Gov. Phil Murphy signed a package of bills into law February 22 that will create a legal adult-use cannabis market in New Jersey. Several other states — from Montana, to Virginia, to New York — are either implementing or appear poised to enact similar legislation. Each of these jurisdictions is unique and complex, and so are their cannabis laws, but they share some common factors that businesses must consider when entering any new cannabis market.
Using New Jersey as an example, here are eight important considerations companies should make when expanding into new cannabis markets:
1. Understand the Legislation and Statute
The first item to analyze should not be a surprise – the bill itself. States vary considerably in their regulation of cannabis. And most of these differences will be set out in the enabling legislation (which is then codified into statute).
The primary legislation setting out the parameters for New Jersey’s adult use system is A21 or the “New Jersey Cannabis Regulatory, Enforcement Assistance, and Marketplace Modernization Act”. It creates seven classes of licenses: laboratory testing, cultivator, manufacturer, wholesaler, distributor, retailer, and delivery. Vertical integration is prohibited for the first two years. There is a cap on the number of cultivation licenses and preferences for awarding licenses are also provided for.
Cannabis markets vary in how they structure their regulators. Some will have commissions and others individual directors.
In New Jersey, the five-member Cannabis Regulatory Commission (CRC) is responsible for overseeing New Jersey’s medical and adult use programs, which includes accepting and processing licenses and promulgating regulations. Appointment of the members of the CRC was completed on February 25th.
3. Rulemaking Timeline
One major misconception in the public mind is the conflation of a bill passing and the applicable law coming into effect. In fact, most aspects of legislation impacting cannabis business will require a rule making process before changes take effect. And it is common for stakeholders to have an opportunity to influence the rulemaking process. If you want to be involved in a new market, you will want to actively track the rulemaking process and participate as well.
The CRC is tasked with issuing regulations within 180 days of A21’s effective date (i.e., August 22, 2021). And the CRC must begin accepting and processing licensing applications within 30 days of issuing the regulations.
4. Apply v. Buy and Head Start Opportunities
Typically, new adult-use cannabis markets arise in states that already have medical cannabis systems. If that is the case, the fastest way to expand into a state may be to purchase an existing operator. And in some cases, the existing operators will have a head start on adult-use operations.
There are currently 12 alternative treatment centers (ATCs) licensed under New Jersey’s Medicinal Marijuana Program (MMP). Each of these ATCs, as well as the 24 ATCs that will become licensed once the 2019 application process finally finishes in the next month, will be eligible to apply to sell into the adult use market once they can prove they have sufficient product to sell and obtain municipal approval.
5. Local Licensing
Depending on the state, local licensing can either be an afterthought to obtaining a limited state license or it can become the limiting factor in the process. In states with limited local licenses, the competition shifts to the local arena and municipalities and counties become critical regulators.
New Jersey will be competitive at both the state and local levels. Municipalities may impose separate local licensing requirements and ban non-delivery cannabis operations (bans must be put into place by August 22, 2021). It may also be the case, like California, that M&A activity will require local approval.
6. Equity Considerations
Increasingly, states are considering social equity when issuing new licenses. It is important to think about what licenses will be set aside for social equity applicants, how social equity applicants are defined, and what are the limitations on transactions with these licensees.
New Jersey’s program has notable social equity provisions. 30% of licenses are intended to be awarded to minorities, women, or disabled veterans. And 70% of the sales tax revenue (including all the excise tax on cultivators) is specifically earmarked for restorative programs for legal aid, health care, and mentoring in communities disproportionately impacted by the war on drugs.
7. Ownership Restrictions
Many states have restrictions on who can own cannabis licenses. Some of the restrictions around residency have gone away (e.g., Colorado), but many limits remain. Common examples include restrictions around owning microlicenses, social equity provisions, license number caps, and residency requirements in medical only states.
In New Jersey, 30% of licenses will be awarded to minorities, women, and disabled vets. There are also significant restrictions on the ownership of microbusiness licenses – they must be 100% owned by two year plus residents of New Jersey and 51% of their owners, directors, officers, and employees must be residents of the municipality in which the microbusiness is located.
8. What can be done in advance of licensing?
Successful cannabis licensing applications in competitive markets require significant planning. In advance of preparing and filing an application, applicants can evaluate real estate opportunities, build their team, raise capital, fill any gaps in their experience, and get involved in the rule making process.
All the foregoing applies in New Jersey. Given the important of municipal licensing, interested parties should also begin thinking about local licensing issues and locating municipalities that will be easier for cannabis companies to with.
There will also be a licensing round for five clinical registrant permits in May. These licenses allow cultivation, manufacturing, and dispensing of medical cannabis and require a contract with an academic medical center to undertake clinical research involving cannabis.
Charlie Alovisetti is a partner at Vicente Sederberg LLP and co-author of “The Cannabis Business: A Guide to the Law, Finance and Governance of America’s Newest Industry.” Jennifer Cabrera is counsel at Vicente Sederberg LLP and manager of the firm’s New Jersey office.