On October 28, the New York Office of Cannabis Management released a set of rules to govern the adult-use cannabis dispensaries that are slated to open soon. Among many provisions, one rule will prevent retail businesses from holding stakes in other cannabis businesses. This is designed to keep large companies from controlling the state’s industry. But it raises the question of how businesses owned by social equity applicants will raise funds.
No adult-use stores are open yet in the state. But Governor Kathy Hochul (D) has said it is “on track” to open 20 by the end of this year, and hopes to add another 20 in each following month, reaching a total of 150 in this initial roll-out.
One of the more important requirements in the newly released rules is to prevent “undue influence.” The document says that retail dispensaries and their owners or investors cannot have an interest in another business anywhere that grows, processes or distributes cannabis. Violating this rule will put your license at risk.
“It does seem they’re limiting multi-state operators from putting their energy in both sides of the industry.”
The rule is intended to prevent cannabis monopolies and thus benefit small businesses, especially those operated by Black and Brown owners and people with prior marijuana convictions.
“If you’re more on the cultivation side, they’re prohibiting ownership on the retail side,” Wei Hu, an attorney and founding partner of MRTA Law, a specialized cannabis firm, told Filter. Hu’s firm, named after the New York’s Marijuana Regulation and Taxation Act, works with prospective license applicants for all types of cannabis businesses in the state.
“Under these provisions it does seem they’re limiting multi-state operators from putting their energy in both sides of the industry,” he continued. “They’re also limiting investments. If you’re a private equity firm, you can’t invest in both cultivators and retail.”
To explore the implications, imagine a partner and I owned a storefront in Williamsburg, Brooklyn’s Dankest. If a major, multi-state company approached us, wanting to buy a 40 percent stake the business, that would be not allowed under the state’s rules—such an agreement could potentially lose us our license and store. The same would apply even if it were a smaller, New York-based cannabis cultivator that made the proposal.
But in the same scenario, if my partner and I had little capital, we would need to raise a lot of money to open and operate Brooklyn’s Dankest—to pay for rent, staff, equipment and furnishings, utilities, marketing and so on. Not being able to sell a stake in our business would remove one obvious way to do that.
“At the same time it will limit capital investment to smaller operators, and limit sources of financing.”
“I think it was definitely intended for the smaller operators to have a greater chance and not really have out-of-state players dominate their industry,” Hu said. “At the same time it will limit capital investment to them, and limit sources of financing.”
Beyond that question, the requirements “are actually a lot more liberal than I originally anticipated,” Hu said. “A lot of the restrictions already existed under the law.” Meanwhile, the rules document confirms that “these dispensaries can do delivery from their brick and mortar locations, so there’s a lot of positive elements.”
Compared to neighboring Massachusetts, where cannabis delivery wasn’t approved until two years after adult-use dispensaries opened and sparked a legal challenge, New York is taking a much more permissive stance on cannabis delivery.
Over 900 applications for retail dispensaries were submitted by September 26, and are now in review. Hu predicted that the first round of “Conditional Adult Use Retail Dispensary” licenses will be issued in November and December. These are reserved exclusively for a group of “justice-involved individuals”—meaning they, or close family members, have a prior marijuana conviction and resided in New York at the time of their conviction. The applicant must also own at least 10 percent of any business that’s been profitable for two years.
To assist this group with securing real estate, the state’s Dormitory Authority is refurbishing and equipping up to 150 “turnkey” sites throughout the state to be awarded to license holders, with the state covering the initial costs. This will be financed by a $200 million Social Equity Cannabis Fund, allocated through the state budget. Without this major helping hand from the state, the first dispensary owners would otherwise have to pay millions of dollars upfront to acquire commercial space.
But it’s possible the state won’t see stores open in 2022, Hu cautioned, saying they may be delayed as late as March or April 2023. The state has not yet confirmed or secured a single dispensary location, the social equity funding itself hasn’t been distributed, and of course the licenses need to awarded. Separately, the state will also reserve 25 additional retail licenses for nonprofits, though they won’t get to access the social equity benefits. This group may be the first to open stores.
New York’s newly published dispensary rules may help to create a fairer market, but they are unlikely to meet all the needs of retail businesses owned by social equity applicants statewide. A longer term solution would require the state government to support retailers with funding, either through grants or low-to-zero interest loans.