Empire State Cannabis Update: 3 Conditional Market Lessons for Future Applicants

Although New York State legalized the possession and use of cannabis by individuals 21 and older in March of 2021, by passing the Marijuana Regulation and Taxation Act (MRTA), no legal adult-use sales have occurred. To date, state regulators from the Cannabis Control Board (CCB) and Office of Cannabis Management (OCM) have opened the application process for only one category of licenses – Conditional Adult-Use Cultivation (CAUC) – which is restricted to only those individuals or businesses that were (1) previously licensed to grow hemp in New York, and (2) are able to provide evidence of two years of harvests. While applications for Conditional Adult-Use Processing (CAUP) and Conditional Adult-Use Retail Dispensary (CAURD) are expected to go live in the summer and fall of 2022, respectively, applicants for permanent licenses have been given little indication as to when the regulations that will define their applications will be issued. That said, future applicants are not completely in the dark as to what criteria OCM and CCB will use to evaluate them. Indeed, the host of laws and regulations released in conjunction with the state’s conditional licenses preview many of the major puzzle pieces expected to be in permanent applications. Below we survey three early lessons from the conditional market that will help future licensees begin to prepare their application materials now,

rather than waiting until regulations are released. 1. YOU WILL BE ASKED FOR A LOT OF DOCUMENTS–COMPILE THEM ASAP.

One of the easiest lessons learned from the CAUC application is that the bulk of material submitted to OCM is in the documents the applicant is required to attach to its submission. Not only were CAUC applicants required to provide basic documentation like owner demographics, organizational charts, and capitalization tables, they were also required to upload business and marketing plans, provide a detailed floor plan of all operations, and disclose all sources of funding of the applicant entity down to the individual investor behind any entity investors. Due to the conditional, rather than permanent nature of the CAUC license, it is more than likely that permanent license applicants will be required to provide even more documentation in accordance with their applications, including but not limited to, detailed security, staffing, marketing, branding, social equity, and environmental sustainability plans along with audited financial statements. Given the various industry professionals an applicant will likely need to contact to finalize these materials, the earlier an applicant can begin to prepare documentation, the better position it will be in when applications go live. For more information on what form this documentation may take, please refer to our article in the 4/20 edition of CannaBuff. 2. BE NIMBLE.

The second lesson the conditional market has taught is that cannabis entrepreneurs expecting to “make it” in New York must be able to quickly adapt because the state’s cannabis industry remains largely undefined. When the MRTA was passed, and for almost a full year after, there was no such thing as a CAUC, CAUP, or CAURD license. Not only do these licenses now exist, but they will be the first awarded in the state, and granted only to operators who meet specific qualifications. These conditional licenses caused some operators to change the scope of their anticipated cannabis businesses based on eligibility determinations and first-to-market considerations. While no major changes to license categories are expected between now and the release of the permanent applications, major developments in the market should not be unexpected. This is most recently exemplified by the proposed Adult-Use Packaging and Labeling Regulations, adopted at the June 1, 2022 CCB meeting. While the THC symbol, health warnings, and third-party testing requirements were predictable, the restrictions prohibiting the use of bubble font, neon colors, celebrity images or likenesses, and more than one logo and brand name were more of a surprise. Many companies have relied on these very techniques to differentiate their brands in mature markets, and it is likely that some New York permanent applicants have envisioned using similar packaging. While still subject to revision based on public comment, it is unlikely that these requirements will vary drastically from their original form such that certain licensees will have to revise branding concepts and corresponding marketing decisions in accordance with these regulations. Cannabis businesses should continue to monitor future regulations that could cause a fundamental business change stemming from an unexpected restriction. 3. REMEMBER THE SPIRIT OF THE MRTA.

At its core, the MRTA seeks to accomplish two major objectives: (1) generate tax revenue for the state, and (2) make substantial investments in communities and people most impacted by cannabis criminalization. The more an applicant can demonstrate throughout its application that it will be profitable and give back to those communities disproportionately impacted by cannabis enforcement, the better the chance of getting one of the state’s highly coveted initial licenses. These themes are underscored in recent conditional market developments. For example, the proposed CAURD Regulations published at the March 10, 2022 CCB meeting drew public attention when they limited eligible applicants to “justice involved” individuals (those who either themselves or a close relative had a prior cannabis conviction) who can prove at least 10% ownership of a business with net profits for at least two years of its operation. Through this proposed regulation, state regulators signaled that they are prioritizing cannabis entrepreneurs with prior business experience, preferably in retail, to make the state’s first retail adult-use sales and help ensure the early success of the legal market. As a further example, the law that created the CAUC and CAUP licenses requires such licensees to enter into mentoring programs with social and economic equity licensees. This additional level of mandatory support of social equity applicants by those businesses receiving priority licensing further exemplifies the state’s commitment to helping communities disproportionately impacted by historical cannabis prohibition. To that end, the most successful permanent license applications will present robust social equity plans with measurable initiatives that will benefit those communities as well. CONCLUSION

Once final regulations are published, there could be a short window for businesses to assemble and submit their applications. The more prepared a prospective applicant is prior to this window opening, the easier it will be to refine application materials to fit the exact requirements set forth by the CCB and OCM. In conjunction with the creation of the conditional market, state lawmakers and regulators have tipped their hats to a few of the major elements of an application beyond what was anticipated to date. Using these conditional market themes as a guide, New Yorkers can and should begin to assemble their application materials in order to be best positioned for application season. The Lippes Mathias Cannabis Practice Team will continue to monitor developments in New York’s burgeoning cannabis industry, including when additional adult-use regulations are published, and when permanent license applications are expected to be released. If you have any questions, please contact one of our attorneys.

WRITTEN BY Ryan V. Stearns, Thomas B. Hughes, & Joseph W. Schafer

OF LIPPES MATHIAS LLP