New York Releases Significant Changes to Adult-Use Cannabis Regulations

On May 11, 2023, the New York State Cannabis Control Board (CCB) of the Office of Cannabis Management (OCM) announced revised proposed adult-use cannabis regulations. The revised regulations contain some significant changes from those initially published on December 14, 2022. Key highlights of the revised regulations include:

• changes restrictions on ownership of Registered Organization Adult-Use Cultivator Processor Distributor Retail Dispensaries (ROD)
• revises definitions of “True Parties of Interest” and “Passive Investors”
• accelerates timeline for the entry of Registered Organizations into the adult-use market
• creates provisional licenses for most classes of adult-use cannabis licenses
• allows for the creation of limited retail consumption areas within retail dispensaries
• implements new regulations for delivery services
• allows for cannabis events with sales of cannabis products

In terms of next steps in the process, the revised regulations will undergo a 45-day public comment period once published, after which the CCB will be able to make additional revisions before enactment. The CCB has made clear, however, that it intends to implement the revised regulations as soon as the public comment period closes and then implement further changes afterward as needed based on the public comments.

Changes That Affect Registered Organizations

Perhaps in response to the lawsuit filed by certain Registered Organizations against the CCB, OCM, and several of their officials, the revised regulations make significant changes to the process for entry of Registered Organizations into the adult-use market. While there are two classes of adult-use licenses available to current Registered Organizations — Registered Organization Adult-Use Cultivator Processor Distributor (ROND) licenses and Registered Organization Adult-Use Cultivator Processor Distributor Retail Dispensary (ROD) licenses — the most significant changes included in the revised regulations apply only to the ROD licenses.

First, the initial regulations prevented any true party of interest (TPI) in a ROD from having any interest in any other licensee in New York as well as any cannabis operator outside of New York. While TPIs in a ROD will still be prevented from investing in other retail dispensaries, on-site consumption licensees, delivery licensees, or other Registered Organizations, there are no longer any restrictions on investing in out-of-state cannabis operators. This also differentiates RODs from general retail dispensary licenses, whose TPIs are still forbidden from investing in out-of-state cannabis operators. It should be noted that while a TPI in a ROD is not forbidden from being a TPI in an adult-use cultivator, cooperative, microbusiness, or ROND licensee, it may only be a Passive Investor in those businesses while remaining a TPI in a ROD.

Second, the timeline for permitting RODs to enter the adult-use market has been greatly accelerated. Previously, the CCB had proposed excluding Registered Organizations from co-locating dispensaries (or selling adult-use cannabis at their medical dispensaries) for three years. Acknowledging at the CCB meeting that there are significant supply issues in New York, the revised regulations are now proposing allowing RODs to co-locate their first dispensary before December 29, 2023, and co-locate their second and third dispensaries before June 29, 2024.

Third, RODs will be required to dedicate at least 70% of their shelf space to cannabis products that are not cultivated and processed by RODs until January 1, 2026, after which they will need to dedicate only 40% of shelf space to non-ROD products. The increase to 70%, from the previously proposed 40%, appears to be intended to protect Conditional Adult-Use Retail Dispensary (CAURD) licensees and other non-ROD licensees (e.g., cultivators and processors) from the perceived advantages of vertical integration enjoyed by the RODs. CCB and OCM policymakers have discussed publicly their concerns about vertical integration, particularly with respect to the CAURD program.

Finally, and possibly most significantly, the initial regulations would have required RODs to pay a $20 million one-time fee, in addition to the licensing fees for each class of license included within a ROD (cultivation, processing, distribution, and retail dispensary), to enter the adult-use market. While RODs will still need to pay a $20 million fee, it is no longer due up front prior to commencing operations in the adult-use market. Under the revised regulations, RODs will pay $5 million at the time of licensure, with the remainder being paid either: 1) when the ROD opens its second co-located dispensary; or 2) in $5 million installments becoming due 30 days after each $100 million in revenue generated by the ROD. The balance of the $20 million fee will be due by December 31, 2033, at the latest, unless New York’s aggregate adult-use cannabis retail and wholesale revenue fails to exceed $20 billion, in which case the ROD will no longer have to make installment payments. In the event that a ROD decides to allow its license to expire, or has its license revoked, canceled, or deemed abandoned prior to December 31, 2033, the ROD will still be responsible for paying the remainder of the $20 million fee.

Overall, the revised regulations create a pathway for RODs to enter the adult-use market much sooner than would have been allowed under the initial regulations, including by allowing them to spread the $20 million entry fee over a period of time. Further, the new regulations include a key change, allowing the owners of RODs to maintain their ownership stakes in other cannabis operators throughout the country.

Changes That Affect Investors

New York’s cannabis regulations require applicants to disclose all TPIs. TPIs are required to undergo background checks and make financial disclosures that many would consider to be onerous. TPIs are also limited from investing in certain combinations of classes of cannabis licenses as well as in certain quantities of licensees.

The definition of a TPI and other provisions related to TPIs in the initial regulations received substantial public comment and criticism. Under the revised regulations, who constitutes a TPI has been changed. Generally, the revised regulations have raised the threshold for what constitutes a TPI; in other words, fewer entities and individuals will qualify as TPIs under the revised regulations compared to the initial regulations. Previously, any person was considered a TPI who, in a calendar year, received the greater of: 1) 10% of gross revenue of a licensee; 2) 50% of the net profit of a licensee; or 3) $100,000 from the licensee. The revised regulations raise the third qualifier from $100,000 to $250,000, making it less likely for a consultants, contractors, or goods and services providers to unintentionally be designated TPIs.

Relatedly, the revised regulations also change the definition of “Passive Investors.” While Passive Investors are considered TPIs and still make the same disclosures, Passive Investors are permitted to invest in more cannabis licensees than other TPIs. Under the initial regulations, Passive Investors were defined as those owning at most 5% of publicly traded cannabis licensees, or at most 20% of non-publicly traded cannabis licensees. Under the revised regulations, Passive Investors will be defined as one of the following:

• those owning at most 5% of publicly traded cannabis licensees
• those owning at most 10% of non-publicly traded RODs
• those owning at most 20% of any other type of cannabis licensee

With respect to investing in RODs at least, the revised regulations are more restrictive than the initial regulations and may cause issues for some Registered Organizations planning to apply for a ROD license.

New Provisional Licenses

The revised regulations introduce the new concept of provisional licenses. 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 TPIs. 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.

New Limited Retail Consumption Areas

The revised regulations expand on the OCM’s vision for consumption of cannabis products on-site at retail dispensaries. While the Marihuana Regulation and Taxation Act (MRTA) made clear that holders of retail dispensary licenses cannot obtain on-site consumption licenses, the initial regulations indicated that some on-site consumption would be permitted at retail dispensaries. The revised regulations expand on this concept by creating “limited retail consumption areas,” which are distinct areas located within licensed retail dispensaries. While cannabis products can be consumed in these areas, the retail dispensary and its employees cannot roll, pack, split, or otherwise prepare the cannabis products. Further, the limited retail consumption areas cannot charge an entrance fee, nor can cannabis products be physically sold within the limited retail consumption area. Thus, a limited retail consumption area will simply be a location within the dispensary where consumers can use the cannabis products they purchased at the dispensary, rather than the cannabis equivalent of a cocktail bar. While these restrictions differentiate limited retail consumption areas from the operations available to on-site consumption licensees, the creation of these new consumption areas may be challenged in court. Retail dispensaries seeking to operate limited retail consumption areas will have to secure approval from the CCB and pay an additional $3,000 licensing fee.

New Delivery Regulations

The revised regulations provide for retail delivery licenses. The regulations set restrictions as to where cannabis may be delivered, including prohibiting the delivery of cannabis to motor vehicles, public buildings, parks, community centers, schools, day cares, or houses of worship. Licensees cannot have more than 25 full-time employees delivering cannabis in any given week. The regulations further restrict the amount of cannabis a delivery driver may carry at a time, and they require that at least 30% of the cannabis in a driver’s possession be paid for before the driver departs from the retail dispensary.

New Event Regulations

Anticipating demand for cannabis sales at events, the revised regulations allow us to envision how cannabis events in New York may unfold. Those seeking to organize cannabis events will need to apply for approval from the CCB. Licensees seeking to participate in cannabis events can apply to extend their licenses to temporarily cover the event location, which must be the premises of another licensee allowing them to sell cannabis at the events. The fees associated with such applications will vary based on the number of days and anticipated attendance for the event, with the temporary extension capped at 30 days. If the event is not exclusively a cannabis event, the organizers must present reliable evidence that the age composition of people anticipated to attend will be over the age of 21. The requirement that the cannabis events be held on the premises of a licensee will likely greatly restrict the types of events that can be held.

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While the above focuses on certain key changes, the revised regulations make significant changes to all license types. The regulations announced on May 11, 2023, are likely to be very similar to what is ultimately implemented by the CCB after the public comment period ends, and therefore they provide pretty clear guidance to future applicants.