Trends and prospects
How would you describe the current state of the cannabis industry in your jurisdiction, including areas of growth, market prospects and trends, and M&A activity?
With the prospect of adult-use legislation on the horizon in 2019, New York is gearing up to become the cannabis capital of the United States. As part of his 2020 budget proposal, Governor Andrew Cuomo revealed his plan to legalize and regulate adult-use cannabis. The decision to include adult-use legislation in the budget signals Cuomo’s intent to legalize recreational marijuana within the coming months.
Currently, New York permits only medical marijuana and has licensed 10 vertically integrated registered organizations to grow, manufacture, distribute, and dispense medical marijuana to patients who have an approved medical condition.
In light of the anticipated adult-use legislation, companies are jockeying for position in the medical space, anticipating that they will have first dibs on recreational licenses. In October 2018 MedMen and PharmaCann, LLC announced that they had signed a binding letter of intent for MedMen to acquire PharmaCann for $682 million.
What primary and secondary legislation governs the use, cultivation and retail of cannabis in your jurisdiction?
New York is currently a medical marijuana state and has no adult-use legislation.
The state’s medical marijuana legislation, the Compassionate Care Act, is codified in Article 33, Title 5-A of the Public Health Law.
The Medical Marijuana Program Regulations detail the specific requirements for medical practitioners, certified patients, designated caregivers, and registered organizations (Section 1004 of the New York Compilation of Codes, Rules, and Regulations).
In January 2019 Governor Andrew Cuomo revealed his plan to legalize adult-use recreational cannabis in the Cannabis Regulation and Taxation Act. The legislation would regulate and control the cultivation, processing, manufacture, wholesale and retail production, distribution, transportation, and sale of cannabis, cannabis-related products, medical cannabis, and hemp cannabis within the state of New York.
New York’s industrial hemp program is codified in Sections 505 to 514 of the Agriculture and Markets Law. The industrial hemp regulations are contained in Section 159 of the New York Compilation of Codes, Rules, and Regulations.
What bodies regulate the use, cultivation and retail of cannabis, and what is the extent of their powers?
The New York State Department of Health oversees New York’s medical marijuana program, and the New York State Department of Agriculture and Markets oversees New York’s industrial hemp pilot program.
The proposed adult-use legislation would establish the Office of Cannabis Management within the Division of Alcoholic Beverage Control to oversee the state’s:
- adult-use cannabis market;
- medical marijuana market; and
- hemp cannabis market.
Personal use and cultivation
Possession and consumption
What rules and restrictions govern the personal possession and consumption of cannabis in your jurisdiction?
Under New York’s medical marijuana laws:
- only certified patients can possess and consume marijuana; and
- the amount in their possession cannot exceed a 30-day supply of the dosage as determined by the practitioner recommending the medical marijuana. (Section 3362 of the New York Public Health Law.)
Under Section 1004.2 of the New York Compilation of Codes, Rules, and Regulations, in order to become a “certified patient,” a person must suffer from one of the following approved medical conditions:
- HIV or AIDS;
- amyotrophic lateral sclerosis;
- Parkinson’s disease;
- multiple sclerosis;
- damage to the nervous tissue of the spinal cord with an objective neurological indication of intractable spasticity;
- inflammatory bowel disease neuropathy;
- chronic pain;
- Huntington’s disease; or
- any condition for which an opioid can be prescribed.
New York’s proposed adult-use legislation—the Cannabis Regulation and Taxation Act—would amend its Penal Law to permit persons over the age of 21 to possess up to one ounce of marijuana and up to five grams of concentrated cannabis.
The proposed legislation does not permit consumers to smoke marijuana in public or in locations where smoking tobacco is prohibited. However, the proposed legislation contains a provision for on-site consumption licenses that permits the consumption of marijuana in permissible licensed establishments.
What rules and restrictions govern cultivation of cannabis for personal use?
New York’s medical marijuana regime does not permit certified patients to cultivate or grow cannabis.
Under the proposed adult-use regulations, consumers are not permitted to cultivate cannabis for personal use.
Use in and outside the workplace
What statutory and case law (if any) governs employers’ ability to restrict cannabis use both in and outside the workplace? Can cannabis use (even medical use) serve as legal grounds for termination?
New York’s medical marijuana legislation— Section 3369 of the New York Public Health Law —states that certified patients will be deemed to have a disability under:
- Article 15 of the Executive Law;
- Section 40(c) of the Civil Rights Law;
- Sections 240.00, 485.00, and 485.05 of the Penal Law; and
- Section 200.50 of the Criminal Procedure Law.
However, this section does not bar an employer’s policy prohibiting employees from performing their employment duties while impaired by medical marijuana. Moreover, it requires no person or entity to perform any act that would put their or their entity in violation of federal law or cause it to lose a federal contract or funding (Section 3369(2) of the New York Public Health Law).
Under the proposed adult-use legislation, unless an employer establishes that the lawful use of marijuana has impaired an employee’s ability to perform their job, it will be unlawful for it to take any adverse action against the employee based on conduct permissible under the law.
Commercial cultivation, retail and marketing
Business licensing requirements
What licensing requirements apply to businesses seeking to cultivate, distribute, produce and sell cannabis products in your jurisdiction? What procedures, timeframes and fees apply in this regard, and on what grounds can a licence be revoked?
New York’s proposed adult-use legislation—the Cannabis Regulation and Taxation Act—provides for six distinct marijuana related licenses:
- Adult-use cultivator licenses—licensees can grow, clone, harvest, dry, cure, and trim cannabis. Cultivator licensees will be permitted to sell only to processors, but licensees can also apply for a processor and a distributor license.
- Adult-use processor licenses—licensees can extract and infuse cannabis to make cannabis products and package and label those products. Processors must purchase cannabis from cultivators and can sell cannabis only to distributors. Processor licensees can have up to three licenses.
- Adult-use cooperative licenses—licensees can acquire, possess, cultivate, process, and sell cannabis from their licensed premises to licensed distributors and retail dispensaries, but not directly to consumers.
- Adult-use distributor licenses—licensees can only distribute and sell cannabis that was purchased from a processor and sell it to licensed retail dispensaries. It is unlawful for distributor licensees to have an economic interest in any retail dispensary license.
- Adult-use retail dispensary licenses—licensees can sell cannabis only directly to consumers. No person may have a financial or controlling interest in more than three retail dispensary licenses.
- On-site consumption licenses—the Office of Cannabis Management has the authority to grant on-site consumption licenses to retail dispensaries. Licensees cannot sell more than one gram of cannabis to consumers for on-site consumption.
Adult-use retail dispensary applicants must notify the municipality in which the premises are located of their intent to file an application between 270 days and 30 days before doing so.
Adult-use cultivators, processors, and distributors cannot have a direct or indirect interest in any premises where any cannabis product is sold at retail or in any business devoted wholly or partially to the sale of any cannabis product at retail by:
- stock ownership;
- interlocking directors;
- mortgage or lien;
- any personal or real property; or
- any other means.
Are any businesses specifically prohibited from selling cannabis products?
Under the proposed adult-use legislation, a business cannot sell marijuana and alcohol products on the same premises.
Zoning and real estate considerations
Are there any zoning restrictions on where businesses can cultivate, produce and sell cannabis products?
In New York, zoning restrictions are determined by local laws (i.e., municipality, county, and town and village ordinances), which provide the parameters and districts outlining land use. All facilities must meet the International Chamber of Commerce/American National Standards Institute A117.1-2003 Standards, which require all sites, facilities, buildings, and building elements that are accessible to and usable by people with physical disabilities to meet all applicable accessibility requirements.
Under the Cannabis Regulation and Taxation Act, counties and municipalities can opt out of the legalization and ban the sale of adult-use cannabis within their borders. Moreover, applicants for adult-use retail dispensary licenses must notify the municipality in which their premises are located of their intent to file an application between 30 days and 270 days before doing so. Municipalities may express an opinion for or against the granting of such application and any opinion will be deemed part of the record on which the Office of Cannabis Management will grant or deny an application.
Under the Cannabis Regulation and Taxation Act, no cannabis retail license will be granted for any premises where a licensee would not be allowed to sell alcohol based on its proximity to a school, church, synagogue, or other place of worship.
Are there any other notable real estate issues pertinent to cannabis businesses, including with regard to landlord/tenant relationships and real estate market activity?
Currently, the New York statutes do not break down the geographic requirements for these medical marijuana dispensaries, apart from saying that the state Department of Health has a duty to ensure a geographic distribution of dispensary locations.
A cannabis business looking to lease a facility should ensure that there are several contingencies written into the lease which are representative of the unique risks faced by these businesses. A cannabis business cannot rely on the standard form lease used for a commercial-use space or building.
Product restrictions and specifications
Are any cannabis products and accessories prohibited from sale? Do any product specifications apply?
Under New York’s medical marijuana regime, smoking flowers and some edible products are not permitted for sale. Under Section 1004.11 of the New York Compilation of Codes, Rules, and Regulations, the only permissible forms of marijuana are:
- liquid or oil preparations for metered oromucosal or sublingual administration or administration via a tube;
- metered liquid or oil preparations for vaporization;
- capsules for oral administration;
- solid and semi-solid preparations, such as capsules, chewable tablets, and lozenges; and
- metered ground plant preparations.
The medical marijuana regulations require registered organizations to:
- use either carbon dioxide or alcohol for cannabinoid extraction; and
- extract only the leaves and flowers of female marijuana plants. (Section 1004.11(b) of the New York Compilation of Codes, Rules, and Regulations.)
Packaging and labelling
What packaging and labelling requirements apply to the sale and distribution of cannabis products and accessories?
New York’s medical marijuana regulations require registered organizations to package the final form of a medical marijuana product at the manufacturing site. The package must be child resistant, tamper-proof, light resistant, and in a resealable package that minimizes oxygen exposure (Section 1004.11(h) of the New York Compilation of Codes, Rules, and Regulations).
Each product must also be affixed with a pre-approved label that includes:
- the registered organization’s name, address, and registration number;
- the medical marijuana product form and brand designation;
- the product’s single dose tetrahydrocannabinol and cannabidiol content in milligrams;
- the unique lot identifier;
- the quantity included in the package;
- the package date;
- the expiration date of the unopened product; and
- the proper storage conditions.
Under Section 1004.11(k) of the New York Compilation of Codes, Rules, and Regulations, the label must also include the following statements:
- “Medical marijuana products must be kept in the original container in which they were dispensed and removed from the original container only when ready for use by the certified patient.”
- “Keep secured at all times.”
- “May not be resold or transferred to another person.”
- “This product might impair the ability to drive.”
- “KEEP THIS PRODUCT AWAY FROM CHILDREN (unless medical marijuana product is being given to the child under a practitioner’s care”).
- “This product is for medicinal use only. Women should not consume during pregnancy or while breastfeeding except on the advice of the certifying practitioner, and in the case of breastfeeding mothers, including the infant’s pediatrician.”
Under the Cannabis Regulation and Taxation Act, the Office of Cannabis Management is authorized to promulgate rules governing the packaging of marijuana products and must ensure that:
- packaging meets requirements similar to those set out in the federal Poison Prevention Packaging Act 1970;
- all cannabis-infused products have separate packaging for each serving;
- cannabis products have labels and are placed in a resealable, child-resistant package prior to delivery or sale at a retailer; and
- packages and labels are not attractive to minors.
The regulations must also require cannabis products to contain a nutritional fact panel that incorporates data regarding serving sizes and the potency of the cannabis.
Advertising and marketing
What rules and restrictions govern the advertising and marketing of cannabis products and accessories (including online)?
New York’s regulations governing medical marijuana advertising and marketing are found in Section 1004.16 of the New York Compilation of Codes, Rules, and Regulations. The regulations prevent registered organizations from:
- advertising medical marijuana brand names or displaying marijuana-related graphics on the exterior of a physical structure; and
- displaying medical marijuana products and paraphernalia so that it is visible from the exterior of a physical structure.
Under Section 1004.16(h) of the New York Compilation of Codes, Rules, and Regulations, ads for approved medical marijuana products cannot contain:
- false or misleading statements;
- statements that falsely disparage competitor products;
- statements or pictures that are obscene or indecent;
- statements or pictures that encourage the use of marijuana for a condition other than a “serious condition,” as defined in the medical marijuana legislation;
- statements or pictures that encourage the use of recreational marijuana;
- statements or pictures that concern the safety or efficacy of marijuana, unless supported by substantial evidence;
- statements or pictures that portray anyone under the age of 18 years old;
- any offer of a price, award or inducement; or
- any statement that indicates that the product or entity has been approved by any person or entity associated with the state of New York.
Under the Cannabis Regulation and Taxation Act, the Office of Cannabis Management is authorized to promulgate rules governing the advertising of cannabis cultivators, processors, cooperatives, distributors, retailers, and any cannabis-related products or services. The office will promulgate explicit rules prohibiting advertising that:
- is false, deceptive, or misleading;
- promotes overconsumption;
- depicts consumption by children or other minors;
- is designed in any way to appeal to children or other minors;
- is within 200 feet of the perimeter of a playground, childcare center, public park, library, or school grounds;
- is in public transit vehicles and stations;
- is in the form of an unsolicited internet pop-up;
- is on publicly owned or operated property; or
- makes medical claims or promotes adult-use cannabis for medical or wellness purposes.
Moreover, the office’s promulgated rules will explicitly prohibit all marketing and advertising that is designed to:
- appeal to persons under the age of 21; or
- disseminate false or misleading information to customers.
Finally, the office will promulgate rules requiring:
- all ads to accurately and legibly identify the licensee responsible for their content; and
- any broadcast, cable, radio, print, or digital communications ad to be placed only where the audience is reasonably expected to be 21 years or older, as determined by reliable, up-to-date audience composition data.
What rules and restrictions govern the branding and trademarking of cannabis products and accessories? Are there any other special branding considerations for cannabis businesses?
Under New York’s medical marijuana regulations, registered organizations can produce up to five brands of medical marijuana product and must offer at least:
- one brand that has a low tetrahydrocannabinol (THC) and high cannabidiol (CBD) content; and
- one brand that has approximately equal amounts of THC and CBD. (Sections 1004.11(c)(1) and (c)(3-4) of the New York Compilation of Codes, Rules, and Regulations.)
For each brand offered, the registered organization must use a distinct name which has been approved by the department and comprises only letters and/or numbers. The name cannot be coined or fanciful or include any street, slang, or other name. No reference can be made to a specific medical condition (Section 1004.11(c)(6) of the New York Compilation of Codes, Rules, and Regulations).
At present, the proposed adult-use legislation has no branding restrictions other than delegating to the Office of Cannabis Management the authority to promulgate explicit rules prohibiting all branding that is designed to appeal to persons under the age of 21 or disseminate false or misleading information to customers.
What private financing options are available for cannabis businesses in your jurisdiction, and what are their respective advantages and disadvantages?
While traditional banks have generally been unwilling to finance cannabis enterprises, a growing number of private equity funds are dedicated to the cannabis industry. These funds may be able to not only provide equity or debt funding to bring a cannabis operation to the next level, but also furnish certain management expertise. Some entrepreneurs are wary of ceding the amount of management control that such funds may require. However, with the assistance of qualified counsel, it may be possible to raise funds from “friends and family” in a securities offering which is exempt from the federal securities requirements under various safe harbors provided by Regulation D of the Securities Act 1933. As discussed below, state securities laws in the states of the offerees should be consulted, but they should not pose a serious impediment. As an example, New York’s applicable securities laws are discussed briefly below.
Issuers have made interstate offerings in reliance on Regulation D of the federal Securities Act, with particular emphasis on Rule 506 of that exemption.
Rule 506(b) provides a safe harbor from securities registration for offerings of any US dollar amount, so long as the following requirements are met with respect to offering and sale:
- There must be no general solicitation or advertising.
- There can be no more than 35 non-accredited investors, plus an unlimited number of accredited investors.
- No false or misleading information can be disseminated, and any information made available to accredited investors must also be made available to non-accredited investors.
- The company must make itself available to answer questions from prospective investors.
Rule 506(c) allows the offering to be made with broad solicitation and general advertising, so long as:
- all investors are accredited; and
- the company takes reasonable measures to verify that all investors are accredited.
Private offerings that satisfy the safe harbor requirements of the Securities Act are also available for issuers in New York. In New York, Article 23-A of the General Business Law, known as the Martin Act, regulates brokers, dealers, and issuers that offer securities “.for sale to the public,” requiring such brokers, dealers, and issuers to register with the state’s investor protection bureau before selling securities in the state. While neither the Martin Act nor the state attorney general have defined what constitutes a “public sale,” most practitioners—including the New York State Bar Association’s Committee on Securities Regulation—take the position that securities issued pursuant to Section 4(a)(2) of the Securities Act are excluded from the Martin Act’s registration requirements.
Offerings are usually described in a private placement memorandum, which is structured according to U.S. Securities and Exchange Commission (SEC) regulations. The “Risk Factors” section, where the issuer must describe risks that are specific to the particular offering, presents some novel issues for companies in the cannabis business. In addition to the obvious, if remote, risk of federal criminal prosecution and seizure of assets, the issuer should consider mentioning a range of lesser but perhaps more probable risks, such as those associated with:
- large volumes of cash;
- landlord/tenant issues;
- interstate commerce; and
What rules and restrictions govern cannabis businesses’ listing and admission to trading on recognised equity securities exchanges? What are the advantages and disadvantages of public listing?
To date, no cannabis company with U.S. operations has gone public in the United States by means of an initial public offering (IPO) of securities. Therefore, while other federal agencies have indicated clear opposition (e.g., the Drug Enforcement Administration and the U.S. Citizenship and Immigration Services), the SEC’s position on cannabis is unclear. One company reached the S-1 submission stage and cleared the comment period without objection by the SEC, but later withdrew its offering for other reasons.
Until another company undertakes the investment in money and effort necessary to stage an IPO, two paths of less resistance are open.
The first is a reverse merger (i.e., acquisition by an existing public shell company). A handful of cannabis companies have successfully taken this route, although to date none have advanced to listing on an exchange in the United States.
The second route is to go public in Canada, where cannabis is legal nationwide. This has also been done in a handful of cases—again via reverse merger, but into a Canadian public shell. From here, it is anticipated that there will be no particular obstacles to listing on a Canadian exchange. However, there are a number of other problems, especially for investors in such companies. Securities firms, many of which operate internationally, are hesitant to handle accounts for U.S. persons who wish to buy and sell Canadian cannabis stocks.
Which medical conditions qualify for treatment with cannabis products? What other rules and restrictions govern medical use of cannabis (eg, dosage limits)?
Only severe, debilitating or life-threatening conditions qualify for treatment with cannabis products. These include:
- HIV or AIDS;
- amyotrophic lateral sclerosis,
- Parkinson’s disease;
- Huntington disease;
- multiple sclerosis;
- damage to the nervous tissue of the spinal cord with an objective neurological indication of intractable spasticity;
- inflammatory bowel disease;
- post-traumatic stress disorder;
- neuropathy or chronic pain; or,
- any condition for which an opioid can be prescribed.
What licensing requirements apply for physicians seeking to prescribe cannabis products to patients?
Physicians, nurse practitioners and physicians’ assistants can become registered after completing a two-to-four-hour training course with the Department of Health.
Only a 30-day supply can be issued at present. Those qualified to certify can waive the requirement to be listed on a public registry.
What licensing requirements apply for pharmacies seeking to dispense cannabis products?
Pharmacies cannot hold a commercial cannabis business license.
How are cannabis products covered by health insurers (both public and private)? Are there any rules or restrictions in this regard?
There is no coverage for cannabis products.
What opportunities are available for cannabis businesses to cooperate with healthcare providers, pharmaceutical companies and research institutes in the development of new medical cannabis products? Are there any notable regulatory considerations in this regard?
Section 3367(2) of the New York Compassionate Care Act permits the Department of Health to seek federal approval for medical marijuana research programs. Moreover, in its two-year report about the state of New York’s medical marijuana program, the Department of Health recommended promulgating regulations making research more accessible. The department’s recommendations include:
- implementing regulatory amendments to support research studies of approved medical marijuana products;
- allowing registered organizations to use third-party contractors to secure research projects; and
- allowing researchers in the state to apply for a license to purchase, posses, and administer medical marijuana to conduct clinical studies.
However, since marijuana remains illegal under federal law, research opportunities for cannabis businesses and healthcare providers are limited. Should federal regulations change, New York is poised to become a national leader in researching the medical benefits of marijuana due to its world-renowned research institutions and robust medical marijuana legislation.
How are sales of cannabis products taxed?
The sale of medical marijuana is exempt from sales tax. Sales of related products purchased to administer medical marijuana are also exempt. Although registered organizations will not be making taxable sales, they must register as a vendor in order to issue and accept certain sales tax-exemption certifications. As a registered vendor, the registered organization will have to file periodic sales and use-tax returns online.
Under the Cannabis Regulation and Taxation Act, cultivators would be taxed at the rate of $1 per dry weight gram of cannabis flower and $0.25 per dry weight gram of cannabis trim. Wholesalers would be taxed 20% of the invoice price to retail dispensaries, plus an additional 2% county tax.
What tax liabilities arise for cannabis businesses, and what best practices are advised for efficient tax planning?
New York imposes a 7% excise tax on gross receipts from the sale of medical marijuana by registered organizations for its medical marijuana program. A “gross receipt” is the amount charged by registered organizations for the sale or furnishing of medical marijuana to a certified patient or designated caregiver, without any deduction for:
- the cost of materials, labor, or services;
- other costs, interest, or discounts paid; or
- any other expenses.
Import and export
What rules and restrictions govern the import and export of cannabis products and accessories to and from your jurisdiction?
It is illegal to transport state-legal cannabis or cannabis products across state lines for any reason.
What immigration rules and restrictions are noteworthy for stakeholders in a cannabis business, including with regard to the movement of employees and the cross-border carriage of cannabis for personal use?
Individuals who are involved (directly or in an ancillary manner) with the cannabis industry in other nations face uncertain risks when attempting to cross the border into the United States. Throughout 2018, there have been reports of individuals who work or invest in the Canadian cannabis sector being turned back at the U.S. border—or worse, being handed a lifetime ban from entering the United States.
On October 9, 2018 the U.S. Customs and Border Protection (CBP) clarified that Canadians who work in Canada’s legal cannabis industry may enter the United States for non-work related reasons without negative consequences. CBP’s clarification states in relevant part:
A Canadian citizen working in or facilitating the proliferation of the legal marijuana industry in Canada, coming to the U.S. for reasons unrelated to the marijuana industry will generally be admissible to the U.S. however, if a traveler is found to be coming to the U.S. for reason related to the marijuana industry, they may be deemed inadmissible.
CBP agents retain discretion to reject any applicant seeking entry for reasons “related to the marijuana industry.” Border crossers are explicitly warned as follows:
Generally, any arriving alien who is determined to be a drug abuser or addict, or who is convicted of, admits having committed, or admits committing, acts which constitute the essential elements of a violation of (or an attempt or conspiracy to violate) any law or regulation of a State, the United States, or a foreign country relating to a controlled substance, is inadmissible to the United States.
CBP will look for evidence that supports the essential elements of a violation of U.S. laws relating to controlled substances. There are a number of relevant statutes and regulations in this regard.