With legalization nearing, what can entrepreneurs expect?
After years of failed laws prohibiting a product that most adults use responsibly, rational voices prevail. The state is on the cusp of enacting a system that legalizes it, taxes it and regulates it. The main question on every policymaker’s mind is the same: How are we going to take an industry dominated by criminal enterprises and bring it into the light? The year is 1933, and if you think we’re talking about marijuana, then you haven’t read the prequel.
When Prohibition ended, most states passed nearly identical laws regulating alcohol. The core features of these laws have remained largely intact for more than eight decades and are widely regarded as a better approach to alcohol policy than the systems in place during Prohibition and before.
Fast-forward to 2019; New York is poised to open the largest market on the East Coast to legal marijuana. Lawmakers in Albany are considering competing legalization bills, some more restrictive than others. Despite their differences, it comes as no surprise to those of us who specialize in alcohol regulation that each bill looks to New York’s post-Prohibition alcohol regulatory system for inspiration.
We anticipate that the existing New York State Liquor Authority will be the agency charged with regulating the marijuana industry, likely with a new, marijuana-focused bureau. With the backdrop of the existing alcohol laws in mind, here are some of the ground rules that marijuana ventures can probably expect in the Empire State.
The centerpiece of most states’ alcohol laws is a ban on individuals owning an interest in multiple segments of the supply chain. By dividing the alcohol industry into three “tiers” — manufacturers, distributors and retailers — and prohibiting participation in multiple tiers, states have made vertical integration unlawful. That’s why you never see a Bud Light Bar or Bacardi Liquor Store; an alcohol manufacturer can’t also be an alcohol retailer.
Similarly, almost every state to legalize marijuana has enacted some form of tiered system, and New York is set to follow, but with a heavier regulatory approach than in other states (as is typical in New York). The proposed legislation creates licenses for producers, distributors and retailers, and prohibits individuals in the production and distribution tiers from investing in the retail tier, and vice versa. Producers may only sell product to distributors (with some exceptions), distributors may only sell to retailers, and only retailers may sell to consumers.
As with the state’s alcohol industry, New York marijuana entrepreneurs will have to carefully consider which tier to invest in, as participation in multiple segments of the supply chain will run afoul of the law in most cases.
Most states’ alcohol laws also prohibit horizontal integration within the same tier, by statutory limits on the number of licenses an individual may invest in. States do this in order to keep ownership small and local, and to avoid the concentration of licenses in only a few hands. In New York, an individual may only own or invest in one liquor store, which is why there are no chain liquor stores in the state. By contrast, there is no limit on the number of restaurant or bar licenses an individual can own or invest in.
New York’s marijuana legislation is expected to replicate the liquor store model, by strictly limiting the number of retail licenses an individual may own or invest in. New York politicians have justified this type of limitation by predicting that it will allow communities of color that have been disproportionally impacted by enforcement of marijuana prohibition to enter the market and compete on a fair playing field.
The limit currently being considered is three retail licenses, but that may change by the time the final bill is passed. Whether the state’s existing medicinal marijuana companies are subjected to this and other restrictions is also a wild card. Whatever the result, the license limitation, just like the tier restrictions, will be critical for entrepreneurs and investors to understand before moving forward with a marijuana venture in New York.
On-Premises vs. Off-Premises
Another core feature of the post-Prohibition alcohol regulatory system is the division of retail licenses into on-premises and off-premises establishments. Bars, restaurants and hotels are “on-premises” because alcohol is consumed at the businesses. Liquor stores and wine stores are “off-premises” establishments because alcohol is purchased to be consumed elsewhere. You can’t buy a bottle of vodka at a restaurant to take home, just as you can’t pop open a bottle of champagne at a liquor store.
Many states that have legalized marijuana, such as Oregon, have limited the retail category to off-premises only, which favors dispensaries over Amsterdam-style coffee shops. Others, like California, have made provisions for on-premises consumption that have not yet been fully implemented. Interestingly, New York’s legislation allows for both categories, but with some strings attached.
The biggest buzzkill is that businesses holding alcohol licenses will not be allowed to also hold on-premises marijuana licenses at the same establishment. Worse, it appears that under one version of the competing bills, only off-premises dispensaries are eligible for on-premises licenses. These restrictions would severely limit the types of on-premises marijuana business concepts that could exist.
New York’s famous culinary and nightlife scene is world-renowned for its energy and creativity. Industry advocates are sure to ask lawmakers to reconsider these limitations, to make room for a potential revolution in marijuana-infused cooking and drinks that could flourish if restaurants and hotels were permitted to obtain on-premises marijuana licenses. Fortunately, no version of the legislation contemplates prohibiting individuals from holding alcohol and marijuana licenses at different businesses.
The United States has a long history of towns, counties and states banning the sale of alcohol within their borders. In the decades before Prohibition, “wet” and “dry” forces waged countless battles at ballot-boxes in towns across the country over rules that would restrict alcohol at the local level. When Prohibition ended, many states decided to return to counties and municipalities the power to stay dry. Even today, there are hundreds of dry counties, particularly in the South, where the sale of alcohol is either outright banned or severely limited.
New York went one step further, allowing municipalities outside of New York City, and neighborhood advisory committees within New York City called Community Boards, to express an opinion to the State Liquor Authority on whether a particular business should be granted a liquor license on a case-by-case basis. The Liquor Authority considers these opinions when deciding whether to grant a license to an applicant. This allows a level of local input even in “wet” jurisdictions.
New York is set to enact a similar local approval policy for marijuana retail licenses, although the competing legalization bills in Albany vary in terms of how much weight the local recommendation will carry. If the local approval system that emerges for marijuana resembles anything like the current system for alcohol, then potential investors will have to plan very carefully before investing in a location that could become mired in local opposition, as is often the case with alcohol.
Regulating marijuana like alcohol presents challenges and opportunities. On one hand, the alcohol laws are complex and restrictive, often requiring businesses to carefully plan to ensure compliance with the various requirements.
With that said, the legalization and regulation of marijuana in New York will give entrepreneurs and investors the chance to access a new market that contains the biggest city in the nation, under a tried-and-true regulatory system that has proven successful.
Robert S. Bookman and Max Bookman are attorneys at Pesetsky & Bookman, an established boutique law firm specializing in alcohol regulatory law in New York, where they advise a wide range of businesses from startups to national brands on a variety of legal issues related to the sale of alcohol. Given the similarities between the alcohol and proposed marijuana laws, they have begun consulting with marijuana ventures considering going into business in New York.