Microbusiness Licenses: Messy, but Powerful

By dan - In

What is a Microbusiness License?

The Microbusiness parameters in the bill are an absolute mess, with inconsistent provisions in various parts of the bill.  It is likely to be clarified by the Office of Cannabis Management (“OCM”) later this year.

For the time being, this is what we are working with:

§ 73 (1) of the bill provides that a “Microbusiness license shall authorize the limited cultivation, processing, distribution, delivery, and dispensing of their own adult-use cannabis and cannabis products.”

§ 73 (2) provides that “A Microbusiness licensee may not hold any direct or indirect interest in any other license in this chapter and may only distribute its own cannabis and cannabis products to dispensaries.”

So (1) says a Microbusiness can occupy and operate the entire vertical for its own products (including functioning as a retailer), while (2) says a Microbusiness can only distribute its own products to retailers. The only way to read this without rendering (2) as superfluous would be that Microbusinesses, when acting in a distributor capacity, can only distribute its own products to dispensaries and not on-site consumption licensees, while leaving the other license permissions intact, but there is serious ambiguity here… and even that reading doesn’t fit with the rest of the bill, as § 77 (7) expressly permits and on-site consumption licensee to get their product from a Microbusiness.  Sigh…

Beyond that, the definitions portion of the bill states that a “Microbusiness means a licensee that may act as a cannabis producer for the cultivation of cannabis, a cannabis processor, a cannabis distributor and a cannabis retailer under this article; provided such licensee complies with all requirements imposed by this article on licensed producers, processors, distributors and retailers to the extent the licensee engages in such activities.”

There’s a lot of inconsistency and ambiguity in the terms above, but read in the context of the entire bill, it at least appears that the Microbusiness license is designed to be a flexible option for small business to develop a variety of business models. 

Hopefully, the parameters will be clarified pursuant to §73 (3), that “The size, scope and eligibility criteria of a Microbusiness shall be determined in regulation by the board in consultation with the executive director and the chief equity officer. The granting of such licenses shall promote social and economic equity applicants as provided for in this chapter.”

Limitations

The Microbusiness license is potentially a beast. Subject to the limitations developed by the OCM later in the year, the Microbusiness license provides a blue ocean of possible business models. Want to just buy from a distributor and run a delivery business? Cool, that works.  Want to grow your own and sell to processors, distributors, or retail shops?  That can work (maybe). Want to make edibles and run a sick awesome bakery? It’s possible. Cultivation in the back, dispensary in the front? OK.

The limitations the OCM will implement will likely put caps on how large a Microbusiness can grow before needing to either cap growth or adjust their business and apply for the regular licenses.  Whether this limitation will be based on weight, volume, revenue, or something else, remains anyone’s guess.

I know I’ve used the word ambiguous several times now, but here it is again.  What constitutes a Microbusiness’s “own” cannabis goods is not clear.  Context seems to indicate there must be some form of production or processing which makes the product “their own”. However, given that a Microbusiness is permitted to engage in single parts of the vertical and is not required to operate in all of them or any specific part, how would a Microbusiness function simply as a retailer, when retailers are restricted to reselling what is necessarily someone else’s brand/product?  It may be that the drafters are aiming to limit Microbusinesses from acting as an extension of another company and “their own” simply means they take ownership of the goods (whereas a simple distributor license, for example, is permitted to operate on a “distribution fee” agreement instead of taking possession of goods and reselling). This is again likely up to OCM interpretation later this year.

More clearly, Microbusinesses would be subject to the same limitations as those with multiple licenses – i.e., if the Microbusiness engages in processing and distribution, it would be limited to distributing only the product it has processed; it cannot also distribute goods from other processors directly to retail or consumers (can’t function the same way as a solo licensed distributor).

Notably, Microbusinesses are exempt from the requirement that a retail operation be located on a street level storefront on a public thoroughfare.  § 72 (5).

Microbusinesses also do not appear to be required to file a notice to the local municipality, as a retail or on-site consumption licensee would be required to under § 76, despite being allowed to operate as a retailer.  We expect this gap to be closed by OCM regulations if a Microbusiness has such a premise in its business model.

Additional Considerations

If you process cannabis products in your Microbusiness, you assume responsible for lab testing requirements. § 82.

If you distribute products in your Microbusiness, you assume responsibility for calculating and collecting the potency tax (cannabis flower at the rate of five-tenths of one cent per milligram of the amount of total THC, as reflected on the product label; (2) concentrated cannabis at the rate of eight-tenths of one cent per milligram of the amount of total THC, as reflected on the product label; and (3) cannabis edible product at the rate of three cents per milligram of the amount of total THC, as reflected on the product label.)

If you sell at retail, you’re responsible for calculating and collecting the sales tax (9% for State, 4% for Local).

More than just about any other licensing type, it is important to consult with professionals to discuss your business plans early for a Microbusiness.  Given the large variety of business models made possible under the Microbusiness license, you may be taking on more compliance obligations than you realize. Each part of the vertical has its own considerations which must be accounted for, which can quickly become a minefield when operating in multiple capacities.

Licensing Considerations and Fees

              I saved this part for last, as if you’ve read the prior post regarding retail licenses, you don’t need to go through this part.  The only differences worth mentioning between licensing considerations for retail and Microbusiness is that Microbusinesses are even more focused on social equity applicants than retail: Microbusinesses are specifically addressed as a license category to promote social equity applicants.  If you haven’t read the prior article, keep going, but be warned there is a lot of text which may make your eyes glaze over.

No one knows what the applications and license fee will be yet. We will wait for the Office of Cannabis Management to provide more information.

However, we can glean from the bill that Microbusiness licenses should be one of the least expensive licenses, as the bill aims to include small businesses and entrepreneurs, particularly social equity applicants.  Further, applicants who meet criteria for preferential licensing consideration (social equity applicants), may also have their fees reduced or even waived.  The OCM will also be putting together an incubator program, and potentially have low-to-zero cost loans available for social equity applicants.

There is a stated goal that at least 50% of licenses will be granted to Social Equity Applicants. Further, the Board “shall” waive or reduce licensing fees for Social Equity Applicants.

Social Equity Applicants are:

(a) individuals from communities disproportionately impacted by the enforcement of cannabis prohibition;

(b) minority-owned businesses;

(c) women-owned businesses;

(d) minority and women-owned businesses

(e) distressed farmers; and

(f) service-disabled veterans.

Further favorable consideration will be given to an applicant who:

(a) is a member of a community disproportionately impacted by the enforcement of cannabis prohibition;

(b) has an income lower than eighty percent of the median income of the county in which the applicant resides; and

(c) was convicted of a marihuana-related offense prior to the effective date of this chapter, or had a parent, guardian, child, spouse, or dependent, or was a dependent of an individual who, prior to the effective date of this chapter, was convicted of a marihuana-related offense.

Considerations that will be made by the Board in evaluating applicants (with notations):

 (a) the applicant is a social and economic equity applicant (see above);

 (b) the applicant will be able to maintain effective control against the illegal diversion or inversion of cannabis;

 (c) the applicant will be able to comply with all applicable state laws and regulations;

 (d) the applicant and its officers are ready, willing, and able to properly carry on the activities for which a license is sought including with assistance from the social and economic equity and incubator program, if applicable;

 (e) where appropriate and applicable, the applicant possesses or has the right to use sufficient land, buildings, and equipment to properly carry on the activity described in the application or has a plan to do so if qualifying as a social and economic equity applicant;

 (f) the applicant qualifies as a social and economic equity applicant or sets out a plan for benefiting communities and people disproportionally impacted by enforcement of cannabis laws;

 (g) it is in the public interest that such license be granted, taking into consideration, but not limited to, the following criteria:

(i) that it is a privilege, and not a right, to cultivate, process, distribute, and sell adult-use cannabis;

(ii) the number, classes, and character of other licenses in proximity to the location and in the particular municipality, subdivision thereof or geographic boundary as established by the board (looking to avoid congestion);

(iii) evidence that all necessary licenses and permits have been or will be obtained from the state and all other relevant governing bodies;

(iv) effect of the grant of the license on pedestrian or vehicular traffic, and parking, in proximity to the location;

(v) the existing noise level at the location and any increase in noise level that would be generated by the proposed premises;

(vi) the ability to increase climate resiliency and minimize or eliminate adverse environmental impacts, including but not limited to water usage, energy usage, carbon emissions, waste, pollutants, harmful chemicals and single use plastics;

(vii) the effect on the production, price and availability of cannabis and cannabis products;

(viii) the applicant’s history of violations and compliance with the laws of another jurisdiction, in which they operate or have operated a cannabis license or registration, related to the operation of a cannabis business;

(ix) the applicant’s history of violations related to the operation of a business, including but not limited to, violations related to labor laws, federal occupational safety and health law and tax compliance; and

(x) any other factors specified by law or regulation that are relevant to determine that granting a license would promote public convenience and advantage, public health and safety and the public interest of the state, county or community.

(h) the applicant and its managing officers are of good moral character and do not have an ownership or controlling interest in more licenses or permits than allowed by this chapter, or any regulations promulgated hereunder;

(i) the applicant has entered into a labor peace agreement with a bona-fide labor organization that is actively engaged in representing or attempting to represent the applicant’s employees, and the maintenance of such a labor peace agreement shall be an ongoing material condition of licensure. In evaluating applications from entities with twenty-five or more employees, the office shall give consideration to whether applicants have entered into an agreement with a statewide or local bona-fide building and construction trades organization for construction work on its licensed facilities;

 (j) the applicant will contribute to communities and people disproportionately harmed by enforcement of cannabis laws through including, but not limited to, the social responsibility framework as provided in section sixty-six of this article and report these contributions to the board;

 (k) (inapplicable);

 (l) the applicant satisfies any other conditions as determined by the board; and

 (m) (inapplicable).

Many of these considerations pop back up in the renewal consideration process; importantly, 1) a labor peace agreement is maintained; and 2) the applicant executes on their plan to contribute to communities and people disproportionately harmed by enforcement of cannabis laws.

Action Steps

Figure out corporate structure and ownership.  There are tremendous benefits to having social equity applicants as primary business owners.

PLAN YOUR BUSINESS MODEL. DISCUSS WITH A PROFESSIONAL. REVISE. PLAN IT AGAIN.

Start planning what a “plan for benefiting communities and people disproportionally impacted by enforcement of cannabis laws” will look like.  This is extremely broad as written, and creativity may be useful here.  Be proactive about union relations (if in NYC or Long Island, most likely Local 338 RWDSU/UFCW https://local338.org/index.php) and be prepared to deal with issues surrounding the labor peace agreement requirements.

Start investigating premises, if necessary to your model.  Check the local zoning laws to make sure it will work.  Speak with commercial landlords who may be willing to offer leases contingent on an approved license.

Get your team in place.  Get to know those intending to enter the industry in higher and lower parts of the vertical depending on your business plan.

And talk to a lawyer!