The New York Cannabis Growers and Processors Association, Inc. (NYCGPA) appreciates the work by the New York State Cannabis Control Board (CCB) and associated Office of Cannabis Management’s (“OCM”) on the Proposed Regulations concerning the conditional adult-use retail dispensaries (the “Proposed Regulations”). However, the NYCGPA notes that the Proposed Regulations create undue burdens for prioritized justice-involved social equity applicants, as well as other highly prioritized prospective licensees.
While the NYCGPA supports a safe and well-regulated adult-use cannabis industry, portions of the regulations can better balance costs and benefits. The comments below specifically address key areas that the NYCGPA would like revised in the regulations to achieve the goals of promoting social equity and repairing the damage done by the War on Drugs, while protecting consumers and promoting the possibilities of the adult-use industry.
The NYS Cannabis law vests the CCB with rulemaking authority. Per Section 13: “The board shall perform such acts, prescribe such forms and propose such rules, regulations, and orders as it may deem necessary or proper to fully effectuate the provisions of this chapter…”1 Such authority explicitly includes, per the statute, both the prescribing of adult-use licensing application forms and processes, as well as the qualifications and detailed eligibility criteria for such licenses.
Exercising such authority, the CCB approved proposed Conditional Adult-Use Retail Dispensary (“CAURD”) regulations at a regularly scheduled meeting on March 10, 2022. Pursuant to such approval, the regulations were filed with the Secretary of State and subsequently published in the State Register on March 30, 2022, thus commencing an initial public comment period running through May 31, 2022. Accordingly, please find below the NYCGPA’s comments and related recommendations based on the initial draft of the proposed CAURD regulations.
1. Financial Statements
Relevant Section(s): §116.2 Application for Conditional Adult-Use Retail Dispensary License
Requiring the submission of audited financial statements could pose a significant barrier to entry for otherwise qualified applicants as the preparation of such statements often cost upwards of $50,000, whereas alternatives such as reviewed financial statements generally cost approximately $10,000. Additionally, audited financial statements are generally only available to companies that have been in business for multiple years. As many otherwise qualified applicants and justice-involved individuals may be legacy operators entering the legal market for the first time, audited financial statements are often not feasible and amount to an overly burdensome and ineffective application requirement. This may hinder the licensing of justice-involved individuals and those wishing to transition from the legacy market—a declared intent of the cannabis law.
It is for these reasons that the NYCGPA instead recommends the submission of reviewed Financial Statements for entities formed prior to one year preceding the application date.
Further, for more recently formed entities, the NYCGPA recommends that the owner or otherwise responsible party be able to self-certify the time of existence for applicant entities formed within the year preceding the date of application submission.
Suggested Amendments to 116.2(17):
audited reviewed financial statements of the applicant for the fiscal year ending one year prior to the date the application is submitted, which shall include, but is not limited to, an income statement, balance sheet, statement of retained earnings or owners equity, statement of cash flows, and all notes to these statements and related financial schedules, prepared in accordance with generally accepted accounting principles, along with the accompanying independent auditor’s report. If the applicant was formed within the year preceding the application for license, provide self-certified financial statements for the period of time the applicant has been in existence and any self-certified pro forma financials used for business planning purposes;
2. Marihuana-Related Offenses/Convictions
Relevant Section(s): §116.1 Definitions and 116.4 License Eligibility & Evaluation
The definition of “Marihuana-related offense” under the regulations provides the OCM with the discretion to deem certain categories of offenses as eligible. Per the regulations, such offense means:
a marihuana or cannabis offense defined under article two hundred twenty-one of the penal law prior to its repeal, any offense under article two hundred twenty or section 240.36 of the penal law prior to the effective date of article two hundred twenty-one of the penal law, where the controlled substance involved was marihuana, any offense that is eligible to be sealed or expunged pursuant to Chapter 131 of the Laws of 2019 or the Act or any offense identified by the Office to be a marihuana-related offense.2
The emphasized language above leaves a considerable amount of discretion to the OCM, and the NYCGPA believes there should be further clarification (“memo to file”) that a federal conviction, which occurred in NYS is indeed a marihuana related offense.
At the very least, further clarity is needed as Penal Law Article 220 governs “controlled substances” and Article 221 is specifically for marijuana related offenses but the NYS cannabis law and proposed CAURD regulations do not state that one needs to have been convicted of an Article 221 Penal Law crime. Therefore, the statute can be read as simply relying on the definition of “marijuana” in the Penal Law.
Such definition is virtually identical to the federal definition of marihuana (including the spelling with an “h” and not a “j”)3. Thus, the state definition of marihuana captures the federal definition of illegal cannabis—the specific citation to federal offenses in the regulations further indicates that a federal conviction of a marihuana related offense in New York qualifies as a marihuana related offense.4
Additionally, the proposed regulatory definition of “justice involved” states that an individual had to be convicted of a marihuana-related offense in New York State, rather than in a New York State court.
It is for these reasons that the NYCGPA believes there should be further clarification (“memo to file”) that a federal conviction, which occurred in NYS is indeed a marihuana related offense.
3. Definition of True Party of Interest
Relevant Section(s): 116.1 Definitions
The NYCGPA applauds New York State’s efforts to implement the interest-related provisions of the MRTA intended to support the cannabis law’s statutory intent of promoting qualified social equity individuals and entities and New York-based local businesses.
Pursuant to this intent, the proposed CAURD regulations define True Party of Interest (“TPI”) by explicating various arrangements and investments that establish or exempt an individual or entity as being identified as an interested party. The cannabis law’s direct and indirect interest provisions – in most cases – preclude such interested parties from having an interest in another license.
While such prohibition partly hinders market domination by large well-capitalized multi-state operators (“MSOs”) it could also effectuate the unintended consequence of inhibiting the capitalization and growth of social equity applicants and licensees or otherwise disadvantaging such operators.
TPI-RELATED POLICY CONSIDERATIONS
a) Percentage-based agreements
Under the proposed CAURD regulations, traditional percentage-based arrangements common in other industries throughout the retail landscape would result in a TPI designation. Such arrangements can, in certain cases, promote social equity by requiring less up-front capital be laid out by prospective licensees. Common arrangements include the following:
Under the definition, only fixed-basis rental agreements would exempt a landlord from being considered a TPI. However, as mentioned above such arrangements are common across the retail landscape without acting as a subterfuge for ownership and can assist less capitalized tenants to establish new businesses without incurring burdensome upfront costs related to securing real estate. For instance, during the Covid-19 lockdown many restaurants executed such arrangements with landlords to weather low turnout and revenues.
Management Service Agreements (“MSAs”)6
The TPI definition only exempts flat-fee or hourly rate-based consulting arrangements. Such compensation structure does not correlate with typical market arrangements. More importantly, such structure could serve to undermine less capitalized social equity operators and licensees as they will be required to pay MSA contractors up-front or on a flat-fee basis, regardless of the quality of the work done by the contractor. Under flat fee arrangements contractors are not necessarily incentivized to execute fully on the contract with quality work as their compensation is not tied directly to the success of the business, instead placing most of the risk on the licensee.
In certain circumstances however, MSAs can serve to benefit less capitalized applicants who cannot afford to pay for such services up-front on a fixed or hourly basis, while simultaneously protecting such applicants and licensees from consultants or contractors acting in bad faith.
The NYCGPA supports the inclusion of percentage-based landlord-tenant or management services agreements as exemptions to the TPI definition.
b) Financier Definition
The regulations include a very narrow definition of the term financier:
(k) Financier means any person, other than financial institution or government or governmental subdivision or agency, that provides capital as a gift, provides a grant, or lends capital pursuant to a secured or unsecured financing agreement. A financier may not receive an ownership interest, control of the business, a share of revenue, gross profits or net profits, a profit sharing interest, or a percentage of the profits in exchange for a gift, grant or loan, unless the financier receives prior approval from the Office.7
Financiers – in most cases – are precluded by definition from consideration as a TPI allowing for access to capital outside of state funding and equity ownership arrangements which are governed by their own set of conditions. That said, the strictness of the definition could lead to unintended consequences as it contravenes market realities and traditional lending practices. The NYCGPA believes there are several potential adverse consequences related to such an approach:
- Failure to account for market realities and the dynamics of traditional lending practices. Such policy will likely facilitate the development of undue friction between qualified justice-involved priority applicants and potential licensees competing for financing rather than – as the law intended – enjoying the benefits of prioritization embedded in New York’s landmark cannabis legalization law. Narrow definitions and strict rules inherently benefit those with existing capital on hand, as well as applicants with established businesses or professional business experience. Further, this approach complicates fundraising for new market entrants due to increased horizontal friction and competition for lenders, as well as increasing the cost and adverse terms associated with such arrangements.
- Inability to secure equipment and complete build-out due to money delays from deal friction. Money delays associated with the above described policy and related market dynamics could easily bankrupt small businesses before they are even able to open or will place them so far behind the lead market pace that the prospect of catching up becomes impracticable.
Such an approach is also largely out of sync with what other states have done with their adult-use programs. In Massachusetts for instance, if a financier is not part of initial financing the licensee is not required to disclose the transaction if it does not affect the licensed entity’s capitalization table.
The NYCGPA supports the broadening of the definition to account for market realities and traditional lending practices. Accordingly, a financier should not be considered TPI when acting in accordance with the following specific circumstances:
- Landlords who provide tenant improvements to location build out and are paid back by tenant over period of time via rent payments; or
- Mezzanine financing agreements which provide debt to equity conversions in the event of debtor default; or
- Lenders who structure their repayment schedules based on monthly revenue (i.e. 2% of monthly revenues until debt repaid).
In cases where the exercise of OCM discretion is necessary to approve certain financiers and financing agreements the NYCGPA supports ensuring that there is a deadline or maximum amount of time for review by OCM to ensure that deal efficiency is met in extraordinary cases subject to OCM approval. Specifically, the NYCGPA recommends requiring the CCB/OCM to consider such submissions within 30 days of filing.
1 NYS Cannabis Law §13-1
2 NYS CAURD Regulations §116.2(q)
3 21 US Code §802 (16)
4 NYS CAURD Regulations §116.2(a) (19)(i))
5 NYS CAURD Regulations §116.2(w)(2)(i)
6 NYS CAURD Regulations §116.2(w)(2)(iv)
7 NYS CAURD Regulations §116.2(k)