Across the nation, states have been passing laws permitting the recreational use and sale of cannabis, and in March 2021, New York became the 15th state to do so. Although New York permitted the sale and use of medical marijuana in 2014 through the Compassionate Care Act (CCA), with the passage of the Marijuana Regulation and Taxation Act (MRTA), New York now allows for retail sales of cannabis and allows anyone 21 years of age or older to lawfully possess, use and transfer up to three ounces of cannabis and up to 24 grams of concentrated cannabis. The MRTA established a new Office of Cannabis Management (OCM) that will develop regulations, issue licenses for producers, distributors and dispensaries, and oversee the adult-use, medical and hemp programs. While sales will not begin until the OCM issues its regulations, entrepreneurs and business owners interested in entering the market should start preparing to take advantage of the opportunity to join this new frontier.
It is essential that anyone contemplating opening a dispensary first check local regulations regarding dispensaries. The MRTA allows towns, cities and villages to opt out of allowing the sale and/or on-site use of marijuana in retail dispensaries. In that situation, local governments must pass a law by December 31, 2021, to opt out. A municipality cannot opt-out after this date but may opt back in at any time by repealing the local law which prohibited sales and/or on-site use of marijuana. Notably, even if a law is passed, voters can gather signatures to petition the government to put the issue on a ballot. This would allow voters to possibly override the opt-out.
Regardless of whether a locality bans adult-use dispensaries, it cannot prohibit recreational use by individuals. In addition, sales of medical cannabis and hemp cannot be banned.
Localities are further permitted to regulate the time, place and manner of cannabis operations through their zoning powers. However, such laws and regulations cannot make the operation of the license unreasonably impracticable. Navigating local regulations will be key to establishing a successful cannabis business.
Unlike the CCA, the MRTA does not allow applicants to be vertically integrated. Licenses will be available for organizations that both cultivate and process cannabis, or for distribution, or for retail; no business can have a license for all activities. There is an exception for existing registered organizations operating under a medical license under the CCA. Those organizations can continue to maintain vertically integrated operations and still apply for the recreational adult-use program.
Since retail dispensaries cannot be vertically integrated under the MRTA, new cannabis businesses must find suppliers to provide merchandise for the store keeping in mind federal restrictions that currently preclude cannabis from entering interstate commerce. As the market develops, there will likely be significant growth in the number of suppliers. However, research and due diligence are important to find reliable vendors with quality products that meet the regulations that will be created by the OCM. Contracts should always be in writing and vetted by an attorney to ensure the parties are protected and not liable for the acts of their business partners.
Notably, the law sets a goal of having 50 percent of licenses given out to “social equity applicants.” This includes individuals from communities disproportionately impacted by marijuana law enforcement, minorities, women-owned businesses, service-disabled veterans and distressed farmers. These individuals can also benefit from grants, loans and incubator programs to assist them in establishing their business. Applicants who meet these criteria will have a significant advantage in participating in this emerging business.
Hiring and training employees is a concern for every business, but it is essential to find skilled workers and monitor their performance in the cannabis business. In addition to regulations that the OCM may impose, best practice is for employers to develop written policies and procedures to ensure both sides understand their responsibilities. Furthermore, employers must understand and comply with federal, state and local employment laws to avoid liability. Employers should also ensure that employees fully understand and acknowledge the risks in working in an industry that while legal under state law remains illegal under federal law.
Start-up and ongoing costs for a dispensary are significant, including application and registration costs as well as rent, staffing, marketing, security and surveillance systems, insurance, legal compliance and other expenses. Federal law still prohibits cannabis, which means that traditional bank financing is unavailable to fund operations. Private investors have shown significant interest in the cannabis market, but a good business plan is essential as discussed further below.
Investor proposals must comply with federal and state securities laws. In the case of private offerings exempt from registering with the SEC, investors must still be given information regarding the potential risks associated with the investment and companies must file exemption paperwork with the SEC – most commonly, a Form D.
A business plan is recommended for several purposes. First, the application for a license will require certain information that is typically in a business plan, such as that regarding manufacturing and sales operations. Next and most importantly, potential investors will want to review a business plan before providing financing.
The plan should provide details about the products and services to be offered, market research, competitive analysis, financial projections, management credentials and compliance with regulatory requirements, among other information.
If you are considering opening a dispensary in New York City, contact an experienced attorney to begin discussing the steps you will need to take to build a successful business.