By Alex Malyshev. Published in the New York Law Journal.
Last March former Gov. Andrew Cuomo signed the Marihuana Regulation and Taxation Act (MRTA) into law to much fanfare. In addition to legalizing adult-use cannabis, and overhauling New York’s existing medical marijuana law, it also created a new unified regulatory body to oversee the adult-use cannabis, medical marijuana, and cannabinoid hemp programs. Specifically, the MRTA established a Cannabis Control Board (the Board) to oversee the programs, and a subordinate Office of Cannabis Management (a division within the alcoholic beverage control) (OCM) to administer it.
Members of the Board are political appointees, split up among the governor and the legislature. Due to the scandal that engulfed the last six months of the Cuomo administration, no appointments were made to the Board during his tenure. This essentially meant that no progress was made on getting the new adult-use cannabis and medical marijuana programs off the ground, as the power to issue licenses, approve regulations, and appoint necessary directors and officers, lies with the Board. See MRTA Art. 2, §10 (Powers and Duties of the Cannabis Control Board). This logjam appears to have been broken earlier this month, after Gov. Kathy Hochul took the reins.
While New York may finally have its regulator in place by the end of the year, any hopes of regulations being issued—let alone any licenses actually awarded during this time frame—have been dashed. This turn of events is not without its silver lining, however, as the Board and the OCM may have the opportunity to apply any “lessons learned” by New Jersey, which approved its Initial Rules for “personal use” (e.g., adult use) cannabis last month. Considering New York’s potential to be a major hub for the industry for years to come, it has every incentive to do so.
Getting Social Equity Right
New York has announced that it is setting aside up to half of available licenses to social equity applicants and, similar to New Jersey’s licensing scheme, will prioritize awarding licenses to such applicants. This is important because social equity applicants have less of a capacity to lay out the funds needed for an application, and then await a decision for many months, before they have an indication as to whether they are going to receive a license. This may require the Board to also prioritize the “incubator” program it was directed to create in the MRTA to both encourage social equity applications and to “provide direct support in the form of counseling services, education, small business coaching and financial planning, and compliance assistance.” See MRTA §87(4). Properly structured, the incubator program should provide an easy to use toolkit to social equity applicants to help them navigate what is expected to be a complicated (and labor intensive) process.
This includes helping these predominantly retail businesses to determine which parcels or buildings are properly zoned for applications, without having to do that legwork themselves. After all, it serves no one to have numerous social equity applications be denied as a result of the applicants being “zoned out” (which increases the workload for both the applicants and the regulator). Lowering the barrier to entry should be the guiding principle to the Board in this respect.
New York must also carefully craft regulations around what financial arrangements social equity applicants may enter into with investors. The MRTA requires social equity applicants to retain a controlling majority of any such company both financially and in terms of legal control. See MRTA §87(5). If regulations are overly burdensome or restrictive, they may discourage outside investment, thereby setting up minority owned businesses for failure. Considering such companies’ limited access to banking and lending, New York’s Urban Development Corporation (UDC), which is authorized to make low interest loans to social equity applicants, may not be sufficient to satisfy demand on its own.
Getting It Right for Everyone Else
New York has expressed a clear preference for a de-centralized market that goes beyond social equity applicants. This is apparent from the three-tier model it adopted for adult-use cannabis, and the limits it has placed on the number of licenses any one “person” may have an interest in. See MRTA §§69-75. The Board and the OCM should consider making many of the resources it is developing for social equity applicants available to as many of these applicants as possible, especially if there is no incremental cost to doing so (by, for instance, making data available and simplifying the application process). Among other things, this will actually promote the social equity goals of the law, since these applicants are expected to implement a social equity component into their operations, thereby benefitting those very same communities.
New York should also consider expanding the loan program to be administered by the UDC, as the costs of operating a cannabis business remain prohibitively expensive for all but the very well capitalized. After all, in addition to dealing with the usual challenges of a start-up business, these entrepreneurs need to deal with the added costs of limited banking and lending, while at the same time being unable to take many ordinary business deductions due to §280E of the Internal Revenue Code, which prohibits such deductions for federally illegal industries.
While many ideas have been floated about how to lower some of these barriers to entry, it will likely require action by several regulators. This includes the Department of Financial Services working with those regional banks and credit unions that have decided to service the industry on a unified set of expectations, and the Board and the OCM simplifying the application process while also providing the kinds of data that entrepreneurs will need to make an informed decision about starting the application process.
Communicate Early and Often
In addition to simplifying the application process, the Board and the OCM should communicate with stakeholders early and often about where it expects regulations to go. Many entrepreneurs are crafting business plans, largely in the dark. There is a lack of certainty about the number of licenses, how they will be awarded (whether in tranches or on a rolling basis), the costs involved, and what business models will be allowed. It is in New York’s interest to have as transparent of a process as possible, as it benefits both the stakeholders, and the state itself. Failure to do so may lead to the kind of acrimonious litigation which states such as Florida, Illinois, and even New Jersey, have seen.
Alexander G. Malyshev is a partner in the Cannabis, Hemp & CBD Industry Group at Carter Ledyard & Milburn.
Reprinted with permission from the September 30, 2021 edition of the New York Law Journal © 2021 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or firstname.lastname@example.org.