There’s a series of rumors floating around New York about exactly how the state plans to regulate the biggest, most lucrative cannabis licenses available, Registered Organizations, the only ten companies allowed to operate vertically-integrated operations in the state. While unconfirmable, the rumors have been powerful enough that the biggest cannabis companies are relying on them to decide whether and how much to invest in New York’s market.
The way the state’s adult use law is set up, cannabis licenses are broken into four sectors: cultivation, processing, retail, and delivery. You can own two adjacent parts of the supply chain, but no more, unless you own an “RO”, as most in the Empire State call them. As a result, the ROs, which have been serving the state’s relatively small medical patient population since 2015, would get to grow, process, and sell at retail, cannabis across the state.
The fact of vertical integration was once enough to drive the value of New York’s RO licenses through the ceiling. At the height of the frenzy for ROs, Miracle Gro’s investment arm, RIV Capital, paid $247 million in cash last April to take over an existing license. Earlier that year, Verano Holdings purchased an RO license in conjunction with licenses in other states for $413 million. Finally in May, Ascend Wellness Holdings set a deal with MedMen to buy their RO license for what seemed like a steal at the time, $88 million.
It seemed like New York’s cannabis industry was ready to explode on the scene. Last January then-Governor Andrew Cuomo’s office estimated a $3.5 billion legal cannabis market by 2024. Industry observers expected the companies that owned the ten precious Registered Organization licenses were going to make a ton of money.
But a few months later, two of the big RO deals collapsed. In August, Ascend pulled out of their deal, citing concerns that MedMen’s assets had “deteriorated materially”. Then, two weeks ago, Verano announced its deal to purchase an RO was off as well.
What happened?
I’ve been calling around New York this week, trying to talk to anyone in Albany or with the ROs that can explain to me the landscape in the state. Plenty of people were willing to talk to me, but nobody on the record.
This creates a serious problem for a reporter. The rules of reporting are pretty basic: Always get a second person who witnessed the event to confirm it (remember the old Chicago City News Bureau saying: “If your mother tells you she loves you, double check it.”) and require sources to talk to you on the record, so readers know who is telling you something.
But New York’s regulatory environment has made operators skittish so that nobody has been willing to go on the record with me. And ROs tell me they’ve had a hard time getting straight answers from the state’s lead regulators, Chris Alexander, the executive director of the state’s Office of Cannabis Management, and Axel Bernabe, his chief of staff.
Yet, cannabis companies are telling me that in absence of clear regulatory guidance, the rumors are powerful enough to guide actual decision making. So, here is the information I’m told cannabis companies are working from in New York.
According to the RO teams, much of what they have learned about regulatory plans come from when they hold extemporaneous private meetings with Alexander or Bernabe, or from unofficial events. For instance, two weeks ago law firm Duane Morris held a continuing education meeting in Manhattan, attended by about 20 people, according to someone who was there. During the meeting, Bernabe discussed how his agency expected to conduct future regulatory plans limiting what sort of business ROs could conduct.
Following the meeting “the phone tree lit up” said one RO team member, and details of Bernabe’s extemporaneous discussion were quickly distributed between RO attorneys and lobbyists.
RO teams are particularly concerned about two rules that could change the cost and the way they could do business in New York. First, a so-called “RO fee”, the state will charge ROs for the privilege of being vertically integrated. Exactly how much that fee will be and over what period of time it will be levied is under fierce debate. Likely to be in the millions of dollars, RO team members have been working under the impression that the fee could be as high as $20 million paid in one lump sum or over a short period of time.
The second rule stirring up ROs is regarding “True Party of Interest”, how the state determines an arms-length relationship and limitations on what parts of the supply chain an entity can participate in. Earlier this year New York’s Office of Cannabis Management posted a guidance document on its website detailing True Party of Interest (TPI) for Conditional Adult Use Retail Dispensary (CAURD) licensees, limiting those licensees from participating with cultivators or processors in license deals.
RO teams, I’m told, immediately assumed that these TPI rules will likely apply to them as well. Since many cultivators operate as a “house of brands”, producing many other licensed products, applying these TPI rules would severely undercut how cultivators operate in many states. For instance, suppose I had a brand of dispensaries named “Brownies” and I wanted to license “Brownie” products to a cultivator to produce and sell to other dispensaries. New York’s TPI rule, as detailed for CAURD license holders, would not allow that.
But nobody really knows for sure how much the RO fee will be. And nobody knows for sure what the TPI rule will be because the Office of Cannabis Management hasn’t released regulations, hasn’t released any official guidance letters, and hasn’t held any public meetings to discuss plans.
Hoping to clarify the situation and learn OCM’s position I reached out to the agency’s communications staff multiple times this week by email and text. As of publication, I have not heard back. If I had tens of millions of dollars at stake and didn’t get a phone call back, I might consider pulling out of New York too.
Many RO teams anticipate that next month the Cannabis Control Board (OCM’s controlling body) will convene to roll out a regulation package that could answer these questions and more. However, CCB has not posted a meeting date and has not met for over 6 weeks, which is unusual, since the Board has been meeting at least monthly since it was constituted last fall.
If a regulatory package is introduced next month, RO teams say they expect it to be in the hundreds of pages. Once it is introduced, OCM is required to conduct a 90-day public comment period. Following that, it will likely need time to digest those comments and make changes to their proposed rules, a process that will take at least 30 more days. Then, another 30 days waiting period for public discussion before the CCB can vote on it. Once the rules are approved, there will likely be further delay as OCM will need time to implement them.
So, optimistically: If OCM roles out proposed regulations next month, it will be at least next June before they can be implemented and ROs are allowed to start selling adult use cannabis – and other license types are enacted.
That’s a long time to wait when you’ve got a lot invested – and other states seem to be moving forward faster.
