On November 21, 2022, the New York Cannabis Control Board adopted proposed regulations developed by the Office of Cannabis Management (“OCM”) for its emerging recreational cannabis market. Based on the parameters of the New York Legislature’s Marihuana Regulation and Taxation Act, New York is implementing an industry structure that its regulators acknowledge most resembles that of Washington State, generally prohibiting vertical integration and limiting investment activity (albeit in different ways), in an effort to create an industry of small businesses despite the inherently capital-intensive nature of the cannabis industry.

Cannabis industry veterans generally consider Washington State’s market structure to be less than optimal, as:

1. Almost all Washington cannabis companies have struggled to achieve scale and profitability;
2. Investment in Washington cannabis companies has been severely restricted, particularly by residency requirements; and
3. Few successful cannabis companies have emerged in Washington despite the market being rather mature.

While New York has not imposed Washington-style residency requirements, it has proposed complex vertical integration, True Party of Interest and Passive Investor requirements that appear likely to restrain the participation of the massive New York investment community in financing its emerging cannabis industry. These restrictions also may weaken demand for future acquisitions of New York licensees, which may make it difficult to achieve one of the regulators’ stated goals of creating generational wealth for the licensees, many of which are expected to be social and economic equity licensees.

Set forth below is a summary of some of the key aspects of the proposed regulations, which due to their length and complexity cannot be fully addressed herein. Additional details are available upon request. Feel free to reach out with any questions.

A full copy of the proposed adult-use regulations can be accessed here.

INDUSTRY STRUCTURE

• Generally, the industry is divided into
  • the “Supply Tier” consisting of cultivation, nursery, processing, distributor and microbusinesses; and
  • the “Retail Tier” consisting of dispensaries, on-site consumption lounges and delivery services.
• Supply Tier licensees and their “True Parties of Interest” (as defined below; referred to herein as a “TPI”) are permitted to:
  • be fully integrated within the Supply Tier with respect to their own products (but generally not third-party products) (Prop Reg Section 123.3(b)); and
  • share common ownership with a microbusiness licensee, which is permitted one retail location. (Prop Reg Sections 123.3(d), 123.5(f), 123.7(d) and 123.11(d)).
• Retail Tier licensees and their TPIs are prohibited from participating with the Supply Tier (Prop Reg Section 123.9(j)), other than permitted ordinary course commercial relationships (as described below under “Retail”).
• True Parties of Interest (“TPIs”) of an applicant/licensee include (Prop Reg Section 118.1(a)(81):
  • sole proprietors;
  • limited and general partners;
  • members;
  • managers;
  • presidents;
  • vice presidents;
  • secretaries;
  • treasurers;
  • officers;
  • board members;
  • trustees;
  • directors;
  • persons with equivalent titles;
  • stockholders;
  • spouses of each of the preceding individuals;
  • each member of the ownership structure of entities with multilevel ownership structures, including subsidiaries, affiliates, parents, shells and holding companies;
  • persons with the right to receive aggregate payments in a calendar year exceeding the greater of:
    • 10% of licensee’s gross revenue;
    • 50% of licensee’s net profit; or
    • $100,000;
  • persons with a financial interest in the applicant/licensee;
  • persons with the authority to exercise control over applicant/licensee;
  • persons assuming responsibility for the debts of applicant/licensee; and
  • management service providers except on a flat fee basis (Prop Reg Section 124.3(c)(2)).
• TPIs of an applicant/licensee do not include persons who (Prop Reg Section 118.1(a)(81):
  • receive payment for rent on a fixed basis under a lease or rental agreement relating to the applicant/licensee;
  • receive a bonus or commission from the applicant/licensee based on the individual’s sales (not to exceed 10% of the sales of the applicant/licensee in any given period);
  • contract with the applicant/licensee to receive a commission for the sale of the business or real property;
  • consult and receive a flat or hourly rate of compensation from the applicant/licensee;
  • are goods and services contractors (without control over the applicant/licensee’s business);
  • are financial institutions (as defined herein); and
  • are financiers (as defined herein).
• Financial interest refers to any actual or future right to ownership, investment or compensation arrangement with another person (including indirectly through a business or certain family members), where the compensation exceeds the greater of (Prop Reg Section 118.1(a)(36)):
  • 10% of gross revenue;
  • 50% of net profit; or
  • $100,000.
• Many requirements applicable to TPIs do not apply to “Passive Investors”, which are defined as TPIs:
  • with no more than:
    • 5% ownership interest in a publicly traded applicant or licensee; or
    • 20% ownership interest in any private entity (Prop Reg Section 118.1(a)(61)); and
  • that do not otherwise have any control or influence over the applicant/licensee.
• OCM has the right to review any agreements between licensees and third parties (Prop Reg Section 124.4(a)). Such third parties shall be deemed a TPI if such agreement:
  • compels the licensee to promise to not purchase or sell products, services or materials to specific businesses;
  • requires surrender of personal assets of the licensee as penalty for noncompliance;
  • is not bargained for in an arms-length transaction;
  • does not allow either party to terminate with due notice; or
  • creates an employer-employee relationship with licensee under New York State Labor Law.

CULTIVATORS

• There are multiple tiers of cultivation licenses based on canopy size for indoor, mixed use and outdoor cultivation, with escalating license fees based on size.
• Cultivators can also have a processor and distributor license, but must have a processor license to hold a distributor license (Prop Reg Section 123.3(b)).
• Cultivators can only sell to a licensed processor, including a microbusiness, a cooperative, a Registered Organization with Dispensing (“ROD”), a Registered Organization Non-Dispensing (“ROND”) or a cannabis research licensee (Prop Reg Section 123.3(a)(2)).
• Cultivators can have their cannabis processed by third party processors on a tolling basis (Prop Reg Section 123.3(a)(3).
• If a cultivator also holds a processor license, then it may purchase cannabis from another cultivator only for processing (Prop Reg Section 3(a)(4)).
• No person can be a TPI in more than one cultivator, except a Passive Investor may be a passive investor in an unlimited number of cultivators (Prop Reg Section 3(c)).
• Conditional cultivator licensees get priority to convert to a tier 4 outdoor or tier 2 combination cultivation license (Prop Reg Sections 123.3(g) and 123.3(h)).
• Cultivators must submit an annual cultivation report (Prop Reg Section 123.4(k)).

PROCESSORS

• Processing consists of blending, extracting, compounding, infusing, making, preparing, manufacturing, packaging, labeling or branding cannabis (Prop Reg Section 118.1(a)(67)). Each processor license may cover all or a designated portion of these activities. Processors appear designed to play a key gatekeeping role in the chain of the distribution of cannabis products in New York.
• Processors may hold one distributor license (Prop Reg Section 123.5(d)).
• A processor may acquire cannabis from cultivators and sell to other processors or distributors (Prop Reg Section 123.5(a)).
• Licensed processors must submit proof of a qualified third party GMP (good manufacturing practice) audit of the licensee’s extraction and/or manufacturing processes within one year of commencing licensed operations (Prop Reg Section 123.6(a)(2)).
  • The OCM will determine who is a qualified third party GMP auditor (Prop Reg Section 123.6(a)(2)).
• A processor is prohibited from processing any cannabis products which, among others:
  • contain synthetic cannabinoids (Prop Reg Section 123.6(e)(5)); or
  • add phytocannabinoid concentrate or extract to commercially available candy or snack food items without further processing (Prop Reg Section 123.6(e)(10)).
• A conditional processor shall be given priority by the Office in review of its application for a full processor or distributor license (123.5(j)).

DISTRIBUTORS

• A distributor may acquire cannabis from a licensed processor or another distributor, which may include a microbusiness, cooperative, ROD or ROND, except not a distributor that also holds a cultivation or processing license (Prop Reg Sections 123.7(b) and (c)).
• A distributor may sell to another distributor or a Retail Tier licensee (Prop Reg Section 123.7(c)).
• Distributors must maintain records of all transactions (Prop Reg Section 123.8(a)(4)).
• There are no restrictions on the number of distributor licenses a person may own, have a financial interest in or in which such person can be a TPI (see generally Prop Reg Section 123.7).

RETAIL

• Each retail licensee operates one physical brick and mortar dispensary.
  • TPIs, other than Passive Investors, may only hold an interest (controlling or financial, direct or indirect) in up to three retail licenses (Prop Reg Section 123.9(g)).
  • Passive Investors may hold an interest in an unlimited number of retail licensees (Prop Reg Section 123.9(g)).
• Each retail dispensary may:
  • Operate a delivery business with up to 25 employees (Prop Reg Section 123.10(k)(3); and
  • Have an adjoining premises for the consumption of adult-use cannabis products sold by such retail dispensary (Prop Reg Section 9(e)).
• Permitted relationships between Retail Tier licensees and Supply Tier licensees (Prop Reg Section 124.3(a)):
  • Provision of general (non-cannabis) goods and services, but providers of such goods and services become TPIs if the compensation they receive exceeds the greater of:
    • 10% of the licensee’s gross revenue;
    • 50% of the licensee’s net profits; or
    • $100,000.
  • Landlords;
  • Financial institutions (any bank, mutual savings bank, consumer loan company, credit union, savings and loan association, trust company or other lending institution under the jurisdiction of the Department of Financial Services) (Prop Reg Section 118.1(a)(35)); and
  • Financiers (any person other than a financial institution or government or governmental subdivision or agency that provides capital as a gift, provides a grant or lends capital pursuant to a secured or unsecured financing agreement) (Prop Reg Section 118.1(a)(37)).
• Retail dispensaries will be able to purchase seedlings and immature plants from licensed nurseries after adult-use home cultivation is authorized by the Cannabis Control Board (18 months after the first adult-use retail dispensary sales) (Prop Reg Section 9(b)).
• Time, manner and place restrictions imposed by local municipalities are prohibited from being unreasonably impracticable, as determined by the Cannabis Control Board (Prop Reg Section 119.2(a)).
• Retail dispensaries may not:
  • include in their name, or in the description of their services, the words “drugs”, “medicines”, “drug store”, “apothecary” or “pharmacy” (Prop Reg Section 123.10(g)(2);
  • provide samples (Prop Reg Section 123.10(g)(8));
  • sell any food, beverage or personal care item which is not a cannabis product (Prop Reg Section 123.10(g)(11)(iv));
  • market through third-party platforms (Prop Reg Section 123.10(g)(21));
  • fulfill orders referred by third-party platforms (Prop Reg Section 123.10(g)(22)); or
  • be located within geographic areas set by the regulations or determined by local municipalities within parameters set by the regulations (Prop Reg Sections 119.1(a) and 119.4).

DELIVERY

• All retail licensees and separately licensed delivery services (under yet-to-be-published regulations) are allowed to deliver cannabis products and paraphernalia (Prop Reg Section 123.9(c)).
  • Such licensees must have a written delivery service plan, available for inspection by OCM (Prop Reg Section 123.10(k)).
• Retail licensees and their TPIs may be TPIs in delivery licensees (Prop Reg Section 123.9(h)) and be a landlord, financier or goods and services provider to such licensees, including an on-site consumption licensee (Prop Reg Section 123.9(i)).

MICROBUSINESS

• Only products exclusively processed and manufactured by microbusinesses and Tier I cultivators may receive “craft designation” and label their products as such (Prop Reg Section 118.1(a)(25)).
• Microbusiness cultivation area varies by type of cultivation (Prop Reg Section 120.3(c)(1)):
  • Indoor: 3,500 square feet;
  • Mixed light: 5,000 square feet; or
  • Outdoor: 10,000 square feet.
• Microbusiness licensees must cultivate and engage in at least one of the following: (1) processing, (2) distributing or (3) retail sales (Prop Reg Section 123.11(a)), and may (Prop Reg Section 123.11(b)):
  • sell cannabis to processors;
  • sell cannabis products to distributors and deliver such products; and
  • directly sell cannabis products it cultivated or processed to consumers.
• Microbusiness licensees shall not purchase cannabis cultivated by cultivator licensees, except with prior written approval from the OCM after a significant crop failure (Prop Reg Section 123.11(c)).
• Microbusiness licensees and their TPIs may be TPIs in cultivators, processors, distributors, cooperatives or ROND licensees; however, such persons may be a TPI in only one (Prop Reg Sections 123.11(d) and 123.11(e)).
  • A Passive Investor may be a Passive Investor in more than one microbusiness (Prop Reg Section 123.11(e)).
• Microbusinesses are subject to restrictions on licensed activities as applicable to each applicable license type (Prop Reg Section 123.12(a)(2)).
• A Microbusiness licensee may be authorized to process up to 1,700 pounds of biomass per year, unless processed exclusively at its licensed premises (Prop Reg Section 123.12(a)(4)).
• Microbusiness retail dispensaries must be (Prop Reg Section 123.12(a)(7)):
  • if in a city with over one million persons, in the same county as its cultivation and processing premises; or
  • if outside such a city, within 25 miles of its cultivation and processing premises.

COOPERATIVES (COLLECTIVES)

• Cooperatives are authorized to act as cultivators, processors and distributors, and are governed by the applicable regulations with respect to each licensed activity (Prop Reg Section 123.13(b)).
  • Cooperatives may conduct processing activities in up to two premises (Prop Reg Section 123.13(b)(1)); and
  • Cooperatives may cultivate at an unlimited number of premises (Prop Reg Section 123.13(b)(2)).
    • Each premises over the sixth carry additional application and licensing fees (Prop Reg Section 123.13(b)(2)).
  • Members of cooperatives may only be members of one cooperative (Prop Reg Section 123.13(c)).
  • Members of cooperatives are TPIs of the cooperative (Prop Reg Section 123.13(d)).
  • Cooperatives must have at least five members that contribute primarily with labor (Prop Reg Section 123.13(i)). There is no requirement that a member be an individual or any particular kind of entity.

REGISTERED ORGANIZATION NON-DISPENSING (ROND)

• Required to pay (a) up front $5,000,000 (plus per category license fees), and (b) lesser of $1,000,000 or 2% of all gross revenues annually for five years (Prop Reg Section 120.4(b)(12)(iv)).
• TPIs of an ROND may be TPIs only to one ROND, except for Passive Investors (Prop Reg Section 123.15(a).
• ROND licensees and TPIs may be a Passive Investor in cultivator, processor, distributor, cooperative or microbusiness licensees (Prop Reg Section 123.15(b)).
• ROND licensees are subject to the applicable requirements for cultivators, processors and distributors (Prop Reg Section 123.16(a)(1)).
• ROND licensees are required to maintain a medical prioritization plan, including (Prop Reg Section 123.16(a)(2)):
  • sales breakdowns;
  • maintenance of medical cannabis necessary to supply to the greater of the highest monthly sales volume within the last 12 months or a minimum threshold set by the Cannabis Control Board; and
  • attestation to stocking sufficient products of different concentrations and dosages.
• ROND licensees are limited to 100,000 square feet of canopy (Prop Reg Section 123.16(b)(1).
• ROND licensees require written authorization of the Cannabis Control Board to:
  • begin construction or major renovations on indoor cultivation and facilities (Prop Reg Section 123.16(b)(2)); and
  • contract with a laboratory for voluntary testing services (Prop Reg Section 123.16(b)(4)).
• ROND licensees may not process more than 55,000 pounds of biomass in one year if such licensee has purchased any cannabis or cannabis product from another licensee in that calendar year (Prop Reg Section 123.16(b)(3)).
• ROND licensees are prohibited from substituting adult-use cannabis products for medical cannabis products (Prop Reg Section 123.16(b)(5).

REGISTERED ORGANIZATION WITH DISPENSING (ROD)

• Required to pay up front $100,000 per retail co-location, plus $3,000,000 per retail co-location (Prop Reg Section 120.4(b)(13)).
• ROD licensees are prohibited from applying for adult-use retail until three years after the first date of retail adult-use cannabis sales (Prop Reg Section 123.18(b)(9)).
• TPIs of an ROD may be TPIs only to one ROD, except for Passive Investors (Prop Reg Section 123.17(a)).
• ROD licensees may not hold a direct or indirect interest in, or be a TPI, Passive Investor, landlord, financier or management service provider to any other license type (Prop Reg Section 123.17(c)).
• ROD licensees must dedicate at least 40% of their available shelf space for products cultivated and processed by third parties which are not RODs (Prop Reg Section 123.18(a)(2)).
• ROD licensees must co-locate their medical and adult-use dispensaries (Prop Reg Section 123.18(a)(3)).
  • If an ROD has multiple sites, one must be outside of the counties of New York, Kings, Bronx, Queens, Richmond, Nassau, Suffolk and Westchester (Prop Reg Section 123.18(a)(4)).
  • Limited to three co-located dispensaries (Prop Reg Section 123.18(b)(6)).
  • May not have two co-located facilities in the same county (Prop Reg Section 18(b)(7)).
• ROD licensees must maintain a medical prioritization plan like RONDs (Prop Reg Section 18(a)(6)).
• ROD licensees are limited to 100,000 square feet of canopy (Prop Reg Section 123.18(b)(1)).
• ROD licensees require written authorization of the Cannabis Control Board to:
  • begin construction or major renovations on indoor cultivation and facilities (Prop Reg Section 123.18(b)(2)); and
  • contract with a laboratory for voluntary testing services (Prop Reg Section 123.18(b)(4)).
• ROD licensees may not process more than 55,000 pounds of biomass in one year if such licensee has purchased cannabis or cannabis products from another licensee in that calendar year (Prop Reg Section 123.18(b)(3)).
• ROD licensees are prohibited from substituting adult-use cannabis products for medical cannabis products (Prop Reg Section 123.18(b)(5)).

LICENSE APPLICATIONS

• Among other requirements, applicants of all license types are required to submit (Prop Reg Sections 120.7(a) and 120.7(b)):
  • Community impact plan;
  • Energy and environmental plan; and
  • History of creating or maintaining and equitable workplace environment including wage and benefits information, diversity, providing services to under-served populations and serving in community leadership roles.
• Some license fees, such as cultivation, can be considerably expensive (Prop Reg Section 120.4(b)).
• Priority may be given to license applications submitted by social and economic equity applicants (Prop Reg Section 120.7(c)(2)).
• A social and economic equity applicant must be solely controlled by an individual in one of the social equity groups (minority-owned, woman-owned, distressed farmer, service-disabled veteran or a member of a community disproportionately impacted by the war on drugs) (Prop Reg Section 121.1(a)(1)).
• Extra priority will be given to individuals who (Prop Reg Section 121.1(k)):
  • are from communities disproportionately impacted by the enforcement of cannabis prohibition;
  • have an income lower than 80% of the median income of their county of residence; and
  • were convicted of a marihuana-related offense prior to March 31, 2021, or had a parent, guardian, child, spouse, or dependent who was, or were the dependent of an individual who was, so convicted.
• Licenses have 2-year terms, subject to renewal in which the following are factors (Prop Reg Section 120.10(a)):
  • contribution to communities harmed by the war on drugs;
  • executed labor peace agreement with a bona-fide labor organization;
  • diversity of owners and employees;
  • adherence to social responsibility; and
  • compliance with OCM and local government regulations and requirements by the licensee and TPIs (Prop Reg Section 120.11(c)(1-5)).

LICENSE CHANGES

• Licenses are transferrable upon the written approval of the Cannabis Control Board. A change in majority ownership or controlling interest in license or its holder constitutes a transfer of the license (Prop Reg Section 120.9(d)).
• OCM approval will be required for:
  • adding any new TPI, except a Passive Investor (Prop Reg Section 120.18(d)(1)); and
  • changing location (Prop Reg Section 120.18(d)(3)).
• 10-day notice to OCM will be required for:
  • a shareholder TPI becoming a Passive Investor (Prop Reg Section 120.18(e)(2));
  • a loan of 10% or more of the licensee’s capital (Prop Reg Section 120.18(e)(3)); and
  • death or removal of a TPI who is not a Passive Investor (Prop Reg Section 120.18(e)(4)).
• 3-business day notice will be required to OCM for:
  • any conviction, indictment or civil judgement against the licensee or any of its TPIs, including a Passive Investor (Prop Reg Section 120.18(f)(1));
  • any regulatory disciplinary action being taken or pending against the licensee or any of its TPIs, including a Passive Investor (Prop Reg Section 120.18(f)(2)); and
  • any judgement, lawsuit, legal proceeding. charge or governmental investigation against the licensee or any of its TPIs, including a Passive Investor (Prop Reg Section 120.18(f)(3)).

OPERATING REQUIREMENTS

• No employee can be in charge of more than one retail dispensary at the same time (Prop Reg Section 123.10(c)(1)).
• General Site and Operating Regulations:
  • Licensees need to submit site plans with specific requirements for different license types (Prop Reg Section 125.1(a)).
    • Also need operating plans for licensed activities of cultivators and processors (Prop Reg Section 125.1(b)).
  • Licensees need to document an energy and environmental plan (Prop Reg Section 125.1(c)).
  • Security requirements for the facilities of licensees include storage, surveillance and locks (Prop Reg Section 125.2(a)(1-6)).
  • Licensees are required to provide training, including free Responsible Vendor Training, to all persons performing activities under their authorizations, within 30 days of engagement (Prop Reg Section 125.4(a)).
  • Seed-to Sale Tracking:
    • Licensees are required to conduct an initial comprehensive inventory of all cannabis and cannabis product in the possession of the licensee at the authorized premises on the date the cannabis licensee first engages in the cultivation, processing, distribution or sale of cannabis (Prop Reg Section 7(c)).
    • Licensees must conduct a monthly inventory audit of all cannabis products (Prop Reg Section 7(d)(2)).
    • Licensees are required to track all physical inventory of cannabis in an electronic real-time inventory tracking system as determined by the OCM. The inventory tracking system shall be capable of showing any cannabis that has been released for sale, to allow for a total recall of all cannabis if necessary (Prop Reg Section 7(a)).
    • Must tag all cannabis and cannabis products (including extracts, seeds, tissue, clone lots, seedlings, immature cannabis plants and cannabis waste) with a unique identifier (Prop Reg Section 7(a)(4)).
    • A licensee, as applicable, shall maintain records identifying the source of each ingredient used in the cultivation and processing of cannabis (Prop Reg Section 7(f)).
  • Transportation:
    • All cannabis and cannabis products shall be transported in a secure manner, in motorized and unmotorized transportation owned and operated by the licensee, including, but not limited to, a vehicle, trailer, bicycle and motorcycle (Prop Reg Section 9(e)).
    • Prior to transporting any cannabis or cannabis products, a licensee shall generate a shipping manifest that contains the purpose for the transport (Prop Reg Section 9(g)(1)).
      • Licensee is required to send the manifest to the OCM and the recipient of the cannabis or cannabis product, prior to transport, in a manner determined by OCM (Prop Reg Section 125.9(g)(2)).
      • Shipping manifests and any invoices shall be made readily available to the OCM, for inspection upon request, for a period of five years (Prop Reg Section 9(g)(10)).
    • Management of Cannabis and Other Waste:
      • Licensees are required to dispose of any cannabis or cannabis product that is outdated, damaged, deteriorated, contaminated or otherwise deemed not appropriate for cultivation, processing, distribution or sale (Prop Reg Section 10(a))
      • Cannabis waste that will be processed in a composting facility or other organics recycler (anaerobic digester, etc.) can only be mixed with other organic waste that the receiving organics recycler can process effectively (Prop Reg Section 10(c)(2)).
      • There are additional requirements for licensees self-transporting their cannabis waste (Prop Reg Section 10(f)), including:
        • Such licensee shall be registered or permitted as a waste transporter and the waste shall only be transported by the licensee or its employees (Prop Reg Section 125.1(f)(1-2)); and
        • self-transported cannabis waste shall only be transported to a solid waste management facility that is permitted by the New York State Department of Environmental Conservation (Prop Reg Section 125.1(f)(3)).
      • Environmental requirements include:
        • Satisfaction of minimum energy efficiency and equipment standards established by the OCM (Prop Reg Section 123.4(g)(1)(iv)); and
        • Power, water, fertilizer, soil and other resource sustainability requirements and reports (Prop Reg Section 123.4(f)(4), 123.4(g)(2) and 123.4(g)(3)).
      • Inspections and Audits:
        • Licensed or permitted premises, regardless of the type of premises, and all records, including, but not limited to, financial statements and corporate documents, shall be subject to inspection by the OCM (Prop Reg Section 11(a)).
      • Licensees must maintain records for at least five years (Prop Reg Section 125.12(a)).

Nothing herein constitutes legal advice.