partners in Portland at Emerge Law Group. And yeah, I'd be happy to hear from folks.

Matthew: Great. Well, Khurshid, thanks so much for coming on the show, educating us, and good luck to you in the rest of 2020.

Khurshid: Thank you very much. Appreciate the opportunity.

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