Tag Archives: licenses

March 15, 2023

Adult Use Cannabis Begins in Compassionate Connecticut

By Abraham Finberg, Simon Menkes, Rachel Wright

On January 10, 2023, Connecticut joined those states in our union that have opened their doors to adult use cannabis sales. Seven dispensaries stepped through those doors and by January 31, Connecticut had recorded $5.1 million in adult use sales, plus an additional $8.2 million in medical sales for a total of $13.3 million.

Like other states now embracing adult use, Connecticut has enacted a strong social equity program, with mixed results so far. Also, perhaps more than any other state, Connecticut has committed to protecting its existing medical cannabis patients and has put in place various mechanisms to guard their access to cannabis.

Slow Roll-Out of Retail Cannabis Licenses

Like other recently-legal states, Connecticut’s rollout of its retail licenses has not been rapid. The state’s initial goal has been to issue twelve retail licenses by lottery, with six reserved for social equity applicants. Also, the eighteen already-operating medical licensees were given the option to upgrade to a hybrid medical-adult use license, a process separate from the lottery.

Governor Lamont at a press conference on January 9, discussing the social equity focus

As of the end of February 2023, there appear to be only twelve current (approved to do business) retail licenses, with eleven of those twelve belonging to medical-adult use hybrids. The majority of the 39 retail licenses listed on the state website are still in the provisional phase, which allows them to “work toward securing a final license.”

Connecticut Social Equity

Connecticut has committed to a robust social equity program and provided an early application opportunity for social equity applicants ahead of non-social equity applicants. In addition, the Nutmeg State has reduced fees for adult-use licenses by 50% for Equity Joint Venture applications, which is where investors agree to partner with a social equity applicant. Further, the state has eliminated 43,754 low-level cannabis convictions.

Connecticut’s social equity requirements are less rigorous than those of neighboring New York and New Jersey, which may provide additional entry opportunities for both in-state and out-of-state entrepreneurs. Connecticut defines a social equity applicant as requiring that at least 65% of a business be owned by an individual with less than 300% of the state median household income in the past three tax years. Since the median household income was $79,855, that individual would need to have earned less than $239,565 annually.

Subversion of the Lottery Process

The lottery for the six initial social equity licenses was held in May 2022 followed by the lottery for the initial six general licenses, which took place in September 2022. Both were administered by a professor and department head at the UConn School of Pharmacy (the state law stipulated the lottery operator must be part “of the state system of higher education”).

15,605 applications were received for both lotteries. Unfortunately, many of the winning applicants flooded the lottery system with hundreds of applications, spending hundreds of thousands of dollars to do so. One example, SLAP ASH LLC, accounted for 850 of the 8,360 applications submitted to the social equity lottery, winning 2 provisional retail licenses. Another company, Jananii LLC, spent over $200,000 to submit 807 entries, receiving one provisional retail license. “There were individuals applying for licenses who submitted 50 applications or more to enter the lottery,” said House Majority Leader Jason Rojas, D-East Hartford. “That wasn’t our intent.” Rojas and others are looking at other options for the next lottery to try and combat the problem.

Protecting Medical Cannabis Patients

Perhaps what makes Connecticut’s adult use cannabis program most unique is its outsized commitment to protecting medical patients’ continued access to cannabis. Concerned that adult use sales wouldn’t leave enough supply for patients, the state mandated a cap of ¼ ounce of cannabis for all adult use purchases. Lieutenant Governor Susan Bysiewicz commented that this action emphasized the importance of “not losing sight of a very robust medical program.”

Lt. Gov. Bysiewicz speaks to an audience on the day adult sales became legal, outside of the ZenLeaf Meriden dispensary.

With the recent strong sales of adult use cannabis, however, patients have expressed concern about access, and now the Nutmeg State is considering further action. A bill is being considered in the state legislature which would create a state cannabis ombudsman. This individual would act as a liaison between patients and the state and would, in effect, be there to put pressure on the four licensed growers. These cultivators are required to submit a medical cannabis preservation plan to “ensure against supply shortages of medical marijuana products” and are in many ways responsible for continued patient access to cannabis.

Licensing Fees

Connecticut lottery winners’ license fees will vary from $1,000 for a micro, to $25,000 for a retail, to $75,000 for a cultivator, subject to a 50% reduction if the applicant is deemed social equity. However, once the field is open to regular applicants, the fees will become sizeable.

Retail license fees will be $1 million and cultivation license fees will be $3 million, and even with a 50% reduction for an Equity Joint Venture application, the investment will be significant. The $1 million fee also applies to any existing medical dispensary that wishes to convert to a hybrid license without going through the lottery process. The four existing cultivation companies that wish to service the adult use market and avoid a lottery process will have to pay the $3 million as well.

Tax Issues

Connecticut cannabis-businesses are obligated to pay a sales tax of 6.35%, a gross receipts tax of 3% and a privilege tax of $0.00625-$0.0275 per mg of THC, depending on the item. Other than New York, Connecticut is the only state to have a tax based on the potency of the cannabis product.

Federal Tax Subject to Section 280E

On the federal level, cannabis businesses are subject to Internal Revenue Code Section 280E, which disallows deductions and credits for expenditures connected with trafficking in controlled substances under the Controlled Substances Act, schedule 1 or 2. As cannabis is a schedule 1 drug, cannabis companies are only permitted to reduce their sales by cost of goods sold when determining their taxable income. By example, a cannabis dispensary would only be allowed to deduct the cost of the product purchased and the cost to transport the product to the dispensary, while disallowing such significant expenses as rent and payroll. All cannabis businesses must forgo expense deductions related to selling, general and administrative expenses, as they are disallowed under the tax code.

While some states like California have not conformed to 280E and allow their cannabis businesses the same deductions as other businesses, Connecticut is not one of those states. Personal income tax starts with Federal Adjusted Gross Income while corporate income tax starts with Federal taxable income as reported on line 28. There are no provisions that say Section 280E does not apply. This will mean a significantly heavier state tax burden for cannabis businesses.

Labor and Employment Issues

Cannabis is expected to fuel significant employment growth in Connecticut, and experts project more than 11,000 cannabis jobs will be added once the market reaches full capacity. These jobs are expected to include full time and temporary positions in all cannabis verticals: cultivation, manufacturing, distribution, retail, marketing, testing, finance, accounting, legal, compliance and C-suite.

As part of its social equity program, the state has made it clear it would like to see cannabis businesses employ individuals from those communities that have been disadvantaged by the war on cannabis. Connecticut has also made it a requirement that every approved licensee enter into a “labor peace agreement” with a labor union, and that such an agreement shall be an “ongoing material condition of licensure.”

The state is focused on maintaining quality control on all aspects of its adult use cannabis businesses, including the people involved. Licenses are needed for all cannabis employees along with a special license for key employees in managerial positions. Additionally, financiers must be licensed, with a Backer license required for individuals with direct or indirect financial interests in a cannabis establishment totaling 5% or more.

Connecticut cannabis employees must be pre-trained through the state’s Social Equity Council. The state also requires that each license recipient have a workforce development plan approved by the Council “to reinvest or provide employment and training opportunities for individuals in disproportionately impacted areas.”

In Summary

No adult cannabis state has come close to having a smooth opening for it adult use sales program, and Connecticut is no exception. With well-funded groups gaming the license lotteries and medical patients concerned about their continued access to cannabis, the Nutmeg State has its work cut out for it. But with its strong commitment to social equity and its outsized commitment to protecting its medical cannabis patients, Connecticut can serve as a role model for compassionate cannabis capitalism. 2023 will reveal how the state rises to its challenges and matures its cannabis marketplace.

February 14, 2023

New Jersey’s Careful Approach to Cannabis: Part One

By Abraham Finberg, Simon Menkes, Rachel Wright

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This is Part One where we examine the state of the market, licensing, approvals and sales. Part Two will delve into all things taxes. Stay tuned for Part Two, coming next week!

On the surface, New Jersey’s new adult use cannabis program is similar to the program of its larger neighbor across the Hudson. Like New York, New Jersey is attempting to right generations of social wrongs by providing support for disadvantaged applicants and expunging people’s records for prior cannabis-related offenses.

However, the Garden State is in many ways a more cautious state. It is, after all, one of only two states where it’s still illegal to pump your own gas. Although the Cannabis Regulatory Enforcement Assistance and Marketplace Modernization Act (the CREAMM Act) became effective August 19, 2021, New Jersey has gotten off to a slow start. April 22, 2022 marked the first day of legal adult use cannabis sales, and only thirteen dispensaries participated, all of them Alternative Treatment Centers (medical cannabis dispensaries) who’d received a coveted “Authorization to Operate” from the state’s Cannabis Regulatory Commission (CRC).

Types of Licenses

In addition to the standard types of cannabis licenses: retailer, cultivator, manufacturer, wholesales, distributor and delivery, New Jersey has also approved a microbusiness license, which will be limited to 10 employees or less and 2,500 square feet or less of operation space. A cannabis business may apply for more than one type of license.

The State Capitol in Trenton, New Jersey

The CREAMM Act limits the issuance of cultivator licenses to 37 (not including cultivation licenses issued to microbusinesses). However, the state has decided to abolish that cap in order to boost the sagging cannabis market, and the cap will expire February 22, 2023.

The CREAMM Act also describes three special sub-types of licensees:

Certified diversely-owned business – the state wants to issue 15% of licenses to minority-owned businesses and 15% of licenses to woman-owned and disabled veteran-owned businesses.
Social Equity business – owned by people who have lived in an Economically Disadvantaged Area. Will receive special priority.
Impact Zone business – located in an Impact Zone (towns with higher-than-average unemployment, crime and cannabis arrests), owned by people from an Impact Zone, or employing residents of Impact Zones. Will also receive special priority.

License Fees

Licensing fees vary widely, from $1,000 for a microbusiness, to $10,000 for a retailer and from $5,000 for a small cultivator to $50,000 for the largest cultivation operation. Alternative Treatment Centers applying for adult use licenses will pay $100,000 for a single dispensary, $400,000 for a single cultivation license and up to $1,000,000 if they’re a vertically integrated business with 3 adult use dispensaries.

“FINAL AGENCY DECISION: APPROVAL” Doesn’t Mean Approval To Operate

As of February 9, 2023, approximately 950 cultivators, dispensaries, and manufacturers had received CRC letters marked “FINAL AGENCY DECISION: APPROVAL OF CONDITIONAL LICENSE APPLICATION.” However, the letter stated recipients “shall not engage in purchasing, possessing, selling…cannabis or cannabis products.” Instead, it gave permission to 1) rent/purchase a site, 2) gain municipal approval and 3) apply to the CRC to for conversion to an annual license, which will allow them to actually operate. The conditional license phase is 120 days with an automatic 45-day extension.

On October 27, 2022, the first 18 annual adult-use licenses, which do allow the holder to open an adult use cannabis business, were issued, and as of January 13, 2023, only 46 annual adult-use licenses had been awarded.

Notoriety doesn’t seem to be moving the time table much faster. Famous rapper and actor Ice T and his ex-playboy bunny partner, Charris B, have been given conditional approval by the CRC and have obtained location approval from Jersey City. They are now waiting for conversion to an annual license, which as of mid-February 2023, they had still not been granted.

Current Sales

From April 22 to the end of June, New Jersey had collected $4,649,202 in tax revenue from sales of adult use cannabis. That amount included $219,482 in Social Equity Excise Fees and was based on $79,698,831 in total sales of adult use cannabis. The 3^rd quarter of 2022, July through September, saw a jump in sales of adult use cannabis in New Jersey to $116,572,533. With medicinal cannabis sales included, the total went up to $177,710,764.

Stay tuned for Part 2, covering taxes in the Garden State, coming next week!

September 2, 2022

Twelve Tips for Scaling Your Cannabis Business

By Eric Schlissel

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We know a thing or two about scaling a cannabis business. While we don’t own a plant-touching business ourselves, we have helped companies like Tokyo Smoke, Superette and Northern Helm to open dozens of dispensaries in less than 3 years as their IT company. Here are some of the things we’ve learned along the way.

Find reliable partners

You can’t do it all alone. Especially when you’re trying to grow fast in a new industry like cannabis. Find reliable external partners you can depend on in areas like construction, design, staffing, financing, legal, real estate, accounting, HR, IT and security. If you’re just starting, consider dividing the work between competing firms, then committing to the one that performs the best.

Maintain consistency

You don’t want to reinvent the wheel with every new location. Develop standardized processes, procedures and equipment as early as possible. This is critical for aspects of your business like efficiency, profit margins and brand awareness.

We work with our clients to develop a standard IT stack (all the same hardware, software and configurations). This makes setups quicker and cross-location management easier and can make you eligible for bulk purchasing discounts.

At the same time, if any of them don’t work out, switch them out as soon as possible. Don’t compound the error by sticking with what isn’t working.

Develop standardized processes, procedures and equipment as early as possible.

Also don’t be afraid to try new things here and there or make each location unique in more subtle ways. Our clients at Superette are a great example of keeping their brand consistent enough across their locations that you know it’s a Superette store just by looking at it; at the same time each store is just a little bit different so that each location is a unique experience.

Leverage multi-site tech

Most cannabis software is web-based and lets you manage multiple different locations in a single platform. Make sure to make good use of this and not use different software for different locations.

This goes for a lot of non-cannabis-specific software too, like Sage, Office 365, Google Workspaces and Solink (a platform that lets you manage all your surveillance systems in one dashboard, and integrates with your POS or ERP).

Use compliance and licensing software

Cannabis regulations can vary widely not only state by state but city by city. Keeping up with all these regulations can be difficult even if you already have a legal expert to rely on.

Compliance software like Simplifya, ProCanna and BuildMySOP let you quickly figure out what the regulations are in a given area, which can make it easier to find a good location, get set up and stay compliant. These applications, along with licensing trackers like Cannabiz Media, can also help you find where cannabis license opportunities are available and send you alerts whenever a state or city is accepting new applications.

Buy materials ahead

This is especially important now with the supply chain crisis still going on, but in general it’s a good idea to start gathering all the materials you need as soon as you’re certain about expanding. In IT in particular, pretty much everything including cash drawers, receipt printers, tablets, POS terminals, firewall appliances and laptops has been in pretty short supply. We’ve heard that it’s the same for just about all materials that go into setting up a new cannabis location whether it’s a dispensary, cultivation, distribution or manufacturing facility.

Lab technicians use the Hunter device during a test process. InstantLabs manufactures the Hunter system as well as test kits for food pathogens and species identification such as the catfish testing commercialization agreement outlined with the FDA. — In IT in particular, pretty much everything has been in short supply.

We’ve stayed on top of it and avoided delays by buying months ahead, purchasing a surplus of product and maintaining close communication with our vendors and distributors; we suggest you do the same for any products you’re purchasing internally.

If you’re buying online and the store says “in-stock,” you may want to contact the store/vendor to double-check that it’s accurate. Sometimes you buy it and you find out that “in-stock” means its parts are “in-stock” in a factory in Asia somewhere and your product is still months away from being manufactured, shipped and delivered to you.

Promote from within

When you’re growing is a good time to promote the all-stars already on your team, giving them a chance to expand their skills and take on greater responsibilities. We’ve seen this with some of our clients where they promote their star budtenders to shift leads or managers at their new stores, and store managers to district managers in new territories. It works out for everyone – the employee gets a raise and a step up the ladder, and you ensure you maintain your company’s culture and fill important positions with people you already know and trust (not to mention it’s often more cost-efficient to hire from within like this than to bring in someone new).

Hire from without when necessary

Sometimes promoting from within isn’t an option, like when you need someone with a particular skillset or level of experience.

Maybe your current COO has done a great job opening and operating 5 stores, but what about 50? If you want a sure thing, you’ll want to hire someone that’s already shown they can handle 50 or more stores, and most likely you’ll have to look outside the cannabis industry to find it.

You’re seeing this more and more in the cannabis industry – some are promoting from within, but many are also hiring experts from other companies and from outside the industry, including lots of people with strong retail, food manufacturing, merchandising, packaged goods and highly regulated goods (especially alcohol) backgrounds.

This can be more expensive than promoting from within and can potentially have a negative influence on company culture and morale, but on the other hand you’re getting valuable expertise that can help you take your cannabis business to the next level; and plus, you may even be able to hire these people at a relative bargain since there are many out there that are eager to work in such an exciting, new and high-growth industry.

Be ready for things to break down

Even if you’re fully prepared, you should still expect some kind of hiccup or hurdle with any new location rollout. It’s just the way it is on projects with an ambitious timeline and a lot of moving parts. The usual culprits are routine construction delays, cable companies and other utilities screwing up, storms, and having to adjust your schedule according to government inspectors on short notice. On some of our jobs in Canada, for example, we’ve run into a few blizzards and cameras and wires getting knocked out/frozen over; and on one occasion we were moderately inconvenienced setting up a store just up the street from the 2022 Ottawa trucker protests.

Don’t panic, don’t get frustrated. Your careful planning will at least ensure that most things go right, giving you the flexibility to react to the things that don’t.

Consider avoiding unlimited license markets

There’s a reason many MSOs avoid unlimited license markets like Oklahoma and Oregon. Limited license markets provide protection against competition. Unlimited license states are often free-for-alls and a race-to-the-bottom on pricing. They’re much tougher markets.

Have a vision

Rather than just wanting to grow and make a lot money, it can be helpful to have a unique, compelling and somewhat clear vision for your company, like Superette’s “making buying cannabis as fun as using it.” This helps you motivate your team, maintain your focus and cohesiveness as you add lots of new people, and differentiate yourself in a crowded market.

Consider franchising where it’s legal and makes sense

Our client Tokyo Smoke has opened over 80 locations in just over 3 years of operations. If that seems like too much growth for one company, you’re sort of right – some of Tokyo Smoke’s stores aren’t company-owned, they’re actually separately owned and managed franchises.

Now franchising a cannabis business isn’t legal everywhere at the moment, but where it is legal it’s a time-tested method of growing your brand and company footprint fast, and establishing dominant mindshare and market share that can’t easily be challenged or reversed.

Consider M&A

Sometimes M&A is the only option for breaking into a new market, like if the market is already oversaturated or not accepting new applications. Established cannabis businesses can start at $1-$10 million per location depending on the situation. Don’t quote us on it, but with some markets becoming saturated and sales declining in areas like Oregon and Canada, you may be able to get a good deal from someone that wants out of the business before things gets worse – assuming you’re bullish on a market rebound or think you can perform better in the market than the current owner.

August 11, 2022

M&A in Cannabis: A Guide for Buyers and Sellers

By Abraham Finberg, Rachel Wright

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Mergers and acquisition activity in the cannabis space tripled from 2020 to 2021, and that pace is on track to continue in 2022. With big players entering the global cannabis market, we’re fielding more questions about mergers and acquisitions of cannabis businesses.

In this guide, we look at the evolution of the U.S. cannabis industry and some best practices and considerations for M&A deals in this environment.

The New Reality of Cannabis M&A Activity

The industry has evolved since adult use cannabis was first legalized in some U.S. states in 2012. More cannabis companies have a professional infrastructure—legal, financial and operational—with executive teams and board members ensuring the organization establishes proper governance procedures. Investors and private equity firms are showing more interest, and some cannabis companies have celebrated their first IPOs on the Canadian Securities Exchange (CSE).

At the same time, we are seeing a kind of “market grab” by multistate operators (MSOs) looking to acquire various licenses and expand their market share. MSOs tend to understand the current state of the market. For example, in California and some other states, there is a surplus of cannabis on the market for various reasons, partially due to so-called “burner distribution”—rogue distributors using licenses to buy vast amounts of legally grown cannabis at wholesale prices and selling the product on the black market, thereby undercutting retailers and other legal cannabis businesses. Another reason for the surplus is simply the entrance of many legal cultivators into the market over the past year.

Due to these trends, MSOs are interested in acquiring the outlets to be able to sell the surplus cannabis within California and other new markets.

Transferring Cannabis License Rights

One of the biggest challenges to M&A activity in the cannabis sector is the difficulty of transferring or selling a cannabis license.

Different types of cannabis licenses in California

Cannabis licenses are not expressly transferable or assignable under California law and many other states. However, the parties involved aren’t without options. For example, a business that is sold to a new owner may be able to retain its existing cannabis license while the new owner’s license application is pending, as long as at least one existing owner is staying on board. At the state license level, a change of up to 20% financial interest does not constitute a change in ownership, although the Bureau of Cannabis Control (BCC) must be notified and approve the change.

This process can take a while—often a year or more—since licensing involves overcoming hurdles at the local level as well as the state level with the BCC. It’s crucial to talk with legal counsel about the particulars of the license and location early in the process to best structure the terms of the agreement while complying with state and local requirements.

Seeking a Tax-Free Reorganization in the Cannabis Space

In many cannabis mergers and acquisitions, the goal is to accomplish a tax-free reorganization, where the parties involved acquire or dispose of the assets of a business without generating the income tax consequences that would result from a straight sale or purchase of those assets.

IRC Section 368(a) defines various types of tax-free reorganizations, including:

Stock-for-stock exchanges (IRC Section 368(a)(1)(B)

In a stock-for-stock reorganization, all of the target company’s stock is traded for a portion of the stock of the acquiring parent corporation, and target company shareholders become minority shareholders of the acquiring company.

Often, it’s tough to meet the requirements to qualify for this type of tax-free reorganization because at least 80% of the target stock must be paid for in voting stock of the acquirer.

Additionally, companies may be saddled with too much debt. If the acquirer assumes that debt, it may be classified as consideration paid to the seller and therefore disqualify the transaction as a tax-free reorganization.

In other M&A deals, the acquiring corporation may be unwilling to assume the debt of the target corporation—perhaps because showing these items on its balance sheet would impact its debt-to-equity and other financial ratios.

Stock-for-asset exchanges (IRC Section 368(a)(1)(C)

Rather than acquiring the target company’s stock, the acquirer may purchase its assets. In a stock-for assets exchange, the buyer must purchase “substantially all” of the target’s assets in exchange for voting stock of the acquiring corporation.

A stock-for-assets format offers the buyer the benefit of not having to assume the unknown or contingent liabilities of the target. However, it’s only feasible if the acquirer purchases at least 80% of the fair market value of the target’s assets AND all or virtually all of the deal consideration will be stock of the acquirer.

Tax Consequences Arising from Sale of Assets

If the sale price doesn’t consist primarily of the buyer’s stock, the transaction may be a standard asset sale. This leads to very different tax results.

If the seller is a C corporation, it will typically face double taxation—paying tax once on the sale of assets within the corporation and again when those profits are distributed to shareholders. If the target company has net operating losses (NOLs), it can use those NOLs to offset the tax hit.

If the seller is an S corporation, it won’t have to pay corporate tax on the transaction at the federal level. Instead, shareholders will pay tax on the gain on their individual returns.

For the buyer, the benefit of an asset sale is that the assets acquired get a “step-up basis” to their purchase price. This is beneficial from a tax perspective, as the buyer can depreciate the assets and may be able to claim accelerated or bonus depreciation to help offset acquisition costs.

Reverse Triangular Merger

Often, in practice, we come across what is termed as a reverse triangular reorganization. In this type of merger,

The acquiring company creates a subsidiary,
The subsidiary merges into the target company before liquidating,
The target company then becomes a subsidiary of the acquirer, and
The target company’s shareholders receive cash.

Structuring the deal this way may work to overcome the hurdle of transferring the license but may not qualify as a tax-free reorganization.

Bottom Line

The circumstances and motivations for mergers and acquisitions in the cannabis industry are diverse. As a result, there is no one-size-fits-all approach to structuring the transaction. In any event, it’s crucial to start the process early and seek advice from legal counsel and tax advisors to minimize the tax burden and ensure that both parties to the transaction get the best deal possible. If you need assistance, contact your 420CPA strategic financial advisor.

July 20, 2022

Cannabis Receiverships: A Viable Alternative to Bankruptcy

By Oren Bitan

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Doing business in California’s legal cannabis industry remains a risky endeavor. The majority of the industry is still unlicensed, tax rates at the state and local levels are high (notwithstanding a recent reprieve from California’s cultivation tax) and there are not enough licenses to meet geographic demand throughout the state. Outside financing remains difficult to secure for equipment, tenant improvements, account receivables and working capital because, under the federal Controlled Substances Act (CSA), cannabis remains a Schedule I narcotic. Therefore, entrepreneurs, investors and lenders who have stakes in state-sanctioned cannabis enterprises expect to see returns that justify the higher level of risk, which places additional financial pressure on cannabis businesses. In addition to the industry specific challenges, the United States economy is on the verge of a recession that may further hamper the industry notwithstanding the industry’s resiliency during the pandemic when it was deemed to be an “essential” industry that benefited from consumer spending of stimulus monies.

These outside pressures increasingly lead to ownership disputes and creditor defaults that result in litigation and the need for restructuring. In some instances, business partners cannot agree about control and finances of the licensed businesses and in other instances unpaid creditors file suit to enforce their interest in a company’s assets. And sometimes a local municipality discovers wrongdoing by an operator and initiates a health and safety lawsuit to cease the illegal condition.

Bankruptcy reorganization is an option typically utilized by struggling businesses to shed or restructure debt. Cannabis businesses, however, cannot take advantage of bankruptcy remedies because bankruptcy is a product of federal law and federal law still prohibits the sale of cannabis.

As a result, stakeholders in legal California cannabis enterprises must consider alternatives to bankruptcy to collect what they can on their loans and investments in the event the enterprise becomes insolvent or requires restructuring. A well-established alternative to bankruptcy is a state court remedy – the appointment of a receiver over the assets of a business or over the entire business operations. Through the receivership process, stakeholders may obtain many of the same protections available to them through bankruptcy

A. Federal Illegality Bars Access to Bankruptcy Protection

Over the past ten years, bankruptcy courts have routinely prohibited licensed cannabis businesses from seeking bankruptcy protection because cannabis remains illegal at the federal level under the Controlled Substances Act (CSA). Bankruptcy trustees are typically charged with managing and operating property in the same manner that the owner would be bound to do if in possession thereof. Because cannabis remains illegal at the federal level, trustees are not able to manage and operate licensed cannabis businesses.

B. Receivership as an Alternative to Bankruptcy

Under California law, a receiver is a neutral agent of the court appointed to preserve, control, manage and ultimately dispose of property that is subject to the litigation before the court.¹ The receiver, therefore, holds property for the court, not the parties to the litigation.

Appointment of a receiver is a statutory provisional remedy. Other than corporate dissolutions under Code of Civil Procedure section 565, the law does not have a specific cause of action to appoint a receiver. Thus, the proponent of a receiver must have a valid cause of action in an underlying lawsuit.

1. The Appointment of a Receiver

The appointment of a receiver rests within the trial court’s discretion. Code of Civil Procedure section 564 contains the broadest statutory authority to appoint a receiver. Subdivision (b), details twelve possible situations in which a receiver may be appointed, most of which are beyond the scope of this article. The most common of these is a lender’s request to appoint a receiver when a borrower defaults on a loan and the lender seeks the appointment of a receiver over its collateral. The statute, however, clarifies that the situations listed in the statute are not exclusive: a court may appoint a receiver “[i]n all other cases where necessary to preserve the property or rights of any party.”

The receiver’s powers are limited by the statute under which the court appointed the receiver and those conferred by the court. The appointment order should, therefore, detail the duties the receiver owes to the court, and actions that the court authorizes the receiver to take to perform those tasks. The order should also specify the property that will be part of the receivership estate.

2. The Receiver’s Powers

The receiver has general statutory powers.² The statutory powers include (i) commencing or defending litigation; (ii) taking and possessing property of the receivership estate, (iii) receiving rent, collecting debts, and making transfers, and (iv) acting in accordance with the court’s instruction with respect to the property.³ But the court’s authorization is necessary to sue the receiver and for the receiver to commence litigation.⁴ In the foregoing scenarios, the receiver is immunized personally from tort liability, but not in his or her official capacity as receiver.⁵

In addition to taking possession of property, the receiver may dispose of receivership property with the court’s approval.⁶ If the receiver is an equity receiver, the receiver may take possession and satisfy creditors from all the debtor’s assets.⁷

The court may further authorize the receiver to issue “certificates of indebtedness” to raise money to administer the receivership estate.⁸ This device permits the receiver to provide liquidity to the estate and gives the certificate holder an interest-bearing priority claim against the receivership estate.

3. Liquidating Cannabis Assets Through a Court Appointed Receiver

After the court appoints the receiver, the receiver should have sufficient powers to, among other things: (i) take over the management of the company; (ii) open bank accounts; (iii) borrow money by issuing receivership certificates; (iv) manage all of the company’s property; (v) hire counsel and other professionals; and (vi) sell the receivership estate’s assets for the benefit of the creditors. To maximize repayment to the creditors, the receiver may hold an auction to sell the assets and assist in facilitating the cancellation of company’s state license while the buyer of the assets secures its state license after the local license is transferred.

State cannabis licenses may not be sold or transferred.⁹ Yet, to maximize recovery for the creditors, the receiver may need to participate in the regulatory process to maintain a license during the pendency of the receivership and to assist in the amendment of a license while a prospective buyer seeks to obtain its own license. To do so, the receiver will first need to qualify as a licensee under state law to join as a licensee on the license and further the licensee as a going concern. Next, the principals of the prospective buyer will themselves need to qualify as licensees under the license. Then, once the sale of the company’s assets (including any interest in the license) to the buyer closes, the receiver and the company’s original owners will terminate their capacities as licensees of the license, leaving only the new owners as licensees. Thus, the proposed order should be written with attention to ensure the receiver has powers to further the foregoing and not diminish the value of the receivership estate.

After the conclusion of the sale of all assets, the receiver will need to obtain a discharge from the court of his or her duties as receiver. The receiver may do so by the parties’ stipulation or by motion. Together with the request for a discharge, the receiver should seek approval to pay: (i) any lenders to the receivership estate; (ii) professionals that the receiver hired; and (iii) him or herself for his or her services. Upon the court’s approval, the receivership will be terminated.

The conflict between federal and California law regarding cannabis continues to be an impediment for stakeholders in California’s cannabis market. Because of this conflict, stakeholders in California’s legal cannabis market lack access to vital traditional institutions, such as bankruptcy remedies. As a result, stakeholders must be prepared to consider alternatives such as a court appointed receiver, which can be a useful alternative to both secured creditors and unsecured creditors. Stakeholders who pursue a court appointed receiver will benefit from a long-established body of law and experienced professionals.

References

Cal. Rules of Ct., r. 3.1179(a).
Cal. Civ. Proc. Code §§ 568-570.
Free Gold Mining Co. v. Spiers, 136 Cal. 484, 486 (1902); Steinberg v. Goldstein, 129 Cal. App. 2d 682, 685 (1954).
Vitug v. Griffin, 214 Cal. App. 3d 488, 493 (1989).
Chiesur v. Superior Court, 76 Cal. App. 2d 198, 201 (1946).
Helvey v. U.S. Bldg. & Loan Ass’n, 81 Cal. App. 2d 647, 650 (1947).
Turner v. Superior Court, 72 Cal. App. 3d 804, 812 (1977).
Cal. Civ. Proc. Code § 568.
See e.g., Cal. Code Regs. tit. 16, § 5023(c).

June 28, 2022

The Story of Chris Lacy: Social Equity & Hope in Cannabis

By Cannabis Industry Journal Staff

7 Comments

Christopher Lacy and The TGC Group recently won a Tier 3 conditional license under New Jersey’s social equity licensing program. Their story is one of misfortune, persistence, family and the dreadful effects that cannabis prohibition and the War on Drugs has had on impoverished BIPOC communities.

Chris’s father was a sharecropper in Mississippi before he moved to Illinois and started a family. Growing up in a poor neighborhood of Chicago, Chris was surrounded by gangs and crime. He started selling drugs when he was 12 and went to prison for cannabis before he was old enough to drink. When he got out, he saw firsthand the effects that incarceration has on a person, their family and their community.

Back in 2020, Chris Lacy and his wife Taneeshia Thomas applied for a craft grow license under Illinois’s new social equity program. Taneeshia wrote an article for Cannabis Industry Journal highlighting their story.

When it was first announced, Illinois’s social equity program seemed revolutionary and one that other states soon followed, setting the stage for markets all over the country to establish social equity licensing programs. However, legal hurdles, red tape and intense litigation have bogged down the system, causing severe delays. Chris and Taneeshia are still waiting to hear back about approval of their license application, years later.

Good news came recently when they were notified that they were awarded a conditional license in New Jersey. With the help of his family, business partners and The Garden State, The TGC Group is moving forward with launching their business. We caught up with Chris, to check in on his business’s progress, hear his story and see if it might inspire others to take a similar path.

Cannabis Industry Journal: Tell me a little bit about yourself and your story with cannabis

Christopher Lacy, Founder of The TGC Group

Christopher Lacy: I grew up on a dead-end block in a little town in Illinois on the far south side of Chicago called Robbins. It has a very high crime rate and a very impoverished community so as you could imagine we grew up pretty poor. I personally didn’t feel the effects of poverty until just before I turned 13. I guess that became more obvious as I started hanging out and seeing that most of my friends had more than 2 pairs of pants. I starting selling drugs when I was 12 years old. When I was about 16-17 years old, I had started trying to grow cannabis. Like any task, it takes time to develop the skills produce a good product. Cannabis definitely has it challenges when it comes to cultivating a product that could be considered good.

It’s not like there was an abundance of information out there specific to cannabis cultivation to aid in the task so besides the basic book knowledge of horticulture, you had to grind it out. It took me a couple years to really get it figured out. Once I did get it going, I started expanding. At first it was basements in the suburbs. We’d grab really nice houses and fill the basements with plants. When that wasn’t enough, we started doing warehouses. There was no real limit, outside of capital and the desire to not draw attention via odor or traffic from workers, if you could produce it, the demand was there. I did go to prison for a short stint when I was 20 years old for delivery of a controlled substance. 0.8 grams. After I got out of prison, I had a very successful illegal operation growing and selling cannabis. Life was pretty good for a few years. I wasn’t rich or anything like that but I was able to be around my family and provide the things that I was denied when I grew up. I don’t blame my parents for what I went through growing up. Because of my father’s age, I’m generation 1 out of the sharecropping era. My parents believed in one thing and that was learning. I tried to instill that into my kids as well. Being a father feels really good to me. Unfortunately, that dream was ended when I was arrested in one of our warehouses in Illinois. I did 3.5 years, locked down 21 hours a day for growing weed.

While serving my time I was able to really take a look at myself and develop a new me. I established some new core principles that I would hold close to my heart. One of them being not going back to jail for the sake of a dollar. I was not going back to prison. I had kids when I was young so I missed out on a big part of their childhoods. I had three daughters and two sons at the time that were of an age where having a stable home plays a huge role on how the child will turn out in the future compared to a typical American lifestyle. When I got out of jail, my kids came and lived with me during and after high school but some serious damage had already been inflicted. I worked a job as a truck driver and did the best that I could to support my family, but I never really gave up on cannabis in the back of my mind. My older brother used to always tell me that I didn’t learn what I knew about weed for nothing and that one day it would all make sense.

For the next few years, we just grinded it out as a family. It wasn’t the ideal situation but we made it work. And when we couldn’t make it work, we lived with it! I just was glad to be there doing Chemistry homework with the kids. That shows what happens when a father is at home with his family. We get college grads.

When the message came out that Illinois was going to do craft grow licenses, I got really excited. I figured this was my chance to do what I love and to make a living doing it. I had no idea how I was going to get to where I wanted to be but I figured if I could just put one foot in front of the other, sooner or later I would get there. I caught a break when my nephew, Edward Lacy, introduced me to someone who understood the application process. She introduced me to some of the most wonderful/helpful people in the world. People who literally wanted to help true social equity applicants like myself. With the help of these new friends, we were able to drop our first application in Illinois. After we submitted that application, that is when the first story came out about us in Cannabis Industry Journal. This story helped me get into a conversation with Cresco labs and I was able to get into a situation that really changed how I saw cannabis production. I got to work around some of the smartest people in the industry for just under a year. I can’t thank Charlie, Barrington and the rest of the guys at Cresco enough for the opportunity. From there, I knew it had to be my destiny to grow cannabis for a living. I just kept beating up the phones and emails. Something was gone give.

CIJ: When we last spoke, you were trying to get a social equity license in Illinois, can you tell me about that? How did it go?

Chris: Ultimately, after 2 years of waiting, we were denied a license in Illinois. When I first got this news. it took me about a week to get out the bed. Lol. It took my wife to pull me through. I can only imagine the pain that all the other disappointed groups are feeling, Ultimately, we all couldn’t win in Illinois so it is what it is. But definitely a big shout out to all the successful applicants that did win. You all have a torch to carry that should ignite the black and brown communities.

From the political standpoint in Illinois, it’s just not conducive for social equity applicants to succeed due to all of the legal hurdles, courts, lawsuits, etc. Not to say that the Illinois process is truly different from other states going through similar processes, New Jersey and other states went through a similar process when social equity licenses were announced. The laws that helped me qualify are what came out of the legal battles in New Jersey. The issue is the resources available for legal fees, holding property, and the time required to see these things through; this all equals dollars and that’s just something lacking in most social equity groups.

CIJ: So, what made you look at New Jersey?

Chris: After I had submitted my application in Illinois, I began looking for financial support. I knew this would be my limiting factor because access to the type of capital required to get a grow facility off the ground is quite substantial. For the most part no one returned calls but I called one financial institution in particular, VenCanna Ventures, and for some miraculous reason, they returned my call. I’m not sure what made them; but we kept an open line of communication going all while we were dealing with Illinois. I knew these guys were good because they were behind an impressive project in Ohio that actually won LEED certification. When I look back on it, it felt like a one-year interview. Then one day this past winter David McGorman, the CEO, asked me to partner up with him in New Jersey. It was exactly what we both needed. He has the expertise in finance and I bring the operations side.

Christopher with his daughter, Janeace Lacy

Once we had that team together, we put together a strategy to try and apply in New Jersey. We built the application and New Jersey actually had some very unique laws. If you had a cannabis conviction, you could qualify. Also, my oldest daughter, Janeace, whom I think my prison time hurt the most, actually lives in New Jersey with my granddaughter. So, she’s our resident in the state that helped us win the application and now a part owner, which led us to where we are now. I just couldn’t be more excited about all of this. It just feels right

We won a tier 3 conditional license and now we’re working on finding a good facility and building the operation.

CIJ: How did you set up your social equity license application for NJ?

Chris: It was a process very similar to Illinois except that the process was split into two phases. A conditional license and an annual license. Phase one was winning the conditional license. This is a more condensed application compared to what I was used to. After filling out the application, we had to submit a bunch of documents and proof of incarceration. That was for the conditional license. We still have to convert the conditional to the annual. The conditional basically tells us that we qualify and we can move forward with the rest of the business plan, find some property and spend some money on a lease. We’re still in that process for converting to annual, but we have won the conditional.

CIJ: What is your plan now that you’ve received conditional approval?

Chris: Right now, we’re working on property and securing a space for our facility. We are pretty close to nailing down a couple good locations. One of the locations that I am really excited about is in Somerset County. If we can lock down the property, submit everything to the state as far as our SOPs, security plans, cultivation plan, design, etc. we can try get approval to convert to the annual license and then we can start the build out. The good thing about the two-step process is that it really helps when it comes to spending money. Basically, if you don’t win a conditional, don’t go out spending tons of cash trying to hold onto property.

CIJ: You’ve come a long way from being put in prison for cannabis, to now being close to establishing a business in New Jersey. What made you decide to stick with the business of cannabis?

Chris: You know, I can’t really describe it very well. It was just one of those feelings, you know it felt good to me. It drew me in when I was a young kid, although, I actually didn’t try using cannabis until I was 21. That’s when I first used it and it really jelled with me. Also, I’ve always loved gardening.

My father was a sharecropper in Mississippi, when our family moved to the suburbs of Chicago the first thing he did was plant a huge garden. I grew up in the garden and around plants. He used to spend so much time in that garden and I loved being there with him. We grew everything out there year after year until he was too old to keep it up. I can’t imagine a more peaceful environment then out in the fields with the plants.

It was also therapeutic, not just the obvious therapeutic aspects of cannabis, but also how therapeutic gardening is. Working with cannabis plants can be a challenge. To try to achieve unique terpene and cannabinoid profiles has always been a lot of fun for me. I love the challenge. Pushing genetics as far as I can to really experience what different cultivars have to offer. It is just one of those things that has always stuck with me and I really enjoy it. Once it became legal, a world of opportunity opened up for me.

You know, people say if you do something you love, you’ll never have to work a day in your life. I was a truck driver after I got out of prison, and I really didn’t like it. I had to have neck surgery from the pounding my spine took. I had to work long hours, man I hated doing it. On the flip side, cannabis is something I love to do. And this is about me trying to control my own destiny, control my own life. I don’t have to struggle mentally and physically just to provide for my family. That’s what keeps me going – the drive to do what I love to do to provide for my family. I see cannabis cultivation as more of an art than I do anything else. The guy behind the growing at any facility in the country could share with people what he believes to be fire. I just love to provide an experience and there’s nothing more satisfying than a satisfied customer. Everything about this process seems to fit perfectly with my life.

CIJ: It’s a pretty inspiring story. How do you hope your story might inspire others to follow in your footsteps?

Chris: I don’t want someone to follow in my steps as far as breaking the law and going to prison. I had to learn this the hard way, you know I didn’t agree with the law, but it doesn’t matter. Whether you agree or disagree with the law, I don’t advise anyone to be a criminal.

On the other hand, I do believe that black and brown people have been impacted by the war on drugs the most. In whatever capacity they can, they should chase the opportunity in this country as the cannabis market evolves. It’s a new industry, it’s a way for people to build wealth, to maybe raise their families out of poverty. So in that sense, yes, I do hope people see my story and see that they could do this too. And if you still out there getting it the best way you know how, God Bless you! Lord knows it breaks my heart every time I see someone get arrested for cannabis. Hopefully that shit stops soon and we can get these mothers and fathers who are basically prisoners of a bogus war, reunited with their families and hopefully they get a chance to rebuild.

This a chance to build generational wealth if it’s done right. I would hope that anyone looking for an opportunity, look into the cannabis space. I know its evolving fast and the window might seem like its closing but that isn’t the case. This is more like the 2^nd inning of a baseball game. There plenty of time to get going.

I don’t think I’m the best role model. I just keeping fighting. And my advice for black and brown folks that might have gone to prison or might be put in a similar situation is this: Its never over. It’s never too late, no matter what somebody does. It’s not the end of the road. It’s just a bump at that moment. Just keep fighting. One step at a time. I do hope that people reach out to me.

I would love to work with anyone as long as they on a positive path, especially convicted felons. God Bless the felons! That’s my number one priority on my list. The guys that have been to prison, the non-violent drug offenders. Our society has a way of shunning those people. Some of the smartest people I’ve met in my life were in prison. It doesn’t speak to the character of an individual because they went to jail. If the system is supposed to work then why is it so hard for a convicted felon to get another chance? Of course, a few people have traversed this path successfully but there are so many more.

CIJ: I know your business is called The TGC Group. Out of curiosity, what does that acronym stand for?

Chris: We’re called TGC New Jersey under our license there and we applied in Illinois under the name, The TGC Group. TGC stands for a lot of things. It has a lot of meanings. I came up with it when I was in prison. I called it The Gathering Company. It was an idea I had because I was reading The Wall Street Journal every day in prison. I wanted to gather people under one umbrella.

But also, my name is Chris, my wife’s name is Taneeshia, (whom I am forever grateful for helping me pull my life together) and we have a son we named Grant. So, the first letter of each of our names also make TGC. It also stands for The Good Choice, because it is a good choice. The Ganja Connoisseur is another good one. I just hope that it grows to be known as a quality brand of cannabis that one can count on for consistent high-quality cannabis. Consistency and quality are what we’re striving for relentlessly.

I hope people read this article and feel inspired. We have a responsibility to give back to the community. We have a responsibility to rebuild what’s been destroyed in our communities. I am just trying to do my part. I was not a nice guy growing up, you know I was a gangbanger. But now, I want to rebuild and give back to my community the best way I can in Chicago. Not just my community, I want to give back to New Jersey communities, because we’re in their house now. I want to give back to Mississippi communities, where my family comes from. I’m not in this to get rich, I am in this to build communities. God willing, we will

May 24, 2022

New York Adds More Conditional Cultivation Licenses

By Cannabis Industry Journal Staff

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Regulators in New York are continuing their push forward in launching the adult use cannabis market. They have approved 58 conditional licenses for hemp growers to begin cultivating cannabis for the adult use market. In just the past few months, the state has already awarded 146 conditional licenses for cultivation.

The Office of Cannabis Management (OCM) in New York also announced their “Get Ready, Get Set” virtual workshop series, designed to help social equity applicants prepare for license applications and better understand the conditional licensing program.

Earlier this year, following an amendment to state law, the OCM launched the conditional licensing program to ensure that hemp farmers in the state with a desire to grow adult use cannabis could get started in the 2022 season.

Applications can be filed with the OCM for conditional licenses through June 30, 2022, with a $2,000 non-refundable application and licensing fee. The licenses are only for farms that have already grown hemp in New York State.

“New York is building the most inclusive cannabis industry in the country and including small farmers with an expertise is an essential component in accomplishing that goal,” says Chris Alexander, executive director at the OCM. “The growing season isn’t waiting for anyone and I’m grateful for the hard work of the CCB and my colleagues at OCM to ensure these licenses are being reviewed as quickly as possible so New York’s farmers can take full advantage of the growing season and cultivate the products that our equity entrepreneurs will be the first to sell when they open their dispensaries this year.”

April 21, 2022

New Jersey Launches Adult Use Sales

By Cannabis Industry Journal Staff

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On Thursday, April 21, a handful of dispensaries in New Jersey begin selling cannabis to adults over the age of 21. The state has so far issued licenses for adult use sales to seven alternative treatment centers (ATCs), otherwise known as medical cannabis businesses already established in the state. In total, thirteen dispensaries in the state can sell cannabis to adults over 21.

The reason why adult use sales could not start on April 20 is because of “unmanageable logistical challenges for patients and other buyers, surrounding communities, and for municipalities,” Toni-Anne Blake, communications director for the New Jersey (CRC) told The Philadelphia Inquirer. “Regulators and industry representatives agreed it was not feasible.”

The seven ATCs awarded adult use licenses are Ascend, Curaleaf, GTI, Acreage, Verano, Columbia Care and TerrAscend. The state’s roll out created a lot of controversy over allowing already established, larger medical cannabis businesses and multi state operators to begin adult use sales before smaller businesses and social equity applicants get licensed.

According to The New York Times, the CRC gave condition approval to 102 companies for cultivation and manufacturing, but they need local approval and real estate before commencing operations. Another 320 organizations have applied for licenses for the New Jersey adult use cannabis market, but could wait up to a year or more before they begin operating.

Regulators in New Jersey say the seven companies commencing sales will need to follow social equity rules, including providing technical knowledge to social equity applicants. “We remain committed to social equity,” says CRC Chair Dianna Houenou. “We promised to build this market on the pillars of social equity and safety. Ultimately, we hope to see businesses and a workforce that reflect the diversity of the state, and local communities that are positively impacted by this new and growing industry.”

Jeff Brown, executive director of the CRC, says they anticipate long lines and crowds. “We expect 13 locations for the entire state will make for extremely busy stores,” said Jeff Brown, executive director of the New Jersey Cannabis Regulatory Commission. “The dispensaries have assured us that they are ready to meet the demand without disrupting patient access, and with minimal impact on the surrounding communities, but patience will be key to a good opening day.”

Adults in New Jersey can purchase up to one ounce of flower, up to five grams of concentrates or up to ten 100mg packages of edibles. Click here for a list of the locations opening their doors for business.

March 18, 2022

The Great Social Experiment: Social Equity in New York

By Abraham Finberg, Simon Menkes, Rachel Wright

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New York is embarking on a great social undertaking. In awarding its adult-use cannabis licenses, under the plan laid out by Gov. Kathy Hochul on March 10, the state is attempting to right generations of wrongs caused by the war on cannabis. The wrongs are numerous and include mass incarceration and complex generational trauma, prevention of access to housing and employment and the forming of an illicit market – all of which have had a disproportionate impact on African-American and Latinx communities.¹

In addition to generating significant revenue for the state, New York hopes to make substantial investments in the communities and people most affected by cannabis criminalization and address the collateral consequences of that criminalization, reduce the illicit market for cannabis and illegal drugs, end the racially disparate impact of existing cannabis laws and strengthen New York’s agriculture sector.²

50% of All Licenses Will Be Social Equity

To accomplish these lofty aims, the state’s goal is to award 50% of adult-use cannabis licenses to social and economic equity applicants – and these licenses will be the first issued.^3,4 The state’s entire focus is on this social equity licensing program; issues regarding non-social equity licenses are not being addressed at this time.

No one knows yet how many licenses will be issued. There are currently only 38 medical licenses in the state, although everyone expects the number of adult-use licenses to be significantly higher. (These medical licenses serve around 140,000 patients with sales in 2021 of around $300 million.)

The First 100 to 200 Licenses

Chris Alexander, executive director of the state’s Office of Cannabis Management, says he expected between 100 and 200 licenses to go first to people who were convicted of a cannabis-related offense before the drug was legalized, or those who have “a parent, guardian, child, spouse, or dependent” with a cannabis conviction. Alexander also said his office would evaluate applicants on their business plans and experience in retail.⁵

What’s the Timeline?

In a recent Q&A interview, Tremaine Wright, chair of New York’s newly-formed Cannabis Control Board (CCB), which will be overseeing the licensing process, stated: “We are setting up a system soup-to-nuts … [final] regulations for the state’s marijuana startups will be issued by the Cannabis Control Board this winter [2022] or early spring [2023] … recreational dispensaries should be licensed to operate by summer 2023.”⁶

Whom Is New York Looking For?

New York has defined social equity applicants as being:

Individuals from communities disproportionately impacted by the enforcement of cannabis prohibition
Minority-owned businesses
Women-owned businesses
Minority and women-owned businesses
Distressed farmers
Service-disabled veterans.⁷

Extra priority will be given to an applicant who:

Is a member of a community disproportionately impacted by the enforcement of cannabis prohibition
Has an income lower than 80% of the median income of the county in which the applicant resides
Was either: (a) convicted of a cannabis-related offense prior to the effective date of the N.Y. Cannabis Law; (b) or had a parent, guardian, child, spouse or dependent; or was a dependent of an individual who was convicted of a cannabis-related offence prior to the effective date of the N.Y. Cannabis Law.⁸

Social Equity Licenses Come With Strings Attached

Social equity licenses cannot be transferred or sold within the first three years of issue. An exception will be made if the license is transferred or sold to another qualified social and economic equity applicant, but this must first be approved in writing by the CCB.⁹

Types of Licenses

While most people appear to be interested in a cannabis dispensary or lounge license, there will be nine types of licenses available: cultivator, nursery, processor, distributor, retail-dispensary, delivery, on-site consumption, adult-use cooperative and microbusiness.

“I don’t hear many people [talking about] processing and manufacturing,” says CCB chair Wright. She noted that processor licenses cover the production of edibles like candy and baked goods, which create a good opportunity to establish a brand.¹⁰

CCB Priorities

Wright also noted delivery companies would likely be capped at 25 employees in order to prevent behemoths like Uber from entering the market. “We’re trying to focus on not creating a space where monopolies can take over and kill all our small businesses,” Wright says.¹¹

License Application Costs

The cost for an adult-use cannabis license in New York is still unknown, so the experts are looking at the cost for a medical cannabis license as the baseline, with a greater cost likely for adult-use. Each applicant was required to submit two fees with its medicinal application: a non-refundable application fee in the amount of $10,000 and a registration fee in the amount of $200,000. The $200,000 registration fee was refunded to the applicant only if the applicant was not issued a registration.¹²

The Marijuana Regulation and Taxation Act (MRTA) states, however, that fees may be waived for social equity applicants.¹³

Funding Assistance for License Applicants

Because of the requirement that each applicant be from one or more of the social equity classes, it is quite likely many of the applicants will lack the necessary funding to open a cannabis business currently.

On January 5, 2022, Gov. Hochul pledged to commit $200 million to support social equity applicants in building adult-use cannabis businesses. New York’s Office of Cannabis management expects that around $50 million of the fund will be raised from registered organizations licensed to operate medical cannabis businesses in NY and that $150 million will be raised from private investors.¹⁴

Wright commented, however, that those loans aren’t guaranteed to be available for the first round of licensing because the money to fund them will largely come from tax revenue generated by the industry. “[The Office of Cannabis Management] is not going to be able to right all the wrongs of the financial services industry,” she added.¹⁵

This lack of capital will offer opportunities to those who might want to invest with a social equity license applicant.

Requirements for Those Who Invest With Social Equity Applicants

Any person or entity investing with a social equity applicant must keep in mind the State’s following requirements:

Any entity applying for a New York cannabis license will need to be owned at least 51% by a social equity class applicant.
That ownership must be “real, substantial, and continuing.”
The social equity applicant must have and exercise the authority to control independently the day-to-day business decisions of the enterprise.
The individual or entity seeking the license must be authorized to do business in the state and be independently owned and operated.
The individual or entity must be a small business.¹⁶

Business Experience & Labor Union Representation Needed

The state is also looking for applicants with previous successful business experience and competency, and preference will be given to those who can demonstrate such experience.¹⁷

Additionally, the state would like to see that the applicant “has entered into [an] … agreement with a bona-fide labor organization that is actively engaged in representing or attempting to represent the applicant’s employees, and the maintenance of such [an] agreement shall be an ongoing material condition of licensure.¹⁸

New York’s Careful Approach

New York has moved slowly and thoughtfully in getting into the recreational cannabis market. Its leaders have studied the experiences of other states, noting complications and pitfalls that have arisen in such states as California, where small cannabis operators have been squeezed out and a large illicit market has grown to dwarf the tax-paying legal sector.

By opening up New York’s initial adult-use licenses to small, social equity applicants and requiring they have solid business experience, New York is hoping to give awardees a foothold in the cannabis market, enabling them to flourish and build strong roots before the onslaught of sophisticated, multi-state cannabis operators enter the fray.

Additional Keys to a Successful Application

New York City
Image: Rodrigo Paredes, Flickr

Beyond fulfilling the ingredients of the social equity applicant “recipe” outlined above, the key to a successful application will come down to the perception it gives the Cannabis Control Board of the applicant’s commitment to the state’s mission. In other words, how committed is the applicant to using his or her license and business to attempt to right some of the social wrongs perpetrated by the state and federal war on cannabis?

In addition to having an owner-applicant from a social equity class, the MRTA gives other clues of steps applicants can take (and discuss in their application) which could put them ahead of the competition in obtaining licensure.

The MRTA suggests the applicant demonstrate that they will “contribute to communities and people disproportionately harmed by enforcement of cannabis laws … and report these contributions to the board.”¹⁹

The MRTA asks each applicant to submit documentation of the racial, ethnic and gender diversity of the applicant’s employees and owners. In addition, the MRTA suggests each applicant consult with the CCB’s Chief Equity Officer and Executive Director “to create a social responsibility framework agreement that fosters racial, ethnic, and gender diversity in their workplace.”²⁰

New York is serious about its mission to use the legalization of cannabis to right some of the social wrongs of the past. An applicant’s dedication to this mission, as evidenced by a well-crafted application that emphasizes these values, may be the deciding factor on whether that applicant is rewarded with one of the state’s “Golden Tickets”. With a population of 20.2 million citizens, New York will be the second largest adult use cannabis marketplace behind California. Initial access to such a valuable and important market is worth the commitment of resources to creating not only a well-crafted application, but a well-crafted management team and business as well.

References

New York Consolidated Laws, N.Y. Cannabis Law § 2, added by New York Laws 2021, ch. 92, Sec. 2 (eff. 3/31/2021) [hereinafter, N.Y. Cannabis Law].
Ibid.
N.Y. Cannabis Law § 87(2).
https://www.nytimes.com/2022/03/09/nyregion/marijuana-sellers-licenses-hochul.html, March 9, 2022
Ibid.
https://gothamist.com/news/faq-new-york-cannabis-board-chair-answers-questions-about-what-it-will-take-snag-marijuana-business-license, Published January 6, 2022.
“Distressed farmer” and “service-disabled veteran” are as defined by N.Y. Cannabis Law §§ 87(5)(e) and (f).
N.Y. Cannabis Law § 87(3).
N.Y. Cannabis Law § 87(7).
https://gothamist.com/news/faq-new-york-cannabis-board-chair-answers-questions-about-what-it-will-take-snag-marijuana-business-license, Published January 6, 2022
https://gothamist.com/news/faq-new-york-cannabis-board-chair-answers-questions-about-what-it-will-take-snag-marijuana-business-license, Published January 6, 2022
https://cannabis.ny.gov/medical-marijuana-program-applications
Marijuana Regulation and Tax Act, § 63-3
See Hodgson Russ LLP, “New York Gov. Pledges $200M to Boost Social Equity Efforts as Part of Adult-Use Cannabis Legislation,” at https://www.jdsupra.com/legalnews/new-york-gov-pledges-200m-to-boost-9306262 (last accessed Mar. 2, 2022).
https://gothamist.com/news/faq-new-york-cannabis-board-chair-answers-questions-about-what-it-will-take-snag-marijuana-business-license, Published January 6, 2022.
Marijuana Regulation and Tax Act, § 87
Id. at § 97
Id. at § 64
Id. at § 64j
Id. at § 66-2

May 14, 2021

Flower-Side Chats Part 5: A Q&A with Bob Fireman, CEO of MariMed, Inc.

By Aaron Green

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In this “Flower-Side Chats” series of articles, Green interviews integrated cannabis companies and flower brands that are bringing unique business models to the industry. Particular attention is focused on how these businesses integrate innovative practices in order to navigate a rapidly changing landscape of regulatory, supply chain and consumer demand.

Multi-state operators (MSOs) are on the rise in the United States, navigating complex regulatory frameworks to drive profitability through economies of scale and scope. As an MSO and an early mover in the space, a significant part of MariMed’s current strategy is to complete the acquisition and consolidation of the licensed state cannabis businesses it has developed. It takes seasoned leadership to make that happen, and MariMed’s is led by one of the most experienced and successful MSO management teams in the industry. Over the last eight years, Bob Fireman and his colleagues have won 17 licenses in 6 states, and designed and developed over 300,000 square feet of cannabis cultivation, production and dispensing facilities.

MariMed has also developed a portfolio of award-winning cannabis brands and infused products which are licensed, manufactured and distributed in Delaware, Illinois, Maine, Maryland, Nevada, Rhode Island and Puerto Rico. A recently announced $46 million financing for a facility with Hadron Healthcare Fund will help repay all MariMed debt other than mortgage-backed bank loans and one convertible note, as well as help upgrade and expand the company’s owned and managed cannabis facilities.

We spoke with Bob Fireman, CEO of MariMed. Bob started the foundations of MariMed in 2008 after getting into large-scale hydroponics for urban sustainable agriculture. Prior to MariMed, Bob served as a startup lawyer focused on tech and emerging industries.

Aaron Green: Bob, tell me about how you got started in the cannabis industry.

Bob Fireman: I practiced law for decades. Part of my practice was to help startups in all sorts of industries, particularly technology and new emerging markets. At one point, I was introduced to a fascinating sustainable food business opportunity – to build hydroponic farms on rooftops in cities across the country.

Bob Fireman, CEO of MariMed, Inc.

When one of our projects in San Francisco hit some roadblocks, our team there pivoted to what was becoming the Wild West of California cannabis. My friend and current MariMed CFO, Jon Levine, and I began investing and managing a cultivation site there. That’s where we built our early foundation of industry knowledge.

Fast forward a few years, and I was afforded the opportunity to be involved in the drafting of the proposed Massachusetts medical cannabis legislation.

Through that work, we met a team that had won one of three cannabis licenses in Rhode Island. We formed a real estate LLC and raised the capital to develop a seed to sale cannabis facility in Providence, which was later leased to the Slater Center, a not-for-profit medical cannabis licensed business. Today, the Slater Center is a nationally acclaimed operation that services over 10,000 medical patients.

From there, we took our know-how and formed a new entity that was the formal beginning of the company we now know as MariMed. Initially, we helped win licenses for clients in Massachusetts, Delaware, Maryland, Illinois and Nevada. We also provided management services, working capital and other necessities. Under our management, we organically built these businesses from the ground up, advancing best practices and somewhat quietly creating a network of best-in-class operations throughout the industry.

That led to the consolidation of those businesses that we’re focused on today as a core strategic pillar.

I’m incredibly proud of our team, the core of which has been at this for 10 years. We’ve watched other MSOs try different models of success, with varying degrees of success. For us, focusing on growth markets, building at a reasonable and scalable clip, attracting incredible talent at all levels of the company, and developing fantastic brands that customers love, are the ingredients that have translated to where we are now – strong performance and an exceptionally bright future. “Slow and steady wins the race” has become a mantra.

Green: What trends are you looking at right now? What’s on your radar?

Fireman: My radar has a singular focus, and that’s to create shareholder value. That’s why completing the consolidation of the cannabis licensed businesses we’ve developed and manage into our public company is so critical. Back in the day, the initial available licenses were in medical-only state programs where applicants were required to be not-for-profit state companies. Accordingly, we raised the capital in the real estate entity which leased facilities to the licensees. Our revenue was from rents, management services and licensing fees.

Panacea Wellness in Middleborough, MA is one of MariMed’s adult use cannabis dispensaries

In 2019, we implemented a new strategic plan to consolidate these businesses. While that translates to our being structured similarly to other MSOs in that we are a vertically integrated seed to sale company, we are distinct in our operational excellence, quality product portfolio, and strong balance sheet. Other MSOs have raised large amounts of capital to pay large sums to acquire licensed state cannabis businesses and have found themselves over-leveraged and challenged to assimilate other companies’ methodologies and cultures. By consolidating the businesses and talented people we developed and managed from day one and utilizing our best practices and processes system-wide, we realize enormous capital efficiencies.

Our strategy is paying off. Our core cannabis revenue in 2020 increased 207% to $50.9 million, and our 10k reported EBITDA of $16.3 million. And now we’re on track to double our revenue in 2021.

The last piece of the puzzle is to let the world know what we’ve been doing. Slow and steady has worked for us but gone are the days of doing so quietly. We’re proud of what we’ve accomplished and exceedingly bullish on what’s to come.

Green: What do you look for in an M&A target?

Fireman: When M&A makes sense for us, we first look for single operators and entrepreneurs in states where we are not active and look to partner with business leaders that had the vision and the courage to get into this industry and build solid cannabis businesses from the ground up. I’m looking for businesses that could benefit from being part of a larger, more experienced and well-capitalized company like MariMed. Obviously, as an MSO with a solid platform, MariMed is approached regularly by other MSOs and banks suggesting candidates for M&A opportunities. Lining up with a company that has complementary cannabis licenses in other states and who shares our vision and ethics could be a win-win situation. They must embrace our commitment to diversity, the environment and proper corporate governance. We have been somewhat reticent to do this until we see some increase in our share price and market capitalization.

Green: Are there any new products, or product trends that you’re looking at?

Fireman: Marimed looks to be the most trusted source of high-quality cannabis products that consistently delivers innovative health and wellness solutions to our patients and customers. Our lab scientists are constantly creating and testing new and innovative formulations of cannabinoid compounds including CBD, THCa, CBG, CBN and others that will improve the health and wellness of our customers.

Our brand portfolio is ever-expanding with new and better product offerings. Our award-winning Betty’s Eddies Fruit Chews brand is adding new SKUs of varieties and flavors for both medical and adult use programs. Our Nature’s Heritage flower and concentrates brand is adding a line of solventless concentrates, live rosin, as well as new formulations for RSO, an oil popular with medical patients. Kalm Fusion is expanding its successful line of powdered drink mixes as we see more movement in the cannabis beverage category.

Microdosing is hugely popular right now, and we’re rolling out products in the 2-5mg dosage range. Health and dietary concerns are top of mind as well, and we offer products that are vegan, sugar-free and gluten-free. Ultimately, we want to be sure that we have something on the shelves for every single consumer. The financial hardship created by the pandemic has made consumers more attracted to value added products such as popcorn buds.

Green: You recently announced an equity financing from Hadron. I’m curious to learn more about it from a nuts-and-bolts perspective if you can share any of that information.

Fireman: Over the last year, access to the capital markets for equity raises in cannabis public companies was difficult. The cost of debt was and is still high, and we were looking for a long-term financial partner that understood the industry and could assist us. Hadron Capital has been successful for several years investing in some of the most successful MSOs and they saw the value and potential in MariMed’s experienced management and great assets.

Hadron invested $46 million in equity in MariMed this March. Approximately $16 million was utilized to retire all our short- and long-term debt but for bank secured debt and one convertible note. $7 million is committed to funding our capex and expanding the capabilities of our facilities, enabling us to grow more flower and automate production. The balance of funding will support our consolidation strategy to fund two more roll ups of state licensed cannabis businesses into the public company.

Going forward, it is comforting to have a capital partner to assist us in future acquisitions and M&A opportunities.

Green: I’d love to learn more about your Nature’s Heritage brand, particularly as it relates to the cultivation and the flower products.

Fireman: Our COO Tim Shaw has assembled a cultivation and production team with expertise in all aspects of genetics, growing methodologies, extraction techniques, and packaging innovation. That’s provided us a rich collection of quality genetics that make up Nature’s Heritage, our top-selling flower, oil and concentrate brand in Massachusetts and Maryland. We’ve recently expanded the line to include Rick Simpson Oil (RSO) and solventless concentrates (including live rosin) and have been receiving stellar feedback.

Green: What are you interested in learning more about?

Fireman: Over the last decade, the MariMed core team has seen the emergence and amazing growth of the cannabis industry. The initial medical programs in California and Colorado have now led to some form of legal medical or adult use cannabis programs in over 33 states and districts.

We are most interested in learning and following the federal, state, and international laws and regulations. It is vital to know how these laws will affect our company and the industry as a whole. When might full federal legalization become a reality? What might different versions of the law be? Will state legal programs be protected as well as the companies that took the risk in investing in the industry at its nascent state and how? What will FDA requirements and regulations look like? What medical claims will companies be allowed to make, and what kind of research or trials will be required to put a product on the shelf? What are the ramifications of the MORE Act or the SAFE Banking Act?

Responsible MSOs need to be prepared to rise to or above the standards of care of other industries. A lot of this was impossible in the past because of federal prohibition laws. Soon, if not already, labs and manufacturing processes will need to be GMP certified and more. Consumer data will need to be HIPAA compliant. Cannabis companies have to be good corporate citizens: diversity and equal opportunity should be embedded in business decisions, and commitment to ESG and sound environmental and social policies with good corporate governance need to be in planning and implemented.

Following the laws and holding ourselves to the highest possible safety and business standards will allow the cannabis industry to finally become “mainstream.”

Green: Alright, great. Thank you, Bob. That concludes the interview!