Introduction

On September 12, the New York Cannabis Control Board (CCB) approved final regulations governing the adult-use cannabis industry in New York,^[1] marking a long-awaited moment for industry participants and state regulators alike. The CCB’s approval signifies a significant step forward for the state’s cannabis market. The regulations are designed to govern all aspects of the industry, from cultivation and processing to distribution, retail, on-site consumption, and delivery services. Among these regulations, one rule stands out for its complexity and potential impact on industry participants: the definition of a “true party of interest.”

To fully understand the implications, one must appreciate the state’s decision to split the industry into two overarching tiers: cultivation and retail. Generally, individuals are prohibited from participating in both cultivation and retail business activities in New York.^[2]

The final regulations^[3] outline licensing requirements for a range of cannabis-related businesses, including “cultivation” licenses (nurseries, cultivators, processors, cooperatives/collectives, distributors, and microbusinesses) and “retail” licenses (retail dispensaries, on-site consumption, and delivery services). In addition, they also impose strict limitations to prevent any one entity from dominating both sides of the supply chain. For example, plant nurseries are prohibited from holding a retail dispensary, on-site consumption, or delivery license, but may hold a cultivator, cooperative/collective, or microbusiness license.^[4]

New York’s regulations prioritize social and economic equity applicants, aiming to rectify historical disparities in the cannabis industry. Existing medical cannabis companies are also presented with opportunities to transition to the adult-use market. Yet, despite these commendable objectives, the road to these regulations has not been without its legal challenges, leading to delays in the rulemaking process.^[5]

The “True Party of Interest” Rule

The CCB defines a “true party of interest” as someone whose level of involvement with a cannabis business has reached a certain threshold — at a certain level of involvement, that individual becomes a true party of interest to that business. Once an individual is labeled as a true party of interest to a certain cannabis business, they are prohibited from becoming a true party of interest in certain other cannabis businesses, depending on the type of business to which they first became a true party of interest.

As written, the rule covers those individuals one would expect, like the businesses’ owners, officers, and board members at any level of the ownership structure, as well as stockholders of the business. However, the rule goes much further than that, and engulfs a whole host of other possible interested parties, including any person with a right to receive a certain amount in aggregate payments in a calendar year, any person that has authority to or exercises control over the applicant or licensee (by controlling interest or otherwise), any person that assumes responsibility for the debts of the licensee, and even spouses of any of the organization’s owners, officers, or board members.[6] This definition introduces a layer of complexity and ambiguity that industry participants must carefully navigate to avoid missed business opportunities.[7]

The primary exception to the true party of interest definition is the “passive investor,” defined as a true party of interest who holds limited equity, no control or influence over the business, and who guarantees the lease of that business.[8] While this exception was likely created to ease concerns from business owners and investors, it remains to be seen to what extent the exception will be applied.

Why It Matters

The implications of the true party of interest rule are far-reaching. Industry participants must understand and comply with the rule to avoid investment pitfalls and navigate the market effectively. The broad application of the true party label may impact investment strategies and market participation. Large investors, spouses of controlling members, individuals entitled to substantial sums, and even those who guarantee a licensee’s debts will need to carefully consider their roles in the industry

[1] See Southall, Expecting Cannabis Boom, New York Lays Down the Rules, New York Times (Sept. 13, 2023), available at https://www.nytimes.com/2023/09/13/nyregion/cannabis-marijuana-regulations-ny.html

[2] See NY CANBS § 80.

[3] Parts 118, 119, 120, 123, 124, 125 and 131 Express Terms, Final 9-12-23, available at https://cannabis.ny.gov/AU-regs-express-terms (hereinafter the “Final Regulations).

[4] Final Regulations at §123.1(c & d)

[5] See Bado & Kozol et al, New York State Court Enjoins Licensing of Adult-Use Cannabis Dispensaries Statewide Amid Retail Cannabis Regulation Disputes, JDSupra (Aug. 24, 2023), available at https://www.jdsupra.com/legalnews/new-york-state-court-enjoins-licensing-8797827/

[6] Final Regulations at § 118.1(105)

[7] For more information on the True Party rule and its exceptions, see Purcell, Delano & Diaz, New York’s True Party Rule is Promiscuous, Emerge Law Group (May 30, 2023), available at https://emergelawgroup.com/blog/new-yorks-true-party-rule-is-promiscuous/

[8] Final Regulations at § 118.1(76)