By Caurie Putnam  |  Rochester Business Journal  |  January 20, 2022

Cannabis regulations proceeding slowly, but now is time to prepare

This March marks one year since former Gov. Andrew Cuomo signed into law the New York State Marijuana Regulation and Taxation Act (MRTA), which made recreational use of marijuana legal in New York for adults over the age of 21.

Almost a year later, yes, marijuana is legal, but you still can’t walk into a licensed shop on Main Street to buy it, because such a license doesn’t exist yet.

A holding area

“We’re kind of in a holding area,” Jay Jerose, principal and cannabis practice leader for The Bonadio Group, said of the status of the adult-use cannabis program rollout right now.

Jerose is eagerly awaiting the release of regulations and licensing applications from the Office of Cannabis Management (OCM) and the Cannabis Control Board (CCB), which serve as the primary regulators of New York’s adult-use cannabis industry.

“There is a lot to put in the regulations and then there will be a public comment period when the regulations come out,” said Jerose, who is hopeful they will be released this spring, but cautioned the goalposts have been moved before. “It just comes down to time. New York has a very complex regulatory department.”

Adult-use license types that New Yorkers are expected to be able to apply for include cultivator, processor, cooperative, distributor, retail dispensary, microbusiness, delivery, nursery and on-site consumption.

“The legislation really doesn’t get into what these licenses will look like, the fees or if there will be quotas, but we expect the applications to be quite detailed,” said Meaghan T. Feenan, an associate at Harris Beach PLLC.

Once retail licenses drop, it doesn’t necessarily mean there will be products to sell immediately, either, as cannabis products legally sold in New York will have to be cultivated in the state, but cultivation cannot begin without a license.

Jerose gave an example of a timeline scenario from Massachusetts, which legalized adult-use cannabis in 2016, that we could have in New York: “Massachusetts issued its first retail license in June 2018, but its first actual sale was not until November 2018.”

New York’s timeline could be impacted by a staggered roll-out of licenses like other states including New Jersey, which legalized in February 2021, have done, but it remains unclear if New York will stagger licenses.

One of the things we do know, Feenan said, is that the OCM and CCB want to avoid any vertical integration of the cannabis industry and will limit the number of licenses that can be owned by one company

“The board has made clear that they don’t want to discourage first time entrepreneurs and small businesses in the cannabis industry,” Feenan said.

Focus on social justice

Another key piece of the roll-out that is clear is New York’s continued focus on social justice.

The MRTA has set a target of awarding half of its licenses to social equity applicants. Groups eligible for social equity status include minority- or women-owned businesses, distressed farmers, service-disabled veterans and individuals from communities disproportionally impacted by past cannabis criminalization.

“The social equity piece and the fact that New York state has prioritized it is really important,” said Mary-Jane Morley, an associate with Phillips Lytle LLP. “No other state has tried to right the wrongs of the past when it comes to cannabis as New York has.”

In the fall of 2021, the CCB appointed Jason Starr as the Chief Equity Officer and tasked him with developing a social equity plan to facilitate and support participation by social equity applicants.

This month, in her State of the State address in Albany, Gov. Kathy Hochul announced New York will establish a $200 million fund to support social equity applicants seeking adult-use cannabis business licenses.

“Compared to other states, New York has certainly set a high bar in terms of making a cannabis program that meets social equity concerns,” said Ross B. Hofherr, a partner with Harris Beach.

Hofherr and other experts noted that since Hochul assumed leadership in August 2021 the pace of the rollout has improved.

“The governor has certainly been receptive to this industry,” Hofherr said. “There was a lot of criticism of the rollout under Gov. Cuomo. People criticized how slow it was going and that it didn’t seem like a priority. Gov. Hochul is making an effort to move things forward at a quicker pace.”

A roadblock for entrepreneurs

The biggest roadblock for entrepreneurs hoping to enter the recreational cannabis space is acquiring capital. Since cannabis is still federally listed as a Schedule 1 substance (defined as “drugs with no currently accepted medical use and a high potential for abuse”) it remains illegal at the federal level.

Therefore, financial service and insurance providers are typically reluctant to do business in the industry, forcing cannabis-related businesses that can get off the ground to deal primarily in cash.

“For most prospective clients, their biggest issue is banking and raising capital,” Jerose said. “Technically banks can’t support them, the Big Three credit card companies will not transact any cannabis transactions where cannabis is legal and it’s hard to find mortgages for cannabis-related businesses.”

There is a workaround banks can do legally, but it involves filing suspicious activity reports that are time consuming and not without risk. Some financial technology companies are also trying creative approaches to work as intercessors but charge high fees for their services.

Under federal law, businesses in the cannabis industry also cannot deduct business expenses on their federal income tax returns.

Banking obstacles could be overcome if marijuana were moved down on the drug schedule or with the passage of the Secure and Fair Enforcement (SAFE) Banking Act, a bill to protect financial institutions that offer services to cannabis-related businesses in states where it is legal.

The bill has been passed by the U.S. House of Representatives five times (most recently in the fall of 2021) with widespread bipartisan support but has not yet cleared the Senate. There is hope it could be passed in some form in 2022.

“Banking is a significant challenge those in the cannabis industry in other states face and it is going to be a challenge in New York as well,” Hofherr said. “The SAFE Banking Act should solve all of these problems.”

Tips while waiting

While New Yorkers hungry to get involved in the adult-use cannabis industry await state-specific regulations and applications, there are things they can do to prepare, including reaching out to the municipalities they hope to operate in for information about their specific zoning rules and ordinances.

“MRTA allowed municipalities and towns to opt out of retail dispensaries and on-site consumption licenses, but they cannot opt out of manufacturing or processing,” said Feenan, who noted the opt out deadline was Dec. 31, 2021. “We believe towns and municipalities that opted out will be able to opt in in the future, but unless laws are changed, towns that did not opt out cannot change their decision.”

Feenan also recommends that those thinking about licensing should retain legal counsel now, if they haven’t already done so, preferably from a firm with a multi-disciplinary cannabis team.

Morley, who is hopeful adult-use cannabis retail operations will be open in New York by the summer of 2023, also recommends potential licensees speak to an attorney now, get a business plan in order, network with others applying for licenses and have an open-mind about the multitude of licenses.

“People are really excited about the retail licenses, but I encourage everyone to look at a summary of all the licenses that will be available,” Morley said. “In western New York specifically we have a lot of potential for processing, distributing and delivery licensing. A delivery license, for example, is great for someone who is looking to start a smaller business that could be very lucrative.”

She also recommends reading the state’s current hemp regulations and looking at the various hemp-related license applications that are live on the state’s hemp licensing program website.

“We do think the cannabis applications will be more extensive and expensive then the hemp applications, but it’s a helpful starting point,” Morley said.

Caurie Putnam is a Rochester-area freelance writer.