Cannabis Industry

A sea change in the funding of New Jersey cannabis businesses has been approved by New Jersey’s Legislature and is pending on Governor Murphy’s desk awaiting his signature.  Duane Morris attorneys assisted in the conception and drafting of this legislation.

That legislation, A4151, will allow far greater levels of investment in minority, women and disabled veteran owned adult use cannabis businesses by those best positioned to invest in them on equitable terms – current licensees and cannabis funds. The bill will increase the equity stake a licensee or investment fund may have in these diversely owned businesses from 5% to 35%, and allow them to invest in up to 7 diversely owned licensees. This will also allow capital stacks to rely more heavily towards equity, reducing the debt component at high interest rates that burn cash flow new operators need to get their businesses on solid footing. To date, these terms have only been available to New Jersey small universe of diversely owned medical cannabis licensees.

The bill protects against predatory conduct by preventing investors from acquiring a majority interest in the diversely owned business, even in cases of default. In the event of default, majority ownership by diverse interests must be maintained.  Terms must be commercially reasonable as determined by the Cannabis Regulatory Commission.

Context: Hundreds of New Jersey conditional licensees are struggling to raise the $250,000 to $1 million initial investment they need to fund even a simple dispensary given high real estate, labor, tax and compliance costs in New Jersey. Without funding, they simply cannot complete the steps needed to convert to annual licensure (i.e., secure real estate and municipal approval and complete their operational plans and SOPs) and open for business.

Without funding, many of those conditional licensees will be forced to abandon their efforts and in many cases wipe out their personal investments to date, which often are funded out of 401(k) and other savings accounts.

Diversely owned cannabis businesses and equity investors alike interested in learning more about this opprtunity should contact Paul Josephson, Tracy Gallegos, or Michael Schwamm.

Duane Morris Takeaways: In Zanetich v. Walmart, Inc., Case No. 1:22-CV-05387 (D.N.J. May 25, 2023), a case of first impression, the Judge Christine O’Hearn of the U.S. District Court for the District of New Jersey found the New Jersey Cannabis Regulatory, Enforcement Assistance, and Marketplace Modernization Act (“CREAMMA”), the 2021 law legalizing recreational marijuana use in the state, does not allow job applicants and employees to file lawsuits alleging adverse actions based on marijuana use.  The ruling is a boon for employers across New Jersey, who will not face the possibility of private lawsuits filed by applicants and employees based on adverse employment actions by employers for their workers’ off-duty marijuana use.  However, the victory may be short-lived, as the Court invited re-examination of the law by way of legislative amendment, enforcement guidance, or New Jersey state court clarity on application of the state’s common law “failure to hire” theory to claims under the CREAMMA.

Case Background

On January 21, 2022, the plaintiff applied for a job with defendants in the Asset Protection Department in one of defendants’ New Jersey locations.  A few days after his January 25, 2022 interview, on January 28, 2022, defendants offered plaintiff the job, beginning on February 7, 2022, “subject to him submitting to and passing a drug test.” Id. at 2. Plaintiff alleged that at the time, the defendants had a Drug & Alcohol Policy that stated “any applicant or associate who tests positive for illegal drug use may be ineligible for employment,” which included marijuana. Id.

After plaintiff took a drug test on January 21, 2022 and tested positive for marijuana, he contacted defendants on February 10, 2022 for an update on his application.  Two days later, defendants informed Plaintiff that his job offer would be rescinded.  When plaintiff asked for the reason for this decision, he was advised it was because he had tested positive for marijuana.

To read the full text of this article, please visit the Duane Morris Class Action Defense Blog.

Duane Morris partners Michael D. Schwamm and Paul P. Josephson contributed sections on New Jersey and New York to the Cannabis Chamber of Commerce’s “State of Cannabis: 15 Key US Markets 2023 Annual Report.” Also involved were partner Katelynn Gray and associate Deanna Lucci for the New York section, and associate Miranda Bovit for the New Jersey section.

Read the full white paper at the Cannabis Chamber of Commerce website.

In June 2022, the Nevada Cannabis Compliance Board (CCB) approved regulations pertaining to the licensing and operation of cannabis consumption lounges in accordance with its authority under Assembly Bill 341 (2021). Following the CCB’s implementation of the regulations, the license application window was opened from October 14 – October 27, 2022. During the application period, the CCB received ninety-nine applications, and on November 30, 2022, the CCB identified forty applicants who would be prospective holders of consumption lounge licenses. Of the total forty applicants identified, twenty were applicants that already held cannabis retail licenses in Nevada and intended to operate consumption lounges attached to their retail dispensaries, ten were social equity applicants that intended to operate standalone consumption lounges, and ten were non-social equity applicants that intended to operate standalone consumption lounges.

While cannabis consumption lounges seemed to be moving in the right direction in Nevada, prospective operators have experienced hurdles that have delayed the opening of consumption lounges, including changes to the regulations. Now, those prospective operators are faced with more challenges, including concerns regarding indoor air quality at consumption lounges. Specifically, the regulations include stringent air quality standards that require, among other things, that air be circulated every two minutes – a requirement that is even more stringent than those imposed on cigar bars, taverns and hookah lounges. Installing ventilation systems that meet the requirements set forth in the regulations would be a costly undertaking for an operator, with some industry experts estimating that a compliant HVAC system would cost nearly half a million dollars to install. Moreover, monthly utility bills are expected to be in the thousands of dollars. With cannabis operators already experiencing difficulties accessing capital due to the status of cannabis under federal law, and the volatility in the economic market as a whole further exacerbating capital constraints, some prospective operators simply do not have the capital required to build out a consumption lounge that complies with the strict regulations.

Some operators who are already in the build-out phase have been forced to pause construction while they attempt to raise the funds required to address the air quality requirements. Other operators have elected to halt construction until a final version of the regulations has been adopted, in order to avoid having to revise their build-out plans if the regulations are further revised.

When the CCB first approved the regulations, many predicted that consumption lounges would be open in Las Vegas as early as the end of 2022. That time line was subsequently pushed back to the second quarter of 2023, with many hoping that consumption lounges would open by 4/20 and, if not, by early summer in time for the tourists flocking to Sin City for their summer vacations. As prospective operators struggle to complete their build-outs, industry insiders have again revised the time line to sometime in the third or fourth quarter of 2023.

For now, the only consumption lounge where tourists can legally consume cannabis products is NuWu Cannabis Marketplace, which also includes a retail dispensary. Because it is located on tribal land, it is not required to obtain a consumption lounge license from the state.