• Recently introduced Maryland House Bill 556 contains essential provisions for persons or entities interested in participating in the cannabis industry in Maryland.
• On or before July 1, 2023, all current medical cannabis licensees in Maryland would be allowed to convert their licenses to medical and adult use.
• There would be a limited number of several types of new licenses issued.
• The first round of licensing, beginning on or before January 1, 2024, would be limited to social equity applicants; the second round of licensing, beginning on or before May 1, 2024, would potentially be open to all applicants.
• If passed as written, the bill would establish ownership limitations, based on type of establishment and licensure.

Maryland House Bill 556 (cross-filed with Maryland Senate Bill 516), introduced on February 3, 2023, contains essential provisions for any person or entity interested in participating in the cannabis industry in Maryland. Importantly, the bill pertains to current cannabis-license holders in Maryland and establishes the framework for issuing new licenses.

The bill proposes shifting the current regulatory authority from the Natalie M. LaPrade Medical Cannabis Commission to a newly renamed Maryland Alcohol and Tobacco Commission (the “Commission”) and to establish a Cannabis Regulation and Enforcement Division (the “Division”) within the Commission. The bill also seeks to establish an Office of Social Equity, which will be responsible for encouraging individuals from communities “that have previously been disproportionately harmed by the war on drugs” to participate in the regulated cannabis industry. The Division will be authorized to issue a set number of licenses, inclusive of existing licenses converted to adult use, in at least two rounds of licensing; the first round of licensing will only be open to social equity applicants, as defined in the bill.

If the bill is passed, on or before July 1, 2023, the Division will be required to adopt emergency regulations to enact the various provisions of the bill, including, but not limited to, all procedures related to cannabis applications, licenses, and registrations. Importantly, on or before July 1, 2023, all current medical cannabis licensees in Maryland will be allowed to convert their licenses to medical and adult use.

Below is a summary of key provisions in the bill as currently drafted. As currently drafted, it appears that there are internal inconsistencies and gaps that will need to be addressed as the bill proceeds through the legislative process. Foley Hoag will continue to provide updates as provisions undergo revisions or dates are modified, but to the extent that you have questions about this summary, or the current status of the bill, please contact Foley Hoag for the latest information.

1. LICENSING, LICENSE CONVERSION, AND TESTING LABORATORY REGISTRATION

In Maryland, all cannabis business operators will be required to hold appropriate licenses. Growers, processors, and dispensaries will have the option to apply for standard licenses or micro licenses.

If passed, the bill will establish the key licensing requirements. To apply for a cannabis license, an applicant will be required to submit an application to the Division and pay an application fee. A cannabis license will be valid for five years upon issuance, then every five years upon renewal. Applicants for standard licenses, incubator licenses, or on-site consumption licenses will be required to pay an application fee of $5,000, and those requesting an application for a micro license will pay an application fee of $1,000.

A. License Conversion

On or before July 1, 2023, the Division may convert existing medical cannabis licenses into medical and adult use cannabis licenses (“AU”), if the holders of medical cannabis licenses pay a one-time conversion fee. All businesses with current medical cannabis licenses that were physically and actively engaged in dispensing medical cannabis before October 1, 2022, will be allowed to convert their licenses to AU.

The conversion fee is based on total gross revenue for 2022.

• For growers and processors, conversion fees range from $100,000 for 2022 gross revenue under $1 million to $2.5 million if 2022 gross revenue exceeded $20 million.
• For dispensaries, conversion fees range from $100,000 for 2022 gross revenue under $1 million to $2 million if 2022 gross revenue exceeded $20 million.

Businesses that had stage-one preapproval for a license and were not operational before October 1, 2022, will pay a statutorily set conversion fee, based on business type.

Additionally, the Division is required to convert all independent testing laboratories (see below).

B. New License Limitations

The bill requires the Division to issue new licenses in a manner that encourages balanced geographic distribution, based on population and market demand within a given county and across jurisdictions. The Division is limited in how many licenses—of each type of license—it may issue. These quotas include the existing licenses that will be converted from medical to medical and adult use (AU).

Limitations for issued standard licenses:

• 75 grower licenses
• 100 processor licenses
• 300 dispensary licenses

Limitations for issued micro licenses:

• 100 grower licenses
• 100 processor licenses
• 200 dispensary licenses

Additional license limitations:

• 10 incubator space licenses
• 50 on-site consumption licenses

The Division will be required to reserve “a reasonable number” of licenses to allow micro licenses to eventually transition to standard licenses. Additionally, the Division will be required to adopt regulations mandating that licensees whose cannabis licenses were converted to AU “reserve a specified amount of cannabis for social equity licensees” (discussed below).

C. Cannabis Licenses

Standard licenses

• Grower: License to cultivate, package, or distribute cannabis; and authorization to provide cannabis to other cannabis licensees and registered independent testing laboratories. Under a standard license, a grower can operate up to 300,000 square feet of indoor canopy or its equivalent.
• Processor: Standard license permits processing of more than 1,000 pounds of cannabis per year.
• Dispensary: License to acquire, possess, repackage, transfer, transport, sell, distribute, or dispense cannabis or cannabis products (such as tinctures, aerosols, oils, ointments, related supplies, and educational materials) to qualifying consumers (including patients and caregivers) via storefront or delivery service. Under a standard license, a dispensary can operate a physical storefront.

Micro licenses

• Grower: Micro license permits operating up to 10,000 square feet of canopy or its equivalent.
• Processor: Micro license permits processing up to 1,000 pounds of cannabis per year.
• Dispensary: Micro license permits the licensee to operate a delivery service that sells cannabis or cannabis products without a physical storefront, and the licensee may only employ up to ten employees.

Incubator licenses

The holder of the license will be authorized to operate a facility within which a micro licensee may operate. The Division may issue incubator-space licenses authorizing an entity to operate licensed premises in which micro licensees operate cannabis businesses. If the bill is enacted into law, the Maryland Economic Development Corporation will acquire and construct or refurbish at least one facility to operate as an incubator space.

On-site consumption licenses

The holder of an on-site consumption license will have authorization to operate a facility in which individuals can smoke, vape, or consume cannabis. Licensees must also provide educational materials to consumers about safe cannabis consumption. Municipalities will be permitted to enact certain limitations on the operating of, smoking or vaping within, or zoning of on-site consumption establishments. Additionally, the bill forbids on-site consumption licensees from cultivating or processing cannabis or cannabis-infused products and from adding cannabis to food prepared or served on the premises; however, food-service facilities may apply for on-site consumption licenses.

The bill forbids employees of on-site consumption establishments from consuming cannabis and requires that employees undergo specific training. Additionally, on-site consumption facilities will not be allowed to distribute free samples, permit consumption of alcohol on the premises, permit the smoking or vaping or tobacco products on the premises, allow activities on the premises that would require another cannabis license (such as growing), admit anyone under the age of 21 onto the premises, or permit anyone who is visibly intoxicated to consume cannabis on the premises. The bill prohibits making cannabis products visible from outside the premises.

Additional registrants

The following entities must register with the Division to provide services to cannabis licensees:

• Transporter
• Security guard agency
• Waste disposal company
• Any other type of cannabis business authorized to “provide plant or product-touching services to cannabis licensees.”

D. Testing Laboratories

As defined in the bill, an independent laboratory must test all cannabis and cannabis products before they can be sold; the Division will develop testing protocols.

The bill requires the Division to register at least one laboratory to test cannabis and cannabis-related products sold in Maryland. Any registration to operate an independent testing facility issued on or before July 1, 2023, will be considered valid and will authorize an independent laboratory to test medical and AU cannabis (as noted above, the Division is required to convert all independent testing laboratory registrations). AU testing is to be held to the same standards as medical-use testing. A laboratory’s license will be valid for two years upon issuance, then must be renewed every two years. Per the bill, a registered independent testing laboratory is authorized to test and transport cannabis-related products on behalf of cannabis licensees; however, a laboratory may not receive direct or indirect financial compensation, other than reasonable contract fees for testing, from any entity for which the laboratory is conducting tests.

To register as an independent testing laboratory, the laboratory must satisfy the following criteria:

• Meet the Division’s application requirements.
• Pay an application fee.
• Meet the Division’s requirements and standards for accreditation, inspection, and testing.

Additionally, an individual who possesses interest in, or is employed by, an independent testing laboratory, or any family member of the individual, may not possess interest in, nor be employed by, another cannabis licensee.

2. SOCIAL EQUITY LICENSING

As noted above, the bill establishes an Office of Social Equity within the Commission, which will promote and encourage individuals from communities “that have previously been disproportionately harmed by the war on drugs” to participate in the regulated cannabis industry.

• A social equity applicant is an applicant for a cannabis license or registration that (1) has at least 65% ownership or control held by one or more individuals who lived in a disproportionately impacted area for at least five of the ten years immediately before submitting an application, or attended a public school in a “disproportionately impacted area” for at least five years; or (2) meets any other criteria established by the Commission, per the results of a disparity study.
• A disproportionately impacted area is a geographic area defined by the Office of Social Equity to be disproportionately impacted by prohibitions on cannabis.

A. Key Information for Both Licensing Rounds

Under the provisions of the bill, the Division is required to award cannabis licenses in “at least” two separate rounds.

The Division will begin issuing the first round of new licenses on or before January 1, 2024; this initial round will be limited only to social equity applicants and will be limited to only certain types of licenses (the first round excludes on-site consumption licenses). The Division will begin issuing the second round of new licenses on or after May 1, 2024; the second round will potentially be available to all applicants. Before accepting or processing licenses, the Division must engage in outreach efforts to contact small, minority-owned, and women-owned businesses, which might have an interest in applying for cannabis licenses and connect potentially eligible applicants with the Office of Social Equity.

The Division is required to accept and process licenses for a period of 30 days, beginning at least 60 days after the Division issues a request for applications. The Division may not accept more than one application for a type of license from any single applicant during any licensing round, nor can the Division accept more than two applications from one applicant in any round of licensing; however, as noted below, an individual may have ownership in, or control of, up to four different licenses, depending on license type. Additionally, the Division cannot require applicants to own or possess a property or a facility to operate a cannabis business at the time of licensing.

B. First Round of Licensing

During the first round, which is limited to social equity applicants (see above), each social equity applicant that meets the minimum qualifications, as established by the Division, will enter into a lottery. During this first round, the Division will issue a set number of each type of license. On-site consumption licenses will not be available in the first round of new licenses (see above).

For standard licenses:

• 20 grower licenses
• 40 processor licenses
• 80 dispensary licenses

For micro licenses:

• 30 grower licenses
• 30 processor licenses
• 75 dispensary licenses

Additional licenses:

• 10 incubator space licenses

The Division will use a pass/fail basis to determine whether an applicant meets the minimum qualifications for the lottery after evaluating (1) an operational plan detailing the safe, secure, and effective cultivation, manufacture, or dispensing of cannabis; (2) a business plan that demonstrates “a likelihood of success and sufficient business ability and experience on the part of the applicant, and providing for appropriate employee working conditions”; and (3) a detailed diversity plan.

C. Second Round of Licensing

Second-round licensing will potentially be available to all applicants (see above). The Division will take into consideration the diversity of the first-round license recipients; the diversity of the first-round applicants will determine whether the second round will be limited to social-equity applicants.

If the Office of the Attorney General determines the applicants that received licenses were not diverse, and a disparity study determines a compelling interest to implement remedial measures to support women and minorities in the cannabis industry, the Division will enter applicants that meet the minimum qualifications into a lottery and issue a set number of licenses. Under these circumstances, the Division will assess the remedial measures established in accordance with the diversity study, in addition to the above criteria (operational plan, business plan, and diversity plan) when issuing licenses. The Division can issue up to a set number of additional licenses.

For standard licenses:

• 25 grower licenses
• 25 processor licenses
• 120 dispensary licenses

For micro licenses:

• 70 grower licenses
• 70 processor licenses
• 125 dispensary licenses

Additional licenses:

• 10 incubator space licenses
• 15 on-site consumption licenses

Alternatively, if the Office of the Attorney General determines that the first-round applicants were diverse, regardless of the result of the disparity study, the Division will enter each applicant that meets the minimum qualifications into a lottery and issue a set number of licenses. Under these circumstances, the Division will assess the above criteria (operational plan, business plan, and diversity plan) and will also consider whether the applicants are social equity applicants, unless they are applying for micro licenses; second round application submissions for micro licensee are limited to only social equity applicants. The Division can issue up to a set number of licenses.

For standard licenses:

• 25 grower licenses
• 25 processor licenses
• 120 dispensary licenses

For micro licenses:

• 70 grower licenses
• 70 processor licenses
• 125 dispensary licenses

Additional licenses:

• 10 incubator space licenses
• 15 on-site consumption licenses

In the second round, the Division will award licenses as needed, according to a market-demand study. The Division will develop the factors to determine qualifications for the lottery. Additionally, the Division may limit some or all of the licenses issued in the second round to social equity applicants or minority business applicants, as determined necessary by the diversity study.

D. Capital Access Program and Cannabis Business Assistance Fund

Capital Access Program

The bill establishes a Capital Access Program within the Department of Commerce, which will support opportunities for social equity licensees that might have difficulties obtaining financing, and to establish a “loan loss reserve account.” Loans can be short or long, have fixed or variable rates, and be secured or unsecured. A loan for a social equity licensee will qualify under the Capital Access Program if the loan meets the following criteria:

• Loan satisfies the lending institution’s criteria.
• Term of the loan does not exceed ten years.
• Amount of the loan does not exceed $500,000.

To participate, a lender must enroll the qualifying loan in the Capital Access Program no more than 30 days after the date of first disbursement.

Capital Business Assistance Fund

Additionally, there is a Cannabis Business Assistance Fund within the Maryland Department of Commerce (the “Department”). The purpose of the fund is to assist small, minority-owned, and woman-owned businesses entering the AU cannabis industry. The fund may only be used for the following purposes:

• Grants or loans to small, minority-owned, or women-owned businesses for cannabis license application assistance (for AU cannabis licenses); assistance with operating or capital expenses for a business participating in the AU cannabis industry; and targeted training to support participation in AU cannabis industry.
• Grants to historically black colleges and universities (“HBCUs”) for cannabis-related programs and business-development organizations, including incubators, to train and assist small, minority, and women business owners and entrepreneurs who wish to become licensed for participation in the AU cannabis industry.

The Department is instructed to prioritize awarding grants and loans to “populations that have been historically disproportionately impacted by the enforcement of laws criminalizing the use of cannabis” and to individuals who have been convicted of violating a law criminalizing cannabis. The Department may not award grants or loans to small, minority, and women business owners and entrepreneurs who have a personal net worth exceeding $1,700,000. Here, “personal net worth” means the net value of the individual’s assets after total liabilities are deducted, including the individual’s share of assets held jointly or as community property with a spouse; the term excludes the individual’s ownership interest in the applicant, equity within the individual’s primary residence, or cash value of qualified retirement plans.

3. OWNERSHIP AND LIMITATIONS

In addition to proposing requirements for licensing, the bill contains provisions for ownership limitations, based on type of establishment and licensure. Individual ownership interest in, or control of (including the power to manage and operate), cannabis licensees is limited to the following:

• For standard licenses and micro licenses: one grower licensee; one processor licensee; and up to two dispensary licensees
• For incubator space licenses, up to two licensees
• For on-site consumption licenses, up to two licensees

“Control” is defined as having decision-making authority over the management, operations, or policies “that guide a business,” or authority over the operations of a business’ technical aspects.

A person who owns or controls an incubator-space licensee or on-site consumption licensee may not own or control any other cannabis licensee. The Division will adopt regulations to limit a person or fund from acquiring a non-majority ownership interest in multiple cannabis businesses, beyond the enumerated limitations. The bill also prohibits certain state officers from owning or having official business relationships with entities that have cannabis licenses. As such, it is possible that a single entity in Maryland might currently possess more cannabis licenses, or have ownership interest in, or control of, more cannabis licensees, than would be permitted under the bill, if enacted as written.

Holders of a cannabis license may not surrender said license and apply for a new license in the same or a similar category. This limitation applies to the following business relationships:

• Affiliates, holding companies, parent companies, or other related entities.
• Individuals and firms with identical (or “substantially identical”) economic or business interests.
• Persons with common investments.
• Firms that are economically dependent on each other, via contractual or other relationships.

Cannabis licensees, including those whose licenses were converted from medical to AU, may not transfer ownership or control of the license for a period of five years, following licensure. This five-year period does not include the time during which the business had “preapproved” status. However, bill does not reconcile the capitation on license ownership with the five-year prohibition on licensing transfer; as noted above, the Division has until July 1, 2023, to enact key provisions of the bill, and could thereby release language addressing any possible issues arising from the interaction of these key provisions.

The bill establishes a phased-in tax rate on the sale of cannabis, starting at 6% in fiscal year 2024. The sales tax rate will increase up to 10% in fiscal year 2028 and thereafter. Local jurisdictions may not impose taxes on cannabis.