David Standa, Esq.
Back in May, the New York Office of Cannabis Management (“OCM”) released the revised adult-use cannabis regulations that clarified the license application process for all license types and provided the parameters for license limitations. These regulations specified that “applications shall be accepted during specific license type application periods, which shall be announced no less than thirty (30) days before the application period opens for that specific license type, as established by the Board.”
We now know when that application period is expected to open.
Last month, the New York Cannabis Control Board indicated that the cannabis license application window will open in October and will “[i]nclude: cultivator, processor, distributor, micro business, and retail licensing applications.” This position was reiterated in OCM’s litigation filings this week where it indicated it still intends to meet the October application rollout as long as the Conditional Adult-Use Retail Dispensary (“CAURD”) program is not permanently enjoined. In other words, despite OCM’s litigation woes, we believe now is the time to start ramping up for the application process.
The public comment period for the
proposed regulations regarding application and licensure closed on July 31, 2023.
Although the applications have not been released, the regulations provide a preliminary road map for what the OCM will require of applicants in October. Most of the requirements are similar to what we have seen in other states’ application processes, with subtle differences that are applicable to New York. As expected, the OCM is clearly interested in discerning which entities and individuals are really behind the entities applying for licensure, and to obtain that information, its proposed regulations seek information from the “true parties of interest” behind an applicant. The definition of that term is long, nuanced, and circular, but it is designed to cast a wide net in an effort by the OCM to limit the number of licenses a single entity or individual can be a part of. It is also clearly targeting entities hoping to utilize management services agreements – which can serve a valid purpose when properly employed – for circumventing license limits.
The regulations also identify a subset of true parties of interest called “passive investors.” Passive investors are individuals or entities that have an ownership interest in an applicant (up to 20% for closely held retail or cultivation applicants) but do “not otherwise have any control or influence over the applicant.” Under certain circumstances, passive investors can avoid limitations on the number of licenses in which a person or entity can have an ownership interest. Entity structure will be critical in avoiding possible hangups with true parties of interest and to take advantage of passive-investor qualifications.
In addition to seeking information about applicants’ true parties of interest, the regulations require applicants to provide what has become the traditional application information in the industry: ownership percentages, financial disclosures, organizational documents, personal histories of entity members/partners, cap tables, information regarding licenses held in other states, copy of a labor peace agreement, and background checks. Applicants, except for applicants applying for a provisional license, will need to have their real estate prior to applying, as the application will require information about the “premises where licensed activities will occur.” The information requested will include title or lease agreement, GPS coordinates, architectural drawings, floor plans, confirmation that the applicant has complied with the municipality notice requirements and insurance documentation. Provisional licenses provide potential business owners with the opportunity to secure a preliminary form of approval without the large capital outlays associated with securing real estate. Specifically, applicants seeking provisional licenses will submit all materials to the OCM except evidence of site control and disclosures of the applicant’s true parties of interest. Upon securing a provisional license, applicants will then have 12 months to raise the funds necessary to secure a proposed site and apply to convert the provisional license to a full adult-use license.
These new provisional licenses will ease the application process for middle- and low-income applicants, who can now limit their up-front costs and leverage the award of a provisional license to secure funding afterward. We saw a similar construct in New Jersey, and it worked well. However, speed to market and local ground game for suitable real estate remain paramount considerations both for investors and ultimately to not being boxed out from the conversion to an annual license.
Additionally, if the applicant wishes to, they can seek to apply as a social and economic equity applicant. Per the Marihuana Regulation and Tax Act (“MRTA”), at least 50% of the licenses issued will be issued to social equity applicants. To qualify for a social and economic equity applicant an applicant must demonstrate that the “sole control of the applicant is held by” an individual from a disproportionately impacted area, a minority-owned business, women-owned business, distressed farmer, or service-disabled veteran-owned business. The requisite paperwork to satisfy the social and economic equity applicant qualification will be specified by the OCM (probably with the release of the applications).
The regulations, while certainly focused on applicants/licensees, also impact service providers that seek to contract with applicants and licensees. The regulations prohibit retail licensees from contracting with third parties “offering two or more of the following services: point of sale, payment processing, inventory tracking, or e-commerce,
such third-party provider offers readily accessible integration of the same functionality to independent alternative service providers for each service offered.” The regulations also prohibit all licensees from entering “into an agreement with a goods and services provider, including, but not limited to: a third-party aggregator or marketplace, point of sale provider, payments service provider, payments processor, inventory tracking system, customer loyalty program, or seed to sale tracking system, that conditions the sale or lease of one product or service on the consumer’s agreement to take a separate product or service.” Further, the regulations state that licensees “shall only enter into agreements with third-party platforms, marketplaces, or aggregators that” meet specific requirements, including signing and submitting “the Office’s Confidentiality and User Agreement or other agreement as required by the Office, if such third-party accesses, extracts, or otherwise relies on the transmission of data from the State’s seed to sale track and trace system.” unless
If adopted as written, this is certainly going to be one of the more complex regulatory schemes to navigate, but we are ready for it. New York is an exciting market that now seems poised to finally get underway.
We are working with applicants and service providers there and can assist clients looking to get into this market. Please contact David Standa at
firstname.lastname@example.org with any questions.