Cannabis Control Board Prioritizes Prior Cannabis Convictions in Retail – Will New York Achieve Social Equity?

By: Andrew P. Cooper, Esq., LL.M. and Terran Cooper

At yesterday’s Cannabis Control Board (CCB) Meeting, the New York regulators passed resolution directing the Office of Cannabis Management to File Certain Proposed Conditional Adult-Use Retail Dispensary Regulations. The regulations will give retail priority to “justice involved” individuals, meaning those with prior cannabis convictions, and to those with a family member or legal guardian with prior cannabis convictions. In order to be eligible for a conditional license, the aforementioned justice involved individual must have been convicted prior to the passing of the MRTA on March 31st of 2021.

Preliminarily, the conditional licenses would require at least 51 percent ownership by a justice involved individual. Another important caveat, is that applicants must hold or have held, for a minimum of two years, at least ten percent ownership interest in, and control of, a business that had net profit for at least two of the years the business was in operation (unless the entity is a nonprofit, which requires that the entity intentionally serve justice involved individuals and communities with historically high indicators of law enforcement activity for cannabis-related offenses). The licenses will be valid and non-transferrable for four years, with the option to apply for a transition to a standard adult-use dispensary license by notifying the Office of Cannabis Management (OCM) at least one hundred and twenty days prior to its expiration. The proposed regulations will now be published in the State Register for a 60-day public comment period. Operators seeking these conditional licenses should also be aware of the $2,000 dollar non-refundable application fee.

These conditional licenses would preclude the existing medical operators from obtaining the first retail licenses in New York. This is likely critical to the potential success of small and minority businesses, as they will have a chance to get up and running prior to any large multi-state operators with already functioning operations having that opportunity. Existing medical operators will still be able to participate in the adult-use market, but Executive Director Chris Alexander has stated that “equity will lead, and those who’ve been most impacted will go first.” (Jaeger, 2022)

New York Social Equity Cannabis Investment Fund

The above-mentioned conditional licenses are just one of three prongs in what the OCM is calling the Seeding Opportunity Initiative. The second prong – the New York Social Equity Cannabis Investment Fund, is a $200 million-dollar program proposed by Governor Kathy Hochul in her 2023 Executive Budget. The Fund would support the development of turnkey dispensary facilities for equity-entrepreneurs, to aid in the finding, securing, and renovating of storefronts for retailers.

Conditional Adult-Use Cultivator Licenses

The last prong, the Seeding Opportunity Initiative Farmers First Program, revolves around the previously announced Conditional Adult-Use Cultivator Licenses, passed through Senate Bill S8084. These Conditional Cultivator Licenses are to go to hemp cultivators growing hemp primarily for CBD (not for those growing industrial hemp), and require a valid Hemp Grower Authorization effective as of December 31st, 2021. Additionally, the cultivator must have grown and harvested hemp for at least two of the past four years, and requires participation in a social equity mentorship program and environmental sustainability program. At their most recent meeting, the CCB also approved a certain Application Form for the conditional cultivator licenses, and announced the application period of March 15th to June 30th, 2022.

Competing with the Legacy Market

The Seeding Opportunity Initiative outlined above is the first of its kind. New York regulators have demonstrated their want for a just and equitable market, prioritizing those impacted most by the war on drugs – but will it be enough? Many states have tried to achieve some form of social equity in licensure, but most have failed miserably. New York seems cognizant of this fact, and appears to be quite meticulous in avoiding those same mistakes in forming their regulations. The greatest unknown in this equation is New York’s thriving illicit or legacy market. The regulators have started to address the ongoing cannabis operations (see New York Lays Down the Law on Illicit Cannabis Operations), as well as having emphasized the need for the successful incorporation of the legacy market.

The success of the future New York market truly depends on the ability of the licensed market to compete with the illicit one. New Yorkers will choose their cannabis based upon a few factors: price, product quality, availability, and their overall retailer and brand relationship. First and foremost, if licensed operators cannot compete on a relative price basis, they will inevitably fail. Over the course of various states' legalization, optimistic legislators had hoped that the promise of a legal cannabis market would be enough to persuade consumers to buy legally. However, what we’ve seen is that when forced to pay 1.5 to 2 times the price for a legal product, shoppers will choose the lower price. Low taxation and quick access to capital, especially in early operations, are necessary to allow licensed operators to compete on a price basis.

Second, product quality will be a driving factor for some consumers in that if they can feel and see a discernable difference in their cannabis and their experience with it, then they will opt for the superior cannabis. This need for quality products serves as our major concern in allowing hemp cultivators to grow the first batch of retail cannabis. If retailers open shop and the first products are worse than that of the illicit market, likely also at a higher price point, then many consumers will leave the legal market never to return. We must ensure that these conditional cultivators, and our eventual standard cultivators, have the knowledge and support necessary to cultivate exceptional cannabis.

Thirdly, the availability of legal cannabis products should not be a problem due to the number of licenses New York is expected to issue. Where the issue lies is with the currently abundantly available illicit cannabis. In the year since legalizing cannabis, New York has seen illicit operations proliferate beyond what we’ve seen anywhere in the U.S. Senate Bill S8511 and the cease and desist letters sent to ongoing illicit operators are a start, but that actually begs the question of how New York intends to ensure that the legacy market is incorporated into the legal one. S8511 will criminalize illicit cannabis sales if passed, to the point of precluding future licensure, but notably not until November, presumably after the licensure regulations are released. This timetable seems to serve as a warning to those currently operating and allows time for a transition to the licensed market. Still, if regulators do not actually facilitate this transition, illicit sales will remain. If there are still illicit cannabis stands, trucks, and retailers on every street corner of Manhattan by the time licensed retailers open shop, our licensed market will be in jeopardy.

Lastly, the current relationships between consumers and illicit operators are not to be understated. While these relationships have always existed, the boldness in which illicit operators have been able to sell cannabis in the past year has solidified them. Our licensed cannabis retailers and delivery services must be a part of the community of cannabis culture. The near-century of illicit cannabis has created a bond between those in the community, all deemed criminals by many on the outside. We must find a way to incorporate the legacy market, and provide the necessary support to our small and minority business owners if we wish there to be any bond between licensed operators and the community.

Too often legislators and regulators have treated cannabis like a government-run program. While it will be the regulations that allow legal sales, we must allow New Yorkers to truly own the cannabis market. In order to compete with the illicit market, we must treat both licensed and unlicensed operators as what they truly are: businesses. Those acting outside of the scope of the law, have always found a way to thrive and compete. Thinking about this as a competition between licensed and unlicensed operators, and facilitating this direct competition, is the way to win New York’s cannabis market.

DISCLAIMER: This summary is not legal advice and does not create any attorney-client relationship. This summary does not provide a definitive legal opinion for any factual situation. Before the firm can provide legal advice or opinion to any person or entity, the specific facts at issue must be reviewed by the firm. Before an attorney-client relationship is formed, the firm must have a signed engagement letter with a client setting forth the Firm’s scope and terms of representation. The information contained herein is based upon the law at the time of publication.