NJ Cannabis Webinar Provides Key Insights on Licensing Process, Equity, Municipalities

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Fox Rothschild LLP

The much-anticipated October 13 Recreational Cannabis Statewide Information Webinar presented by New Jersey’s Cannabis Regulatory Commission (CRC) provided critical information on the state’s adult-use cannabis program, including key insights into the license process, the power of municipalities to influence what happens on the ground in their communities and the importance of equity and inclusion.

More than 1,100 people tuned in to the two-hour webinar, a recording of which will soon be posted to the CRC website. Executive Director Jeff Brown, Chair Dianna Houenou, and Vice Chair Sam Delgado covered essential points concerning New Jersey’s 160-page Adult-Use Cannabis Rules, which were released on August 19, 2021.

The webinar delivered pertinent information for those interested in applying for New Jersey adult-use cannabis business licenses, providing an overview of the initial rules, basic application requirements, expectations for CRC background investigations; what business can do to prepare for applications; Management Service Agreements and Financial Source Agreements; expectations for neighborhoods with cannabis; and CRC’s next steps.

Interestingly, the CRC spoke candidly and emphasized a few key points:

The License Process

The classes of cannabis businesses encompass:

  • Class 1: Cultivators
  • Class 2: Manufacturers
  • Class 3: Wholesalers
  • Class 4: Distributors
  • Class 5: Retailers
  • Class 6: Delivery
  • Testing Laboratories

The CRC did not spend equal time discussing each license application type. Instead, presenters focused on categories of license applications that will need to be issued first to ensure the successful deployment of the program (i.e., Cultivators, Manufacturers, Retailers), providing little detail on Wholesalers, Distributors, Delivery and Testing Laboratories licenses, which left many questions unanswered. However, the CRC promised that this webinar would be the first of many, and that subsequent webinars would touch on the other types of cannabis business licenses and application processes. As it stands now, the CRC must release its Notice of Application, which is slated to contain additional color concerning the submission window and application processes of each type of license. It is believed that the CRC will adopt a staggered approach when accepting applications for various types of cannabis business licenses. The CRC’s focus on accepting applications pursuant to the supply chain hierarchy will help ensure a smoothly deployed state cannabis program. However, it was surprising to see a lack of clarity concerning the Testing Laboratory license. Before products can be released to the public, the details surrounding Testing Laboratory licenses should be fleshed out to ensure adequate product supply. We’ve seen lackluster rollouts in other states where regulators failed to license Testing Laboratories – which led to inadequate market supply or untested product being released to the public, both of which could undo New Jersey’s careful rollout. We’ll see how the equally anticipated Notice of Application fleshes out the application window and process for each type of cannabis business before we determine whether New Jersey repeats or defeats hurdles that tripped up other states’ rollouts.

The Power of Municipalities

While the CRC’s rules provide the state regulatory framework for operating in New Jersey, municipalities have the power to define how that unfolds in communities. The webinar highlighted the importance of cannabis businesses working with communities and municipalities. Vice Chair Delgado emphasized that cannabis businesses must “know the municipality, know the playing field, and know the players.” And fittingly so, as the CRC will only license cannabis businesses if they have demonstrated support from the municipality, zoning approval, and have been verified to operate in compliance with any municipal restrictions. Municipalities can determine hours of operation, the number and kinds of licensed businesses operating within their borders, and whether to enact a 2% transfer tax on any sales between cannabis businesses. They can also enact any requirements or restrictions on cannabis businesses that would apply for other business types, such as requiring compliance with all relevant codes and ordinances. Municipalities will also have the opportunity to weigh in on which applicants seeking to operate within their towns should be issued a license from the Commission. Specifically, municipalities can enact ordinances that:

  • Authorize certain types of cannabis businesses
  • Set numerical limits on the numbers of certain types of businesses operating within the jurisdiction
  • Restrict the hours of operation of cannabis businesses and their location, including banning cannabis businesses in school zones and setting restrictions regarding playgrounds and places of worship
  • Create local licensing requirements and set civil penalties
  • Restrict the types of cultivation that occur within the municipality, for example, requiring all cultivation to be indoor
  • Establish a 2% transfer tax on cannabis or cannabis products being transferred by businesses within the jurisdiction
  • Communicate the municipality’s preference for licensure to the Commission.

The differences between municipalities’ role in annual business licenses versus conditional licenses is particularly interesting. Annual business licenses undergo the full application process, are reviewed after conditional licenses, and require site control and municipal approval. In contrast, conditional licenses are prioritized over annual licenses and give the licensee up to 5.5 months plus one 45-day extension to convert to an annual license via an abbreviated application process and do not need site control or municipal approval. The last point is particularly interesting, because it means a conditional applicant has over six months to obtain site control and municipal approval. Thus, if a conditional license applicant were to apply for an initial application with the CRC, it would only have to identify a site, not have control or municipal approval like an annual business license applicant. This gives conditional license applicants who can navigate the pitfalls of local governments a strategic advantage. In new state markets, when a municipality allows a certain type of cannabis business, that type of cannabis business undoubtedly floods in, saturating the local market and leading to increased competition and tighter margins for operators. A conditional applicant could gain a business advantage by identifying a site within a municipality that has opted out of hosting cannabis businesses and using the six-month window to lobby local officials to opt-in or allow them to operate within the jurisdiction. If successful, the conditional applicant would be able to operate in a less saturated jurisdiction. Although risky, such a strategy could benefit the brave few who attempt it by giving them a first-mover advantage in a certain geographic region of the state.

Equity and Inclusion Are Not Just Talking Points – They Matter

The CRC emphasized social and economic equity to a degree not often seen in other states. CRC officials highlighted safeguards designed to mitigate against predatory practices, including protections for license holders and license applicants and a social equity excise fee that will be directed specifically towards community benefit. Although little information was provided on the social excise fee and what constitutes a “community benefit,” the discussion surrounding Management Service Agreements (MSAs) and Financial Source Agreements (FSAs) was comprehensive. The CRC urged groups against using New Jersey licensees as vehicles to gain inroads into the state. For example, MSAs and FSAs cannot allow the management services contractor or financial backer to:

  • Impose unreasonable fees, interest rates, or returns
  • Receive an ownership interest in the cannabis business
  • Obtain an unfair advantage over the cannabis business
  • Receive a percentage of business profits greater than the net profits received by the cannabis business
  • Prohibit the cannabis business from selling to or buying from any company
  • Require the cannabis business to enter into a non-compete.

Although the webinar highlighted the state’s intent to mitigate against predatory practices, rules concerning the transfer of ownership were not explicitly covered during the webinar. As it stands, the FSAs and MSAs cannot put the management services contractor of financial backer in a position to “overrule” an applicant’s decision regarding transfers of ownership. However, pursuant to the regulations, the majority share of a license’s ownership interest can transfer after two years of cannabis operations, and within those two years and beyond, FSAs can include a creditor that holds a security interest in the license holder, the cannabis business or the premises. This is primarily important for larger groups seeking to extract profits from licensees. We’ll see if the CRC addresses these points in future webinars.

While thorough, the CRC webinar left many questions unanswered. The commission will surely hold additional webinars concerning its adult-use regulation and application processes.

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