Michelle Bodian, Sam Kovach-Orr, Bridgette Nikisher

Vicente Sederberg LLP

Draft regulations to implement the Marijuana Regulation and Taxation Act MRTA have been published. Public comment is due by February 12, 2023.

On December 14, 2022, the draft regulations to implement the Marijuana Regulation and Taxation Act (New York’s cannabis law) were published in the state register with a 60-day public comment period. The Office of Cannabis Management (OCM) must receive all comments by February 12, 2023. These draft regulations include the application, eligibility, and licensing procedures for applicants seeking to obtain a license to operate as an adult-use nursery, cultivator, processor, distributor, retail dispensary, microbusiness, cooperative, registered organizations with dispensing (ROD), or registered organizations nondispensing (ROND). 

While the draft regulations are over 280 pages, below are ten aspects that will most directly impact hopeful and existing New York cannabis businesses.

1. Prohibitions on Ownership/Investment in Multiple License Types

While New York’s cannabis law set the framework for tiered supply chain (mirroring the state’s alcohol and beverage law), the draft regulations greatly expand the limitations on who cannot “cross tiers.” The two tiers are supply (cultivation/nursery/distributor/processor) and retail (dispensary, on-site consumption, delivery).

The draft regulations broadly define several terms, including:

• True Party of Interest (TPI)
• Passive Investor
• Financier
• Goods and Services Agreements
• Control or Controlling Interest
• Aggregate Ownership

These definitions, when taken together, prohibit existing cannabis investors from investing in the New York cannabis market and will impede many existing cannabis operators from replicating their success in other states in New York.

2. Undue Influence

The draft regulations set forth robust restrictions on promotional items and activities. These restrictions include a prohibition on a licensee’s ability to give or receive a “benefit equivalent to the value of money” from another licensee. However, licensees are permitted to give branded promotional items “of nominal value” to dispensaries and/or their employees on the condition that the items may not be given to retail dispensary customers. Further, licensees are generally prohibited from providing promotional item giveaways to retail dispensary customers, including branded and unbranded merchandise (excluding samples of non-infused edibles and topical products). (See Part § 124.1).

3. Lack of Materiality Threshold for Private Companies

Most states have a materiality threshold whereby individuals under a certain percentage of ownership or control do not need to be disclosed to the state or listed on cannabis license; in New York these are “passive investors.” New York has a materiality threshold for publicly traded companies (of which there are very few) in line with other states’ thresholds; however, New York’s threshold for private companies is untenable. The draft regulations state that a “passive investor” (aka someone that does not need to be disclosed to the state) is an individual with total ownership of either 5% of a publicly traded company or 20% of a privately held company, and who does not have any other control or influence. A 5% materiality threshold for ownership and disclosure for privately held companies is more consistent with other states. While this would not guarantee access to investment dollars, this would allow greater opportunity for New York licensees to raise capital to finance their operations. (See Part § 118.1(61)

4. Registered Organization Dispensary Moratorium and Need to Divest Assets

While Registered Organizations will ultimately be permitted to conduct adult-use sales, RODs will be prohibited from obtaining authorization for adult-use retail dispensary operations for three years without exception. (See Part 123.18(b)(9) stating “A ROD shall not: be granted authorization to apply for adult-use retail before three years from the first date of a retail adult-use cannabis sale by a licensee authorized under the Cannabis Law.”)

In addition, a ROD or its TPIs are not permitted to hold a direct or indirect interest in, or be a TPI, passive investor, landlord, financier, or management services provider, or by any other means, to a cultivator, processor, distributor, cooperative, microbusiness, retail dispensary, on-site consumption, delivery, ROND, registered organization, or cannabis laboratory licensee or permittee, or any person licensed outside of New York State who are licensed to function as any of the aforementioned licenses. This will effectively require all RODs to divest their assets in other states or be blocked from converting to adult use. (See Part 123.17(d)).

5. Processor White Label Restrictions

The draft regulations state that a cannabis processor may only enter into a branding or white labeling agreement with its TPIs or another licensee. As brands are not eligible to become licensees, this will severely limit and prohibit out-of-state brands. (See Part §C 123.5(c))

6. “Community Facility” and “Unreasonably Impracticable”

The draft regulations create a newly defined term, a “community facility.” This term and the rules contained in § 119.2 greatly expand on permitted municipal setbacks. 

“Community facility” means a facility that may include, but not be limited to, a facility that provides day care to children; a public park; a playground; a public swimming pool; a library; or a center or facility where the primary purpose of which is to provide recreational opportunities or services to children or adolescents. A municipality may issue a local law regarding community facilities that are not unreasonably impracticable. § 118.1(a)(21).

“Unreasonably impracticable” is not defined; however, Part 119.5 outlines the procedures for CCB review of municipality rulemaking alleged to be unreasonably impracticable. Under Section 131(2) of New York’s cannabis law, municipalities are prohibited from enacting and/or enforcing any rules, regulations, ordinances, or other action “if such action otherwise impedes on duties and obligations of the Board as set forth under the cannabis law, violates any provision of the cannabis law [or the draft regulations], or discriminates against or frustrates the registrant, licensee, or permittee’s ability to carry out the operation of such registration, license, or permit as issued by the Board.” (See Parts § 119.2 and §119.5).

7. Factors in Determining Cannabis Cultivation Canopy Expansion in New York

New York’s draft cannabis regulations outline the factors OCM will utilize to determine whether to grant requests to expand a cultivator’s canopy to a larger tier. These factors include cultivation and sales history, the licensee’s inventory and inventory history, whether the licensee underwent a catastrophic event affecting plants and/or inventory, and the licensee’s adherence to its submitted plans (e.g., the licensee’s operating plan). The draft regulations also include a “catch-all” factor (“any other factors determined by the Board”). Cultivators aiming for long-term growth and expansion should consider how they will demonstrate success in the articulated factors; and whether there are more concrete factors that should be utilized. (See Part § 120.3(a)(5)).

8. Lack of Delivery License Information

While all other license types are discussed in detail in the draft regulations, cannabis delivery is expressly excluded at this time. While OCM has indicated these draft regulations will be promulgated eventually, it leaves many questions unanswered for the time being.

New York cannabis delivery guidance has been provided to CAURD licensees, which provides a sneak peek into what the final delivery regulations might say. Still, since delivery is not included in the draft regulations, we can’t be certain. The CAURD delivery guidance also might not align with the final delivery regulations as many of the provisions in the CAURD delivery guidance are special terms for CAURD licensees only. While businesses are planning their entry into the New York, it would be beneficial to know the rules of the game for all possible licenses at the same time.

9. Converting a New York Conditional Cultivator License to a Full License

According to the draft regulations, New York Adult-Use Conditional Cultivators (AUCC) will be permitted to transition to a full license upon the satisfaction of certain conditions; however, the transition will only allow for a Tier IV outdoor license or a Tier II combination cultivator.

A Tier IV outdoor will allow greater than 25,000 square feet, but not exceeding 50,000 square feet. A Tier II combination cultivator allows greater than 5,000 square feet, but not exceeding 12,500 square feet of outdoor, and greater than 2,500 square feet but not exceeding 6,250 square feet of mixed light. Currently, AUCCs may cultivate up to 43,560 square feet of flowering canopy outdoors or 25,000 square feet of flowering canopy in a greenhouse. An AUCC can grow outdoors and in a greenhouse if flowering canopy in a greenhouse is equal to or less than 20,000 square feet and the total flowering canopy is equal to or less than 30,000 square feet. This will result in the following potential loss of canopy:

(See Part § 123.3(g)).

10. 1,000-foot Setback for Cannabis Dispensaries in New York’s Major Cities

The draft regulations require New York municipalities with a population of 20,000 or more to require a 1,000-foot radius from other premises that have been issued the same license type. This means that in many municipalities—including New York City, Buffalo, Syracuse, and Albany—a retail dispensary cannot be located within 1,000 feet of another retail dispensary. (See Part § 119.1(a)(4)). This radius may prove impossible in densely populated cities where property is already scarce.

Municipalities were given the option to “opt out” of allowing retail dispensaries, consumption lounges, or both. In the chart below, “opted out” means that the municipality opted out of allowing both retail dispensaries and consumption lounges to operate within its borders.