New York and New Jersey have recently passed legislation legalizing adult-use cannabis. While both states required vertical integration in their medical cannabis markets, both elected to forbid vertical integration for the adult-use market, outside a few exceptions. This will distinguish New York’s and New Jersey’s markets from other states, such as California, and may lead to those states’ legalization efforts more closely mirroring those of Washington.
A ban on vertical integration means that a company cannot own licenses along the entire chain of cannabis sales, from cultivation to production to retail sales. Specifically, New York’s Marihuana Regulation and Taxation Act provides that: “A person holding an adult-use cultivator’s license may not also hold a retail dispensary license pursuant to this article and no adult-use cannabis cultivator shall have a direct or indirect interest … in any premises licensed as an adult-use cannabis retail dispensary.”
Likewise, the New Jersey Cannabis Regulatory, Enforcement Assistance, and Marketplace Modernization Act provides that: “For a period of 24 months after the effective date … it shall be unlawful for any owner … or any other person interested in any cannabis cultivator, cannabis manufacturer, cannabis wholesaler, cannabis distributor, cannabis delivery service, or cannabis testing facility to engage in the retailing of any cannabis items in this State, or to own, either in whole or in part, or be directly or indirectly interested in a cannabis retailer.”
This means that for two years in New Jersey, and until the Legislature says otherwise in New York, cultivators cannot operate their own retail stores. The purpose of these restrictions on vertical integration is to encourage competition and prevent large, already established cannabis businesses from dominating the market.
The result is that cannabis retailers will operate similarly to liquor stores, in that retailers will be independent of the cannabis cultivators and manufacturers, and different cannabis brands will compete for shelf space in each store. Thus, cannabis cultivators will not have to worry about the risk of a large competitor buying out retailers and only stocking their own product.
New York provides one way in which a cannabis business can vertically integrate, and that’s if they are operating under a microbusiness license. Those operating under a microbusiness license will be able to fully vertically integrate but may only sell their own products.
The MRTA leaves regulations as to the size of a microbusiness up to the Cannabis Control Board, but it is anticipated that a cannabis microbusiness will be greatly limited in size and scope of operations.
While microbusiness licenses may be viable options for small businesses or cannabis enthusiasts, holders of such licenses are unlikely to compete with the companies with standard cultivation, manufacturing or retail licenses.
The hope is that competition resulting from a lack of vertical integration will cause New York’s and New Jersey’s marketplaces to closely resemble the craft beer industry, with consumers having a wider variety of brands and products to choose from, and entrepreneurs gaining a marketplace that is easier to enter.
Individuals and companies looking to break into the burgeoning cannabis marketplaces in New York and New Jersey will have to decide whether they want to operate a retail business or develop their own strains of cannabis or cannabis products, at least to start. In New York, a single entity may hold a combination of cultivation, processing and distribution licenses, allowing a single company to control all but the retail sales for a given product.
New Jersey’s licensing is even more restricted, but still allows for cannabis businesses to hold multiple licenses. Under New Jersey’s law, a cultivator or manufacturer may hold only one additional license, which cannot be for wholesale or retail purposes, while a wholesaler may only hold an additional license as a distributor.
Therefore, a business could grow their own cannabis and manufacture it into different products but cannot sell their products directly to retail stores.
New York and New Jersey are establishing a marketplace that will offer small businesses a chance to compete with the already-established actors in the cannabis industry. However, brand recognition established in California and elsewhere may still give the larger companies an advantage in retail sales, despite the bans on vertical integration.
The states’ ability to support a wide array of small businesses will ultimately depend on how well their licensing regimes prevent market domination.