By Amith Arcot, Associate
In November 2020, New Jersey voters, by referendum, voted in favor of amending the New Jersey Constitution to legalize the personal use of marijuana and allow the state to create a market for regulated, recreational-use marijuana cultivation, distribution, and sales. Within a matter of months, Governor Murphy had put pen to paper and signed three laws, following through with New Jersey’s promise of legalized marijuana on a recreational basis. NJ A21 legalized marijuana for adult use, NJ A1897 decriminalized the possession of marijuana and hashish, and NJ S3454 defined its legality for use by adults and penalties for possession by those under the age of 21. (See also “Cannabis Regulatory, Enforcement Assistance, and Marketplace Modernization Act” P.L.2021, c.16 (C.24:6I-31 et seq.))
Wasting no time, New Jersey is now leaps ahead of neighboring New York. In only a few months, it has established a functional New Jersey Cannabis Regulatory Commission (“CRC”), which has already adopted the first set of rules to govern the cultivation, distribution, and sale of personal-use marijuana within the state. Additionally, the CRC has made it clear that while these rules lay the groundwork for the legalized personal-use cannabis market, the rules will evolve and augment over time. Among other things, it is expected that specific regulations targeted at delivery, wholesale, and other aspects of the cannabis market will be implemented as the industry begins to take flight. At the same time, however, the CRC has stated that these initial regulations are critical for establishing “a comprehensive rulebook for [the licensing] and operating of a cannabis establishment in the cannabis industry” in the state of New Jersey.
The 160-page document setting forth New Jersey’s initial recreational-use cannabis rules and regulations went into effect on August 19, 2021. These will remain in effect initially for one year and may be readopted with any amendments by the CRC at that time. The rules span a variety of areas from social equity to safety, market access, municipal authority, licensing, cultivation, packaging and advertisement, and sales. Some of the highlights include:
USE
Those over the age of 21 can legally purchase and possess up to one ounce of cannabis or an equivalent amount of cannabis products. Consumers and entities engaged in the activities allowed by state statute, rule, or regulation are protected from criminal prosecution.
LICENSING
Subchapter 7 of the new rules (“Rules”), N.J.A.C, Title 17, Chapter 30, sets out the application and licensing process for each of the licenses authorized by New Jersey. At present, there will be six different types of licenses that can be granted. They include licenses for manufacturing, cultivation, wholesale, retail, distribution, and delivery, and they will be renewable annually. These licenses also include those for “microbusinesses” composed of (i) 10 or fewer employees and (ii) business operation locations of 2,500 square feet or less.
The CRC is seeking to take a progressive approach to licensing by giving priority to individuals who live in economically distressed areas of New Jersey and/or who have received cannabis-related convictions (“Social Equity Businesses”). Additionally, minority, women, and disabled veteran-owned cannabis businesses—as certified by the New Jersey Department of Treasury—also receive licensing prioritization in New Jersey (“Diversely Owned Businesses”). Businesses located in what are known as “impact zones” comprised of municipalities containing large populations and high unemployment, or high numbers of crime or arrests for marijuana, receive similar licensing priority (“Impact Zone Businesses”).
Licensing in New Jersey will be based, in part, on market demand. That said, there is not a state-mandated licensing cap, except for cultivators (which is capped at 37 through February 22, 2022, at which time and thereafter the CRC may determine to expand this “cap”), and municipalities can set their own local restrictions on the number of businesses permitted within their borders.
New Jersey has also adopted a two-tier licensing scheme allowing for both conditional and annual licenses. Conditional licenses seek to provide some prioritization for microbusinesses and to create “a pathway for entrepreneurs into the industry.” Conditional license (“CL”) applicants will need to show that all owners with decision-making authority over the applicant had adjusted gross income of less than $200,000 during the preceding year, or $400,000 if filed jointly with another. The process allows for these license applicants to bypass several of the requirements annual license applicants will face, such as details of experience in the cannabis industry, thereby encouraging and incentivizing local entrepreneurs to enter this new market in an expedited fashion.
If approved and issued a CL, the holder will then be required to solidify a permanent site for their business, gain control of the property through lease or purchase, and obtain municipal approval. Once ready, the CL holder can submit a conversion application, which includes submitting standard operating procedures for the business, an environmental impact plan, a workforce development plan, and a security plan.
Alternatively, applicants for annual licenses are required to submit a more detailed application that includes details for the proposed site for the business (which must be owned or leased), municipal approval, and zoning approval. These applicants must also submit an operating summary plan that details their experience, history, and knowledge of critical pieces for operating a cannabis business.
The CRC has proposed a fee schedule that would keep initial application fees relatively low to reduce barriers to entry into the New Jersey market. Applicants only need to pay 20% of the application fee when submitting their applications. The remaining 80% is only due if and when an application is approved. These application fees start as low as $100. Once an application is approved, the overall cost can range from $500 to $2,000. Additionally, annual licensure fees are tied into the size of respective businesses ranging from a low of $1,000 per year (e.g., for a microbusiness) up to $50,000 per year (e.g., for a cultivator with up to 150,000 square feet of cultivation capacity).
MICROBUSINESSES
Among the vast number of rules promulgated by the CRC, special attention was paid to what the CRC is referring to as “microbusinesses,” as defined above. Much like minority-owned businesses, microbusinesses will also be afforded priority in licensing. Microbusinesses will be able to apply for a conditional license which they can seek to upgrade to a standard annual license after a year, giving them a simpler application process and requiring them to pay smaller fees, thus encouraging local entrepreneurs to throw their hat into the (cannabis) ring.
MUNICIPALITIES
Despite cultivation, sale, distribution, consumption, and delivery of marijuana being legal in New Jersey, the CRC, through Subchapter 5 of the Rules, continues to recognize municipalities as having notable authority and autonomy to restrict the cannabis industry locally. In concept, this is similar to what other states have done. The deference provided to municipalities in New Jersey extends to the ability to authorize certain types of businesses, set caps on the numbers of certain types of cannabis businesses, create local licensing requirements, create zoning restrictions, and have a voice in determining who is granted a license. As to delivery and transportation services, however, municipalities cannot prohibit the actual delivery of cannabis and related supplies by such a service within their jurisdiction or restrict the time of operation of these deliveries. Additionally, existing medical marijuana dispensaries may apply for municipal approval to also now sell recreational cannabis products.
The laws signed by Governor Murphy in February also provided municipalities 180 days from February 22, 2021 (i.e., ending on August 21, 2021) to adopt ordinances opting out of permitting recreational-use cannabis businesses to establish locations within their jurisdictions. Those that did not opt out cannot do so for another 5 years. Those that did opt out, however, can reverse that course at any time and allow such businesses. As of the August 21st opt-out deadline, roughly 400 municipalities (nearly 73% of locales throughout New Jersey) have completely opted out of allowing recreational marijuana-use businesses within their borders. However, since few, if any, of these municipalities had the benefit of adequate consideration of the new CRC rules before the deadline, a number of the opt-out municipalities may simply opt back in during the months ahead as they become more familiar with the newly adopted rules. Yet, even with limited understanding of how the CRC would act to regulate the recreational-use market, some 98 municipalities passed ordinances allowing dispensaries while another 41 approved ordinances allowing some combination of 5 classes of the New Jersey cannabis licenses while expressly prohibiting, for now, dispensaries.
CULTIVATION
The CRC has outlined different cultivation tiers depending on premise size ranging from up to 2,500 square feet for microbusinesses to up to 150,000 square feet for Tier VI cultivators and expanded ATC cultivators. Among other restrictions and authorized business conduct for cultivators, outdoor cultivation must be explicitly approved by the municipality in which the cultivator operates, and cultivation facilities will be required to secure their facilities.
OPERATIONS
Subchapter 8 and 9 of the Rules contain a host of provisions largely now endemic to the cannabis industry generally addressing (i) the necessity for Cannabis Business Identification Cards for any individual acting on behalf of a cannabis business or testing lab and (ii) material conditions and operational requirements applicable to any cannabis business license holder. As to the latter, the Rules in Subchapter 9 address, with specificity, expected business operational requirements for such things as:
- the business premises;
- ongoing licensure qualifications;
- sanitary conditions;
- sustainability plans;
- a series of business-related prohibitions;
- detailed operations manuals and employee training;
- the maintenance of a system of specified record keeping;
- security protocols;
- inventory tracking and controls;
- secured transportation of cannabis items;
- the recordation of product-related complaints; and
- product recall procedures.
Subchapters 11 and 12, in turn, contain business conduct requirements specifically pertinent to (1) cannabis manufacturers and (2) cannabis retailers, while Subchapters 15 and 16 of the Rules cover the licensing, qualifications, and operational conditions for testing labs.
ADVERTISEMENT & PACKAGING
Cannabis businesses will have to adhere to strict advertising restrictions which include airing marijuana-related advertisements between the hours of 10:00 pm and 6:00 am to reduce the risk of their advertisements being aired to individuals under the age of 21. Additionally, marijuana packaging will be required to be completely child-resistant (both before being opened and also when resealed), be devoid of imagery that might be attractive to children, and also contain conspicuous warning labels specifying potency, health risks, and urging consumers from operating machinery and vehicles after consumption. Retail businesses are also required to have (i) strict age verification protocols and (ii) distributable consumer education materials for customers, including information on potential side effects, safe use techniques, and substance abuse indicators.
ENFORCEMENT & FINES
The CRC also has the teeth to ensure rules are adhered to. Among other things, the CRC has the authority to not only inspect cannabis businesses but also will be able to issue violation notices and fines for violations of New Jersey’s cannabis statutes and rules. Pursuant to the current framework, standard fines will not exceed $50,000, but fines for major violations relating to issues of “public safety or welfare, or a betrayal of public trust” can be issued for up to $500,000. Any business or revocations are appealable pursuant to the Administrative Procedure Act.
New Jersey has officially stepped up as the first in the tri-state area to make significant ground in laying a framework for a working cannabis market. This progress stands in stark contrast to its neighbors, New York and, to a lesser extent, Connecticut. New York remains in a nascent stage of establishing both the administrative mechanism for and actual set of rules and regulations needed to create a functional recreational-use industry as well as a sophisticated oversight process for the corresponding legal market. While additional details and specifics will continue to be ironed out over time, New Jersey’s legislative and executive branches have taken major strides in furtherance of the voters’ mandate from this past November, carving out a brand new market that is likely to spur significant economic benefits for New Jersey’s various stakeholders, as well as those looking to enter a potentially lucrative cannabis industry within the state.
Barton LLP maintains an interdisciplinary approach to providing answers and advice pertinent to the cannabis industry and its related laws, rules, and regulations. Should you have any questions or require additional information about any of the above or generally with respect to cannabis legalization, please contact Eric W. Sleeper.
