In December 2017, the city council of Los Angeles, California released its proposed regulations for recreational marijuana retailers, cultivators, and manufacturers. For most businesses hoping to enter the market when it opened in January 2018, the road to get a license to operate looked like it would be an uphill climb. Now that we’re closing in on the end of the first quarter of 2018, it’s safe to say they were right.

First, let’s back up a bit and put this story into perspective. Marijuana businesses were banned from operating in Los Angeles in 2013 as part of Proposition D (medical marijuana dispensaries were granted immunity), but that law was repealed and the city’s Department of Cannabis Regulation began accepting permit applications from retailers on January 3, 2018.

Before we go any further, consider these statistics. The adult population of Los Angeles City (a 469 square mile area) is approximately 3.06 million. That means more adults live in Los Angeles than in 24 other states in the country. In other words, more adults live in Los Angeles than live in Alaska, Arkansas, Connecticut, Delaware, the District of Columbia, Hawaii, Idaho, Iowa, Kansas, Maine, Mississippi, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Dakota, Oklahoma, Rhode Island, South Dakota, Utah, Vermont, West Virginia, and Wyoming.

What does this tell us? The market potential in Los Angeles is massive, and businesses want to get in early so they can capture market share quickly. But there’s a problem. Getting a new license to enter the Los Angeles marketplace won’t be easy for everyone.

Key Licensing Restrictions in Los Angeles

The problem for many businesses that want to become licensed adult-use marijuana retailers within the city of Los Angeles is two-fold: prioritization and social equity. Let’s take a look at each in more detail.

Los Angeles is awarding retail licenses through a four-phase process. The first businesses that will receive retail marijuana licenses in Los Angeles during phase one will be those that meet “priority status” requirements according to the regulations developed by the Los Angeles City Council. These regulations were voted on by Los Angeles residents in March 2017 and are referred to as Proposition M.

The application submission deadline for retail marijuana licenses under Proposition M Priority Processing ended on March 5th. Processing of these applications will begin at the discretion of the Department of Cannabis Regulation and is expected to end 60 days after it begins.

Priority status was given to businesses that already had medical marijuana dispensing licenses or business tax registration certificates. These businesses were allowed to continue operating after the new regulations went into effect and of course, were given priority status for adult-use retail licenses. Furthermore, they’ll be able to keep their medical marijuana dispensary licenses by simply applying for a “provisional” license.

In addition, these priority business will be allowed to apply for non-retail licenses to act as cultivators, distributors, and manufacturers. Applications for non-retailer commercial licenses for businesses that were in operation prior to January 1, 2016 are being accepted as the second phase of Los Angeles’ licensing process and will end on April 1, 2018.

Clearly, giving certain businesses a head start in claiming market share in Los Angeles’ adult-use marijuana marketed creates a barrier to fair competition.

The second restriction of the Los Angeles licensing process that makes it difficult for businesses to enter the market relates to the city’s “social equity” program which provides an advantage to communities that have been negatively affected by the war on drugs.

The program allows marijuana businesses that meet the “social equity” criteria to jump to the head of the license application line. This criteria includes things like having a low income status, having a marijuana-related conviction, and being located in an area that has had a high number of marijuana-related arrests.

For retailers, the city will process applications from two qualifying “social equity” businesses for each one application from a non-social equity business. The 2-to-1 ratio would not apply for cultivator or manufacturer licenses.

In phase three of the city’s licensing process, applications will be accepted from businesses that don’t meet the priority status or social equity requirements. However, the number of licenses granted to general applicants must equal the number given to applicants of the social equity program. That means “social equity” businesses will have a distinct advantage to enter the adult-use marijuana market.

In the fourth phase of the Los Angeles licensing process, applications will be accepted from and licenses will be given to the general public during an “unrestricted phase.” This phase won’t begin until the Social Equity Program has been fully funded and implemented.

Keep in mind, businesses would still need to be approved by local agencies, such as the city of Los Angeles, to apply for state licenses.

What’s Next in Los Angeles?

While these new regulations are intended to make it easier to penalize businesses that are operating illegally with harsh fines and/or jail time, they’re also limiting competition. Any time you limit competition, problems will arise in the marketplace. Already stories of licensing delays and dissatisfied business owners are circulating. With the massive size of the Los Angeles market, it’s guaranteed that this is a story a lot of people will be watching closely in the coming months.

Originally published 12/17/2017. Updated 3/23/18.

Susan Gunelius, Lead Analyst for Cannabiz Media and author of Marijuana Licensing Reference Guide: 2017 Edition, is also President & CEO of KeySplash Creative, Inc., a marketing communications company offering, copywriting, content marketing, email marketing, social media marketing, and strategic branding services. She spent the first half of her 25-year career directing marketing programs for AT&T and HSBC. Today, her clients include household brands like Citigroup, Cox Communications, Intuit, and more as well as small businesses around the world. Susan has written 11 marketing-related books, including the highly popular Content Marketing for Dummies, 30-Minute Social Media Marketing, Kick-ass Copywriting in 10 Easy Steps, The Ultimate Guide to Email Marketing, and she is a popular marketing and branding keynote speaker. She is also a Certified Career Coach and Founder and Editor in Chief of Women on Business, an award-winning blog for business women. Susan holds a B.S. in marketing and an M.B.A in management and strategy.