New York’s draft conditional retail regulation raises practical concerns

It’s an exciting time in New York as momentum is finally building toward early sales in the adult cannabis market. Just weeks after Gov. Kathy Hochul signed into law a bill allowing qualified hemp farmers to begin cultivating the first batch of adult-use cannabis, the Cannabis Control Board released draft regulations that would award the first 100 retail licenses to applicants that meet certain requirements, most specifically that an individual applicant or immediate family member has a criminal record in New York for a marijuana-related offense.

It should be noted up front that state cannabis regulators have an extremely difficult task balancing a number of conflicting interests. Regulators have tried a number of novel approaches to establish fair and equitable industries in their states, but almost inevitably there have been litigation from parties who felt they did not have a fair shake, sometimes delaying the start of the entire industry in that state.

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Photo by Tom Ritson via Unsplash

Unfortunately, the new draft regulations in New York could lead to a similar result. Every headline announcing the regulations focused on the requirement that an applicant have a family history of marijuana, but unfortunately, the requirements for an applicant to qualify for these conditional licenses don’t end there. The draft regulations also require that an applicant’s controlling owner “must hold or have held, for at least two years, at least ten per cent of the ownership interest in and control of a qualifying entity, i.e. an entity that has had net profit for at least two of the years in which the company operated.” This is potentially problematic for a number of reasons.

First, regulators’ stated goal is to help families who have been significantly harmed by marijuana convictions. But when these families are so badly affected, wouldn’t it be extremely difficult to own part of a profitable business? Putting this potential mismatch aside, the practical implication of the viable business ownership requirement is that the pool of potential applicants who might qualify for the license will shrink to an extent that seems difficult to assess.

While most states require applicant companies to provide state regulators with information about their owners and managers, these draft regulations are exceptionally detailed, listing the types of information and documents related to an applicant company’s ownership and control that will be disclosed have to. The draft regulations are intended to ensure that an applicant’s individual owners who are “judicially involved” (ie, have a family history of marijuana convictions) retain control of the applicant business throughout the application process and throughout the term of the conditional license , unless a transfer of ownership has been approved by the New York regulators.

The other important part of the draft regulations that should not be overlooked is the insight into the potential locations of licensee pharmacies. New York is trying to set up a $200 million fund to meet licensee winners’ real estate needs. The state currently uses real estate agents to find over 100 suitable pharmacy locations, and the state intends to use the fund to arrange leases and manage the construction and furnishing of these properties.

On this point, the draft regulations would allow regulators to establish geographic zones across the state and link them to applicants’ overall scores. Applicants may be asked to rank their preferences for the geographic zone where their dispensary would be located, and then regulators would assign the applicants with the highest total points of application points to their preferred geographic zone. If there are more applicants applying for a given geographic zone than there are leased pharmacy locations in that zone (e.g. New York City!), regulators would reassign applicants with lower overall scores to a different geographic zone.

Photo by Ferdinand Stöhr via Unsplash

There is no information on how applicants in a specific geographic zone would be matched to specific characteristics, but it would presumably be a similar ranking system based on total score.

If we take a step back, the result of this system is that there are certain applicants who can end up with pharmacies far from where they live. Applicants receiving these conditional retail licenses may have the benefit of being first to open their doors and the economic support of the proposed fund, but in return they would appear to sacrifice some autonomy, including choosing where to locate their business.

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In summary, with the draft conditional retail regulations, New York regulators have created a novel approach to the issue of equity in the cannabis industry. Unfortunately, the very specific requirements for qualifying applicants and the system for selecting pharmacy locations and assigning applicants to those locations can complicate the application process and introduction of these conditional retail pharmacies.

Jon Purow is Counsel in Zuber Lawler’s New York office, where he assists clients with their cannabis and/or intellectual property legal matters. When not practicing law or fighting crime as a masked vigilante, Jon hosts the Cannabis Last Week podcast, a hybrid news/analysis excerpt from over 420 sources.

This article originally appeared on Zuber Lawler and has been republished with permission.