On Feb. 22, 2021 Gov. Phil Murphy signed into law the Cannabis Regulatory, Enforcement Assistance, and Marketplace Modernization Act, which established the framework for a legal, adult-use cannabis industry in New Jersey. By some estimates, recreational cannabis may grow to be a billion-dollar industry in the state over the next few years. Many have worried that much of this growing economic pie may be grabbed by large, well-capitalized cannabis companies from out of state that have already established themselves in those other markets where recreational cannabis was legalized earlier than New Jersey.
Enter the microbusiness license.
Per New Jersey’s cannabis licensing laws, a microbusiness is a cannabis business with strong established connections with New Jersey that is subject to certain size and operational limitations. A significant number of licenses to operate in the cannabis industry will be earmarked solely for such microbusinesses. As such, microbusinesses will only need to compete against one another during the application process, rather than needing to compete directly with larger, more established businesses. This potentially gives entrepreneurial start-up companies seeking to delve into the cannabis industry a path forward without getting pushed aside by multi-state operators (MSOs) in the frenzy once New Jersey begins accepting applications.
To qualify as a microbusiness, the business must meet the following criteria:
- All of the owners of the business must be current New Jersey residents, and must have resided in New Jersey for the past two consecutive years.
- At least 51% of the owners, directors, officers, and employees must be residents of the municipality where the business will be located (or at least an adjoining municipality).
- The business can have no more than 10 employees.
- The business operating space can be no more than 2,500 square feet (and in the case of cultivators, can have a height of no more than 24 feet).
- There are various limitations on the monthly volume of cannabis that the business can be involved in, which vary somewhat depending on the type of license being applied for (in some cases limits of 1,000 cannabis plants per month, or limits of 1,000 pounds of usable cannabis per month or other cannabis products or resin, or other similar restrictions).
- Conversely, no owner, director, officer, or other person with a financial interest and decision-making authority in any other cannabis business (whether that business is a microbusiness or not) is permitted to have any financial interest in a microbusiness.
These are not insignificant restrictions, but companies that can plan to fit within the regulations may ease their path to obtaining a license to operate a cannabis business. According to the law, at least 25% of all New Jersey cannabis licenses will be granted solely to microbusinesses (and at least 10% of each class of licenses must go to microbusinesses). In addition, while the legislation provides that no more than 37 cannabis cultivator licenses will be issued in New Jersey during the first two years after enactment, that cap does not apply to microbusinesses.
The law provides for six different types of licenses that businesses may seek in connection with the recreational cannabis market:
Class 1 License: Cannabis Cultivator (growing cannabis)
Class 2 License: Cannabis Manufacturer (preparing and packaging)
Class 3 License: Cannabis Wholesaler (selling to other wholesalers and retailers)
Class 4 License: Cannabis Distributor (selling between cultivators/establishments)
Class 5 License: Cannabis Retailer (selling to retail customers)
Class 6 License: Cannabis Delivery (delivery from retailers to retail customers)
Potential microbusinesses will want to consider which license class will be their focus, and then begin mapping out how they can develop their business plan within the constraints of qualifying as a microbusiness.
Although the bill was signed into law on Feb. 22, 2021, there currently are no application forms or regulations laying out the details of the license application process.
The Cannabis Regulatory Commission is given 180 days from the effective date of the law to develop and finalize these forms and regulations. Thirty days after those application forms and regulations have been finalized, the license application process can formally commence. We do not yet know what the application fee will be for any given class of license, but the Act does provide that the application fees for a microbusiness will be no more than 50% of what the fees would be for non-microbusiness applicants. Also, we know that a microbusiness will be exempt from the requirement to provide evidence that it has entered into a labor peace agreement with a bona fide organization (a requirement imposed on other license applicants).
Potential microbusinesses will want to keep carefully apprised of developments as these forms and regulations are slowly developed, since being ready to apply as soon as New Jersey will permit it is key to having a reasonable chance of approval in what is likely to be an intensely competitive process.
When a microbusiness is ultimately able to receive a cannabis license, that license will be effective for one year (subject at that point to renewal). Importantly, however, the Act provides that there will be a process for microbusinesses to later convert to an ordinary license—not subject to the various ownership and operational limitations imposed on a microbusiness. So, starting as a microbusiness will not automatically condemn the business to stay small as the years go by.
A couple of other points for potential microbusiness applicants to consider:
In evaluating applications for licenses, microbusinesses that meet the state’s criteria to qualify as being minority-owned businesses, women-owned businesses, or disabled veteran-owned businesses will receive special consideration. New Jersey is seeking to have 15% of the licenses granted to minority-owned businesses, and another 15% of the licenses go to women-owned businesses or disabled veteran-owned businesses. There is no requirement that any microbusiness must fall into one of these groups, but if your microbusiness does, you may get the benefit in the application process associated with this type of ownership preference, on top of your general benefit as a microbusiness.
Similarly, the law identifies certain municipalities as “impact zones” (those which meet specified high rankings in past small amount cannabis crimes, crime rate, and unemployment). Special priority will be granted to license applications for businesses that will operate in these impact zones. Additional priority will be granted to businesses that have a significant person in their operations who has resided in the impact zone for three or more years prior to submitting the application. Again, there is no requirement for a microbusiness that it should have such impact zone nexus, but if your microbusiness does it may enhance your license application.
All of these microbusiness and licensing arrangements are new, and the details will evolve as regulations and application forms are developed over the next few months. Now is the time to strategize and develop your business plan to qualify as a microbusiness, and develop your team of trusted advisors to get you through the process. A new industry is being born.
Robert W. Anderson, Esq., is a partner with the law firm Lindabury, McCormick, Estabrook & Cooper, P.C., based in Westfield, N.J. Anderson's practice emphasizes the needs of fast-growing, entrepreneurial companies. He serves as co-chair of Lindabury’s Cannabis Industry Team.