The first retailers to sell adult-use cannabis in New York will be social equity businesses.
In March, the New York State Office of Cannabis Management issued its first regulations governing conditional adult-use retail dispensary licenses: a first-of-its-kind, merit-based, competitive opportunity for qualified applicants. The OCM anticipates that it will award 100-200 “turnkey” licenses pursuant to this program, which will receive financing through a $200 million private/public fund.
While other states have reserved specialized license types for social equity candidates, such as delivery and social use licenses in Massachusetts, New York’s regulations mark the first time that the “first bite” at the retail market will not be handed to existing medical cannabis operators. However, many social equity advocates are split as to whether this measure is truly “equitable,” or whether it serves preordained organizations and individuals.
The eligibility requirements that a person or business must satisfy in order to qualify for a social equity retail license in New York are narrow. In addition to having a presence in the state, there are only two primary criteria: the applicant must be “justice involved” and demonstrate a very specific degree of business sophistication.
In order to qualify as “justice involved,” an individual must have been convicted — not merely arrested or subjected to a plea — of a marijuana-related offense; or they must have had a parent, legal guardian, child, spouse or dependent convicted of such an offense; or they must have been the dependent of an individual who was convicted of such an offense. The marijuana-related offense must have been committed under New York’s penal law — not federal law or the law of any other state — and had to have been committed in New York, as a New York resident.
Also, that individual must hold or have held for at least two years at least 10% ownership interest and control of a “qualifying business,” defined as a business that had net profit for at least two years. If the applicant is a nonprofit, 501(c)(3) status is mandatory. The nonprofit must, among other requirements, serve “justice involved” individuals and related causes, and must show at least two years of positive net assets or profit, as shown on tax returns, with at least five full-time employees.
At least 51% of the applicant must be owned, in the aggregate, by at least one individual who satisfies the above criteria; and at least one individual who satisfies the above criteria must hold at least 30% of the applicant or license — and have sole control of the licensed business.
To me, this means that the 51% can be broken up as follows: 30% owned by one individual or entity who satisfies both criteria, while 21% can be comprised of other justice-involved individuals, who do not meet the business sophistication criteria.
Also unique is that, by the proposed regulations, prospective social equity candidates will not be required to submit extensive application materials, including operational plans, manuals or standard operating procedures, as traditionally required in competitive, merit-based cannabis business licensing application processes. Instead, the OCM will focus purely on the two eligibility criteria described above. The OCM envisions creating regional zones to score applicants, and requiring applicants to rank location preferences, with tie-breaks resolved via lottery.
Pros and Cons
Proponents of the program are thrilled to see New York work toward its goal of awarding 50% of all adult-use cannabis business licenses to social equity candidates and see the program as protective of small businesses, particularly against predatory practices commonly associated with larger, more capitalized multi-state operators.
But opponents of the program fear the eligibility criteria are too narrow — perhaps purposefully designed to capture a predetermined set of prospective applicants and real estate developers. Cannabis arrests, pleas and other run-ins with law enforcement, regardless as to whether they result in conviction — and regardless of geography — can result in the same collateral consequences associated with a state conviction. Moreover, business success does not always turn on profitability; many businesses, such as restaurants, may operate at a loss or break even as a matter of course. Accordingly, the program sends the message that the most worthy applicants are those that have been convicted, to the exclusion of other qualified applicants, breeding resentment across the supply chain and anticipation that restrictions on ownership will stifle growth and relationship-building, while increasing compliance costs and defeating any early market opportunity.
Adding insult to injury, the fund to which the state refers as prospective financier to these new businesses, is conceived as a debt fund (not grants), begging numerous questions as to who will truly profit.
Now is the time to submit public comment and work to ensure that this program does not stymie what could still be the most progressive adult-use cannabis legalization in the country.