The U.S. cannabis industry is reportedly worth an estimated $61 billion dollars as of late 2020. Expert projections have that figure increasing at an unprecedented rate as federal, state and local regulations continue to dwindle. What was once a taboo subject has now become a hot button topic amongst business owners, manufacturers and investors who hope to cash in on the rapidly changing perception of cannabis. While the business opportunities associated with cannabis continue to expand, individuals and corporations seeking to enter the industry should be cautious of federal, state and local laws that dictate the use, manufacture and sale of the product. The little green plant can mean a lot more green in your pocket, but it is critical that you abide by the applicable laws discussed below.
Commonly Used Terms
Industrial hemp is a legally defined term that refers to cannabis sativa plants with less than 0.3% delta-9 tetrahydrocannabinol (“THC”) on a dry weight basis. The cannabis plant contains many different compounds known as cannabinoids, of which THC and cannabidiol (“CBD”), are the most prevalently discussed and used in commerce. THC is essentially the main active ingredient in cannabis that gives marijuana its psychoactive effects. CBD is another highly prevalent cannabinoid in the cannabis plant and research has shown that it does not cause the psychoactive affects associated with THC. Essentially, industrial hemp and marijuana are the same plant, except industrial hemp has a very low amount of THC.
At the federal level, marijuana is controlled substance and listed as a “Schedule I” drug, which is a category reserved for drugs with no medical value and a high potential for abuse. This directly conflicts with a majority of state laws, creating problems for marijuana retailers in legalized states when it comes to both handling business finances and establishing legal protections.
While marijuana remains a controlled substance under federal law, the federal government has legalized hemp. The Agricultural Improvement Act of 2018 (“AGIA”) set forth federal regulations legalizing the industrial production of hemp. The law allows licensed farmers to grow cannabis plants, so long as they contain less than 0.3% THC on a dry weight basis. This means producers must check the THC levels of their plants and dispose of all that are over the federal threshold limit. The AGIA also legalized extracts of hemp, so long as the extracts also comply with the limit on THC. This has led to the increase of sale and consumption of products containing CBD and other cannabinoids.
The FDA to date has only approved the use of one CBD product, Epidiolex, a CBD based drug to help with those suffering from epileptic seizures. While many other CBD products are available in stores, they may be in violation of the Food, Drug and Cosmetic Act (“FD&C”), which the is the law that governs many of the activities of the Food and Drug Administration (“FDA”). Despite this, there are numerous products on the market containing CBD intended for use by consumption including tinctures, gummies, capsules, beverages and foods and the FDA has done little to exercise its enforcement authority under federal law. In fact, to date, FDA enforcement has been largely targeted at companies and products making medical claims and not aimed at products who limit their claims to indicating that products contain CBD or that products have very general wellness benefits. As such, those producing and marketing CBD products need to be careful of what claims they make and how the products are labeled to minimize exposure to FDA sanctions.
New York State Legislation
On the state level, around the country there has been constant change in marijuana laws. Since California became the first state to legalize medical marijuana use in 1996, the landscape has shifted drastically. Forty-five states have now passed legalization laws in some form. Among them is New York, where the state joined the group of now 18 states to legalize adult recreational use of marijuana. Signed into law by Governor Andrew Cuomo on March 31, 2021, the Marijuana Regulation and Taxation Act (“MRTA”) will have a substantial impact on the cannabis industry as a whole by allowing the retail sale of marijuana in one of the largest population centers in the country.
New York has also established the Cannabinoid Hemp Program, which allows users who obtain a license through the New York Department of Health to process, manufacture, and sell cannabinoid products, with the largest being CBD. The state seeks to protect CBD consumers by ensuring that products are properly manufactured, lab tested and correctly labeled.
Cannabis Brands and Marketing
If you are a business interested in entering the cannabis industry, you must be prepared to address the supply chain intricacies. Most critically, federal law prohibits the transportation of cannabis across state lines. Also, regulations surrounding label compliance, lab testing, approvals and taxation serve as significant barriers to entry for retailers, manufacturers and investors alike. Despite the obstacles, business owners are optimistic about the commercial prospects of the cannabis industry.
Selling cannabis and cannabis-products can be a legal nightmare without the proper foresight and business strategy to navigate industry’s rapidly changing regulations, medical and recreational uses, product testing, label compliance and more.
As with everything in the cannabis industry, the laws relating to labeling and packaging vary from state to state. That being said, the following regulations show up repeatedly in states’ cannabis legislation:
- Packaging must be child-resistant;
- Ingredients and lab results must be placed on the label;
- Packaging must be opaque;
- Specific amount of cannabis contained in the package must be listed; and
- Use of cartoons and graphics on the packaging is prohibited.
With the recent legalization of adult-use cannabis in New York, the MRTA has laid out the cannabis labeling laws for both medical cannabis and adult-use cannabis. Starting with medical cannabis, the MRTA requires the following information to be placed on packages:
- (a) the information required to be included in the receipt provided to the certified patient or designated caregiver by the registered organization;
- (b) the packaging date;
- (c) any applicable date by which the medical cannabis should be used;
- (d) a warning stating, “This product is for medical use only. Women should not consume during pregnancy or while breastfeeding except on the advice of the certifying health care practitioner, and in the case of breastfeeding mothers, including the infant’s pediatrician. This product might impair the ability to drive. Keep out of reach of children.”;
- (e) the amount of individual doses contained within; and
- (f) a warning that the medical cannabis must be kept in the original container in which it was dispensed.
For adult-use cannabis, the MRTA includes the following labeling and packaging requirements:
- (a) packaging must meet requirements similar to the federal Poison Prevention Packaging Act of 1970;
- (b) cannabis products must be placed in resealable, child-resistant packages;
- (c) packages, labels, shapes and products should not be made to be attractive to or target persons under the age of twenty-one;
- (d) labels warning consumers of any potential impact on human health resulting from the consumption of cannabis products must be affixed to the cannabis products when sold;
- (e) product labels must accurately display the total THC of each product; and
- (f) in some cases, a nutritional or supplement fact panel that incorporates data regarding serving sizes and potency of the cannabis products.
For cannabis brands in New York, ensuring that you comply with the applicable state labeling and packaging laws will streamline the sale of your cannabis products and pave the way for your success in the industry.
For licensed retailers in the cannabis space, it is required that your cannabis products undergo a series of tests by a state-accredited lab before placing your products on the shelves. The tests help ensure that the products being sold are safe to consume and are correctly labeled. In general, the lab tests screen for potency levels of THC and CBD, unwanted contaminants, the presence of mycotoxins like mold and mildew and residual pesticides. As is often the case in the cannabis industry, the requirements for lab testing are determined on a state-by-state level, so compliance with your state’s laws is of critical importance.
In New York, the state requires that approved third-party labs must test medical marijuana for an extensive list of contaminants, including some contaminants that no other states test for, such as salmonella and E. coli. For the full list of contaminants that New York state tests medical marijuana for, see page 69 of this document.
With respect to adult-use cannabis in New York, the MRTA provides a general overview of the lab testing requirements for such products. The MRTA requires the following lab testing protocols:
- Every processor of adult-use cannabis must contract with a state-approved independent laboratory to test the cannabis products it produces pursuant to the rules of the Office of Cannabis Management;
Adult-use cannabis processors, microbusinesses, cooperatives and registered organizations must make lab test reports available to licensed distributors, retail dispensaries and on-site consumption sites for all cannabis products manufactured by the processor or licensee; and
- Licensed retail dispensaries must maintain accurate documentation of lab test reports for each cannabis product offered for sale to cannabis consumers, and such information must be made publicly available by the licensed retail dispensary.
While the Office of Cannabis Management is sure to provide more information regarding lab testing requirements for adult-use cannabis in the coming months, the above provisions provide New York cannabis brands and retailers with the guidance they will need to legally sell their cannabis products.
Supply Chain Protections
As states continue to legalize marijuana, there are consistent long term supply shortages because dispensaries quickly sell out once sales begin. This is why it is critical to have a sufficient supply chain – one that both ensures there is enough product to reach growing demand and is compliant with the local regulatory landscape.
- Integration. First, depending on the state, a cannabis company needs to consider if their state requires them to have a fully integrated vertical supply chain from cultivation to retail. For example, Florida has required this but has been challenged in court by companies seeking to open up market for standalone licensing opportunities. New Jersey requires vertical integration as well. Vertical integration may benefit companies by allowing them to control processes, reduce costs and maintain efficiency. However, it costs a lot more money and supply chain planning from one step to the next and selection of dispensaries is considered worse in states with mandated vertical operations.
- Cultivation. Next, when a company wants to start the cultivation process, they may do so in either of two ways: seeds or clones. Transportation of seeds is legal in the United States because seeds do not contain THC but since clones already contain THC, they are technically not able to be transported legally from one state to another. After a grower gets their hands on a seed or clone, they must look to regulations. In some states, including Massachusetts, growers are capped at a certain level of canopy that they are allowed overall. If a grower chooses to grow in indoor facilities, companies are allowed to turn multiple lifecycles of plants in one year although. However, plants need about 2-3 months to grow which many state regulators do not consider. The plants then need to be cured (which can take about 5-15 days). Some plants will be used as smokable flower, but others will go to manufacturing facilities to be turned into other cannabis products such as edibles or oil.
- Manufacturing. The manufacturing part of the supply chain is where things start to get tricky since multiple suppliers are involved. It is common for different companies to handle cultivation and manufacturing where the cultivation company provides the flower to the manufacturer and then the manufacturer does the extractions. Rarely, manufacturing and cultivation happen in the same facility. There are strict rules as to where the manufacturing locations can be located due to the highly volatile chemicals needed for the extraction process. Once a manufacturing facility secures a location, the manufacturer needs to obtain highly specific materials for cannabis processing. The raw material is put in a closed-loop extraction machine, usually with butane or CO2, highly volatile chemicals which come from a separate supply chain. The output is known as “crude oil” which is then turned into a usable product via more processing with ethanol so the company would also need to find an ethanol supplier.
- Packaging. Most states have strict regulations requiring cannabis products to be put into child-proof containers. Companies must consider the products they are making such as flower, edibles or concentrates, and the strains they put into them to determine which type of packaging is required. Once the manufacturing facility obtains its chemical and flower suppliers, location, and packaging, it then needs to figure out how to get the product into a dispensary.
- Distribution. To distribute cannabis products, businesses must go through a licensed distributor – FedEx is not allowed. Not every state creates distributor licenses to there is no legal way for third parties to move products just yet. This is in contrast to California which has a strong market for distribution options since the cannabis industry is quite mature in the state. Further, some states require cannabis businesses have control and ownership of outward distribution.
- Tracking and Tracing. Tracking and tracing laws, which differ from state to state, require cannabis to be tracked from the moment the seed is planted to the sale of the final product. However, for a cannabis company to operate in multiple states and comply with each state’s law, it can benefit from having a basic tracking and tracing system that is compliant with all of them and then building it out from there. This may include tracking the plants growing stages, oils and DNA that are being used. Tracking and tracing systems provide visibility to regulators when needed. For instance, if a person gets sick from a product, regulators can locate it back to which plant caused the illness and take necessary action from there.
States where recreational marijuana is legal have generally implemented third-party testing requirements to protect consumers and ensure accurate product labeling. Tests primarily screen for potency and levels of THC and CBD, unwanted contaminants, presence of mycotoxins (i.e. mold and mildew) and residual pesticides.
Testing laws vary from state to state in terms of what the product needs to be screened for, and impact who can succeed in the recreational marijuana supply chain. If the cost of testing is too high in a state it may be a barrier to entry for smaller businesses seeking to break into the cannabis industry. It follows that while one of the biggest benefits of legalization is the end of the underground marijuana market, an appropriate balance must be struck between consistent testing requirements and too much regulation in order for that to occur. If the testing requirements in a state are too stringent or costly, operators may resort to selling on the illegal market.
Manufacturers should consider using Good Manufacturing Practices (“GMPs”) which is a system, codified in the Code of Federal Regulations, for guaranteeing that products are meeting quality standards and regulatory guidelines while ensuring consistency. A GMP compliant program benefits both manufacturers and consumers in that it allows manufacturers to understand the intended use of their products and minimizes overall business risk, while protecting consumer from unsafe and ineffective products. By getting GMP certified, it shows consumers that products are of quality and that the business is a credible one. Employing GMP in the cannabis industry is complicated though since regulatory requirements are unclear in some states and operators may not understand how to classify the end use of their products.
How to Invest in Cannabis
With the cannabis industry estimated at $61 billion as of 2021, people want to know how to invest their money correctly in the market to yield high returns. One important note is that there are three main types of cannabis companies: marijuana growers, cannabis-focused biotechnology companies and cannabis industry product and service providers (for example, lighting systems and distribution). Once a prospective investor determines which type of company they want to invest in, they should proceed just as they do to invest in any other kind of stock–research the company’s management team, growth strategy and the competitive landscape.
Next, prospective investors should see whether the company is profitable yet since the marijuana industry is still in its infancy in many states. If it is not yet profitable, determining how quickly the company will start to profit is key. Lastly, before investing it is important to understand the geographic markets a cannabis company targets. Because marijuana is not legal throughout the entire United States nor is it legal worldwide, each geographic market comes with different opportunities and gambles.
Those looking to invest in cannabis should be wary, however. Even though several states including New Jersey, New York and Virginia passed laws allowing cannabis for medicinal and/or recreational use, sales are not expected to begin until 2022, so it is unlikely we will see money from those states in the short term. Further, prospective investors still face the challenge of there being no federal legislation regarding a banking law which would lessen the risk to the capital markets and attract more institutional investors like hedge funds to the cannabis market.
Regulations and Banking
Since selling marijuana is still federally illegal in the U.S., the federal government has placed severe restrictions on banks that deal with cannabis-related businesses. It follows that U.S. cannabis companies have difficulty obtaining financial services because banks get put at risk of facing federal punishment. With that said, there are three pieces of federal legislation that have the potential to reform cannabis banking in the upcoming year: The SAFE Act, The States Act and the MORE Act.
The Secure and Fair Enforcement Banking (SAFE) Act, if passed, would create protections for banks and credit unions that provide financial services to cannabis-related businesses operating legally in the U.S. Additionally, the act protects cannabis industry service providers who currently can lose access to banking services just for having cannabis businesses as customers.
Next, the Strengthening the Tenth Amendment Through Entrusting States (STATES) Act would give individual states the authority to establish their own cannabis laws without intervention from the federal government and remove the fear of federal trafficking prosecution for businesses operating in compliance with state laws. If the Act is passed, banks would need to verify whether cannabis customers are complying with state law. All banks may not have the expertise or staff to do so which may steer them away from complying with the Act.
Finally, the Marijuana Opportunity Reinvestment and Expungement (MORE) Act, which was reintroduced to Congress in May of 2021, would decriminalize cannabis for adults at the federal level by deleting cannabis from the list of controlled substances under the Controlled Substances Act (CSA). It would expunge cannabis arrests, charges and convictions on the record of individuals in the U.S., as well as impose a 5% tax on cannabis products in order to fund criminal and social justice reform projects.
Marijuana Regulation and Taxation Act (MRTA)
On March 31, 2021, New York enacted the MRTA, which legalizes adult recreational marijuana use in the state. The law makes it so adults 21+ are able to purchase marijuana from licensed dispensaries, possess three ounces of cannabis and up to 24 grams of concentrated cannabis and cultivate up to six plants for personal use.
The bill establishes an Office of Cannabis Management (OCM) under the Division of Alcohol Beverage Control. It will be headed by a five-member Cannabis Control Board to oversee the adult-use, medical, and cannabinoid (CBD) hemp industries. The Governor will appoint all five members and the chair who would serve as the Board’s executive director. The OCM has the sole discretion to:
- issue or revoke licenses, registrations, and permits to all business entities in the production and distribution process;
- regulate advertising, marketing and product labeling;
- implement a social equity program;
- inspect and enforce adult-use, medical and CBD hemp programs;
- make necessary changes to improve registration, public health and access for treatment; and
- promulgate all related regulations.
While the MRTA outlines cannabis regulations throughout the entire state, it also allows towns, cities and villages to opt out of allowing the sale and/or on-site use of cannabis in retail dispensaries. To opt out, local governments must pass laws by December 31, 2021. However, they may choose to opt in at any point by repealing the local law prohibiting sales and/or on-site use. Even if there is a local ban on dispensaries, the locality cannot prohibit recreational use by adult individuals. Further, hemp and medical cannabis sales may not be banned.
The first policy concern under the MRTA is aimed at offsetting economic losses from the COVID-19 pandemic. Passing the cannabis law would stimulate New York’s economy in two major ways.
- Licenses. People seeking to capitalize on the legalization of recreational marijuana in New York can apply for any one of the following licenses: adult-use cultivation, processing, distribution, retail dispensary or on-site consumption license; delivery or nursery license; microbusiness or small business license. To advance the Act’s equity goal, the applicant must show proof of racial, ethnic, and gender diversity of their employees and owners before a license is renewed. Like a liquor license, a cannabis license must be renewed every two years.
- Taxes. The bill establishes an eighteen percent tax on cannabis sales at retail dispensaries. With the 1.5 million regular cannabis users living in New York, the enactment of the MRTA is projected to bring in $436 million in tax revenue annually. Revenue from those tax dollars would be funneled into three areas: 25% towards the state lottery fund designated for the Department of Education; 25% towards a drug treatment and public education fund; and 50% towards a community grant reinvestment fund which gives back to communities that have been most disproportionately affected by the existing marijuana laws (i.e. job development and a statewide public health campaign focused on the health effects of cannabis and legal use).
The second policy concern under the Act is the promotion of social and economic equity which is weaved into nearly every section of the bill.
- Equity Applicants. The chief equity officer, who will be part of the Cannabis Control Board, will establish and implement a social and economic equity plan that encourages people who come from communities disproportionately impacted by marijuana prohibition to apply for licenses. Those who apply for a license to start a marijuana business and qualify as equity applicants will have their application fees reduced or waived and pay low or zero interest on loans.
- Diversity Promotion. A goal is to give fifty percent of cannabis licenses to social and economic equity applicants to ensure the inclusion of women and minority-owned businesses.
- Record Expungement. People with prior cannabis convictions will have their records expunged. Even if they have a prior offense connected to the sale or possession of marijuana and want to apply for a license, they may do so because a person cannot be denied a license to cultivate, process, distribute or dispense cannabis based on a related offense.
Most states that have legalized medical or recreational cannabis give employers full discretion in making drug testing and subsequent decisions, while a smaller number of states have policies that address anti-discrimination for medical cannabis patients.
Use of Cannabis on the Job – General
With more and more states continuing to modernize their cannabis laws, employers are now left questioning how these changes impact their business while employees are in the workplace. One issue is marijuana use and its impact on job safety in jobs where there is a higher risk of on-the-job injuries. The perceived risk has influenced workers’ compensation laws in states such as Wisconsin and Michigan. For instance, in Wisconsin if an employee gets injured while intoxicated by marijuana or any other controlled substance at work, their workers’ compensation benefits can be reduced by 15%. Similarly, in Michigan, workplace injuries that occur while an employee is intoxicated are not covered at all by worker’s compensation.
Further, there is the issue of employees being under the influence of medical cannabis while in the workplace and the challenge of reducing employer liability. A few states are seeking to address these problems, including Indiana where a bill was introduced that would forbid employment discrimination against medical cannabis patients. Specifically, the bill would prohibit medical patients from carrying out tasks while high on cannabis (think operating heavy machinery) which would subsequently reduce employer liability for the actions of their employees.
Use of Cannabis off the Job – General
Employers also may have difficulty developing policies regarding employee cannabis use outside of the workplace since cannabis is not yet federally legal. One consideration is differentiating between adult-use cannabis, a recreational activity, and medical cannabis, a prescribed medicine. States that choose to distinguish between the two in the workplace can influence employers’ drug policies. Employers within states that make the distinction should take note as to whether any of their employees are prescribed medical marijuana and determine if their state protects cannabis use on the job or against mandatory drug testing. For example, many states have laws that shield medical marijuana patients from employment discrimination so if employers want to randomly drug test those individuals, they must make sure they either do not test for marijuana or have a policy in place along the lines of stating medical marijuana use is not grounds for termination. However, employees can still maintain a zero-tolerance drug policy if they so choose.
It is important to note that many of the earlier states to legalize recreational cannabis use provide minimal or no job protections for the off-the-job use, while states that have recently legalized adult-use cannabis have included employment protections in their legislation. States such as Colorado and California do not have laws protecting employees who consume cannabis outside work hours. However, in New York, a state that recently approved recreational marijuana, now has a law that prohibits employment discrimination against people who legally use marijuana off duty.
New York State Employees
Now that cannabis has been legalized in New York, it is critical that employees know their rights regarding the recreational use of cannabis in relation to the workplace. Employers cannot refuse to hire, employ or discriminate against an individual who legally uses marijuana as permitted by state law. Further, employers also cannot discriminate in compensation, promotion, terms, conditions or privileges of employment if an employee chooses to use cannabis.
However, employees are not relieved of all liability should they choose to use marijuana recreationally. Under New York Labor Law Section 201-d, an employee’s marijuana use is only protected when it is outside of work hours; off the employer’s premises; and without the use of the employer’s equipment or other property. Put simply, although cannabis is now legal in New York, this does not mean employees can get high on the job without repercussions.
New York State Employers
To understand the rules surrounding employment and the legal use of marijuana in New York, employers should look at the difference between the state’s anti-discrimination laws and the City’s prohibition of pre-employment marijuana testing. Absent any sign or symptoms of marijuana use, employers in New York are prohibited from discriminating against an individual based on a positive drug test.
Employers can continue to test for marijuana in New York with the exception of New York City’s limitation of pre-employment marijuana testing of non-safety sensitive positions. Additionally, companies may still have a drug and alcohol policy, and under §201-d, they can take action if the employer believes that: an employee violated the workplace or program policy, professional contract or collective bargaining agreement, or the individual’s actions were deemed by an employer or previous employer to be illegal or to constitute habitually poor performance, incompetency or misconduct.
Guidance for Dispensaries
While marijuana is still federally prohibited under the Controlled Substances Act which classifies controlled substances into groups depending on their potential for abuse and medical use, as well as harm to users, a growing number of states have legalized cannabis use so that businesses can produce and distribute marijuana. Clearly, federal and some state laws are in direct conflict with one another which puts cannabis business owners in a precarious situation. Nonetheless, to open a dispensary, it is critical that prospective dispensary owners check their own state’s requirements.
- Property. Whether you are purchasing real property or leasing property for a cannabis business, restrictions on location, land use and zoning are all potential issues for those looking to open a dispensary within their state. It is important to scope out the potential land restrictions before deciding on a location. Leasing property for a dispensary is also difficult since state regulators will usually look at each proposed lease or sublease as a prerequisite to giving out a license. The lease should state the standard business terms as well as cannabis-specific provisions to ensure compliance with the local laws.
- Licensing. Each state has its own licensing and regulation requirements which vary widely by state. Retaining an experienced cannabis regulatory and compliance lawyer is key to navigating the muddy waters of obtaining proper licenses. For example, before opening a dispensary you should check what is required to obtain license; whether the state has a limited number of licenses it gives out; and the state’s requirements for demonstrating financial resources.
- Getting the Product. Another important aspect of operating a dispensary is obtaining good quality and more importantly, legal product. Many dispensaries grow their own marijuana and, in some states, it is mandatory that they do so. It is important to check local and state guidelines before securing a plant provider.
- Tracking and Tracing. In states where cannabis is legal, each dispensary must implement a seed-to-sale software tracking system to assist state and local governments with regulation enforcement, tax collection, product quality verification and prevention of illegal cannabis sales. Not only does the system link cannabis products to plant origin, but each sale is also tracked to the patient or customer. This helps ensure the product is truly tracked from seed-to-sale.
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