As of today, New Jersey opened the state’s marijuana license application period, allowing individuals and businesses to apply for licenses to be marijuana cultivators and manufacturers in that state. With more and more states implementing marijuana programs and still more states expanding their programs from medical to adult use, if you have ever considered entering the market, there are certain steps you should be taking now to ready yourself to strike when the iron is hot.
What is the first step? The marijuana license application.
Whether you are applying for one of the newly available New Jersey licenses, previously applied for a license in another state but were not awarded a license, or are keeping your eye on the development of the marijuana industry and waiting for your opportunity to enter one or more emerging markets, marijuana license applicants and industry participant hopefuls should have a comprehensive understanding of several threshold issues relevant to license eligibility, the marijuana license application itself, the operation of the future business before deciding to develop and submit a marijuana license application.
I. Types of Licenses
There are several categories of licenses (and sub-categories within those categories) that a state requires in order for you to operate a legal marijuana business within that state. If you are hoping to be awarded a new marijuana license, you will need to submit a marijuana license application. While in the past, most licenses were awarded on a lottery basis, the vast majority of applications today are merit-based. This means that your application must be well-planned, well-executed, and well-advised for you to even begin to be considered for a newly available or soon-to-be-awarded marijuana license.
These license categories differ among the states, the rights and responsibilities of licenses differ among the states, and eligibility for these licenses differs among the states. Generally, however, these licenses include marijuana producer licenses; marijuana processor licenses; marijuana retailer licenses; marijuana testing licenses; and marijuana transportation licenses. Additionally, some states require you to hold multiple licenses (called “vertical integration”), while other states categorically prohibit you from holding multiple licenses. It is critical you understand the regulations that apply to you and develop your business plan and marijuana license application accordingly.
However, there are many ways to get involved in the cannabis industry without a license or without “touching the plant.” Successful ancillary businesses may provide packaging, printing, technology, equipment, development, real and tangible property leasing, marketing and brand development, payment processing, and other products and services to marijuana businesses. The barriers to entry to the industry are far lower with respect to many ancillary businesses by virtue that you do not need to submit a marijuana license application or be awarded a marijuana license, and also because products (such as insurance) and services (such as banking services) are more readily available to these businesses.
II. Relevant Regulations & Regulators
It is critical to know the relevant marijuana regulations that apply to you and your business and to become familiar with the primary agencies and groups with which your marijuana business will interact regularly before you submit your marijuana license application.
Absent reading and analyzing all of the administrative, state, and local laws applicable to your business, as well as attending ongoing government and legislative sessions, it is critical to partner with an attorney who has made it their career to be well-versed in regulations applicable to your business, who is engaged in community and government relations, and who is well attuned to the relevant legislative and enforcement policies and procedures that will largely affect the success (or even the sheer existence) of your business.
In addition to state and local governing cannabis regulators, you will also likely need to work with various groups such as building, planning, and zoning committees, various environmental boards, and more in both drafting your marijuana license application and ultimately operating your marijuana business. It is also important to remember that in new states, regulators, as well as these additional committees, are also learning the law anew and may even be hostile to the implementation of a cannabis business in their jurisdiction; patience and cooperation should ideally characterize these relationships both during marijuana license application, and continuing after licensure.
III. Eligibility & Your Marijuana License Application
State marijuana license applications vary greatly, but there are a handful of common threads that industry entrant hopefuls should be aware of, such as:
- Members of the Business – Each member must be minimally eligible under the state licensing requirements and, ideally, should contribute points to the marijuana license application – whether that be cannabis business knowledge, experience in the marijuana industry, transferable experience from other markets, or even contributing to equity considerations. Such minimum eligibility requirements vary among states but may include things like residency, criminal background, and other requirements. Additionally, some states extend the “vetting” process beyond the applicant themself to individuals such as spouses, all LLC members (even non-managing members), etc.
- Residency Requirements – Some states impose strict residency requirements, requiring you to prove that you have maintained a primary home in the state for a certain period of time (examples may include: primary residency for two years prior to the application date; residency two of the last five years; etc.) before you may apply or hold a license.
- Criminal Background – Some states restrict applicants who have certain criminal histories.
- Equity – Some states have implemented marijuana licensing regulations that are intended to provide a benefit to individuals and communities who have disproportionately suffered the burdens of the failed “war on drugs.” Other states provide additional “points” for applicants who include other favored parties, such as military veterans. It is generally wise – in order to help right these wrongs and also to increase the chance your application will result in the issuance of a license – to include such individuals in your business.
IV. Corporate Structure & Disclosures in Your Marijuana License Application
From LLCs to Corporations to S-Corps, and more, early on, you will need to determine the appropriate business structure for your business. You then need to implement a robust and compliant Operating Agreement and other corporate policies and procedures that are not only compliant with existing law but allow the businesses the flexibility to pivot and maintain these protections for their business and themselves if – actually, when – the regulations evolve in the future.
These documents will establish the foundation of your marijuana license application and will also be attached to your marijuana license application for evaluation by the licensing board.
If you will not be able to fund the start-up, licensing, and future operation of the business entirely yourself (and provide proof of funds in your application), you will need to secure capitalization. However, states restrict the capitalization of marijuana businesses, including who can loan money to a marijuana business, through what structures, and under what terms. It is critical to be aware of these restrictions and develop your business plan and marijuana license application in compliance with the same.
It is also important to be extremely careful when drafting your loan and security agreements to ensure they do not violate marijuana-specific laws, for example, by providing “rights” to the creditor which are unenforceable because they violate state marijuana laws. For example, you cannot securitize a license or raw material in the provision of a loan… unless you are a licensee. This means unless the lender is a member of the licensed marijuana business itself, you’ll need to get strategic and creative about the structure and content of third-party financing agreements.
VI. Intellectual Property
There are many, many considerations with respect to intellectual property, including copyright, trademarks, patents, trade secrets, and your marijuana license application.
Briefly, one of the most common questions our office is asked is, “is my brand name/logo usable?” Unfortunately, in many cases, the answer is simply: no. If you have not yet developed a brand identity, there is one primary pitfall to avoid in the cannabis industry: The mark must be distinctive. For example, avoid terms like “canna,” “green,” and “mary jane” and other synonyms for marijuana that are descriptive, may be generic, and are generally not protectable. The general rule of thumb is the more creative or unique, the better.