Governor Phil Murphy signed a package of laws on February 22nd that will create a legal adult cannabis market in New Jersey. Several other states – including Montana, Virginia, and New York – are either implementing similar laws or appear ready to enact them. Each of these jurisdictions is unique and complex, as are their cannabis laws. However, they share some common factors that companies need to consider when entering a new cannabis market.
Using New Jersey as an example, here are eight key considerations companies should consider when expanding into new cannabis markets:
1. Understand the legislation and statute
The first point to analyze should come as no surprise – the bill itself. States differ significantly in their regulation from cannabis. And most of these differences are set out in the enabling laws (which are then codified into law).
The main legislation that sets the parameters for the adult use system in New Jersey is A21 or the New Jersey Cannabis Regulatory, Enforcement Assistance and Marketplace Modernization Act. Seven license classes are created: Lab Tests, Cultivators, Manufacturers, Wholesalers, Distributors, Retailers, and Delivery. Vertical integration is prohibited for the first two years. The number of cultivation licenses is limited and preferences for the granting of licenses are also given.
The cannabis markets differ in the structure of their regulators. Some will have commissions, others will have individual directors.
In New Jersey, the five-member Cannabis Regulatory Commission (CRC) is responsible for overseeing the medical programs and programs for adult use in New Jersey, which include accepting and processing licenses and posting regulations. The appointment of the members of the CRC was completed on February 25th.
3. Timeline for rulemaking
A major public misunderstanding is the amalgamation of a bill and the entry into force of applicable law. In fact, most aspects of the legislation that affect cannabis companies require a regulatory process before changes take effect. And it is common for stakeholders to have the ability to influence the rule-making process. If you want to be involved in a new market, you should actively follow the rulemaking process and participate as well.
The CRC is tasked with issuing regulations within 180 days of the effective date of A21 (i.e. August 22, 2021). And the CRC must begin accepting and processing license applications within 30 days of the regulation being issued.
4. Apply v. Opportunities to buy and get ahead
Typically, new adult cannabis markets emerge in states that already have medical cannabis systems in place. In this case, perhaps the fastest way to expand into a state is to acquire an existing operator. In some cases, existing operators have a head start on adult operations.
There are currently 12 Alternative Treatment Centers (ATCs) licensed under the Medicinal Marijuana Program (MMP) in New Jersey. Any of these ATCs, as well as the 24 ATCs that will be licensed next month after the 2019 application process is completed, will be able to apply for sale in the adult market once they can demonstrate they have sufficient products to sell and get municipal approval .
5. Local licensing
Depending on the state, local licensing can either be an afterthought to obtaining a restricted state license or it can become the limiting factor in the process. In states with limited local licenses, competition shifts to the local arena and communities and counties become critical regulators.
New Jersey will be competitive on both the state and local levels. Municipalities can impose separate local permit requirements and prohibit nondelivery cannabis operations (bans must be in place by August 22, 2021). As in California, M&A activities may require local approval.
6. Equity considerations
States are increasingly taking social justice into account when issuing new licenses. It is important to consider what licenses are reserved for social justice applicants, how social justice applicants are defined, and what are the restrictions on transactions with these licensees.
The New Jersey program contains remarkable social justice provisions. 30% of the licenses are to be given to minorities, women or disabled veterans. And 70% of sales tax revenue (including all excise tax on farmers) is specifically earmarked for legal aid, health care and mentoring recovery programs in communities disproportionately affected by the war on drugs.
7. Restrictions on Ownership
Many states have restrictions on who can hold cannabis licenses. Some of the restrictions on residence are gone (e.g., Colorado), but many of the restrictions remain in place. Common examples include restrictions on micro-license ownership, social justice regulations, license number caps, and residency requirements in states that are medical-only.
In New Jersey, 30% of licenses are given to minority, women, and disabled veterans. There are also significant restrictions on microbusiness license ownership: they must be 100% owned in New Jersey for more than two years, and 51% of their owners, directors, officers and employees must be in the community in which they belong the microbusiness is active.
8. What can be done before licensing?
Successful applications for cannabis licenses in highly competitive markets require extensive planning. Before preparing and submitting an application, applicants can evaluate property opportunities, build their team, raise capital, fill gaps in their experience, and get involved in the settlement process.
All of this is true in New Jersey. Given the importance of community licensing, interested parties should also start thinking about local licensing issues and finding communities that cannabis companies can more easily work with.
There will also be a five license round for clinical registrants in May. These licenses allow the cultivation, manufacture, and distribution of medical cannabis and require a contract with an academic medical center to conduct clinical research on cannabis.