In an interview published on March 23, 2023, Green Market Report spoke with Axel Bernabe, the Chief of Staff and Senior Policy Director for the New York Office of Cannabis Management (“OCM”). The interview is significant because Axel Bernabe is one of the leading policymakers in the OCM. The interview ranged over many topics; however, the most-detailed part of the interview was devoted to the proposed True Party of Interest rules (“TPI”) issued in December of last year.
In the interview, Axel Bernabe explained that the focus in understanding the TPI rules should not be on the mechanics of the rules but on their purpose. The purpose of the rules is to prevent ownership or control between the supply tier of the cannabis industry, consisting of cultivation, processing and wholesale distributing, and the retail tier of the cannabis industry, consisting of retail dispensaries, on-site consumption establishments and delivery. This two-tier market structure is fundamental to the New York Cannabis Law. Accordingly, if a person or entity has an ownership or control interest in a business in the supply tier, then that person or entity cannot have any ownership or control interest in any business in the retailing tier. Similarly, if a person has an ownership or control interest in a business in the retailing tier, then that person cannot have any ownership interest in any entity in the supply tier.
Bernabe explained that New York has adopted this policy because suppliers who had an interest in the retailing tier would be able to exert anti-competitive pressures on retailers, which would limit choice and quality of product.
Bernabe admitted that there has been heated criticism that the TPI rules would hobble the ability of dispensary operators to raise funds because many investors want to buy into vertically integrated operation, due to the perceived economic advantages of vertical integration. However, Bernabe seemed dubious about these economic advantages. In addition, he felt that the investors (for the most part) who would be discouraged by the TPI rules would be existing cannabis businesses that are vertically integrated. As a side note, although Bernabe did not mention it, less than half of California cannabis businesses are vertically integrated, which helps his argument that prohibition of vertical integration does not foreclose businesses in the retail tier from finding investors.
Bernabe further argued that barring businesses in the supply tier from dictating to the retail tier would, in fact, further (rather than discourage) the ability of the retail tier to raise investment money from investors new to the cannabis industry. He added that this model has been used in the liquor industry in New York and has produced a market of thousands of profitable, small and often family-owned liquor stores.
In short, from the policy point of view enunciated by Bernabe, the only purpose of the TPI rules is to prevent ownership between the two tiers. The idea is straightforward. If the true person of interest is identified, then prohibited cross-ownership would be easy to detect by comparing whether the same name is appearing on one tier and the other tier. Accordingly, the application for a conditional adult use dispensary license requires both a personal history disclosure form and an entity history disclosure form. (In fact, the TPI definitions in the rules proposed in December of last year are substantially the same as the TPI definitions in the Conditional Adult-Use Retail Dispensary rules, which were adopted in final form on August 3, 2022, and presumably are already affecting investors in positive and negative ways.)
Bernabe stressed that horizontal integration among licensees in a tier is permitted, although subject to certain limitations on size such on the number of acres in a farming facility or the amount of passive investment in multiple retail dispensaries. Accordingly, the horizontal integration rules are much less severe than the absolute prohibition on vertical integration. Bernabe confirmed that out-of-state vertically integrated operators would be free to invest in New York supply operations as long as the operators did not invest or control businesses in the retail sale tier.
Bernabe admitted that the final TPI rules will likely be strict, broad and perhaps mechanical, but that it is necessary to draw a “bright line” to preserve the integrity of the two-tier regulatory regime.
Bernabe did not say when the TPI rules—whose comment period ended on February 13, 2023—would be issued in the final form.
