Daniel Shortt CORPORATE & REGULATORY ATTORNEY
On March 9, New York regulators announced that the first 100-200 adult-use cannabis retail licenses will be awarded to people with previous cannabis convictions and their families. Convictions must have occurred before March 31, 2021, the date when former governor Andrew Cuomo signed the Marijuana Regulation and Taxation Act (MRTA).
The New York Cannabis Control Board (CCB) has issued proposed regulations on Conditional Adult-Use Retail Dispensaries. These regulations will soon be available for public comment on cannabis.ny.gov.
These conditional cannabis dispensary licenses would be in effect for four years. The goal of these regulations is to implement the spirit of MRTA and to create an equitable cannabis market in which those negatively impacted by the War on Drugs would have opportunities in the newly legal cannabis markets. By providing the first dispensary licenses to individuals convicted of cannabis crimes, as well as their families, New York is truly addressing injustices of the past and fulfilling its promise regarding social equity. In addition, by beginning a process to license conditional cannabis dispensaries, New York is shortening the timeline to legal cannabis sales, considering that the state already passed legislation for conditional cultivator and processor licenses.
This informational post includes regulations relating to who can apply and what the application will require. The application requirements are robust and successful applicants will need to carefully prepare for a competitive process. Applicants should carefully consider how they will prepare written agreements required through the application process as well as whether they want to apply as a business or individually.
True Party of Interest and Financier
The CCB appears to have borrowed some terminology from Washington State. For example, in Washington, a “True Party of Interest” means any person with an ownership stake in a licensed business, who shares in the profits of the business, or who controls a business. Washington licensees must disclose true parties of interest to state regulators. A “Financier” is any person who loans money to a licensed marijuana business. Financiers in Washington must go through an application process to loan money. The concept of True Party of Interest is one of the most unique aspects of Washington cannabis law and the term will also shape New York’s cannabis market for years to come.
In New York, a “True Party of Interest” includes, but is not limited to, the following:
- applicant or licensee’s sole proprietor, partner (whether limited or general), member, manager, president, vice president, secretary, treasurer, officer, board member, trustee, director, or a person with equivalent title to each of the foregoing and their spouses;
- stockholder of applicant or licensee, other than a passive investor (i.e., a person that has an aggregate ownership interest of no more than five percent of the outstanding shares of an applicant or licensee whose shares are publicly traded, and such person does not have control over the applicant or licensee) and their spouses
- each person that makes up the ownership structure of each level of ownership for an applicant or licensee that has a multilevel ownership structure and their spouses;
- person with a right to receive some or all of the revenue, gross profit, or net profit from the licensed business during any full or partial calendar or fiscal year;
- person with a financial interest (i.e., any actual or future right to ownership, investment or compensation arrangement with another person, either directly or indirectly, through business, investment, spouse, parent or child. Person with a financial interest does not include a passive investor) in the applicant or licensee
- person that has authority to, or exercises, control over the applicant or licensee;
- person that has membership rights in the applicant or licensee in accordance with the provisions of any articles of incorporation, bylaws, limited liability corporation agreements, partnership agreements or operating agreements; or
- person that assumes responsibility for the debts of the applicant or licensee.
- The term True Party of Interest does not include a person that:
- receives payment for rent on a fixed basis under a lease or rental agreement relating to applicant or licensee. Notwithstanding, if there is a common ownership interest between applicant or licensee and the entity that owns the real property, the Office of Cannabis Management (OCM) may investigate all funds associated with the landlord to determine if the landlord is a financier. The OCM may also investigate a landlord in situations where a rental payment has been waived or deferred;
- receives a bonus or commission from the applicant or licensee based on the individual’s sales, so long as the commission does not exceed ten percent of the sales of the applicant or licensee in any given bonus or commission period, unless otherwise determined by the OCM. Commission-based compensation agreements must be in writing;
- contracts with the applicant or licensee to receive a commission for the sale of the business or real property;
- consults, receiving a flat or hourly rate of compensation from the applicant or licensee under a contractual agreement;
- has an option to purchase the applicant or licensee, in the event the applicant or licensee is not an individual or conditional adult-use retail dispensary, so long as no money has been paid under an option contract or agreement for such purchase or sale;
- has a contract or agreement for services with an applicant or licensee, such as a branding or staffing company, as long as the applicant or licensee retains the right to and controls the business;
- is a financial institution; or
- is a passive investor.
Applicants should start planning as to who will qualify as a True Party of Interest in advance of submitting any application. A person can become a True Party of Interest, even if the person does not outright own a business applying for a license, so long as the person has a financial interest, ability to assert control, or assumes debt of an applicant or licensee.
The term Financier means any person, other than a financial institution or government or governmental subdivision or agency, that provides capital as a gift, provides a grant, or lends capital pursuant to a secured or unsecured financing agreement. A financier may not receive an ownership interest, control of the business, a share of revenue, gross profits or net profits, a profit sharing interest, or a percentage of the profits in exchange for a gift, grant or loan, unless the
financier receives prior approval from the OCM. Put simply, loaning money to a cannabis business makes one a Financier. Investing in a cannabis business makes one a True Party of Interest.
Eligibility
In order to qualify for an adult-use conditional dispensary license, an applicant must demonstrate:
- a significant presence in New York State, either individually or by having a principal corporate location in the state;
- it is incorporated or otherwise organized under the laws of New York State; or
- a majority of the ownership of the applicant are residents of New York State by being physically present in the state no less than 180 calendar days during the current year or 540 calendar days over the course of three years.
Regulators want to ensure that these licenses benefit New Yorkers, which explains why there are these residency requirements built into the regulations.
If the applicant is an individual or an entity with one or more individuals, at least one individual must:
- be justice involved, which means an individual that
- was convicted of a marihuana-related offense in New York State prior to March 31, 2021; or
- had a parent, legal guardian, child, spouse, or dependent who was convicted of a marihuana-related offense in New York State prior to March 31, 2021; or
- was a dependent of an individual who was convicted of a marihuana-related offense in New York State prior to March 31, 2021;
- provide evidence of the primary residence of the justice involved individual at the time of such individual’s arrest or conviction; and
- hold or have held, for a minimum of two years, at least ten percent ownership interest in, and control of, a qualifying business, which means a business that had net profit for at least two of the years the business was in operation.
The purpose of these conditional dispensary licenses is to ensure individuals impacted by the War on Drugs, and their families, are given opportunities to qualify, and applicants must demonstrate that past harm.
If the applicant is a nonprofit organization, the nonprofit must:
- be recognized as an entity pursuant to section 501(c)(3) of the Internal Revenue Code;
- intentionally serve justice involved individuals and communities with historically high rates of arrest, conviction, incarceration or other indicators of law enforcement activity for marihuana-related offenses;
- operate and manage a social enterprise that had at least two years of positive net assets or profit as evidenced in the organization’s tax returns;
- have a history of creating vocational opportunity for justice involved individuals;
- have justice involved individuals on its board or as officers; and
- have at least five full time employees.
This is an interesting set of regulations, which may prohibit non-profits from applying. Achieving exempt 501(c)(3) status usually precludes violating federal law. It is unclear whether an applicant will maintain 501(c)(3) status if it is awarded a cannabis license.
The proposed regulations also include ownership and control minimums:
- At least 51% or more of the applicant shall be owned, in the aggregate, by (i) at least one individual that satisfies the requirements for an eligible applicant set forth in sections 116.4(a)(1) (residency) and 116.4(a)(2) (past convictions), or entity that satisfies the requirements for an eligible applicant set forth in sections 116.4(a)(1) (residency) and 116.4(a)(3) (non-profit eligibility) of this Part, and (ii) any other additional individuals, if any, who are justice involved;
- At least one individual that satisfies the requirements for an eligible applicant set forth in sections 116.4(a)(1) and 116.4(a)(2), or entity that satisfies the requirements for an eligible applicant set forth in sections 116.4(a)(1) and 116.4(a)(3) of this Part shall own at least 30% of the applicant and such individual or entity shall have sole control of the applicant or licensee.
Application Requirements
Applications will be submitted to the OCM. If there is a deficiency with an application, the applicant will have thirty days to address the issue. There will be an application and license fee of $2,000. The fee is not refundable. The application for a conditional adult-use retail dispensary license requires the following information:
- the legal name of the applicant;
- the name under which the conditional adult-use retail dispensary will operate or make sales if different than the legal name of the applicant, including, but not limited to, the assumed name, where applicable;
- the name, address, federal employment identification number, and date of birth, where applicable, of the applicant and each True Party of Interest of applicant;
- a copy of a valid photo identification containing the individual’s date of birth issued by a local, state or federal government for the applicant and each True Party of Interest of applicant, each of which shall be at least 21 years of age;
- a personal history disclosure for applicant and each True Party of Interest of applicant;
- submission of fingerprints for applicant and each True Party of Interest set forth in sections 116.1(w)(i) – (iii) (True Party of Interests), on a form and in such manner as specified by the OCM for purpose of obtaining a criminal history report from division of criminal justice services;
- the ownership structure of the applicant;
- the percentage of ownership interest held by each True Party of Interest in the applicant, and a description of any other interest held in the applicant;
- a list of all parent companies, subsidiaries, affiliates, predecessors, and successors of the applicant, including but not limited to, all individuals of each entity at each level of ownership for the applicant that has a multilevel ownership structure;
- the name of every financial institution at which the applicant and each True Party of Interest of applicant that has or has had a personal and business account that is or was used to financially support the business in the past 3 years;
- a current organizational chart of the applicant that includes position descriptions and the names and resumes of persons holding each position identified on the organizational chart, to the extent those positions have been filled; to the extent not revealed by the resume, include additional information with each resume setting out the employee’s particular skills, education, experience or significant accomplishments that are relevant to owning or operating a conditional adult-use retail dispensary. The organization chart should identify all officers with the authority to control and all business entities that through direct or indirect means, will manage, own or control the interests and assets of the license holder. If the business entities have boards, include all board members on this chart. If the business entity has a parent company, include the name of each parent company’s principal officer(s) and the percentage ownership interest;
- organizational documents such as the certificates of incorporation, certificates of limited partnerships, articles of organizations, charter, by-laws, partnership agreements;
- agreements between any two or more persons of the applicant that relate in any manner to the assets, property or profit of the applicant, or any other comparable documents that set forth the legal structure of the applicant or relate to the organization, management or control of the applicant;
- if an applicant is not an individual, a description, beginning with the formation of the applicant, of any and all ownership changes between the formation of the applicant and the date the application is submitted, including, but not limited to, events such as asset sales and purchases, stock sales and purchases, mergers, business combinations, or consolidations involving the applicant, including all former names of the applicant;
- a copy of all compensation agreements between or among applicant and each True Party of Interest, or group of True Parties of Interest, whether direct or indirect, and to the extent such agreement is oral, a written description of the terms of such agreement with True Parties of Interest of the applicant;
- any proposed or executed contract, term sheet, agreement, or side letter between the applicant, True Parties of Interest of the applicant, or financier, and another party that relates to the ownership and control structure, assets, liabilities, real or intellectual property, revenue, funding or capitalization, royalties, or profit, or future profit, of the applicant or proposed licensee or comparable documents;
- the nature, type, terms, covenants and priorities of all outstanding bonds, loans, mortgages, trust deeds, pledges, lines of credit, notes, debentures or other forms of indebtedness issued or executed, or to be issued or executed, in connection with opening or operating the proposed conditional adult-use retail dispensary;
- audited financial statements of the applicant for the fiscal year ending one year prior to the date the application is submitted, which shall include, but is not limited to, an income statement, balance sheet, statement of retained earnings or owners’ equity, statement of cash flows, and all notes to these statements and related financial schedules, prepared in accordance with generally accepted accounting principles, along with the accompanying independent auditor’s report. If the applicant was formed within the year preceding the application for license, provide certified financial statements for the period of time the applicant has been in existence and any pro forma financials used for business planning purposes;
- all sources of funding used to acquire, start, or develop the business for which the license is sought, and documentation concerning the source of the funds and copies of closing documents in connection with such acquisition or development
- details of any state or federal, administrative or judicial proceeding in which the applicant or any of the True Parties of Interest of the applicant:
- pled guilty, pled no contest, conditionally or otherwise, or were, convicted, fined, or the equivalent, or had a registration or license cancelled, suspended or revoked; or
- managed or served on the board of a business or nonprofit organization that pled guilty or was convicted, fined, or had a registration or license cancelled, suspended or revoked.
- information relating to a business continuity plan;
- a certificate of status or good standing from the governing state agency of the state of formation, certificate of assumed name, a certificate of authority to do business in New York from the New York Department of State if the applicant is a foreign business, where applicable;
- if applicant or any True Parties of Interest of applicant are currently or have previously been licensed or authorized in another state or jurisdiction to cultivate, process, manufacture, distribute or sell cannabis products in any form, the following:
- a copy of each license or authorizing document verifying licensure in that state or jurisdiction;
- a statement granting permission to contact the regulatory agency that granted the license to confirm the information contained in the application is true and accurate; and
- if the license, authorization, or application was ever cancelled, denied, suspended, revoked or otherwise sanctioned, a copy of documentation so indicating, or a statement that the applicant or True Party of Interest of applicant was so licensed and was never sanctioned;
- any management agreement, contract, arrangement, or other type of formal understanding between a contractor and an applicant where the contractor will or does provide administrative, operational, financial, advisory, and/or management services to an applicant in exchange for remuneration and a list of all the parties that are contained in those agreements;
- a list of each vendor with which the applicant has entered into a contract, term sheet, agreement, or side letter;
- whether the applicant or any True Party of Interest of applicant:
- has ever filed a voluntary petition or had an involuntary petition filed against it for relief under the United States Bankruptcy Code; o is out of compliance with General Obligations Law Section 3-503(2);
- has been disciplined or sanctioned by a state or federal agency; or
- has had any state or federal tax liens against any of their property;
- a list of each financier of applicant, and copy of all financier agreements, if any;
- a copy of each agreement between applicant and any person with a financial interest in the applicant;
- a list of any charitable contributions by the applicant in the last five years;
- a list of stocks, mutual funds or bonds held by the applicant;
- documentation acceptable to the OCM that the applicant will be able to obtain insurance sufficient to indemnify and hold harmless the state and its officers and employees;
- information regarding any relationship, agreement, or arrangement that may exist between (i) the applicant or True Parties of Interest and (ii) any official or any other individuals with control over the approval of an application or license, including, but not limited to, employees of the OCM and members of the Board;
- information evidencing compliance with the provisions set forth in section 116.4(a)(1) (residency) of this Part as required by the OCM;
- information evidencing applicant’s eligibility as set forth in sections 116.4(a)(2) (past cannabis convictions) or 116.4(a)(3) (non-profit eligibility) of this Part as required by the OCM;
- designation of each portion of the application that applicant considers to be exempt from disclosure under the New York State Freedom of Information Law; and
- any additional information requested by the OCM.
BOTTOM LINE
The application process is going to be intense and require a lot of documentation. These regulations are subject to change during the notice and comment period but provide a first look at how New York cannabis dispensary licenses will work.
