New York’s Office of Cannabis Management (“OCM”) posted today updates to its proposed adult-use regulations (the “Revised Regulations”), in advance of a vote of the Cannabis Control Board (the “Board”) to release them for public comment. While these Revised Regulations merely contain amendments to the robust first set of proposed rules (“Prior Draft”), which were previously broken down and discussed in detail by Foley Hoag, they are nevertheless important given both the timing to general adult-use licensing it lays out, as well as the roadmap for what the application process and adult-use marketplace will look like in the weeks, months, and years to come.
While Foley Hoag is preparing a more comprehensive summary of the Revised Regulations (in addition to providing an overview of the regulations as a whole, including what remains the same from the Prior Draft), we provide the below snippet to give readers an overview of what is in store in the days and weeks to come.
As it relates to timing, the million dollar question for prospective cannabis businesses in New York has been when will general licensing commence. Most are familiar that the only licenses issued in New York, to date, have been conditional licenses with extremely limiting conditions (hemp program licensure, qualifying businesses, qualifying convictions), meaning, license opportunities have not been available to any old businesses and/or individuals that wished to apply. However, the posting of the Revised Regulations today aligns with statements made by Senior Level OCM officials regarding the anticipated roll-out towards regular licensing. For instance, Axel Bernabe, Chief of State and Senior Policy Director of OCM, previously gave the anticipated timeline as follows:
The regulations that we filed for public comment, we’re really trying to get them done by our May 11 board meeting. If we get it done by then, we should be able to file final regs by the end of August. Then we can start opening the general application period within a couple months of that. These are all tentative dates, but in the fall, after Labor Day, that’s when we can start to award more dispensaries.
In short, several months after this comment was made, OCM’s predication on the time-frame for the Revised Regulations have hit the mark, with the hope that the remainder of the timeline noted above also holds true.
Rolling Licenses Have Evolved to Application Periods
One of the biggest changes to the application process is that whereas the Prior Draft noted that applications would be solicited and accepted “on a continuous rolling basis,” the Revised Regulations have changed this to distinct application periods. For example, the Revised Regulations identify that “[l]icensing 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.” Meaning, this will not be an open and rolling application period, like we’ve seen in other recent adult-use states such as New Jersey, and instead, more akin to what we’ve seen during the Adult-Use Conditional Cultivator, Adult-Use Conditional Processor, and Conditional Adult-Use Retail Dispensary (“CAURD”) rounds. The Revised Regulations have maintained the language identifying potential caps, wherein it identifies that “[l]imitations may be imposed on the acceptance of licensing applications, including, but not limited to, the total number of licenses; locations or authorized regions of operations; size of operation or output; limitations associated with true party of interest; eligibility criteria; and operating conditions, such as sustainability, public health and safety, and social and economic equity factors.”
In short, we’re likely to see, like we did with the CAURD licensing round, an opening of applications subject to specific criteria and that limits the total number of opportunities by region. For instance, when the CAURD round was initially announced, OCM solicited only one hundred fifty (150) total CAURD licenses, and broke that down by different regions of the state. Though OCM subsequently doubled that to three hundred (300), this example is certainly in stark contrast with an open application round that accepts application on a seemingly continuous and rolling basis.
We note that this again holds true to public comments made by senior level OCM staff, who had anticipated:
. . . a phased rollout to a certain extent, so we don’t have a thousand people all looking for dispensaries at the same time. We have like, 100, and then another 100, and then a couple months later, another 100. Then you don’t have 500 people descending on a county and all scrambling and fighting for space and bidding up the price.
How Will These Applications Be Processed?
While priority was certainly important under the Prior Draft, it has become especially important in light of the defined application periods noted above. The regulations identify that applicants will be reviewed based on priority, including based on “provisional, social and economic equity status, or any additional criteria to be set by the Board.” Social and economic equity applicants include those entities who are owned and solely controlled by: (a) an individual from a community disproportionately impacted (“CDI”) by the enforcement of cannabis prohibition; (b) minority owned businesses; (c) woman-owned businesses; (d) distressed farmers; (e) and service-disabled veteran owned businesses. Moreover, the rules give OCM the ability to provide extra priority to those businesses owned by those from a CDI and who have income lower than 80% of the median income in the county in which the applicant resides plus convicted of a cannabis related offense.
How Will Applications Be Evaluated?
Largely the same as under the Prior Draft, including by reference to: (a) community impact plan; (b) operational and regulatory compliance plans, highlighting technologies, techniques, and strategies to protect the surrounding environment, limit carbon footprint, and leverage sustainable energy sources; (c) completion of workforce or training programs offered by OCM; (d) applicant’s history in creating or maintaining an equitable workplace environment through the review of previous business and management practices; (e) history in creating or delivering culturally and linguistically competent services to diverse and underserved populations; (f) service in community leadership roles; (g) relative performance of applicants based on such criteria; (h) applicant’s qualification for provisional licensing status; and (h) consideration to whether applicants have entered into an agreement with a statewide or local bona-fide building and construction trades organization for construction work on its licensed facilities.
Importantly, the request for operational plans should not be overlooked, as they constitute the regulatory meat of the submissions associated with the application. Operational plans will include reference to: (a) energy and environmental standards; (b) site, operating, and environmental plans; (c) security and storage of cannabis; (d) employee requirements and obligations; (e) responsible workforce training; (f) worker health and safety standards; (g) sanitary facility, equipment, and handling standards; (h) inventory and tracking; (i) quarantine and recalls; (j) transport of cannabis and cannabis products; (k) management of cannabis and other waste; (l) inspections and audits; (m) general recordkeeping; and (n) processing samples for internal quality control. In short, the preceding is akin to the types of application sections and materials that we see in most other competitive marketplaces. Moreover, when one of the criteria to be assessed by OCM in connection with license issuance is the “relative performance of applicants based on such criteria,” the message is that the narrative responses must not only meet the relevant regulatory criteria, but exceed it by reference to best practices that differentiate one applicant’s protocols from another.
What is Provisional Licensing Status?
A provisional licensee is a relatively new concept identified under the Revised Regulations. While the Prior Draft referenced provisional licenses, it mainly referenced in the context of an approved application status prior to final license issuance (much like we’ve seen in Ohio for approved medical dispensaries prior to ultimate license issuance). The Revised Regulations discuss provisional license applicants as those applying without the other required elements for applicants identified under the rules, specifically calling out the potential omission of “the right to use a proposed premises.” While there is not yet a tremendous amount of substance on this point in the Revised Regulations, it seems to suggest a process similar to the conditional license we’ve seen across-the-river in New Jersey. Or, it could also look similar to the CAURD process, which focused more on who the applicant and the TPIs are, while providing the provisional license phase to fill in the relevant regulatory requirements, safeguards, and site control. In any event, the Provisional Licensing Period identified under the Revised Regulations is twelve (12) months from the date of the issuance of the provisional license, unless extended.
Do the Extra-Territorial Restrictions Remain?
Yes, but just for the retailers (and not medical retailers, as discussed below). Specifically, the language still remains that “no adult-use retail dispensary or its true party of interest is permitted to hold a direct or indirect interest, including by being a true party of interest, passive investor, or having a goods and services agreement with, or by any other means, in an adult-use cultivator, processor, distributor, cooperative or collective, microbusiness, ROD, ROND, registered organization under Article 3 of the Cannabis Law, or cannabis laboratory licensee or permitted, or any person outside of New York State, otherwise licensed to conduct the activities authorized under such licenses, registration, and permits.” In short, if an applicant and/or its true parties of interest hold an interest in cultivation outside of New York, that will preclude it from becoming a true party of interest to a retailer inside of New York.
What About the Medical Operators?
The good news is that the Prior Draft – which included unnecessarily punitive restrictions on Registered Organizations (“ROs”) – has been amended both to remove the extra-territorial retail restrictions noted above, and to clarify the process and timeline for commencing retail operations sooner.
First, ROs converting to adult use dispensing (ROs with dispensaries referred to as “RODs,” ROs with no dispensaries (essentially cultivators/wholesalers) referred to as “RONDs”), are no longer subject to the same extra territorial restrictions as other retailers. In the Prior Draft, RODs were subject to the same extra-territorial restriction as the retailers noted above, a major impediment to ROs that had been already been operating in the State for years and servicing the medical patient population, most of which are multi-state operators with cultivation operations in other States. The extra-territorial restriction imposed on them in the Prior Draft essentially voided the right of all of them to convert, as provided under the MRTA. However, this restriction was removed as an impediment to conversion for RODs.
Second, the Prior Draft was amended under the Revised Regulations to streamline the time-frame for commencing ROD retail sales. In particular, the Prior Draft identified that RODs could not commence retail sales until three (3) years after the first adult-use retail sale in New York (which occurred in late December 2022). Instead, the Revised Regulations identify that RODs may open their first co-located store after December 29, 2023, and their second and third after June 29, 2024. ROs may only co-locate three adult-use/medical retail outlets.
However, RODs will be required to dedicate a minimum of 70% shelf space for products cultivated and processed by licensees that are not RODs until January 1, 2026 (up from 40% under the Prior Draft), and 40% shelf-space for these non-ROD licensees thereafter.
Any Changes to TPI Limitations?
Anyone familiar with the New York adult-use cannabis industry is painfully aware of true party of interest (“TPI”) limitations. Whereas other jurisdictions focus on who is an “owner,” “financial source,” and/or “management services provider,” New York keys in on who is receiving the lion’s share of economics of a license, designates them as TPIs, and identifies cross-ownership prohibitions associated on TPI status, as opposed to mere ownership (though ownership is still a direct tie to who is a TPI as well). While the TPI definition largely remains the same, it has increased some of the economics. For instance, as it relates to those receiving aggregate payments from a license holder, the language remains the same that a person receiving 10% of the gross revenue and 50% of the net profit are TPIs, while increasing the monetary threshold from $100,000 to $250,000. Importantly, the analysis for a TPI is someone receiving the “greater of” the 10% of gross revenue, 50% of net profit, or $250,000.
The other noteworthy change to the definition of TPIs relates to spouses. New York treats as a TPI not only those individuals holding direct interests in an applicant/license holder, but also their spouses who might not otherwise be in direct privity with the entity, necessitating that both the husband and wife fill out the onerous TPI personal history disclosure form. However, whereas the Prior Draft designated that only the spouses of the applicant/licensee’s owners, stockholders, and officers were TPIs, the Revised Regulations have now identified that the spouses of “each person that makes up the ownership structure of each level of ownership for an applicant or licensee that has a multilevel ownership structure” are also TPIs. While we note that this definition gets cross-referenced with the passive investor definition, noting an exception to more robust disclosure for passive investors that hold no more than 5% of an applicant whose shares are publicly traded, 10% of a non-publicly traded ROD license and microbusiness licenses, or 20% for everyone else, the preceding nevertheless identifies an expansion to the field of spousal TPIs.
What Else is New?
The Revised Regulations discuss a “licensed premises for cannabis events,” which is essentially a temporary cannabis pop-up event license. Anyone who holds a retail, on-site consumption, microbusiness, or ROD license may petition for a temporary (30 day) pop-up license, as approved by OCM. While this license includes several other regulatory requirements and restrictions, it nevertheless provides a retailer the opportunity to host events beyond its own brick and mortar.
While Foley Hoag will be circulating a more fulsome breakdown of the proposed rules, both of the Prior Draft and what has changed under the Revised Regulations, the preceding certainly provides a major change to the playing field in adult-use cannabis in New York, and, most importantly, sets the stage for the final rollout of general licensing in the months to come. Stay tuned.