As New York develops adult-use marijuana rules, equity concerns emerge

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New York’s plan to create a diverse, multibillion-dollar adult-use marijuana industry is in danger of slipping from its high goals, according to critics, making it potentially the latest social equity program to experience a less-than-smooth start.

As the state works toward finalizing its adult-use regulations, critics are highlighting what they see as major shortcomings from a program intended to promote greater racial and economic diversity by giving opportunities to those impacted by the war on drugs.

Sales are expected to start late this year or in early 2023, and state officials said in March that the initial 100 to 200 recreational retail licenses would focus on applicants with past marijuana-related convictions.

But critics note that there is:

  • No chief equity officer in place.
  • No advisory board to offer guidance on making the state’s recreational marijuana program more diverse.
  • No detailed social and economic equity plan as required by the adult-use law enacted last year.

The lack of progress on those fronts jeopardizes the lofty social equity goals the state has set, industry experts say.

Those goals include ensuring that 50% of all licenses go to social equity applicants and that a $200 million fund is created to help support those businesses.

All of this is reminiscent of other slow-to-start equity programs, most notably Illinois, which still doesn’t have an equity business in operation 2½ years after the start of recreational marijuana sales.

A chief equity officer “is a critical position to roll out these social equity measures,” said Rob DiPisa, co-chair of the cannabis law practice at Cole Schotz in New Jersey.

New York’s adult-use law calls for the chief equity officer to assist in the development and implementation of the social and economic equity plan as well as to ensure that it is complied with on a continual basis.

Big illicit market

The social equity program’s success also is essential to reducing a large illicit marijuana market that threatens to undercut upcoming legal one, according to industry experts.

The concerns about the lack of progress in filling social equity positions were raised in comments about proposed regulations governing adult-use retailers.

The proposed regulations are just one set of rules that New York regulators are in the middle of finalizing.

Overall, New York is taking a piecemeal approach to drafting and finalizing adult-use regulations, DiPisa noted.

For example, the state’s Cannabis Control Board last week unanimously approved a set of strict marketing and packaging rules that some industry officials fear will make it difficult for marijuana businesses to develop distinctive brands.

The rules would require reusable packaging and would prohibit using certain images and lettering that regulators believe could attract minors.

Those rules still must go through an additional public comment period before a final vote.

For that reason, DiPisa indicated he’s not getting too worked up over a particular set of draft rules.

However, experts are concerned about the lack of progress over certain elements of New York’s social equity program and how that could affect the state’s equity goals and the market’s launch.

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In written comments about the proposed retail regulations, the Minority Cannabis Business Association (MCBA) said a chief equity officer, advisory board and detailed social and economic equity plan are critical so regulators can “proactively address and timely respond to barriers to entry and sustainability, and other challenges to creating an equitable cannabis industry.”

The Washington DC-based advocacy group also noted that proper oversight is essential to:

  • Avoid the missteps that have occurred in other states.
  • Reduce the illegal market.
  • Ensure that funding to social equity applicants occurs in a timely fashion.

New York Gov. Kathy Hochul plans to create a $200 million public-private fund to support social equity applications as they “plan for and build out their businesses.”

But details are still to come.

“When the funding is not timely and meaningful, it really is nothing but bells and whistles,” MCBA Executive Director Amber Littlejohn told MJBizDaily.

“We still don’t have a single state that on the day the market opens provided funding to social equity applicants.”

Rollout questions

DiPisa said existing medical marijuana operators could start sales before year-end.

But if New York is serious about having a social equity retailer help launch the market, he added, regulators must begin and complete a licensing round relatively soon.

“I don’t see how this all is going to work,” DiPisa said, especially with no chief equity officer in place.

Illinois, meanwhile, stands as a potential warning sign for social equity advocates in New York.

The Midwestern state once was lauded as a potential social equity blueprint before New York came along as a potential game changer.

Recreational marijuana sales in Illinois launched in January 2020, but the state has yet to issue a single low-interest loan from its social equity fund. Also, zero social equity growers and processors are operating in Illinois.

Despite New York’s lofty social equity goals, concerns have persisted that the existing 10 medical marijuana operators will have an inherent market advantage and dominance because they are allowed to be vertically integrated while social equity businesses won’t be.

Nine of the 10 existing medical marijuana businesses are multistate operators.

The last remaining independent, Etain Health, announced in March that it was selling for $247 million to Toronto-based RIV Capital, a Canadian investment firm bankrolled by a unit of lawn and garden giant Scotts Miracle-Gro.

As for New York’s draft regulations, experts such as DiPisa see positive aspects as well as areas for concern.

“It’s clear to me that New York is taking its time and being thoughtful and definitely cherry-picking the successful aspects from other jurisdictions,” he said.

Some might criticize the piecemeal approach, DiPisa said, “but I think it’s a good way to expedite” the regulations.

He said he was pleasantly surprised about the strict sustainability provisions in packaging, such as the requirement for reusable material.

But industry officials are concerned about extremely restrictive draft marketing provisions that would prohibit bright colors, bubble letters and even the word “candy.”

Kaelan Castetter, co-founder of the New York Cannabis Growers and Processors Association, said the proposed regulations would make it more difficult for marijuana businesses to develop distinctive brands, according to The (Syracuse) Post-Standard.

“Brands are not going to have a lot of creative freedom when designing their packaging if these regulations were to go on the books as is,” Castetter said.

DiPisa countered: “What’s important for everyone to remember is that these are in draft form. The whole point is that the community can now come forward with public comment.”

Jeff Smith can be reached at jeff.smith@mjbizdaily.com.