BILL NUMBER: S7504

SPONSOR: BAILEY
 
TITLE OF BILL:

An act to amend the cannabis law, in relation to expanding who can hold
membership in an adult-use cooperative license

 
PURPOSE OR GENERAL IDEA:

The purpose of this bill is to expand who can hold membership in an
adult-use cooperative license.

 
SUMMARY OF SPECIFIC PROVISIONS:

Section one of the bill amends section 70 of the cannabis law to strike
out the language pertaining to "natural person." Section two of the bill
sets forth the effective date.

 
JUSTIFICATION:

              

In the Fall of 2023, the NYS Office of Cannabis Management (0CM) antic-
ipates opening up long-awaited licensing portals for a number for
supply-side and retail-side operations in the State's nascent cannabis
market. On the licensing front, New York has decided to go a novel route
in licensing individuals and entities who wish to participate: there
will be no "vertical integration" allowed in our market. The reasoning
behind this policy is to combat well-known barriers to entry into a
highly competitive and expensive cannabis business world, and to prevent
monopolies from taking over the market and limiting product diversity
and consumer choice. Preventing full-blown vertical integration also
creates multiple entry points for entrepreneurs of all business levels,
styles, size, and experience to have a chance at what is expected to be
one of the nation's largest cannabis markets.

However, there are three notable exceptions to this unique ban: 1.
Existing Registered organizations (RO's) who currently control the
supply and retail sides of our medical cannabis market are already set
up and operating as fully vertically integrated entities, and they are
allowed to continue operating as such; 2. The Microbusiness License in
which very limited vertical integration is allowed:  licensees will be
able to cultivate, process, and engage in distribution OR retail sales;
and 3. Adult-Use Cooperatives in which very limited vertical integration
is allowed: democratically controlled licensees will be able to culti-
vate, process, and distribute (they cannot sell directly to consumers.)
This proposal deals with the Adult-Use Cooperative License.

In making a slight technical change to the current law, whereby the
phrase "shall be a natural person" is stricken from the law, the State
opens up opportunities for more of these Adult-Use Cooperative Licenses.
With the law as it is currently written, only natural persons can estab-
lish a cooperative in NYS; business entities established by the NYS
Department of State cannot.

The State wishes to make coop's more attractive by allowing already
established entities to be able to obtain this type of license which
would be beneficial for overall market health and diversity. Doing so
will also offer protection to co-op members from personal liability by
allowing them to come structured as a limited liability entity.  Also,
this amendment would encourage investment, which is especially crucial
for this capital-strapped industry, as investors can join as members
through their entities, which they prefer for tax and liability
purposes.

While one of the core missions in the MRTA is to prevent conglomerates
from taking over the market structure and raising barriers to entry, the
thought is that this proposal does not run the risk of that happening
simply by removing the "natural person" language for a number of
reasons. For background - there are two types of "members" discussed in
the OCM regulations: "Labor Members" and "Other Members" (i.e. investor
members.) Labor members under the MRTA and in OCM's regulations, retain
more authority over the coop than investor members. The big business
conglomerates would likely not want to subordinate capital to labor or
be subject to the voting preferences that the regulations place on
laborers, etc. Most importantly, no entity or person can be a True Party
of Interest (TPI) in a coop license and any other license. So if big
business conglomerates do decide to be a coop member, this is their only
entry into NYS's cannabis market in a meaningful way. In short, a coop
member can only be a passive investor in other licenses but nothing more
than that.  As such, this proposal does have some inherent checks and
controls to prevent abuses while also enhancing the Adult-Use Cooper-
ative License's reach and applicability.

 
PRIOR LEGISLATIVE HISTORY:

New bill.

 
FISCAL IMPLICATION FOR STATE AND LOCAL GOVERNMENTS:

None.

 
EFFECTIVE DATE:
Immediately.