Kaufman McGowan Submits Comments on Draft Adult-Use Cannabis Regulations

1.          

Section 118.1(a)(3)

This Section should be deleted.

The term “Aggregate ownership interest” is only used in the definition of “Passive Investor.” By definition, a Passive Investor is not permitted to have any control or influence over the applicant or license, which means under no circumstances could Section 118.1(3)(c) be applicable to a “Passive Investor.” In addition, with respect to prongs (a) and (b) of Section 118.1(3), since a passive investor is a true party of interest (“TPI” or “true party of interest”), entities and multilevel ownership structures in prong (a) and spouses in prong (b) are explicitly covered in the definition of true party of interest, which makes this unnecessarily confusing and duplicative. In addition, prong (b) expands the “spouse” concept beyond spouses to include other immediate family members, which goes beyond the scope of true party of interest and would be impracticable and unreasonably burdensome to calculate.

If the term “Aggregate ownership interest” remains, then it should be defined with respect to legal entities using affiliates instead of broadly referring to “multilevel ownership structure” without any reference to control. Similarly for individuals, “aggregate ownership interest” should be limited to spouses to be consistent with the definition of true party of interest. See alternative revised language below:

(3)        Aggregate ownership interest means, with respect to an applicant for a license or a licensee, the total ownership interest held by the following, or any combination of the following: (i) any direct owner of a legal entity and any other legal entity that, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, such legal entity; or (ii) any individual with control or direct ownership of such legal entity and any spouse of such individual.

2.          

Section 118.1(a)(6) (and throughout the rest of the regulations)

“Attractive to individuals under twenty-one means attractive to individuals under twenty-one (21) years of age as defined in Part 128 of this Title.”

Please note that as it relates to use of numerical values throughout the regulations, the use and application of using actual numbers vs. written out numbers is inconsistent. We tried to make all references to numerical values consistent by using the following format: [number written out] ([actual number]). We did not include a corresponding footnote for every change made in this respect.

3.          

Section 118.1(a)(7)

“Biodiversity means the variety of animals, plants, fungi, microorganisms and other life that make up our natural world. Each of these species and organisms work together in habitats or ecosystems to maintain balance and support life.”

This Section has been revised to clarify the definition of Biodiversity.

4.          

Section 118.1(a)(21)

“Community facility means a facility that provides day care to children; a public park; a playground; a public swimming pool; or a library.”

The definition of “Community facility” goes beyond the scope of Section 86(2)((e) of the Cannabis Law and has been modified to be consistent therewith. Also, the last sentence: “A municipality may issue a local law regarding community facilities that are not unreasonably impracticable” should be deleted as it is covered explicitly in Section 119.1 and Section 119.2 hereof and thus unnecessary and duplicative.

5.          

Section 118.1(a)(23)(viii)

“control substantially all or a material portion of the assets of the person;”

This Section should not say “any of the assets of the person” because someone controlling the ordering and supply of immaterial assets (e.g. office supplies, like staples and pens), should not be deemed to have a controlling interest in the person, which would be the case if this definition remained as-is. Rather, a quantitative standard and/or materiality qualifier, as proposed, should be used.

6.          

Section 118.1(a)(23)(ix)

“encumber substantially all or a material portion the assets of the person by way of mortgage or other indebtedness; and”

This Section should not say “encumber the assets of the person…” This is too broad as written and should, as with Section 118.1(a)(23)(viii), use a quantitative standard and/or materiality qualifier, as proposed.

7.          

Section 118.1(a)(33)

“Extracting means the process by which phytocannabinoids are separated from cannabis plant material through chemical or physical means, including without limitation, concentrating and isolating one or more phytocannabinoids from cannabis.”

This Section has been revised to more accurately describe extraction. This definition is derived from Section 15000(x) of Division 19 of Title 4 of the California Code of Regulations, which can be found at: https://api.cannabis.ca.gov/cannabis-laws/dcc-regulations/).

8.          

Section 118.1(a)(33) [New Section]

“(33)    Exempt goods and services means accounting, record-keeping, non-cannabis materials and goods from unlicensed persons, office supplies, leasing equipment, architect services, construction, heating, ventilating, air conditioning, refrigeration, plumbing, cleaning and janitorial, lighting, security, legal services, government relations (registered lobbyist), and license application preparation and regulatory compliance, and any other services of a similar nature, including those contemplated by and set forth in Section 124.3.”

A new Section 118.1(a)(33) should be added to include a definition of “Exempt goods and services” which would treat such services as truly exempt, whether or not the service provider exceeds the 10%/50%/100k thresholds. As a result, there should be a similar carveout in the definition of “Financial interests” and revisions made to Section 124.3(e) (see comments to those Sections below). While we understand the OCM’s concern that service providers who receive significant fees from licensees may be employing work-arounds to avoid other restrictions or otherwise exert undue influence over a licensee, we believe that the risk of such unscrupulous behavior should be outweighed by the need for certain essential services and the mitigation of such risk by the professional licensing regulation which is applicable to many of these exempt services. This clarification will avoid the need to analyze individual agreements and corresponding fees and also limit instances where, for example, accounting and law firms are deemed to be TPIs because customary fees exceed applicable thresholds. We understand that this was not the intent of the proposed regulations.

9.          

Section 118.1(a)(34) [New Section]

“Exempt goods and services provider means any person or entity providing exempt goods and services to an applicant or licensee. An exempt goods and services provider may not control or otherwise have undue influence over an applicant or licensee.”

A new Section 118.1(a)(34) should be added to include a definition of “Exempt goods and services providers” which corresponds to the newly proposed definition “Exempt goods and services” in Section 118.1(a)(33) (see comment in Section 118.1(a)(33)).

10.      

Section 118.1(a)(36)

“(36)    Financial interest means any actual or future right to ownership, investment or compensation arrangement with another person, either directly or indirectly, through business, investment, spouse, parent or child where the compensation exceeds the greater of: (i) 10% of revenue, (ii) 50% of net profit, or (iii) $100,000. Person with a financial interest, who would otherwise qualify as a passive investor, shall not be deemed a passive investor hereunder.”

This Section has been revised to add clarifying language.

11.      

Section 118.1(a)(37)

“(37)    Financier means 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. Agreements will be assessed based on current and future right to ownership or interest on the licensee, including, but not limited to, interest in the event of default, bankruptcy, or reorganization. A financier may not receive an ownership interest; control of the business; or a share of revenue in excess of the greater of: (i) 10% of gross revenue, (ii) 50% of net profit, or (iii) $100,000, in exchange for or in connection with such a gift, grant or loan; provided, however, that a financier shall be entitled to hold a future right to ownership to the extent such right gives no current or future right to control the business, is not exercisable for at least three (3) years from the date of grant and upon the exercise thereof, such financier would be a passive investor or five percent investor. Financial interest excludes any exempt goods and services provider so long as such provider does not otherwise have any control or undue influence over the applicant or licensee.”

This Section has been modified to (a) clarify what appears to be some surplus duplicative and confusing language, and (b) permit a financier to hold a future right to equity so long as it would still be a passive investor or hold five percent (5%) or less of the licensee. Many if not almost all non-CAURD applicants and licensees who are not self-funded are likely to need investment capital at some point. The strong investment community in New York is already limited and disincentivized in a number of ways under these regulations, and we are concerned that prohibiting future rights to ownership would disincentive their participation in financing the growth of the New York cannabis industry even more. Convertible debt is a common financing structure in cannabis and otherwise. We believe that permitting a future right to ownership that does not carry a controlling interest in the business and is capped at 20% upon a conversion is a way to reduce the disincentivization of the financial community to invest without imposing an unduly burdensome administrative burden on the investor and the applicant or licensee, while at the same time permitting the State to achieve its goal of preventing predatory takeovers by capping ownership and control.

Further, until they become an actual owner, such person or entity is not able to (absent other facts to the contrary) exert any control or influence over the applicant or licensee. In many instances, a right to future ownership in an entity may never come to fruition for various reasons. There is no public policy stated in MRTA or elsewhere that is furthered by treating a person with a right to future ownership in a licensee as a true party of interest until such time that person actually owns the equity.

With respect to the last sentence, see comment to Section 118.1(a)(38).

12.      

Section 118.1(a)(40) [New Section]

“(38)    Five Percent Investor means a person that is an equity owner of a licensee with an aggregate ownership interest of no more than five percent (5%) of the fully diluted shares of an applicant or licensee whose shares are publicly traded, or 5 % or less of the fully diluted shares or interest of any other entity, and does not otherwise control or have undue influence over the applicant or licensee. For the avoidance of doubt, five percent investors shall not be deemed to be true parties of interest solely by virtue of such ownership of an applicant or licensee.”

See comments in Section 118.1(a)(61) and Section 118.1(a)(81).

13.      

Section 118.1(a)(41) [New Section]

“(39)    Goods and services means goods and services not deemed or considered to be exempt goods and services, including those set forth in Section 124.3(b) and Section 123.4(c). If there is any conflict between exempt goods and services and goods and services, then to the extent the provider of such goods and services has no control or ability to have an undue influence over an applicant or licensee, such goods and services shall be deemed exempt goods and services.”

See comment in Section 118.1(a)(38) below.

14.      

Section 118.1(a)(38)

“Goods and services provider means any person or entity providing non-exempt goods and services to an applicant or licensee.”

This Section should be revised since “goods and services agreement” is not clearly defined in Part 124 of the draft regulations and the term “goods and services agreement” is not consistently used with other similar terms such as “goods and services provider” and “goods and services contractor.” In addition, the regulations’ attempt to distinguish between goods and services, exempt services and non-exempt services is confusing. We believe the regulations would benefit by defining goods and services provider by way of reference to non-exempt services and globally using the term “goods and services provider” or “exempt goods and services provider”.

15.      

Section 118.1(a)(44)

“(44)    House of Worship means a whole building owned or leased by a religious corporation as described by New York State Religious Corporation Law or used by a religious corporation or association of any denomination pursuant to the written permission of the owner thereof, which is used by members exclusively as a meeting place for divine worship or other religious observances presided over by a member of the clergy; provided, that in each case, such religious corporation or association shall have been approved by the Internal Revenue Service as tax-exempt under Section 501(c)(3) of the Internal Revenue Code, as amended.”

This Section has been revised to require that for a religious corporation or association to meet the definition of a place of worship, it must have been approved by the Internal Revenue Service as tax-exempt under Section 501(c)(3) of the Internal Revenue Code, as amended. In the absence of this, the existence of unaccredited or fly-by-night organizations claiming to be religions could undermine the certainty that licensees are entitled to have with respect to their locations.

16.      

Section 118.1(a)(50) (and throughout the rest of the regulations)

“(50)    Local law means a local rule or local regulation or local ordinance or action which is adopted by the municipality on matters otherwise not preempted by the Cannabis Law; provided, however, that such local law shall not be unreasonably impracticable as determined by the Board.”

Please note that we have revised this Section and many others throughout the regulations to add a semi-colon prior to the use of “provided” and/or “however”, where grammatically appropriate. We did not include a corresponding footnote for every similar revision. Also, please note that typically municipalities and counties are not one in the same. These terms are used throughout the regulations inconsistently and should be reviewed for accuracy.

17.      

Section 118.1(a)(52)

“(52)    Management services provider means any person who is a party to a management services agreement, which is an agreement, contract, arrangement, or other type of formal understanding between a vendor, consultant, or contractor and an applicant for a license or a licensee where the provider engages in (1) professional services related to administrative and professional staffing, business operations, and business strategy; or (2) consulting related to the growing, processing distributing, and selling of the plant or other core business functions under a licensee’s authorization. For the avoidance of doubt, no provider of exempt goods and services or persons or entities exempt under Section 124.3(a) shall be deemed to be a management services provider.”

This Section has been modified to be consistent with our other comments related to goods and services providers providing exempt services. See comments in Section 118.1(a)(33), Section 118.1(a)(38), Section 118.1(a)(40) [new Section] and Section 118.1(a)(41) [new Section] and Section 124.3(e).

18.      

Section 118.1(a)(61)

“Passive investor means a person that is a true party of interest of a licensee with an aggregate ownership interest of more than 5% but not more than 20% of the fully diluted shares or interest of any other entity, and does not otherwise control or have undue influence over the applicant or licensee. The total shares of an applicant or licensee shall be calculated as on a fully diluted basis (inclusive of all restricted stock units, options, warrants, or any other units of ownership that can be converted into a share of voting stock or equity), less contingent or future shares owned by persons whose financial or controlling interest in an entity is active.”

This Section should be modified to change the definition of passive investors to those persons or entities holding more than 5% and less than 20% of a private company so long as they as not actively involved in management of the business (investors owning 5% or less are proposed to be addressed separately through the definition of 5% investor); and (ii) remove any reference to “future voting shares” or “future equity share” so that the status of a passive investor would be determined if, and when, the investor becomes an actual owner above the established thresholds. In either case, investors under 5% ownership and holders of future equity are not able to (absent other facts to the contrary) exert control or undue influence over a licensee and should be excluded from the definition of TPI (see the newly proposed Section 118.1(a)(38) and comment to such section).

With respect to holders of 5% or less of the equity of a private company, it would be impracticable and unreasonably burdensome to require applicants and licensees to meet the TPI disclosure obligations (and continuing disclosure obligations). These holders, absent extraordinary circumstances, cannot control or exert any undue influence by virtue of their ownership. We strongly urge the Office to consider adopting a regulation similar to what is in effect in the State of California with respect to limiting disclosure for investors who own less than 20% of a licensee. Please note that Section 15002(b)(15)(A) and (B) limit the disclosure required with respect to financial interest holders, which include investors who own less than 20% of a licensee, to:

“(A)     For financial interest holders that are individuals, the first and last name of the individual, a contact phone number and email address, and the type and number of the individual’s government-issued identification, such as a driver’s license.

(B)       For financial interest holders that are entities, the legal business name, the name and phone number and email address of the entity’s primary contact, and federal taxpayer identification number of the entity.”

See Section 15002(b) of Division 19 of Title 4 of the California Code of Regulations, which can be found at: https://api.cannabis.ca.gov/cannabis-laws/dcc-regulations/

To illustrate the impossible disclosure burden applicant’s and licensee’s will face, as an example, Section 120.2(a)(2)(xviii) requires the applicant to disclose whether the applicant or any of its TPIs are out of compliance with General Obligations Law Section 3-503(2), has been disciplined or sanctioned by a state or federal agency or has had any state or federal tax liens against any of their property. The result of this Section is that an applicant must determine and disclose whether its TPIs (which include persons holding 0.0001% of the applicant directly or indirectly through a fund or public company) are in compliance with their child support obligations, including obtaining their social security numbers and a written statement under oath swearing to that fact whether they have been disciplined or sanctioned by a state or federal agency (which is not always possible to find) and whether a tax lien has been has been filed against their property. This Section, plus Section 120.17(b), which imposes on licensees a duty to make ongoing disclosures, forces the applicant or licensee to be in an impossible constant state of vigilance, playing the likely to fail role of big brother, in order to try and comply with an impossible and unduly burdensome set of disclosure obligations. There are many examples of this exact issue (much of which stems from the disclosure obligations regarding TPIs, which include passive investors, set forth in Section 120.2) and we think the fairest way to give applicants and licensees a chance to comply with their onerous disclosure obligations is to carve out 5% or less owners thereof. It would appear that the Office has thought about this on some level, as evidenced by Section 120.2(a)(2)(viii), which requires disclosure of a capitalization table showing ownership above 10% of an applicant or licensee.

In many instances, a right to future voting shares or future equity shares in an entity may never come to fruition for various reasons. There is no public policy stated in the MRTA or elsewhere that is furthered by treating a person with a right to a future interest in a licensee as a passive investor or true party of interest until such time that such person actually owns the equity. For reference, the Commonwealth of Massachusetts provided the following guidance with respect to a similar issue: “Through this guidance, the Commission clarifies that unexercised stock options, warrants, and/or convertible debt notes do not qualify as “possessing” equity and, therefore, is not included in the assessment of whether an individual or entity meets or exceeds the 10% threshold. If and when stock options, warrants, and/or convertible debt are exercised or vest, the resultant equity ownership will be immediately considered as possession of equity to be assessed against the 10% threshold.” See: Guidance-on-Control-and-Ownership_For-Public-Comment.pdf (masscannabiscontrol.com)

The state should also clarify the meaning of indirect interest, and that it should be viewed on a “look through” basis. In other words, the state should clarify that that the 5% and 20% thresholds for passive investors should be viewed at the licensed entity level, with proportionate pass-through attribution. By way of example, if a pooled investment vehicle owns 25% of a licensee, and one person owns 10% of such pooled investment vehicle, such person will be deemed to indirectly own 2.5% of the licensee. The Massachusetts Cannabis Control Commission has issued similar guidance with respect to their ownership limitations. See Guidance-on-Control-and-Ownership_For-Public-Comment.pdf (masscannabiscontrol.com).

19.      

Section 118.1(a)(68)

“(68)    Processor means a licensee that extracts concentrated cannabis or compounds, blends, extracts, compounds, infuses, makes, prepares, manufactures, labels or brands concentrated cannabis or cannabis products, but not the cultivation of the cannabis contained in the cannabis product.”

This Section has been revised to sync up with the definition of “processing” set forth in Section 118.1(a)(67).

20.      

Section 118.1(a)(81)

“True Party of Interest:

shall include the following:”

Especially given the broad scope of this definition, the industry and all applicants and licensees participating therein need the certainty of a clearly defined class of TPIs, rather than an open-ended definition.

21.      

Section 118.1(a)(81)(i)(a)

“(a)      applicant or licensee’s sole proprietor, partner (whether limited or general), member, manager, president, vice president, secretary, treasurer, executive officer, board member, trustee, director, or a person with equivalent title to each of the foregoing; provided, that a partner or member that is a five percent investor with no control or ability to unduly influence the applicant or licensee shall be excluded from this Section 118.1(a)(81)(a);”

This Section should be revised to carve out five percent investors for the reasons set forth in the comment to Section 118.1(a)(61). Additionally, this Section 118.1(a)(81)(i)(a) has been revised to clarify which officers of an applicant or licensee are TPIs. We believe that limiting this to executive officers (in addition to the named positions) more appropriately covers the scope of persons who should be subject to being TPIs. For example, a low-level assistant vice president or assistant secretary should not be a TPI. For example, it is not uncommon for administrative convenience for an associate at a company’s law firm to be elected as an assistant secretary, and it would be impractical to subject all such persons to the TPI requirements.

22.      

Section 118.1(a)(81)(i)(b)

“(b)      stockholder of applicant or licensee other than five percent investors;”

See comments in Section 118.1(a)(61) and Section 118.1(a)(81)(i)(a).

23.      

Section 118.1(a)(81)(i)(c)

“(c)  if the applicant or licensee is owned in whole or in part by an entity and the entity includes individuals who control or significantly influence the operations of the applicant or licensee in a manner similar to the persons set forth in Section 118.1(a)(81)(i)(a) above, then such entity and those individuals. To the extent any subsidiaries, affiliates, parents, shells, and holding companies of the applicant or licensee includes similar individuals who control or significantly influence the operations of the applicant or licensee, then such entity and those individuals;”

This Section should be revised to cut off who is considered a true party of interest in an applicant of licensee when working up or down the corporate chain or as it relates to affiliates. This Section has been revised to model the standard used in California (see Section 15003(b) of Division 19 of Title 4 of the California Code of Regulations, which can be found at: https://api.cannabis.ca.gov/cannabis-laws/dcc-regulations/). As proposed, this Section creates, at best, a very difficult if not impossible administrative burden for applicants or licensees, which would be required to police the otherwise unrelated activities of possibly large numbers of remotely related persons with respect to intrusive personal matters. This would virtually preclude any investment by investment funds, which likely will be needed by applicants and licensees, to the extent it would otherwise be available.

24.      

Section 118.1(a)(81)(i)(d)

“(d)  person, other than exempt goods and services providers, who receives aggregate payments in a calendar year, as part of a risk sharing or services agreement, that exceeds the greater of: 1) 10% of gross revenue, 2) 50% of net profit of a licensee, 3) $100,000 from the licensee in a calendar year;”

This Section defines a “True Party of Interest” to include persons “with a right to receive” certain amounts of money beyond thresholds that can only be known in retrospect, as the levels of revenues and profits of a licensee will not be known until after the end of each year. As written, this provision could deem a service provider a passive investor or true party of interest through no fault of their own, after a retroactive application of the “10/50/100 rules”. Moreover, it is possible that the service provider’s ownership (including owners’ spouses) of interests elsewhere in the supply chain or the retail chain could jeopardize the status of the licensee. The following change will at least provide the service provider and licensee with the option to reject or refund the payment if, in retrospect, such payment would exceed 10% of the gross revenue or more likely 50% of the net profit, of the licensee. This is especially important in the first few years after licensure since all initial applicants and licensees will be pre-revenue.

In addition, exempt goods and services providers should be specifically carved out of the definition of true party of interest since the proposed definition of “exempt goods and services providers” requires that such providers have no control or ability to unduly influence the applicant or licensee. As mentioned in our comment to Section 118.1(a)(33), while we understand the OCM’s concern that service providers who receive significant fees from licensees may be employing work-arounds to avoid other restrictions or otherwise exert undue influence over a licensee, we believe that the risk of such unscrupulous behavior is outweighed by the need for certain essential services and the mitigation of such risk by the professional licensing regulation which is applicable to many of these exempt service providers. This clarification will avoid the need to analyze individual agreements and corresponding fees and also limit instances where, for example, accounting and law firms are deemed to be TPIs because customary fees exceed applicable thresholds. We believe that this would be consistent with the spirit of the proposed regulations.

25.      

Section 118.1(a)(81)(i)(h)

This Section should be deleted.

This Section’s inclusion of “spouses” should be deleted. The Board and the Office have acknowledged that the Cannabis Laws have been influenced by or in some instances, directly based on the State of Washington’s cannabis regulations Many Washington licensees and cannabis industry experts have expressed concerns about the burdensome requirements imposed by the Washington cannabis regulations, including with respect to ownership and TPI requirements, and the negative impact that these burdensome requirements have had on Washington licensee’s ability to raise necessary capital. While the Washington regulations remain burdensome, one key issue was resolved in 2020 when the Washington legislature amended the definition of “True Party of Interest” to remove “spouses” as TPIs solely based on their spousal status (See: Wash. Admin. Code 314-55-035 and https://lcb.wa.gov/sites/default/files/publications/rules/2020%20Proposed%20Rules/WSR_20-18-099.pdf). This was done in order to help applicants and licensees navigate Washington’s disclosure requirements and remove the substantial burden to have spouses of TPIs obtain background checks, be fingerprinted and comply with other TPI disclosure requirements.

New York’s proposed Adult Use Cannabis Regulations have proposed similar “True Party of Interest” requirements as Washington, even including spouses of certain True Parties of Interest as TPIs themselves. For the same reasons that Washington ultimately removed spouses from the definition of TPIs and the disclosure requirements related thereto, New York should amend its definition of TPIs, as proposed hereby, to relax this substantial burden by removing spouses as TPIs.

26.      

Section 118.1(a)(81)(ii)(b)

“receives a bonus or commission from the applicant or licensee based on the individual’s sales, so long as the bonus or commission does not exceed ten percent (10%) of the sales of the applicant or licensee in any given bonus or commission period, unless otherwise determined by the Office. Commission-based compensation agreements shall be in writing;”

This Section has been revised to clarify the sentence.

27.      

Section 118.1(a)(81)(ii)(e)

“is a goods and services provider or exempt goods and services provider, as long as the applicant or licensee retains the right to and controls the business;”

This Section has been revised to be made consistent with the definition of “goods and services providers” and “exempt goods and services providers” proposed hereby.

28.      

Section 118.1(a)(81)(ii)(h) [New Section]

“(h)      owns an interest in an applicant or licensee through (1) an entity whose shares are publicly traded, or (2) an interest in an open end or closed end mutual fund, exchange-traded fund or similar pooled investment vehicle, or (3) a blind trust or similar instrument; in each case, who does not exercise discretion over investment or divestment decisions of such publicly traded entity or pooled investment vehicle, as applicable, and who does not otherwise have any control over the applicant or licensee;”

The state should adopt a safe harbor for certain indirect interest holders who own such indirect interest in New York or elsewhere by virtue of their ownership in a company whose shares are publicly traded or through a pooled investment vehicle over which such person does not have investment discretion, similar to the California’s Department of Cannabis Control’s Consolidated Regulations, specifically Section 15004(b), which reads as follows:

“Financial interest holders do not include any of the following:

(1)        A bank or financial institution whose interest constitutes a loan;

(2)        Persons whose only financial interest in the commercial cannabis business is through

an interest in a diversified mutual fund, blind trust, or similar instrument;

(3)        Persons whose only financial interest is a security interest, lien, or encumbrance on

property that will be used by the commercial cannabis business; and

(4)        Persons who hold a share of stock that is less than 10 percent of the total shares in a

publicly traded or privately held company.”

None of the policy concerns contained in the MRTA, its legislative history, or elsewhere in the rules and regulations promogulated or proposed to be promulgated under the MRTA are implicated by such passive and remote ownership. An indirect interest holder through a pooled investment vehicle, unless such person is a general partner or employee or director of the general partner or investment advisor or is the portfolio manager of the pooled investment vehicle, has no authority or discretion whatsoever over the pool investment vehicle’s investment either in the licensee or elsewhere in the supply chain, let alone any undue influence or control over the licensee. In fact, in many cases, the pooled investment vehicle investor may not even be aware that the vehicle owns such an interest. Not all pooled investment vehicles even provide notice of funding or investment in a portfolio company. Second, it is common practice for cannabis industry professionals to receive compensation for their expertise in the form of equity.

29.      

Section 118.1(a)(81)(ii)(i) [New Section]

“(i)       Five percent investors;”

See comments in Section 118.1(a)(61) and Section 118.1(a)(81)(i)(a).

30.      

Section 119.1(a)((4)(i)

“(i)       no less than a 500 foot radius of another premises for which a license of the same type has been issued in a city, town or village having a population of 20,000 or more; and”

The Board and the OCM should consider reducing this 1,000 foot and 2,000 foot radius requirement to be consistent with the 500 foot rule to which retail dispensaries and on-site consumption sites are subject. While it may be a good idea to set forth a minimum to which counties and municipalities are subject, the Cannabis Law does not contemplate these restrictions. To illustrate how different the proposed rule is from the 500 foot rule, which is contemplated by the Cannabis Law, and how burdensome it will be when implemented, please note that:

1. a 1,000 foot radius is equal to 3,141,592 square feet.

2. Manhattan is approximately 636,000,000 square feet, which means a total of approximately 202 retail dispensaries and on-site consumption sites (combined) will be theoretically possible, before factoring in the following, each of which carries their own burdensome 200 feet and 500 feet requirements, as applicable thereto:

a. Manhattan has an estimated 2,000 churches and 4,000 other places of worship (see https://hifld-geoplatform.opendata.arcgis.com/datasets/geoplatform::all-places-of-worship/explore?location=40.756534%2C-73.766027%2C12.00 and screenshot of map from Homeland Infrastructure Foundation-Level Data showing all places of worship in NYC attached as Exhibit A hereto);

b. New York City has approximately 1,859 public schools and 900 privately run secular and religious schools (see https://www.schools.nyc.gov/about-us/reports/doe-data-at-a-glance and );

c. New York City has more than 1,700 parks, playgrounds, and recreation facilities across the five boroughs, 10 of which are more than 500 acres large (see https://www.nycgovparks.org/about/faq); and

d. New York City has 2,185 licensed day care facilities, which does not even include school age, family and group family child care providers (total of which is 9,862 providers) (see https://ocfs.ny.gov/programs/childcare/assets/docs/factsheets/2020-DCCS-Fact-Sheet.pdf).

Accordingly, while we have been unable to calculate this definitively, the number of locations available in densely populated areas may be severely limited well beyond the extent intended if a 1,000 foot radius ban is permitted.

Also, we think that particularly in vertical environments such as New York City, the regulations would benefit if the Office provided clarity as to whether multi-story buildings are distinguishable from two first-floor buildings. For example, if a retail dispensary is located on the 1st floor of One World Trade Center and an onsite consumption lounge is on the 104th floor of the same building, since the distance is more than 1,000 feet, is that permissible despite being in the same building?

31.      

Section 119.1(a)((4)(ii)

“(ii)      no less than a 1,000 foot radius of another premises for which a license of the same type has been issued in a city, town or village having a population of less than 20,000.”

See comment in Section 119.1(a)((4)(i). For the same reasons, we think the radius should be cut in half. Also, this Section 119.1(a)(4)(i) contemplates a population of 20,000 or more, while this Section contemplates a population of 20,000 or less. Since a population of 20,000 is covered in both Sections, we revised this Section to say “a population of less than 20,000.

32.      

Section 119.1(c)

“(c)      The Office may issue a license pursuant to this Section for a premises which shall be within a 1,000 foot radius of an existing premises licensed and operating in a city, town, or village having a population of 20,000 or less, pursuant to this Section, after it determines that granting such license would be in the public interest.”

See comment to Section 119.1(a)((4)(i). This should be reduced to match Section 119.1(a)((4)(i).

33.      

Section 119.1(d) [New Section]

“(d)      The Office may issue a license pursuant to this Section for a premises which shall be within a 500 foot radius of an existing premises licensed and operating in a city, town, or village having a population of 20,000 or more, pursuant to this Section, if it determines that granting such license would be in the public interest.”

This Section has been added to cover 1,000 foot radius scenarios; provided, that this should be reduced to match Section 119.1(a)((4)(i), See comment to Section 119.1(a)((4)(i).

34.      

Section 119.2(a)

“(a)      All municipalities and counties, towns, cities and villages are hereby preempted from adopting any law, rule, ordinance, regulation or prohibition pertaining to the registration, licensing, permitting or operation of registered organizations, adult-use cannabis businesses, or, or cannabinoid hemp businesses; provided, however, such municipality, town, city or village may enact local laws and regulations governing the time, place and manner of the operation of licensed adult-use cannabis retail dispensaries and/or on-site consumption sites, provided that such law or regulation shall not make the operation of such licensed retail dispensaries or on-site consumption sites unreasonably impracticable as determined by the Board. To the extent the following is not unreasonably impracticable, the Board authorizes municipalities, towns, cities and villages to pass local laws and regulations governing the time, place, and manner, which shall mean and apply to the following activities:”

This Section has been revised to made consistent with Section 131(2) of the Cannabis Law.

35.      

Section 119.2(a)(1)(ii)

“(ii)      shall not restrict operations to less than ninety-eight (98) hours a week; provided, however, this provision shall not be construed as removing the licensees’ discretion to operate for less hours of operation.”

If a retail dispensary is not permitted to be open between 2am and 8am, then it should be permitted to be open, in its discretion, between 8am and 1:59am. 18 hours per day multiplied by 7 days per week is 126 hours. Permitting a municipality to limit a retail dispensary to 10 hours per day, or 70 per week, is unreasonably impracticable. The State Liquor Authority offers more flexibility to locations selling alcohol. The change to 98 hours would permit dispensaries to remain open 14 hours per day, 7 day per week.

36.      

Section 119.2(2)(ii)

“(ii)      shall not restrict operations to less than ninety-eight (98) hours a week; provided, however, this provision shall not be construed as removing the licensees’ discretion to operate for less hours of operation.”

See comment to Section 119.2(a)(ii).

37.      

Section 119.4(a)(3)

“on the same road of a community facility if the municipality has enacted an ordinance in accordance with Section 119.2 of this Part, and is within 500 feet of such community facility;”

This language has been revised to be made consistent with and include critical clarification set forth in Section 86(2)(e) of the Cannabis Law. In addition, the word “section” has been revised to say “Section” in order to be consistent with the application and use of the word throughout the regulations. There are many other places where we have fixed the word “section” to “Section” but did not include a corresponding comment.

38.      

Section 119.4(a)(5)

This Section should be deleted.

The restrictions proposed by this Section are not contemplated by or set forth in the MRTA.

39.      

Section 119.4(a)(6)

This Section should be deleted.

The restrictions proposed by this Section are not contemplated by or set forth in the MRTA.

40.      

Section 119.4(a)(7)

“(7)  The measurements in paragraph (a) of this subdivision are to be taken in a straight line from the center of the nearest entrance of such house of worship, the nearest entrance of school grounds or the nearest entrance of such community facility, if applicable, to the center of the nearest entrance of each such premises licensed and operating pursuant to this Section 72 and Section 77 of the Cannabis Law; except, however that no renewal license shall be denied to any premises at which a license under this Chapter has been in existence continuously from a date prior to the date when a building on the same road and within 200 feet of said premises has been occupied exclusively as a house or worship or 500 feet of said premises has been occupied by schoolgrounds or community facility.”

This Section has been revised to made consistent with Section 86(2)(e) of the Cannabis Law, to make it consistent with the rules regarding a house of worship and schoolgrounds (all three of which are included in Section 119.4(a), which Section 119.4(a)(7) cross-references), and provide needed clarification related to community facilities in the event they are applicable (which they should not be).

41.      

Section 119.4(a)(7)(i)

“(i)       Within the content of this subdivision, the “entrance” shall mean a main door of a house of worship, community facility, or of premises licensed and operating pursuant to this Section, regularly used to give ingress to the students of the school, to the general public attending the house of worship, and to patrons or guests of the community facility or the premises licensed and operating pursuant to this Section or of the premises sought to be licensed, except that where a school, community facility or house of worship or premises licensed and operating pursuant to this Section or the premises sought to be licensed is set back from a public thoroughfare, the walkway or stairs leading to any such door shall be deemed an entrance; and the measurement shall be taken to the center of the walkway or stairs at the point where it meets the building line or public thoroughfare. Such definition shall not include cellars, back and side doors, delivery entrances, or emergency exits.”

See comment to Section 119.4(a)(7).

42.      

Section 120.2(a)(1)(ii)(b)

“(b)      address of the principal place of business;”

This Section has been revised to correct a typo.

43.      

Section 120.2(a)(1)(ii)(i)

“(i)       for each individual partner, member, member-manager or nonmember-manager, director, officer, trustee, certain shareholder, and each individual true party of interest of the applicant and of each level of ownership of the applicant, in each case, to the extent required by Section 118.1(a)(81)(c)”

This Section has been modified to sync up with and include a cross-reference to Section 118.1(a)(81(c), which has been revised to cut off the up-the-chain disclosure based on whether the entity owner controls or has aa significant influence over the applicant or licensee.

44.      

Section 120.2(a)(1)(iii) [New Section]

“(iii)     With respect to five percent investors of an applicant, only the following information shall be required:

(a) for five percent investors that are individuals, the first and last name of the individual and a contact phone number and email address; and

(b) for five percent investors that are entities, the legal business name and the name, phone number and email address of the entity’s primary contact.”

A new Section 120.2(a)(1)(iii) has been added setting forth the information that an applicant will need to disclose with respect to its five percent investors. Based on similar requirements in other states for investors of a similar nature, we think that this is a reasonable and manageable disclosure obligation and does not impose an unreasonably burdensome obligation on the applicant.

45.      

Section 120.2(a)(2)(i)

“(i)       the percentage of ownership interest or financial interest held in the applicant by persons, and the applicant’s true parties of interest;”

This Section, as proposed, is far too broad to be practical for any applicant that takes in investment from any type of institutional investor. Ownership interests and financial interests are what create TPI requirements. There is no definition or standard proposed by the Board or the Office with respect to “any other interest.” If such standard were to remain, there would be substantial uncertainty as to what constitutes such an interest (that is not an ownership or financial interest). As revised, this provides the clarity necessary to assist an applicant in meeting its administrative and disclosure burden and reduces the risk of substantially disincentivizing institutional investors from participating in the New York cannabis industry.

46.      

Section 120.2(a)(2)(ii)

“(ii)      a list of all parent companies, subsidiaries, affiliates, predecessors, and successors of the applicant and all individuals controlling or serving as an executive officer, director, manager, general partner or, in the case of an open end or closed end mutual fund or similar pooled investment fund, the executive officer, director, manager or general partner of the investment advisor and any sub-advisor thereof, of each of the foregoing parent companies, subsidiaries, affiliates, predecessors, and successors of the applicant, in each case, to the extent any of the foregoing satisfy or meet the requirements of Section 118.1(a)(i)(c);”

See comments to Section 118.1(a)(i)(c).

47.      

Section 120.2(a)(2)(iv)

“(iv)     copies of business formation and organizational documents, such as a certificate of incorporation, certificate of limited partnerships, certificates of authority, articles of organizations, charters, bylaws, partnership agreements, operating agreements, agreements between any two (2) or more persons of the applicant that relate in any manner to the voting rights with respect to, operation or control of the applicant, property or profit of the applicant, and any other comparable documents and agreements that sets forth the legal structure of the applicant or relate to the formation, organization, management or control of the business and all amendments and changes thereto;”

This Section has been revised to add clarifying language regarding shareholder agreements.

48.      

Section 120.2(a)(2)(v)

“(v)      personal histories or an entity history, as applicable, disclosure forms including, but not limited to, a person’s residence, employment and licensure history, with respect to all persons or entities satisfying Section 118.1(a)(81)(a), including executive officers, directors, managers or general partners of the applicant;”

This Section has been revised to clarify which histories are required to be disclosed. We suggest cutting off this obligation at those persons who may control or significantly influence the applicant, such as executive officers, directors, managers and general partners. To require the items contemplated by this Section without any cutoff or limitation would be unduly burdensome for an applicant. We also removed “conviction history” as this is covered extensively for these persons and entities in Section 120.2(a)(3).

49.      

Section 120.2(a)(2)(vi)

“(vi)     all executed contracts, term sheets, agreements, or side letters between the applicant or its true parties of interest of the applicant and a goods and services provider or another party that relates to the ownership and control structure; control of material assets; material liabilities; real or intellectual property; administrative, operational, financial, advisory, or management services; revenue; funding or capitalization; royalties; or profit or future profit, of the applicant or proposed licensee or comparable documents, in each case, other than with exempt goods and services providers;”

See comments in Section 118.1(a)(33), Section 118.1(a)(38), Section 118.1(a)(39) and Section 124.3(e).

50.      

Section 120.2(a)(2)(viii)

“(viii) capitalization tables showing ownership above ten percent (10%) of an interest in the applicant, including owners of all parent and holding entities relating back to all individual persons involved, including any person with any vested future rights to ownership or revenue, except passive investors as defined in Part 118 of this Chapter and those persons contemplated by Sections 118.1(a)(81)(ii)(h) and (i);”

This Section has been revised to be made consistent with suggested addition of a pooled investment exception to the TPI definition. See comment in Section 118.1(a)(81)(ii)(h).

51.      

Section 120.2(a)(2)(ix)

“(ix)     documents relating to the ownership structure of the applicant, showing all holding and parent companies, subsidiaries, and affiliates of the applicant;”

This Section has been revised to add clarifying language.

52.      

Section 120.2(a)(2)(xiii)

“(xiii)   a description of any license or authorization in any other state or jurisdiction, currently or previously, to cultivate, process, manufacture, distribute, deliver, or sell cannabis or cannabis products in any form, held by the applicant or any true parties of interest of the applicant other than passive investors, and the following which may include, but not be limited to:”

This Section has been revised to exclude passive investors to limit the substantial burden placed on a licensee to comply with this disclosure item. This information often is not readily available or easily obtainable and being required to obtain it would be very difficult for a licensee and could impede investment in New York licensees.

53.      

Section 120.2(a)(2)(xviii)(a)

“(a)      with respect to an individual, is out of compliance with the General Obligations Law Section 3-503(2);”

This Section has been revised to add clarifying language. Please note that we suggest deleting this Section as it imposes a significant and costly burden on applicants to comply. It is a lot to ask of an applicant to determine and disclose whether its TPIs are in compliance with their child support obligations, for example, and of a licensee to remain in a constant state of vigilance to meet its duty of continuing disclosure hereunder.

54.      

Section 120.2(a)(2)(xix)

“(xix)   a list of any charitable contributions exceeding $5,000 by the applicant in the last five (5) years;”

This Section has been revised to add a threshold in order to minimize the administrative burden on applicants and licensees to make this disclosure. It is far too broad as drafted and we think, based on our cannabis industry experience, a $5,000 threshold for charitable contributions is reasonable.

55.      

Section 120.2(a)(2)(xxi)

“(xxi)   a copy of the labor peace agreement between the applicant and a bona fide labor organization and an attestation that the applicant understands that the maintenance of such a labor peace agreement shall be an ongoing material condition of the license, or a notarized statement that the applicant will enter into and abide by the terms of a labor peace agreement;”

This Section has been revised to provide an option to enter into a labor peace agreement in the future. We believe this is necessary and appropriate because applicants will need time to select from among multiple labor unions and because a labor peace agreement may take substantial time and effort to prepare, review and negotiate. The added language does not skirt the responsibility of the applicant to enter into one, but reflects the reality that many, if not all, applicants, will not have entered into a labor peace agreement at the time of submission of their application. The revised language is based on Section 15002(c)(19) of Division 19 of Title 4 of the California Code of Regulations, which can be found at: https://api.cannabis.ca.gov/cannabis-laws/dcc-regulations/), pursuant to which California acknowledged via the regulations that applicants and licensees will not be able to enter into a labor peace agreement easily or quickly.

56.      

Section 120.2(a)(3)

“(3)      Criminal history and legal proceedings. For the applicant and its true party of interest, other than its passive investors and those persons contemplated by Sections 118.1(a)(81)(ii)(h) and (i) or as otherwise determined by the Office:”

This Section has been revised to be made consistent with suggested exceptions to the TPI definition. See comment in Section 118.1(a)(81)(ii)(h).

57.      

Section 120.2(a)(3)(ii)(d)

This Section should be deleted.

This Section has been removed as it is duplicative of Section 120.0(a)(3)(ii)(c). Subsections (e) to (g) should be renumbered as (d) to (f).

58.      

Section 120.2(a)(3)(iii)

This Section should be deleted.

We suggest deleting this Section for several reasons.

1.      The requirements are duplicative and confusing, particularly since other parts of this Section 120.2(a)(3) require the same items, but limited to a certain period of time, such as 10 years.

2.      Fingerprinting, criminal history information is sufficiently covered by Section 120.2(a)(3).

3.      We see no reason why information to be disclosed in connection with criminal cases as otherwise contemplated by Section 120.2(a)(3) couldn’t include court documents.

4.      Arrest reports and accusatory instruments for pending criminal actions in Section 120.2(a)(3)(ii)(a). If the person arrested or accused of a criminal offense has been convicted, then such conviction is already covered by Section 120.2(a)(3). If a person was arrested or accused of a criminal offense, but such action resulted in a dismissal, ACOD or non-conviction, then arrest reports and accusatory instruments seem inappropriate, and in any event, are covered for the last 10 years by Section 120.2(a)(3)(b).

59.      

Section 120.2(a)(4)(viii)

Original language: “(viii)            documentation acceptable to the Office, that the applicant will be able to obtain insurance sufficient to indemnify and hold harmless the state and its officers and employees;”

We do not understand this Section. Why would an applicant be required to obtain insurance (which is an additional start-up cost) that may not be available on terms that comply with this Section. Also, why would a licensee be required to purchase insurance policies indemnifying the State? It’s not clear for what the State is seeking indemnification. We believe this Section should be removed, or alternatively, clarified.

60.      

Section 120.3(b)(1)

“(1)      There are four (4) different license types for cultivation: (i) outdoor, (ii) mixed light, (iii) combination of outdoor with mixed light, or (iv) indoor. A cultivator may only have one cultivator license which will authorize the cultivator to cultivate within a specified type and canopy tier as approved on the cultivator’s application.”

We understand that the Office wishes to limit how many cultivation licenses one cultivator can hold; however, we strongly urge the Office to clarify how many locations one licensed cultivator is permitted to own or operate. We see no public policy or prevailing reason why a cultivator shouldn’t be permitted to obtain a Tier V cultivation license and open up five 20,000 sq. ft. facilities rather than one 100,000 sq. ft. facility, especially considering how expensive and difficult large parcels are to identify and purchase or lease in high-density locations. We think the industry would greatly benefit from permitting this kind of flexibility to holders of cultivation licenses while also remaining consistent with the aggregate caps on square footage set forth in these proposed Cannabis Laws.

61.      

Section 120.3(b)(5)(v)

“adherence to any plan required in this chapter, including, but not limited to, the licensee’s operating plan, environmental plan, and community impact plan; and”

This Section has been revised to correct a typo.

62.      

Section 120.3(b)(6)

“(6)      At the time of license renewal, cultivators shall provide inventory and production records requested by the Office during the six (6) months prior to the application for renewal. As part of the license renewal process, the Board may reduce a cultivator’s maximum cultivation canopy to a lower tier if the cultivator sold less than 50% of what it harvested in the previous six (6) months in the absence of extenuating or unusual circumstances such as economic hardship.”

This Section has been revised to (i) correct a typo, and (ii) provide some assurances to cultivators with respect to potential reductions in canopy. The Office should consider that the first few years of the New York industry likely will be a difficult environment to succeed in for cultivators, particularly with limited retail capacity. Also, many cultivators will be making investments or building-out large-scale cultivation operations; however, without sufficiently robust retail channels, which will take time to develop, cultivators should not be penalized in the manner set forth in this Section.

63.      

Section 120.3(d)

Original language: “(4)            branding, including for the exclusive performance of white labeling agreements;”

Our understanding is that the Office and a member of the Cannabis Control Board have publicly stated that if a person or entity is simply licensing its brand or intellectual property to a licensed cannabis business, that the person or entity licensing such brand or intellectual property would be required to hold a processing license. We believe that this is inappropriately burdensome and unnecessary, including for the following reasons:

1.      Section 120.3(d) and the regulations make it clear that there are 3 types of processing licenses, not 4 (a brand license would be the 4^th).

2.      The reference to branding in this Section seems like it was intended to apply to the processor performing the processing services, not the licensor.

3.      It is not clear what standard operating procedures would be applicable to a brand licensor if it would need to apply for a processor license, since it would not actually be processing any cannabis.

4.      As a matter of public policy, neither the Office, the Board nor the public should be concerned about these types of arrangements so long as the licensor utilizes the services of businesses licensed to conduct commercial cannabis activities in the State of New York for all activities that touch the cannabis product.

5.      A white labeling or intellectual property license agreement would likely need to be disclosed to the Office pursuant to the Cannabis Laws, so the Office will be aware of the arrangement and the identity of the licensor.

64.      

Section 120.4(e)

“(e)      Upon application for license renewal, a licensee shall pay renewal fees equivalent to the fees paid for the initial license, or as otherwise determined by the Board; provided, however, a ROND shall only pay the license fee set out in (12)(iv) upon initial licensure and a ROD shall only pay the one-time license fee set out in (13) upon initial licensure.”

This Section has been revised to add clarifying language about one-time license fees to be paid by an ROD and an ROND.

65.      

Section 120.7(b)(5)(ii)(d)

“(d)      employer paid retirement benefits such as 401(k) match or direct contributions;”

This Section has been revised to correct a typo.

66.      

Section 120.7(c)

“(c)      Selection. During the evaluation of an application, the Office may use evaluation mechanisms including but not limited to, scoring, compliance, qualified lotteries and a randomized selection process or any combination thereof.”

This Section has been revised to correct a typo.

67.      

Section 120.7(c)(2)

“(2)      The Board may prioritize application submission, review, selection and issuance by, including but not limited to, region, license type and social and economic equity status.”

This Section has been revised to conform to the format used in in Section 120.3(c).

68.      

Section 120.7(c)(3)(v)

“(v)      A group consisting of all other applications not included in the categories in subparagraphs (i) through (iv) of this paragraph.”

The Office should clarify why this Section omits minority and women-owned businesses and revise it accordingly if such businesses should be included.

69.      

Section 120.7(f)

“(f)  If a provisionally approved applicant fails to satisfy the conditions determined by the Board within twelve (12) months from applicant’s receipt of such approval, unless otherwise approved by the Board, the application will be deemed incomplete and the provisional approval will be revoked; provided, however, that the applicant may request additional time and shall have the opportunity to demonstrate to the Board a reasonable documented effort to complete the conditions required by this Section in a timeframe set out by the Board. If the applicant fails to satisfy the conditions and is unable to demonstrate a reasonable documented effort, the applicant will not be refunded the licensing fee.”

This Section has been revised to sync it up with the 12-month submission period permitted by Section 120.9(c).

70.      

Section 120.9(c)

Original language: “Licenses issued under this Chapter shall be effective upon the date the provisional license approval converts to a final approval and shall specify the following information:”

This Section was incorrectly labeled as subsection “(c)” in the proposed regulations, but sequentially, should be subsection “(d)”.

71.      

Section 120.9(d)

“Licenses shall not be transferable or assignable without prior written approval of the Board including, without limitation, to another licensee. A change in majority ownership or controlling interest in the license or person holding the license, shall be deemed to constitute a transfer of the license.”

This Section was incorrectly labeled as subsection “(d)” in the proposed regulations, but sequentially, should be subsection “(e)”. We also added clarifying language to the second sentence of this Section.

72.      

Section 120.9(e)

Original language: “To obtain approval from the Board for the transfer of a license, a transferee shall submit an application to the Office, in a manner prescribed by the Board, demonstrating an ability to operate the license in compliance with this Chapter, along with an application fee pursuant to Section 120.4.”

This Section was incorrectly labeled as subsection “(e)” in the proposed regulations, but sequentially, should be subsection “(f)”.

73.      

Section 120.9(f)

“The Board may deny an application for transfer of a license if the application fails to demonstrate that the transferee will comply with all the requirements of this Chapter, or if the licensee has a record of poor performance, meaning two (2) or more Category 1 and 2 Violations pursuant to this Part 133, within the past two (2) years.”

This Section was incorrectly labeled as subsection “(f)” in the proposed regulations, but sequentially, should be subsection “(g)”.

74.      

Section 120.9(g)

“A licensee may amend a license to add or delete permitted activities or change the location of a licensed premises by submitting a written request to the Office along with an application fee pursuant to Section 120.4.”

This Section was incorrectly labeled as subsection “(g)” in the proposed regulations, but sequentially, should be subsection “(h)”.

75.      

Section 120.9(h)

Original language: “A request to add permitted activities shall be reviewed by the Office in accordance with Section 120.7.”

This Section was incorrectly labeled as subsection “(h)” in the proposed regulations, but sequentially, should be subsection “(i)”.

76.      

Section 120.9(i)

“Verification. The Office may conduct random or scheduled verification inspections after a license has been issued to determine if the plans submitted to the Office meet or met the minimum requirements as described in this Chapter or in guidance as may be issued by the Office.”

This Section was incorrectly labeled as subsection “(i)” in the proposed regulations, but sequentially, should be subsection “(j)”.

77.      

Section 120.11(a)

“(a)      An application to renew any license issued under this Part shall be filed with the Office not more than one hundred twenty (120) days nor less than sixty (60) days prior to the expiration thereof. If a renewal application is not filed at least sixty (60) days prior to the expiration thereof, the Office may determine that the license shall expire and become void on such expiration date.”

The first sentence of this Section has been revised to make the period of time during which an application can be submitted consistent with the second sentence. Without this change, there would a period of time between 60 days and 90 days prior to the expiration date that is not addressed. Further, based on our industry experience, we think a 60-day renewal application window is appropriate.

78.      

Section 120.11(c)(2)

“the licensee has an executed labor peace agreement with a bona-fide labor organization or provided a notarized statement that the applicant will enter into and abide by the terms of a labor peace agreement;”

This Section has been revised to be consistent with the revisions made to Section 120.2(a)(2)(xxi) and the comment made thereto.

79.      

Section 120.11(c)(6)

Original language: “the licensee has no outstanding filings, reports, fines or other deficiencies with the Office in the operations of its adult-use license; and”

This Section was incorrectly labeled as subsection “(6)” in the proposed regulations, but sequentially, should be subsection “(7)”.

80.      

Section 120.11(c)(7)

Original language: “any other information requested by the Office.”

This Section was incorrectly labeled as subsection “(7)” in the proposed regulations, but sequentially, should be subsection “(8)”.

81.      

Section 120.11(b)

“The Board shall determine whether to renew an applicant’s license based on the relevant factors in this Section and Section 120.7 of this Part.”

This Section was incorrectly labeled as subsection “(b)” in the proposed regulations, but sequentially, should be subsection “(d)”.

82.      

Section 120.11(c)

Original language: “If applicable, the licensee shall provide a statement that there have been no amendments or changes to the licensed premises since the license was issued, excepting any amendments or changes that previously received approval from the Office or Board as applicable; and”

This Section was incorrectly labeled as subsection “(c)” in the proposed regulations, but sequentially, should be subsection “(e)”.

83.      

Section 120.11(d)

Original language: “An applicant may not apply to renew a license if the license has been cancelled, suspended or revoked.”

This Section was incorrectly labeled as subsection “(d)” in the proposed regulations, but sequentially, should be subsection “(f)”.

84.      

Section 120.12(a)(2)

“(2)      the applicant or their true parties of interest have a history of violations relating to its operation or ownership of a licensee;”

This Section has been revised to correct and clarify the proposed language.

85.      

Section 120.12(a)(3)

Original language “(3)  the source of funds identified by the applicant to be used for the acquisition, startup, or operation of the business is determined by the Office to be questionable, unverifiable, or gained in a manner which is in violation by law;”

Please note that with respect to this Section and the legacy market, the Office and the Board have stated that one of their goals is to transition the legacy market into the regulated, taxed and legal market. We note that continuing competition from the black market has been a significant challenge in almost all other state-legal adult-use markets. We believe that that the greater portion of the black market that can be transitioned over to the legal market, the stronger the legal market will be. We recommend that with all of the time, effort and work being invested into building a state-legal market where social and economic equity applicants can thrive, the Office would be wise to create a flexible and tolerant pathway for legacy market operators to obtain licenses and divert their businesses from the black market to the state-legal market.

We have anecdotally observed an eagerness by substantial portions of the New York legacy market to join the legal market, including by social and economic equity participants. We believe that these efforts would be more likely to succeed to a greater extent if transitioning legacy market operators were granted a New York State tax and criminal prosecution amnesty (which we acknowledge may require legislative action) and provided flexibility in connection with this transition and the related licensing application process. This must include no requirement to verify the source of such applicant’s funds, which may have derived from legacy market operations. While we recognize the issues with that, we believe that any negatives would be outweighed by making available to many social and economic equity applicants a source of self-funding that likely would otherwise not be available, especially in light of the anticipated severe lack of investment capital we expect to be available to New York applicants under the regulations as proposed (as described elsewhere).

86.      

Section 120.12(a)(5)

“(5)  the applicant makes a false representation or fails to disclose a material fact to the Office, and therefore may be subject to prosecution under Section 190.25 of the Penal Law, during the application process;”

This Section has been revised to correct a few typos.

87.      

Section 120.12(a)(8)

“(8)      the applicant, or any true party of interest of the applicant, has outstanding violations, fines, fees, payments or other indebtedness assessed against them by state or federal regulatory authorities or any local municipalities;”

This Section has been revised to correct a typo.

88.      

Section 120.12(a)(11)

“(11)    the proposed licensed premises is located in a location prohibited by Cannabis Law or state laws or regulations, except with respect to a licensed premises previously approved;”

This Section has been revised to correct a typo.

89.      

Section 120.12(a)(14)

“(14)    knowledge of sale of cannabis or cannabis products by the applicant not meeting the requirements of this Chapter;”

This Section has been revised to clarify that it relates to the sales by the applicant.

90.      

Section 120.12(b)(1)

“(1)      the applicant fails to maintain a labor peace agreement with a bona-fide labor organization or to submit a notarized statement that the applicant will enter into and abide by the terms of a labor peace agreement;”

This Section has been revised to be consistent with the revisions made to Section 120.2(a)(2)(xxi) and Section 120.11(c)(2) and the comments made thereto.

91.      

Section 120.13(a)

“(a)      An applicant whose application was denied or a licensee whose license was cancelled, suspended, revoked or not renewed, due to one or more of the provisions in paragraphs (1) through (5) of this subdivision, may reapply at any time after the failure or disqualification is cured:”

This Section has been revised to make the reference to subsections consistent with the rest of the proposed regulations. In addition, the reference to “4” has been changed to “(5)” as a corresponding change to our proposed addition of a new Section 120.13(a)(5) (see comment to Section 120.13(a)(5)).

92.      

Section 120.13(a)(5) [New Section]

“(5)      failure to comply with paragraphs (1) to (5) of Section 120.12(b).”

This Section has been added to include additional flexibility to the applicant or licensee in the event they fail to comply with paragraphs (1) to (5) of Section 120.12(b), which we think is more reasonable and fair than the alternative, which is to wait 1 year to reapply pursuant to Section 120.13(c). For example, a licensee that fails to submit a renewal application at least 60 days prior to its expiration or fails to maintain a labor peace agreement (which, as other states with similar requirements have seen, is not an easy requirement to meet), would be forced to wait 1 year to reapply. All of the time, investment, potential tax revenue and jobs related to that license would be lost for an extended period without an opportunity to cure.

93.      

Section 120.13(c) (last sentence)

“The new application shall include submission of sufficient evidence demonstrating that the factual circumstances upon which the denial, cancellation, suspension or revocation was based have been cured to the satisfaction of the Office.”

This Section has been revised to correct a typo.

94.      

Section 120.16(a)(4)

“(4)      Where applicable, all look back periods for criminal conditions, offenses, violations and conduct commence on the date of disposition; provided, however, that if the disposition results in incarceration in any institution, the look back period shall commence on release from incarceration; and”

This Section has been revised to correct a few typos.

95.      

Section 120.17(b)

“(b)      If an applicant is issued a license, the duty of ongoing disclosures for the licensee and its true parties of interest, pursuant to this Chapter, shall continue throughout the licensed period.”

This Section has been revised to correct a typo.

96.      

Section 120.18(a)

“(a)      Duty to Report. Licensees have an ongoing duty to report any material changes or amendments to their cannabis operations to the Office. A licensee has a continuing duty to provide the Office with up-to- date contact information and shall notify the Office in writing of any amendments or changes to the mailing addresses, phone numbers, electronic mail addresses, and other contact information they provide the Office. A licensee shall report to the Office:”

This Section has been revised to add a materiality standard in order to clarify the purpose of this paragraph. Otherwise, this Section would be impossible to comply with.

97.      

Section 120.18(a)(1)

Original language: “(1)            any amendments or changes to the cannabis business operations that are required in regulation and law.”

Why would an applicant be required to notify OCM of adapting its business to a regulatory change?

98.      

Section 120.18(a)(iv)(c)

“(c)      material alterations of ingress or egress”

Should minor things like adding another lock or changing locks really require notice?

99.      

Section 120.18(b)(2)(ii)

“(ii)      granting the right to make material business decisions or veto significant events which may include, but are not limited to, any sale of all or substantially all of the business’s assets, a merger or consolidation in connection with which a change in control occurs, a change in control, liquidation, dissolution of an organization, or other events as determined by the Board;”

This Section has been revised to add clarifying language regarding change in control transactions. We also removed the word “ownership” as it is duplicative with “a change in control”.

100.  

Section 120.18(b)(2)(iii)

“(iii)     any mergers and acquisitions, applications for additional licenses, or hiring and firing of executive level officers; or”

This Section has been revised to correct a typo.

101.  

Section 120.18(b)(3)

“(3)      for licensees with less than ten (10) owners of record with an equity interest:”

This Section has been revised to clarify the measurement of number of owners.

102.  

Section 120.18(b)(3)(i)

“(i)  any time there is a new person with an equity interest in the licensee other than those persons or entities contemplated by Section 118.1(a)(81)(ii)(h), the licensee shall submit, within ten (10) days, an updated entity disclosure, in the form and manner prescribed by the Office, with all new holders of equity in the license; and”

This Section has been revised to (i) correct a typo, (ii) add clarifying language, and (iii) include a reference to Section 118.1(a)(81)(ii)(h), which covers public companies and certain funds. It would be impossible or nearly impossible for a licensee to track changes at those levels.

103.  

Section 120.18(b)(4)

“(4)      licensees seeking to materially change their attributes subject to subdivision (2) of this Section, shall submit an application to the Office at least 60 days prior to the proposed date of execution, acquisition or transfer. In determining whether to approve such application, the Office may set terms or conditions under which it may allow the continued operation of the licensee.”

A mandatory 60-day waiting period may chill merger and acquisition and financing activity to the significant detriment of many applicants and seems likely to particularly harm applicants which are not self-funded (i.e. the ones not owned by rich people).

104.  

Section 120.18(c)(1)

“(1)      a change in control of the licensee, by transfer or issuance of more than 50% of the voting power of the licensee, or a change in the majority of the board of directors without the approval of the board of directors or other governing body or the right to elect such majority, or a change in the decision-making authority of the board of directors or other governing body whereby such board or body is not responsible for the ultimate management of the licensee.”

This Section has been revised to clarify what types of changes in control require Board approval. We found the language proposed by the Office confusing.

105.  

Section 120.18(d)(2)

“(2)      changes requiring background checks of the altered parties, which includes any time a new true party of interest is added to the entity, not including a passive investor or five percent investor; and ”

This Section has been revised to add five percent investors to the passive investor carveout set forth in this Section.

106.  

Section 120.18(d)(3)

“(3)  a change in the location of a licensee’s licensed activities.”

This Section has been revised to correct a typo.

107.  

Section 120.18(e)(1)

Original language: “when a non-shareholder true party of interest no longer maintains the position of true party of interest;”

This is practical only if the revisions to the definition of TPI proposed herein (or similar revisions) are adopted.

108.  

Section 120.18(e)(3)

“when a person or entity loans to a licensee an amount greater than ten percent (10%) of a licensee’s total assets; and”

Total assets is a better measure than capital, especially for early-stage businesses that may have little capital, and reduced definitional uncertainty which could result from using a vague term like “capital”.

109.  

Section 120.18(e)(5) [New Section]

“(5)      upon (i) the consummation of a corporate reorganization, restructuring or conversion where no change in control or event requiring approval of the Board in accordance with Section 120.18(c)(1) occurs, including without limitation, a merger, consolidation, conversion by filing, assignment of assets or similar transaction, and (ii) an individual licensee, including sole proprietorships holding a license, transfers its applicable license or licenses into an entity into an entity solely owned by such licensee.”

A new Section 120.18 should be added to create a streamlined pathway for corporate reorganizations, restructurings and conversions of various types, in each case, where no change in control occurs. For example, a licensee may have formed an LLC, but due to IRC 280E issues, is advised to convert such LLC into a corporation. If the members of the LLC simply become shareholders of the newly converted corporation, and control and management remains the same, then we see no reason why notice to the Office wouldn’t be sufficient. Another example is an individual licensee or sole proprietorship initially obtains the license in such individual’s name, but is later advised (rightfully so) to transfer the license into an entity that is owned by the same person. Based on our experience and for the foregoing reasons, we think this scenario and similar scenarios enumerated in our proposed changes should only require notice to the Office.

110.  

Section 120.18(f)

“(f)      Circumstances Requiring Notification to the Office within Three (3) Business Days. A licensee shall notify the Office within three (3) business days of becoming aware of any of the following:”

This Section has been revised to remove the subjective standard “should have been aware”. The Office should consider removing this part of the Section to make the standard more objective. For example, if the licensee engages a third-party who exceeds the thresholds in Section 118.1(a)(81)(i)(d) and as a result, is now a TPI, how would a licensee know or be aware of the fact that this TPI was charged with a criminal offense (which should not be the standard and is often not public record), or is convicted of a criminal offense (like a speeding ticket)?

111.  

Section 120.18(f)(1)

“(1)      criminal convictions or civil judgments against the licensee or its true parties of interest other than passive investors in New York State or any other state, federal, or foreign jurisdiction in an amount exceeding $100,000;”

This Section has been revised to remove “charges” as a disclosure obligation because under the U.S. Constitution, citizens are “innocent until proven guilty.” There is no public policy or prevailing reason to burden a licensee with this onerous disclosure requirement. Also, we have revised this Section to set a threshold amount, as any conviction or judgment less than $100,000 is, in our experience, not material to the business and operations of a licensee. Without any threshold, a conviction for a speeding ticket would trigger this 3-day disclosure obligation, which surely is not the intent of this provision.

112.  

Section 120.18(f)(2)

“(2)      disciplinary action taken against the licensee or its true parties of interest other than passive investors by this state or any other state, federal, or foreign jurisdiction, including any pending action, to the extent a notice of violation, summons or similar notice has been received by such licensee or true party of interest; and”

This Section, as proposed by the Office, is far too broad. We believe that an objective standard like the standard we have proposed is more appropriate. Typically, if an action has risen to the level where “discipline” is on the table by the applicable regulatory body, a notice of violation or summons has been sent to the licensee or the TPI, as applicable, and so adding this requirement to this Section would be more reasonable, appropriate and fair.

113.  

Section 120.18(f)(3)

This Section should be deleted.

This Section has been deleted since judgments, actions and the like are sufficiently covered in Section 120.18(f)(1) and (2).

114.  

Section 120.18(i)

This Section should be deleted.

This Section has been deleted since it is generally duplicative of Section 120.18(c)(1), which is broad and already requires Board approval. Having two sections addressing the same scenarios (such as change in control), one with a notice requirement to the Board and both requiring the approval of the Board, is confusing and unnecessary.

115.  

Section 120.18(j)

“(j)       Removing a true party of interest from a license. Upon a request to remove a true party of interest from a license, such request shall be accompanied by the following:”

This Section has been revised to clarify that it applies to the removal of a true party of interest. Without this clarification, it is not clear what persons are on a license and would be subject to the terms of this Section.

116.  

Section 120.18(j)(1)

“(1)      A letter, signed by the licensee and the to-be-removed party, acknowledging the change, and explicitly acknowledging that the party losing ownership effects of that change;”

This section has been revised to add clarifying language about who signs the contemplated letter. We have further concerns that in the event of a dispute among owners, this requirement may be problematic if one of them is uncooperative, which is common in such situations.

117.  

Section 120.18(j)(2)

“(2)      a corporate resolution of the licensee authorizing the licensee to change the ownership of the licensee pursuant to and consistent with articles of incorporation, LLC agreement, operating agreement, bylaws, partnership agreement, or similar governing document and the laws of the state of formation of the licensee, and an affidavit of a member of the licensee’s board of directors or similar governing body, a managing member, general partner, or sole member, as may be applicable, attesting that the undersigned is authorized to act on behalf of the licensee and that the submission of the change of ownership application premised on the corporate resolution constitutes a valid corporate action, or such other evidence reasonably satisfactory to the Office;”

This Section has been revised to expand the concept of a Board of Directors to cover those entities that do not customarily have a Board of Directors, like an LLC or Limited Partnership. Managing members, for example, are only one kind of management structure for an LLC permitted by NY LLC law. It has also been revised to provide flexibility in the type of document that could be submitted to the Office evidencing a TPIs removal. For example, a corporate resolution is not always required under and pursuant to an entity’s bylaws or operating agreement. It may also be difficult or impossible to get a notarized signature from the person to-be-removed, particularly if there is a dispute among the parties (such as a CEO being terminated by the licensee). The Office should consider the types of documentation that could be submitted recognizing that the 3 options proposed may not be possible to obtain.

118.  

Section 120.18(j)(4) [New Section]

“(4)      With respect to passive investors and five percent investors, a statement from the licensee requesting the removal of such person or entity from the license.”

This Section has been added to streamline the process with respect to passive investors and five percent investors, who by definition, have no control or ability to unduly influence a licensee. The process for removal should be simpler for these investors and should not require a board action, which often would not be required, or a notarized signature of the investor, which in our experience, often can be difficult to obtain from smaller investors.

119.  

Section 121.2(a)

“(a)      An applicant seeking to qualify as an individual from a community disproportionately impact, minority-owned business, women-owned business, distressed farmer or service-disabled veteran owned business shall submit documents sufficient to demonstrate ownership and sole control by an individual or group of individuals who are from a community disproportionately impacted, members of a minority group, women, distressed farmers or service-disabled veterans as defined in the Cannabis Law and as qualified in Section 121.1 of this Part including, but not limited to, the following:”

This Section has been revised to make the order of the types of applicants consistent with the order in which they appear in Section 121.1.

120.  

Section 121.2(a)(2)

“(2)      delegations of authority or resolutions of the board of directors or similar governing body of an entity, if applicable, of the applicant;”

This Section has been revised to expand the concept of a Board of Directors to cover those entities that do not customarily have a Board of Directors, like an LLC or Limited Partnership.

121.  

Section 121.2(a)(4)

This Section should be deleted.

This Section, Section 121.2(a)(5) and Section 121.2(a)(6) have been removed as these do not make sense or matter for an applicant, especially one that is a startup, who will not be able to submit any of these documents since such records likely will not exist at the time an application is submitted.

122.  

Section 121.2(a)(5)

This Section should be deleted.

See comment in Section 121.2(a)(4) and Section 121.2(a)(6).

123.  

Section 121.2(a)(6)

This Section should be deleted.

See comment in Section 121.2(a)(4) and Section 121.2(a)(5).

124.  

Section 121.3(c)

“(c)  Failure to notify the Office of any material change in the information provided may provide grounds for enforcement action against the licensee including, but not limited to, suspension, revocation, or denial of any license.”

We deleted “the sole” to avoid possible inference that such failure to notify would constitute the only grounds for suspension, revocation, or denial.

125.  

Section 121.4(a)

Original language: “(a)  An applicant or licensee, as defined in Section 118.1 of this Chapter, may be required to demonstrate their commitment to the social and economic equity goals of the Cannabis Law as part of the application process. Such commitment may be demonstrated by the design and implementation of a community impact plan.”

The goals listed below are all laudable; however, we urge the Office to consider the burden and cost of this plan and all the other plans called for by the proposed regulations. While each individually may be justified and beneficial, the combined burden and cost to applicants and licensees may be significant, especially for those that are unable to self-fund and unable to raise investment capital.

126.  

Section 123.1(a)(1)

“(1)  a nursery shall not hold a retail dispensary, on-site consumption, or delivery license.”

This Section has been revised to correct a typo.

127.  

Section 123.1(a)(2)

“(2)  a nursery may also hold a cultivator, processing, distributor, cooperative, microbusiness, registered organization, ROND or ROD license.”

This Section has been revised to permit a nursery licensee to hold a processing and/or distributor license based on the tier system established by the proposed regulations. We see no public policy or prevailing reason in these regulations, the Cannabis Law, or in the legislative history that should prohibit this.

128.  

Section 123.1(d)

“(d)  A nursery may only hold one nursery license, but may cultivate at multiple premises, and their true parties of interest are not restricted in the number of nursery licenses they can have an interest in.”

This Section has been revised to correct a typo.

129.  

Section 123.1(e)

“(e)  A nursery or its true party of interest may be a landlord, financier, goods and services provider or exempt goods and services provider, to an adult-use cultivator, processor, distributor, cooperative, microbusiness, and ROND license, subject to the limitations and other ownership, control and interest requirements, and prohibitions of the Cannabis Law and this Chapter.”

See comments in Section 118.1(a)(33), Section 118.1(a)(38), Section 118.1(a)(39) and Section 124.3(e).

130.  

Section 123.1(f)

“(f)  In addition to any other restrictions or prohibitions in this Part, including, but not limited to, Part 124 of this Chapter, no nursery licensee or its true party of interest (other than as a passive investor) shall be permitted to hold, a direct or indirect interest in, or be a true party of interest (other than as a passive investor), in a retail dispensary, on-site consumption, delivery, registered organization, or cannabis laboratory licensee or permittee. Where a nursey license is held by a ROD, the licensee and its true parties of interest shall be subject to the true parties of interest prohibitions and authorizations set forth for the ROD licensees.”

Inclusion of TPI here would be workable if our proposed revisions to the definition of TPI are adopted, and that should be the standard rather than applying additional restrictions on leasing, lending or services.

131.  

Section 123.3(a)(2)

Original language: “(3)  sell cannabis only to a license that authorizes the processing of cannabis, which may include a duly licensed processor, microbusiness, cooperative, ROD, ROND, or a cannabis research licensee;”

We note that a “cannabis research licensee” is referenced here, but nowhere else. We see no corresponding definition or use in the proposed regulations. The Office should clarify this or delete it.

132.  

Section 123.3(d)

“(d)      A cultivator or its true party of interest may be a true party of interest in a nursery, processor, distributor, cooperative, microbusiness, or ROND license.”

This Section has been revised to add that cultivators and their true parties of interest can be true parties of interest in a nursery. Section 123.1(c) permits a nursery or its true parties of interest to be a true party of interest in a cultivator. The only way that can work is if the right to be a true party of interest is reciprocal among these persons.

133.  

Section 123.3(e)

“(e)  A cultivator, or its true party of interest, may be a landlord, financier, goods and services provider or exempt goods and services provider, to an adult-use cultivator, processor, distributor, cooperative, microbusiness, or ROND license, subject to all restrictions governing such relationships, including, but not limited to, undue influence, control and true party of interest requirements.”

See comments in Section 118.1(a)(33), Section 118.1(a)(38), Section 118.1(a)(39) and Section 124.3(e).

134.  

Section 123.3(f)

“(f)      In addition to any other restrictions or prohibitions in this Chapter, including, but not limited to, Part 124 of this Chapter, no cultivator or its true party of interest (other than as a passive investor) is permitted to hold, a direct or indirect interest in or be a true party of interest (other than as a passive investor), in a retail dispensary, on- site consumption, delivery, ROD, registered organization, or cannabis laboratory licensee or permittee.”

As mentioned in our comment in Section 123.1(f), inclusion of TPI here would be workable if our proposed revisions to the definition of TPI are adopted, and that should be the standard rather than applying additional restrictions on leasing, lending or services. See comment in Section 123.1(f).

135.  

Section 123.4(b)(4)

“(4)  Within three (3) calendar days of receiving or acquiring an immature cannabis plant, a cultivator shall assign a plant tag belonging to the cultivator in accordance with paragraph (3) of this subdivision.”

This Section has been revised to correct a typo.

136.  

Section 123.4(d)(1) (first sentence)

“(1) Harvested plants that are hanging, drying, or curing shall be assigned a unique harvest batch name, which shall be recorded in the licensee’s inventory tracking system and placed within clear view of an individual standing next to the batch.”

This Section has been revised to correct a typo.

137.  

Section 123.4(f)(3)(iii)

“(iii)     application of the minimum amount of pesticide necessary, in accordance with the label;”

This Section has been revised to correct a typo.

138.  

Section 123.4(g)

“(g)      On-premises based identification.”

This Section has been revised to make the use of the term “on-premises” consistent throughout the regulations.

139.  

Section 123.4(g)(1)(iii)

“(iii)     have an on-premises based identification system which shall be able to integrate with the seed-to-sale inventory management tracking system used by the Office; and”

This Section has been revised to correct a few typos and make the use of the term “on-premises” consistent with how it used elsewhere in the regulations.

140.  

Section 123.4(g)(2)(v)

“(v)      any other information as determined by the Office to assist with energy usage benchmarking.”

This Section has been revised to correct a typo.

141.  

Section 123.4(g)(3)

“(3)      Cultivators shall use a resource manager to audit and track energy consumption metrics, as approved by the Office, and report utility and energy bills, together with cannabis yield data, to the Office upon request.”

This Section has been revised to correct a typo.

142.  

Section 123.4(k)

“(k)      Annual Cultivation Report. A cultivator shall submit to the Office, in a manner and format determined by the Office, an annual cultivation report, including, but is not limited to:”

This Section has been revised to correct a typo.

143.  

Section 123.5(c)

“(c)      A processor may only enter into a branding or white labeling agreement with its true parties of interest, or another licensee, provided that such licensee is not otherwise prohibited therefrom pursuant to this Chapter. A processor may also enter into a branding or white labeling agreement with a third-party so long as a copy of the agreement is provided to the Office with the name of the third-party and those persons controlling such third-party.”

This Section has been revised to correct a typo. It has also been revised to expand the ability of processors to enter into branding and white labeling agreements with unlicensed brand-owners. We believe it would create an unreasonable and unnecessary burden to require “brands”, as that term is broadly defined, to become licensed processors where they are not touching the plant or controlling the processing of any product. This burden could be a significant obstacle to the formation of what would otherwise be successful businesses at relatively low cost, which is exactly the kind of businesses that would seem to be more readily available to an entry-level equity participants. We note that a member of the Board has recently stated that California’s cannabis regulations require both sides to a white labeling agreement to be licensed; however, we are not aware of that requirement and do not believe that it exists. See comments to Section 120.3(d).

144.  

Section 123.5(f)

“(f)      A processor or its true party of interest may be a true party of interest in a cultivator, nursery, distributor, cooperative, microbusiness, or ROND license.”

This Section has been revised to add that processors and their true parties of interest can be true parties of interest in a nursery. If our changes are accepted, Section 123.1(c) would permit a nursery or its true parties of interest to be a true party of interest in a processor. The only way that can work is if the right to be a true party of interest is reciprocal among these persons. We think it is appropriate and there is no public policy or prevailing reason to prohibit this (see comments in Section 123.1(c) and Section 123.3(d)).

145.  

Section 123.5(g)

“(g)      A processor, or its true party of interest, may be a landlord, financier, goods and services provider or exempt goods and services provider, to an adult-use cultivator, nursery, processor, distributor, cooperative, microbusiness, or ROND license, subject to all restrictions governing such relationships, including, but not limited to, undue influence, control and true party of interest requirements.”

See comments in Section 118.1(a)(33), Section 118.1(a)(38), Section 118.1(a)(40) [new Section] and Section 118.1(a)(41) [new Section] and Section 124.3(e) with respect to exempt goods and services providers. See comments in Section 123.5(f) with respect to nursery licenses.

146.  

Section 123.5(h)

“(h)      In addition to any other restrictions or prohibitions in this Chapter, including, but not limited to, Part 124 of this Chapter, no processor licensee or its true party of interest (other than as a passive investor) shall be permitted to hold, a direct or indirect interest in, or be a true party of interest (other than as a passive investor), in a retail dispensary, on- site consumption, delivery, ROD, registered organization, or cannabis laboratory licensee or permittee.”

This Section has been revised for the same reasons stated in our comments in Section 123.1(f) and Section 123.3(f), and has been revised to sync up with our proposed language thereto. See comments in Section 123.1(f) and Section 123.3(f).

147.  

Section 123.6(d)(6) [New Section]

“(6)      infused pre-rolls and other infused cannabis flower products;”

This Section has been added to permit processors to infuse pre-rolls and other cannabis flower products. These types of products have become commonplace and increasingly popular in the cannabis industry and fit squarely into the type of product that will not only be requested by other licensees, but consumers as well. These products are well-positioned to address the lack of high-quality flower that third party sources have reported plague the current New York licensed market.

148.  

Section 123.6(d)(7)

“any other cannabis product type or form, except for the prohibitions in subdivision (e) of this Section, with prior written approval of the Office which, following written submission by the processor and a review process by the Office of the proposal, including, but not limited to, review of proposed manufacturing processes, methods of administration and any other factors which assess risk to public health and safety, is determined in writing by the Office to be suitable as a product for retail adult use sale.”

This Section was incorrectly labeled as subsection “(9)” in the proposed regulations, but sequentially, should be subsection “(8)”, assuming our proposed Section 123.6(d)(6) is accepted.

149.  

Section 123.6(e)(4)

“(4)      are disproportionately attractive or targeted to individuals under twenty-one (21) years of age as set forth in Part 128 and 129 of this Chapter;”

This has been clarified to address what we interpret the intent of this provision to be. Many cannabis products may be attractive to minors; hence the previous language was too broad.

150.  

Section 123.6(e)(5)

“(5)      contain synthetic cannabinoids, as defined in subdivision (g) and subdivision (h) of schedule I of Section 3306 of the Public Health Law;”

We note that non-cultivation biosynthesis appears to be becoming increasingly technically feasible and popular. We do not understand why a production method that may be environmentally and energy-efficient should be banned, and urge the Office to reconsider this provision.

151.  

Section 123.6(e)(6)

“(6)  contain any artificially derived phytocannabinoids;”

This Section has been revised to correct a typo.

152.  

Section 123.6(e)(9)

“(9)      contain any non-phytocannabinoid ingredient that would increase potency, toxicity, or addictive potential, or that would create an unsafe combination, known or unknown, with other psychoactive substances. This prohibition shall not apply to products containing naturally occurring caffeine or sugar or other sweeteners, such as coffee, tea, or chocolate;”

See comment in Section 123.6(e)(5).

153.  

Section 123.7(b)

“(b)      A distributor may acquire cannabis products from any duly licensed processor or distributor, which may include a microbusiness, cooperative, ROD or ROND. A distributor may also acquire cannabis products from a duly licensed retail dispensary, delivery licensee or on-site consumption licensee, including in the event that such retail dispensary or on-site consumption licensee becomes insolvent or admits to its inability to pay its debts generally as they become due, becomes subject to any voluntary or involuntary foreign or domestic bankruptcy or similar proceeding or insolvency law, or is dissolved or liquidated or takes any corporate action for such purpose.”

This Section has been revised to permit distributors to repurchase products from retailers, including when a retailer goes out of business. We believe this would facilitate a more efficient operation of the marketplace and reduction of supply bottlenecks, and we do not see any downside to this flexibility.

154.  

Section 123.7(d)

“(d)      A distributor or its true party of interest may be a true party of interest in a cultivator, nursery, processor, cooperative, microbusiness, or ROND license.”

This Section has been revised to add that distributors and their true parties of interest can be true parties of interest in a nursery. Section 123.1(c) permits a nursery or its true parties of interest to be a true party of interest in a distributor. The only way that can work is if the right to be a true party of interest is reciprocal among these persons.

155.  

Section 123.7(e)

“(e)      A distributor, or its true party of interest, may be a landlord, financier, goods and services provider or exempt goods and services provider, to an adult-use cultivator, nursery, processor, distributor, cooperative, microbusiness, or ROND license, subject to all restrictions governing such relationships, including, but not limited to, undue influence, control and true party of interest requirements.”

See comments in Section 118.1(a)(33), Section 118.1(a)(38), Section 118.1(a)(39) and Section 124.3(e). Also, this Section has been revised to add that distributors and their true parties of interest can be true parties of interest in a nursery. If our changes are accepted, Section 123.1(c) would permit a nursery or its true parties of interest to be a true party of interest in a distributor. The only way that can work is if the right to be a true party of interest is reciprocal among these persons. We think it is appropriate and there is no public policy or prevailing reason to prohibit this (see comments in Section 123.1(c) and Section 123.3(d)).

156.  

Section 123.7(g)

“In addition to any other restrictions or prohibitions in this Chapter, including, but not limited to, Part 124, no distributor or its true party of interest (other than as a passive investor) shall be permitted to hold a direct or indirect interest in, or be a true party of interest (other than as a passive investor), in a retail dispensary, on-site consumption, delivery, ROD, registered organization, or cannabis laboratory licensee or permittee.”

This Section has been revised for the same reasons stated in our comments in Section 123.1(f), Section 123.3(f) and Section 123.5(h) and has been revised to sync up with our proposed language thereto. See comments in Section 123.1(f), Section 123.3(f) and Section 123.5(h). Also, this Section is labeled as “(g)” but sequentially, it should be “(f)”.

157.  

Section 123.8(a)(3)

“(3)  or employee thereof, or other person acting on behalf of a distributor who shall possess or transport cannabis products upon the public highways, roads or streets of the state, shall have in their possession invoices and manifests for such cannabis products.”

The first sentence of this Section appears incomplete and may be missing some language. The Office should review and clarify this Section.

158.  

Section 123.9(g)

“(g)      No person, other than a passive investor or five percent investor in a retail dispensary license, shall be a true party of interest in more than three (3) retail dispensary licenses.”

This Section has been revised to add five percent investors to the passive investor carveout to the 3 retail dispensary limitation on TPIs

159.  

Section 123.9(i)

“(i)       A retail dispensary or its true party of interest may be a landlord, financier, goods and services provider or exempt goods and services provider, to an on-site consumption or delivery license, provided the retail dispensary or its true parties of interest do not exceed authorized true party of interest ownership limits.”

See comments in Section 118.1(a)(33), Section 118.1(a)(38), Section 118.1(a)(39) and Section 124.3(e).

160.  

Section 123.9(j)

“(j)       In addition to any other restrictions or prohibitions in this Part, no retail dispensary or its true party of interest (except for a passive investor) shall be permitted to hold a direct financial interest in, or be a true party of interest in a cultivator, processor, distributor, cooperative, microbusiness, ROD, ROND, registered organization, or cannabis laboratory licensee or permittee in the State of New York.”

This Section should be modified as proposed for several reasons.

First, the restrictions on retail dispensaries and their true parties of interest with respect to their interests outside of the State of New York are not reflected in the Cannabis Law, and the Office has no authority to regulate these activities.

Second, such restrictions violate the “dormant commerce clause” of the United States Constitution and therefore are highly likely to precipitate litigation in which they are unlikely to survive a constitutional challenge, and which could delay the implementation of the regulations in unforeseen and potentially unforeseen ways.

Third, passive investors and five percent investors of retail dispensaries should not be prohibited from owning an interest, direct or indirect, in a cultivation, processor or distribution license because, by their very definition, a passive investor and a five percent investor is not capable of exerting any control or influence, let alone undue influence or control over the day to day operations or the high level commercial decisions of a retail dispensary, assuming the passive investor is also a passive investor in the other license.

Furthermore, the cannabis industry is still very much in a nascent stage of development with a limited amount of investment capital and a limited amount of human capital. These prohibitions preclude a vast majority of the available investment capital from being deployed in the NY cannabis industry. This has two primary effects: first, lack of capital, particularly at such a sensitive stage in the NY industry’s growth, will stunt the NY adult use market’s growth, rendering New York licensee non-competitive and reducing the likelihood that New York-based cannabis businesses will be able to succeed on a broader scale. Given the fact that cannabis remains a Schedule 1 controlled substance under the Federal Controlled Substances Act, the pool of available investment capital remains incredibly small as it is, making it extremely difficult for existing operators to find fairly-priced equity and debt financing. Basic economics (particularly, supply and demand) suggest that these restrictions would leave licensees with a an even further limited pool of capital to finance the launch and development of their businesses. The less financing options available, the more likely licensees will be forced to turn to predatory investors to finance their businesses. There are currently dozens of venture capital and private equity funds that have existing cannabis investments that would be able to deploy non-predatory growth capital to NY licensees, however they are all completely prohibited from providing this capital, as are all of their investors, unless they divest their entire portfolio (which is of course impossible).

In addition, no provision of the MRTA bars a “passive investor” or “five percent investor” from financing a company in the cultivation, processing and/or distribution tier and also investing in a retail license. Nor does the MRTA sanction the adult-use regulations prohibition on a financier in the supply side tier outside of New York investing in a retail dispensary in New York State. By imposing this restriction, the Board has usurped the legislature’s policy-making powers and has exceeded the interstitial rule-making authority that typifies an administrative body’s legal mandate.

161.  

Section 123.10(e)(2)(viii)

“(viii)  dedicate a minimum of 40% of cannabis products cultivated or processed by cultivators and processors that are not RODs for a period of five (5) years from the first retail sale in New York.”

This Section should be revised because shelf space is a very difficult standard to measure, especially without specific direction as to exactly how that is calculated. We suggest that a much more calculable standard would be a percentage of products offered for sale or SKUs.

162.  

Section 123.10(g)(11)(i)

“(i)       any amount of cannabis product which they know would cause the cannabis consumer to be in violation of the Cannabis Law or possession limits established by article two hundred twenty-two of the Penal Law;”

This Section has been revised to change “cannabis law” to “Cannabis Law”, use of which is consistently applied throughout.

163.  

Section 123.10(g)(22)

“(22)    fulfill any order referred to it by a third-party platform.”

This Section has been revised to add a period to the end of the sentence.

164.  

Section 123.11(d)

“(d)      A microbusiness or the true party of interest in a microbusiness may be a true party of interest in a cultivator, nursery, processor, distributor, cooperative, or ROND license.”

This Section has been revised to add that microbusinesses and their true parties of interest can be true parties of interest in a nursery. Section 123.1(c) permits a nursery or its true parties of interest to be a true party of interest in a microbusiness. The only way that can work is if the right to be a true party of interest is reciprocal among these persons.

165.  

Section 123.11(f)

“(f)      A microbusiness or its true party of interest may be a landlord, financier, goods and services provider or exempt goods and services provider, to an adult-use cultivator, nursery, processor, distributor, cooperative, microbusiness, or ROND license, subject to all restrictions governing such relationships, including, but not limited to, undue influence, control and true party of interest requirements.”

See comments in Section 118.1(a)(33), Section 118.1(a)(38), Section 118.1(a)(40) [new Section] and Section 118.1(a)(41) [new Section] and Section 124.3(e). Also, this Section has been revised to add that microbusinesses and their true parties of interest can be true parties of interest in a nursery. Section 123.1(c) permits a nursery or its true parties of interest to be a true party of interest in a microbusiness. The only way that can work is if the right to be a true party of interest is reciprocal among these persons.

166.  

Section 123.11(g)

“(g)      In addition to any other restrictions or prohibitions in this Chapter, including, but not limited to, Part 124, no microbusiness or its true party of interest (other than as a passive investor) shall be permitted to hold, a direct or indirect interest in, or be a true party of interest (other than as a passive investor), in a retail dispensary, on-site consumption, delivery, ROD, registered organization, or cannabis laboratory licensee or permittee.”

This Section has been revised for the same reasons stated in our comments in Section 123.1(f), Section 123.3(f), Section 123.5(h) and Section 123.7(g) and has been revised to sync up with our proposed language thereto. See comments in Section 123.1(f), Section 123.3(f), Section 123.5(h) and Section 123.7(g).

167.  

Section 123.13(e)

“(e)      In addition to any other restrictions or prohibitions in this Chapter, including, but not limited to Part 124, no collective or its true party of interest (other than as a passive investor) shall be permitted to hold, a direct or indirect interest in, or be a true party of interest (other than as a passive investor), in a retail dispensary, on-site consumption, or delivery licensee.”

This Section has been revised for the same reasons stated in our comments in Section 123.1(f), Section 123.3(f), Section 123.5(h), Section 123.7(g) and Section 123.11(g) and has been revised to sync up with our proposed language thereto. See comments in Section 123.1(f), Section 123.3(f), Section 123.5(h) Section 123.7(g) and Section 123.11(g).

168.  

Section 123.15(b)

“(b)  A ROND or its true party of interest may be a true party of interest in a cultivator, nursery, processor, distributor, cooperative, or microbusiness license.”

This Section has been revised to add that RONDs and their true parties of interest can be true parties of interest in cultivators, nurseries, processors, distributors, cooperatives and microbusinesses, which syncs up with the corresponding Sections above, each of which permits the foregoing or their true parties of interest to be a true party of interest in an ROND. The only way that can work is if the right to be a true party of interest is reciprocal among these persons.

169.  

Section 123.15(d)

“(d)      In addition to any other restrictions or prohibitions in this Part, no ROND or its true party of interest (other than as a passive investor) shall be permitted to hold, a direct or indirect interest in, or be a true party of interest (other than as a passive investor), in a retail dispensary, on-site consumption, delivery, ROD, registered organization, or cannabis laboratory licensee or permittee.”

This Section has been revised for the same reasons stated in our comments in Section 123.1(f), Section 123.3(f), Section 123.5(h), Section 123.7(g), Section 123.11(g) and Section 123.13(e) and has been revised to sync up with our proposed language thereto. See comments in Section 123.1(f), Section 123.3(f), Section 123.5(h) Section 123.7(g), Section 123.11(g) and Section 123.13(e).

170.  

Section 123.17(c)

“(c)      In addition to any other restrictions or prohibitions in this Chapter, no ROD or its true party of interest (other than as a passive investor) shall be permitted to hold, a direct or indirect interest in, or be a true party of interest (other than as a passive investor), in an adult-use cultivator, processor, distributor, cooperative, microbusiness, retail dispensary, on- site consumption, delivery, ROND, registered organization, or cannabis laboratory licensee or permittee.”

This Section has been revised for the same reasons stated in our comments in Section 123.1(f), Section 123.3(f), Section 123.5(h), Section 123.7(g), Section 123.11(g), Section 123.13(e) and 123.15(d) and has been revised to sync up with our proposed language thereto. See comments in Section 123.1(f), Section 123.3(f), Section 123.5(h) Section 123.7(g), Section 123.11(g), Section 123.13(e) and 123.15(d).

171.  

Section 123.17(d)

“(d)      In addition to any other restrictions or prohibitions in this Part, no ROD or its true party of interest (except for a passive investor) is permitted to hold a direct financial interest in, or be a true party of interest to a cultivator, processor, distributor, cooperative, microbusiness, retail dispensary, on-site consumption, delivery, ROND, registered organization, or cannabis laboratory licensee or permittee.”

The same rationale applies as set forth in the comment to Section 123.9(j) (which is incorporated into this footnote by reference) (see the comment in Section 123.9(j)). We also synced this Section up with our proposed changes to Section 123.1(f), Section 123.3(f), Section 123.5(h) Section 123.7(g), Section 123.11(g), Section 123.13(e), 123.15(d) and Section 123.17(c).

172.  

Section 124.1(a)

“(a)      No person shall enter into any agreement which would cause undue influence over a licensee, as set forth herein or as may be set out by the Office in guidance. This rule shall not be construed as prohibiting the placing and accepting of orders for the purchase and delivery of cannabis or cannabis products that are made in accordance with usual, customary or common business practices and that are otherwise in compliance with this Chapter.”

It is questionable whether the Office guidance can be enshrined as regulation by reference such as this.

173.  

Section 124.1(b)

“(b)      No distributor, microbusiness, cooperative, ROD, or ROND shall advance to any retail licensee, and no licensee authorized for the retail sale of cannabis or cannabis products to consumers shall receive, money or a benefit equivalent to the value of money under an agreement or by means of any other business practice or arrangement which is intended or designed to influence the business practices thereof relating to inventory, promotion or sales, such as:”

Without this or some other appropriately descriptive reference, this section is completely open-ended and unworkable.

174.  

Section 124.1(b)(1)

“(1)      Gifts which are of nominal value;”

This addition makes this provision consistent with paragraph (e) below.

175.  

Section 124.1(b)(2)

Original language: “(2)            discount, except otherwise permitted in this article;”

Commercially reasonable volume discounts should be permitted.

176.  

Section 124.1(b)(3)

Original language: “(3)            customer loyalty programs;”

The regulations must clearly permit retailers to establish and maintain customer loyalty programs, even if the Office seeks to ban such programs for retailers by distributors.

177.  

Section 124.1(b)(10)(ii)

“(ii)      such agreements and services as are authorized in this Section or which may be authorized by a license issued pursuant to the Cannabis Law.”

This Section has been revised to add clarifying language.

178.  

Section 124.1(d) (first sentence)

“(d)      A microbusiness, cooperative, distributor, ROD, or ROND may provide free samples of cannabis products to negotiate a sale to a retail dispensary, delivery service or on-site consumption premises that does not currently carry the brand, type, or form of the cannabis product. Such licensees shall abide by any sample limits set by the Office and shall record the amount, transfer, and receipt of each cannabis product sample in the licensee’s inventory tracking system in accordance with the requirements set forth in Part 125 of this Chapter.”

This Section has been revised to add a reference to delivery services, which appears to be missing from, but should be included in, this Section.

179.  

Section 124.1(e)

“(e) A microbusiness, cooperative, distributor, ROD, or ROND may provide retailers and their employees with branded promotional items of nominal value. These items can only bear imprinted advertisements of such licensees. The items may not be forwarded on and given to retail customers, through purchase or giveaway.”

This change was made to make the order of named licensees consistent with Section 124.1(d).

180.  

Section 124.1(g)

“(g)      Any person who, under the definitions in this Title, would be considered a true party of interest of an entity, and who is permitted to conduct activities which are authorized for a licensee under the Cannabis Law, shall be subject to the true party of interest authorizations and prohibitions for that license type.”

We have attempted to clarify the language to implement what we think is the intent of this section, which is not completely clear to us.

181.  

Section 124.2(a)(2)

“(2)      not discriminate, directly or indirectly, in price, payment terms or discounts for time of payment or in discounts on quantity of merchandise sold, except as otherwise permitted by this Part;”

This Section has been revised to fix a typo and add clarifying language.

182.  

Section 124.2(a)(3)

“(3)      be prohibited from refusing to sell any brand of cannabis or cannabis product to any person authorized to purchase such brand of cannabis or cannabis product from such licensee at market value or based on price disclosures authorized by the Board; provided the purchaser pays cash therefor, and except as herein provided.”

In the event of supply shortages, this provision could perversely cause a rush to hoard inventory. This could, among other things, interfere with short -term inventory financing arrangements. The all-or-nothing approach to this provision could also render it easily frustrated. For example, a distributor could comply with this provision, as written, by selling one unit of product to a retailer which might prefer to purchase 10,000 units.

183.  

Section 124.2(b)(3)

“(3)  distributors, microbusinesses, cooperatives, ROD, or ROND shall not be required to sell to a retail licensee except for checks or electronic payments drawn on or from a retail dispensary’s account.”

This Section has been revised to add clarifying language.

184.  

Section 124.2(c)

“(c)      Distributor, microbusiness, cooperatives, ROD, or ROND licensees may, but are not required to, allow licensees authorized for retail sales to pay on credit, provided:”

This Section has been revised to correct a typo.

185.  

Section 124.2(e)

“(e) Each such distributor, microbusiness, cooperative, ROD, or ROND is hereby required, on or before the respective notification dates, as determined by the Office, for each retail dispensary license, to give written notice of default, by first class mail or by such other method as contemplated or permitted by or under the applicable agreement, to all such licensees therein who have failed to make payment to them on or before their final payment date for cannabis products sold or delivered to them during a credit period ending on their final payment date. No retail licensee shall be placed in default if the distributors, microbusinesses, cooperatives, ROD, or ROND has issued an account credit to the licensee, which after application to all debts owed by the retail dispensary licensee, is equal to or greater than the amount of the default. Any such retail dispensary licensee receiving a notice of default shall not thereafter purchase cannabis products, except for cash, until such time as the Office determines that their name shall not be published on the delinquent list as provided in subdivision (d) of this Section, or until such time as the Office permits sales or deliveries to them as provided in subdivision (g) of this Section. Each such distributor, microbusiness, cooperative, ROD, or ROND is hereby required to file with the Office, on or before each notification date, copies of the notices sent by them to all delinquent retail dispensary licensees as required in this subdivision, and in addition, if the Office shall so require, a written list setting forth the names and addresses of all such delinquent licensees. The Office, in its discretion, may extend, for a period not exceeding three (3) days, the date for giving written notice of default to delinquent retail dispensary licensees and extend for three (3) days, the date for filing with the Office, the copies of notices sent to such licensees and/or the written list of delinquent retail dispensary licensees as required in this subdivision. The Office, in its discretion, may limit the documents to be filed to those relating to licensees who are to be added or deleted from the default list and direct that distributors, microbusinesses, cooperatives, ROD, or ROND maintain copies of all other documents required under this Section for future inspection by the Office. The Office shall, as soon as practicable after each notification date, compile and publish and furnish each distributor, microbusiness, cooperative, ROD, and ROND licensed under this Chapter a list, to be designated on the delinquent list containing the names and addresses of all retail dispensary licensees who have been reported by distributors, microbusinesses, cooperatives, ROD, or ROND pursuant to the provisions of this Section as having failed to make payment as required by this Section for cannabis products sold or delivered to them, and no such distributors, microbusinesses, cooperatives, ROD, or ROND, on or after the fifth (5th) day after the receipt of such delinquent list, shall knowingly, willfully, or intentionally sell or deliver any cannabis to any such licensee whose name appears on such list, except for cash, until such time as the name of such licensee is removed therefrom, except as hereinafter permitted. The receipt of a delinquent list by a distributor, microbusiness, cooperative, ROD, or ROND shall constitute knowledge of the names of the retail dispensaries licensees who have failed to make payment for cannabis as required by this Section. The failure of any distributor, microbusiness, cooperative, ROD, or ROND to comply with the foregoing provisions of this Section may, at the discretion of the Office, subject the license of such distributor, microbusiness, cooperative, ROD, or ROND to suspension for not more than five (5) days for the first offense, and not more than thirty (30) days for a subsequent offense. The Office may publish the delinquent list on its website; provided, however, that full access shall be restricted to those distributors, microbusinesses, cooperatives, ROD, or ROND licensed under this Chapter and access to their specific status shall be provided to retail dispensaries licensed under this Chapter. Such publication shall be considered receipt thereof by all distributors, microbusinesses, cooperatives, ROD, or ROND.”

It is not clear what public policy objective is addressed by the Office meddling in the commercial dealings between suppliers and retailers. This entire Section 124.2, especially provisions related to required payment timing and any consequences of late payments, invasively intrudes on private business dealings and could materially adversely affect struggling retailers, with possible unforeseen consequences. This Section has also been revised to correct a few typos.

186.  

Section 124.2(f)

“(f) In the event that any dispute shall exist between any distributor, microbusiness, cooperative, ROD, or ROND and a retail dispensary licensee to whom they shall have sold cannabis products, either as to the fact of payment or as to the amount due for such cannabis products or as to the quantity of the cannabis products sold or delivered, which dispute cannot be resolved between them, the Office is hereby authorized to receive statements from each of the parties to such dispute as to the facts and circumstances thereof and to determine whether or not a retail dispensary licensee is delinquent and should be included on the appropriate delinquent list.”

Does the Office really want to be in the commercial dispute arbitration business? Why?

187.  

Section 124.2(g)

“(g)      The Office, in the case of a retail dispensary licensee who has made payment for cannabis products, or on good cause shown to do it…”

It is not clear what this Section means by saying “The Office, in the case of a retail dispensary licensee who has made payment for cannabis products, or on good cause shown to do it”. It is vague and confusing.

188.  

Section 124.2(g)

“may permit sales or deliveries to any retail dispensary licensee who has received notice of default, or who is named on any delinquent list, on terms other than for cash, but within the limitations of this Section, prior to the publication of the next appropriate delinquent list.”

Putting retailers on and off no-sale lists likely will be very disruptive to the industry.

189.  

Section 124.2(h)

Original language: “(h)            The Board may impose any penalty or condition otherwise authorized by this Section in the case of any such retail dispensary licensee who fails or refuses to liquidate and pay unpaid balance becoming due under this subdivision.”

Late payments are an inescapable part of business. These provisions seem dangerously intrusive on commercial relationships between suppliers and retailers.

190.  

Section 124.2(k)

“(k)      The Board may revoke, cancel, or suspend any license issued pursuant to this Chapter for:”

If all licensees who made late payments lost their license, there would not be very many cannabis businesses left in this country. This will be especially problematic if investment capital is scarce for retailers, which will be the case if any investor with any interest in any cannabis business anywhere is prohibited from investing in New York retail cannabis businesses, as contemplated by the proposed regulations. Contrary to the spirit of the Cannabis Laws, only rich self-funded retailers would survive.

191.  

Section 124.3(a)(1)

“(1)      General providers of goods and services, including without limitation for these purposes, exempt goods and services providers.”

This Section has been clarified to use appropriate defined terms in light of our proposed definitions of “goods and services” and “exempt goods and services.” Section 124.3(a)(1)(i) can be deleted since it would be addressed by our proposed new definitions of “exempt goods and services” and our proposed definition of “exempt goods and services providers.” See comments in Section 118.1(a)(33), Section 118.1(a)(38), Section 118.1(a)(40) [new Section] and Section 118.1(a)(41) [new Section] and Section 124.3(e).

192.  

Section 124.3(a)(3)(i)

“(i)  a person may be a financier or financial institution across multiple licenses. If the financier or financial institution becomes a true party of interest in a license, they are subject to the prohibitions of true parties of interest for that license type. Principal repayment and commercially reasonable interest shall be excluded from any calculation of fees paid to a financier or financial institution in a calendar year.”

Both principal and commercially reasonable interest should be excluded from any calculation of fees paid to financier or financial institution in a calendar year. If no control or ability to unduly influence a licensee exists, then commercially reasonable interest payments should not factor into whether a financier or financial institution is a TPI. For example, if Valley National Bank, Dime Bank, BCB Bank, or some other financial institution, were deemed to be a TPI of a licensee, it would be a substantial problem for the industry, participants therein and such financial institution.

193.  

Section 124.3(b)(1)

“(1)      non-exempt agreements include but are not limited to, agreements for the provision of consulting, advisory, or strategic services related to the licensee’s cultivation, processing, extraction, manufacturing, distributing and/or selling of cannabis.”

This Section has been revised to add clarifying language.

194.  

Section 124.3(b)(2)

“(2)      any goods and services provider providing goods and services other than an exempt goods and services provider that is not based on a flat fee, including, but not limited to, agreements based on business performance, revenues, royalties, or profits, shall be prohibited from having any goods and services agreement with licenses in a separate licensing tier to the extent the aggregate payments in a calendar year exceed the thresholds set forth in Section 118.1(a)(81)(i)(d).”

This Section has been revised to sync up with the Section 118.1(a)(81(i)(d) which refers to services provided by persons exceeding the 10/50/100 rule. This should be the standard used in this Section.

195.  

Section 124.3(c)(2)

“(2)      a person providing management services not based on a flat fee, including, but not limited to, agreements based on business performance, revenues, royalties, or profits, shall be a true party of interest in the licensee receiving services, to the extent the aggregate payments in a calendar year exceed the thresholds set forth in Section 118.1(a)(81)(i)(d).”

This Section has been revised to sync up with the Section 118.1(a)(81(i)(d) which refers to services provided by persons exceeding the 10/50/100 rule. This should be the standard used in this Section.

196.  

Section 124.3(c)(3)

“(3)      a management services agreement shall state that the services provider, its owners, principals, and staff, directly or indirectly, involved in professional services, or the consulting on behalf of the cannabis business, are supervised and compensated in such operations entirely by the licensee.”

Why would the licensee pay the service provider and double pay by also paying its people?

197.  

Section 124.3(d)

“(d)      Stacking Agreements. Where a person has multiple goods and services agreements with a licensee, other than agreements with exempt goods and services providers, the value of the payments made under such agreements shall be combined for purposes of determining whether a person is a true party of interest, and the combined agreement shall be held to the strictest prohibitions of each of those individual agreements.”

Exempt goods and services providers, which include those persons or entities exempt under Section 124.3(a), are by definition not exerting any control or undue influence on the applicant or licensee and should be carved out of this Section 124.3(d) to be consistent in the application of this concept. We also added some clarifying language.

198.  

Section 124.3(e)

“(e)      A person providing goods and services under this Section shall be a true party of interest to the license to which it is providing such services if such person qualifies as a true party of interest by any means in this Part; provided, however, that an exempt goods and services provider shall not be a true party of interest whether or not it receives the right to or actual payment from the licensee exceeding the greater of the amounts set forth in Section 118.1(a)(81)(d).”

See comments in Section 118.1(a)(33), Section 118.1(a)(38), Section 118.1(a)(40) [new Section] and Section 118.1(a)(41) [new Section] and Section 124.3(e).

199.  

Section 123.3(f)

“(f)  Where a goods and services provider violates the financial interests and controlling conduct prohibitions set forth in this Part, the Office may terminate that party’s interest in the licensee and recommend a civil penalty to be imposed by the Board and collected by the Office.”

See comments in Section 118.1(a)(33), Section 118.1(a)(38), Section 118.1(a)(39) and Section 124.3(e).

200.  

Section 124.4(a)

“(a)      Under any circumstance, the Office reserves the right to review any agreements between a licensee and a third party. A third party, other than an exempt goods and services provider, will be deemed to be a true party of interest with financial or controlling interest in a license where such agreement:”

By definition, agreements with exempt goods and services providers (as revised hereunder) including those exempt under Section 124.3(a), do not have any control or undue influence. For clarity, these persons should be carved out here.

201.  

Section 124.4(a)(2)

“(2)      imposes penalty upon a licensee for noncompliance with the agreement that requires surrender of personal assets of the licensee’s owners or principals;”

This Section has been revised to correct a typo.

202.  

Section 124.4(a)(5)

“(5)  creates an employee-employer relationship under New York State Labor Law between the licensee and one or more non-licensed persons based on the agreed services to be performed under said agreement.”

This Section has been revised to add clarifying language.

203.  

Section 124.5(a)

Original language: “(a)  Adult-use licensees are prohibited from contracting or subcontracting with a person or entity performing any function or activity directly involving the licensed activities authorized for that license type, including, but not limited to, cultivating, processing, manufacturing, distributing, or selling cannabis or cannabis products.”

This restriction creates an impractical restriction on licensees, especially inexperienced licensees, including equity licensees. Startup licensees need to learn how to run their business, and prohibiting them from obtaining that knowledge from a third party is likely to make their learning curve much longer and more difficult. We believe the TPI thresholds are sufficient to detect any potential undue influence.

204.  

Section 124.5(b)

“(b)      Adult-use licensees may contract with a person or entity performing a function or activity ancillary to the licensee’s licensed activities, including, but not limited to, accounting, record- keeping, architectural services, construction, heating, ventilating, air conditioning, refrigeration, plumbing, cleaning and janitorial, lighting, security, and legal services and other exempt goods and services providers.”

This Section has been revised to add clarifying language about exempt goods and services providers.

205.  

Section 125.1(a)(4)

“(4)      perimeter dimensions of property and any facilities on premises where licensed activities are taking place or cannabis or cannabis products are being stored;”

This Section has been revised to correct a typo.

206.  

Section 125.1(c)(7)(iv)(b)

“(b)      description of how the licensee will ensure proper operation and energy efficient operations, including, but not limited to, practices to limit or improve odor control and air filtration;”

This Section has been revised to correct a typo.

207.  

Section 125.4(d)(5)(ix)

“common violations resulting in license cancellation, suspension, revocation, and denial of a renewal, civil and criminal fees, fines, and penalties;”

This Section has been revised to correct a typo. The Section was previously labeled as “(iv)” but should be labeled “(ix)”.

208.  

Section 125.4(d)(5)(xii)

“(xii)    licensee responsibility for activities occurring on licensed premises under the operating plan, including:”

This Section has been revised to change the term “Operating Plan” to “operating plan” which is how this term is used throughout the regulations.

209.  

Section 125.4(g)(2)(ii)

“trainee’s date of hire; and”

This Section has been revised to add a space between “;” and the word “and”.

210.  

Section 125.7(b)(5)

“(5)      Document the cause for loss of access, as well as the dates and times for when the loss occurred.”

This Section has been revised to correct a typo.

211.  

Section 125.9(e)

“(e)      All cannabis and cannabis products shall be transported in a secure manner, in motorized or unmotorized transportation owned or exclusively leased and operated solely by the licensee, including, but not limited to, a vehicle, trailer, bicycle, and motorcycle.”

Requiring ownership increases capital requirements and is unnecessary so long as the licensee has sole control of the vehicle.

212.  

Section 125.9(e)(2)

Original language: “(2)            Transportation shall bear no signs, markings, advertisements or marketing that would either identify or indicate that the transportation is used to transport cannabis or cannabis products.”

With all the other severe restrictions on marketing and advertising, we believe that licensees should be permitted to brand their vehicles in a manner that would not materially exacerbate the risk of robbery.

213.  

Section 125.9(g)(2)

Original language: “(2)            Prior to transport, the licensee shall transmit the shipping manifest to the Office, in a manner determined by the Office, as well as to the licensee, permittee or other authorized party that will receive the cannabis, or cannabis product. The shipping manifest shall contain, at a minimum, the following information;”

It may not be practical to require prior notice of all shipping unless the Office establishes a robust electronic methodology, and provision should be made in the event any such system malfunctions so that all business does not need to cease in such event.

214.  

Section 125.9(g)(5)

Original language: “(5)            A licensee shall not void, modify or change a shipping manifest or invoice after departing from the originating licensed premises.”

Provision needs to be made for when good faith mistakes happen, such as if a manifest does not match the product ordered or delivered or delivery failures occur, as contemplated in subsection (4) below.

215.  

Section 125.9(g)(6)

“(6)      The licensee receiving and taking possession of cannabis or cannabis products shall ensure and verify that the cannabis or cannabis products being received and taken into possession for transport at the originating licensed premises are as described and accurately reflected in the shipping manifest, subject to ordinary course correction of errors with prompt reporting thereof.”

See comment to Section 125.9(g)(5).

216.  

Section 125.12(c)(2)

“(2)      financial records that accurately reflect all transactions in all material respects, including, but not limited to, true parties of interest, bank statements, sales invoices, receipts, and any other records maintained for tax purposes;”

GAAP covers the principles of financial reporting, but not books and records recordkeeping requirements.