New Jersey Cannabis: Drastic Expansion in License Ownership Rights

Foley Hoag LLP - Cannabis and the Law

Foley Hoag LLP - Cannabis and the Law

Both Houses of the New Jersey Legislature just passed a law that would allow anyone – including operators already holding other licenses in the State of New Jersey – to obtain ownership in up to seven (7) diversely-owned Class 5 Retail Licenses.

By way of background and reminder, the current regulations promulgated by the New Jersey Cannabis Regulatory Commission (“CRC”) prohibit an owner (holding 5% or more equity) of one entity holding a cannabis license from being an owner in any other entity applying for or holding a cannabis license. Moreover, the rules also prohibit any entity from holding any ownership interest in more than one (1) Class 5 Cannabis Retailer. Thus, the rules prior to the law change identified that while you could be vertical (holding one (1) Class 1 Cultivation, one (1) Class 2 Manufacturer, and one (1) Class 5 Retailer), it prohibited any one entity from horizontal expansion, i.e., holding more licenses along one license class tier.

However, following the passage of S2766/A4151 (the “Bill”) out of both the New Jersey Senate and Assembly, these limitations will expand drastically. Assuming the Governor signs the Bill, it would allow for anyone to own up to 35% equity in up to seven (7) diversely-owned Class 5 Retail Licenses, while also allowing the 35% equity holder to provide loans and/or license intellectual property (“IP”) to the very same license holders, provided the terms of same are “commercially reasonable.”

We note a few points of emphasis and raise other points for consideration. First, the Bill only applies to diversely-owned retailers, i.e., Certified Women-Owned (“WBE”), Certified Minority-Owned (“MBE”), and/or Certified Disabled-Veteran (“VOB”) owned businesses, but not social equity, impact zone, bonus point, and/or general license applicants and/or license holders. Second, there are certain well-defined provisions, i.e., the term under which repayment must be provided (no less than 10 years if the loan is for $500,000 or more), with other provisions remaining up to the discretion and review by the CRC for what constitutes “commercially reasonable” terms. Third, the 35% ownership group can never increase beyond that threshold, even upon default, though a substitute ownership group that otherwise meets the qualifications of WBE/MBE/VOB can be substituted in.

Much consideration should go into what constitutes “commercially reasonable” terms of any loans and/or IP agreements. In particular, the CRC has the ability to withhold license approvals and/or changes of ownership if it determines that any terms are commercially unreasonable. Notably, while this process envisions a back-and-forth with the CRC as to any initial positions and/or conclusions of commercial reasonableness, without a good grasp of the basic framework of commercial reasonableness under the rules, delays are virtually guaranteed. In particular, the existing CRC regulations already lay out a basic framework of what constitutes commercial unreasonableness and/or unfair advantage, including, percentages of profits, max interest rates, other elements of undue control, etc.

In any event, the Bill represents a drastic expansion of rights for participants in the New Jersey marketplace, and provided the Governor signs it, will provide a fresh inducement for investors considering entering into and/or doubling down on the New Jersey cannabis marketplace.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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