BILL NUMBER: S5277

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:

To expand who can hold membership in an adult-use cooperative license.

 
SUMMARY OF SPECIFIC PROVISIONS::

Section 1 of the bill amends section 70 of the cannabis law to strike
out the language pertaining to "natural person."

 
JUSTIFICATION::

In the fall of 2023, the NYS Office of Cannabis Management (0CM) opened
up the long-awaited licensing portal 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 is 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 expe-
rience 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) that have controlled the supply
and retail sides of our medical cannabis market are set up and operating
as fully vertically integrated entities, and 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 cultivate, 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 New York State; business entities established by
the NYS Department of State cannot.

The state wishes to make co-op's more attractive by allowing already
established entities to be able to obtain this type of license. Doing so
will be beneficial for overall market health and diversity, and will
also offer protection to co-op members from personal liability by allow-
ing 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 co-op 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 regu-
lations place on laborers, etc. Most importantly, no entity or person
can be a True Party of Interest (TPI) in a co-op license and any other
license. So if big business conglomerates do decide to be a co-op
member, this is their only entry into NYS's cannabis market in a mean-
ingful way. In short, a co-op 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 Cooperative License's reach and applicability.

 
PRIOR LEGISLATIVE HISTORY::

2023-24: S7504 - Passed Senate

 
FISCAL IMPLICATION FOR STATE AND LOCAL GOVERNMENTS::

None.

 
EFFECTIVE DATE::

Immediately.