The First Step for any Recreational Cannabis Business in New Jersey

New Jersey State Senator Nicholas Scutari (D. Union) recently introduced Senate Bill 3195 (“the bill”) legislation to legalize the sale and consumption of recreational cannabis in the State of New Jersey.  There are several reasons to believe that the Act will, after deliberation and modification, be enacted into law.  First, polling data shows that the majority of New Jersey residents are in favor of legalization of cannabis.  Second, not only does legalization have general bipartisan support, but it also has the support of New Jersey Senate President Stephen Sweeney, who traveled to Colorado in 2016 with Senator Scutari and several other New Jersey legislators to observe Colorado’s highly successful recreational cannabis industry and returned with very favorable impressions.  Finally, Democratic gubernatorial candidate Phil Murphy has declared his support for legalization of cannabis in New Jersey.  The Republican gubernatorial candidate, Kim Guadagno, has not specifically taken a position on legalization of cannabis, but instead recently equivocated during a primary debate that she both favors decriminalization and supports Attorney General Jeff Sessions’ views on cannabis. Some version of the bill will probably be enacted in 2018.  It is entirely possible that if enacted, the bill will contain new or revised provisions that do not currently exist in the proposed legislation.  This post addresses the bill as presently written.

Picture of a courthouse in Newark.

With the recreational cannabis industry in Colorado eclipsing $1 billion in annual sales, many entrepreneurs will want to take advantage of the nascent New Jersey recreational cannabis industry.  The fundamental question that follows is: what is the first step that any individual or business must take to become a part of the recreational cannabis industry in New Jersey?  The bill answers that question with clarity:

Recreational Cannabis Businesses Must Be Licensed

The condition precedent to the operation of any recreational cannabis business is licensure.  The bill proposes creating four specific licenses that will be available to New Jersey recreational cannabis businesses.  This article explores how these licenses may function in the event the bill becomes law.

  1. Class 1: Marijuana Cultivation Facility Licenses or Marijuana Product Manufacturing Facility Licenses

Before cannabis can be sold, it must be grown.  The bill, which uses the term marijuana instead of cannabis, creates a specific license for growers to operate a “marijuana cultivation facility.”  A marijuana cultivation facility is defined as “an entity licensed to cultivate marijuana and sell marijuana to marijuana producers, to marijuana product manufacturing facilities, and to other marijuana cultivation facilities, but not to consumers.  This entity shall hold a Class 1 Manufacture’s License.”  The practical impact of this license is:

a) cannabis cultivation cannot begin without a proper license;
b) cultivation facilities cannot sell directly to consumers or to marijuana retailers; but
c) cultivation facilities can sell to manufacturing facilities or other cultivators.

Cannabis is not always consumed in its natural form.  To meet the demand for cannabis consumable in alternative formats (for example, edible cannabis), the bill sets forth an additional Class 1 license for a “marijuana product manufacturing facility,” which is defined as “an entity licensed to purchase marijuana, manufacture, prepare, and package marijuana items; and sell items to other marijuana product manufacturing facilities and to marijuana retails, but not to consumers.  This entity shall hold a Class 1 Manufacturers product manufacturing license.”  The practical impact of this license is:

a) cannabis manufacturing – e.g., creating edibles, oils, prepackaged cigarettes, etc., – cannot begin without a proper license;
b) cannabis manufacturing facilities cannot sell directly to consumers; but
c) cannabis manufacturing facilities can sell to cannabis retailers or other cannabis manufacturing facilities.

  1. Class 2 Marijuana Wholesaler License

The demand for recreational cannabis is expected to be extraordinarily high.  High demand will likely require wholesale distribution much like any industry with high product demand and volume.  The bill anticipates this inevitable reality by creating a Class 2 license for “marijuana wholesalers.”  Marijuana wholesalers are defined as “any licensed person or entity who sells marijuana items or marijuana paraphernalia for the purpose of resale either to a licensed marijuana wholesaler or to a licensed marijuana retailer.  This entity shall hold a Class 2 Wholesalers license.”  The practical impact of this license is:

a) wholesale distribution of cannabis cannot begin without a proper license;
b) the bill does not specifically prohibit marijuana wholesalers from selling directly to consumers.  This anomaly appears to be the result of poor drafting: Class 1 Licenses specifically prohibit sales to consumers and Class 3 Licenses specifically allow for sales to consumers.  While the Act does use the term “resale,” it fails to expressly state whether the holder of a Class 2 License can sell directly to consumers, unlike other provisions in the bill.  This is likely one of the facets of the bill that will be modified as the legislative process unfolds; and
c) marijuana wholesalers can specifically sell to other wholesalers or marijuana retailers.

  1. Class 3 Marijuana Retailer License

The actual sale of cannabis to consumers, likely to be the most regulated aspect of the recreational cannabis industry, will be done by “marijuana retailers,” defined by the bill as “an entity licensed to purchase marijuana from marijuana cultivation facilities and marijuana items from marijuana product manufacturing facilities or marijuana wholesalers and to sell marijuana and marijuana products to consumers.  This entity shall hold a Class 3 Retailers license.”  The practical impact of this license is:

a) the final piece of the puzzle – selling cannabis to consumers – cannot begin without a proper license;
b) marijuana retailers may sell to consumers; and
c) marijuana retailers may purchase the marijuana from marijuana cultivation facilities, marijuana wholesalers or marijuana manufacturing facilities.

  1. Class 4 Marijuana Transportation License

Finally, the bill envisions regulations associated with the physical transportation of cannabis before it is purchased by the consumer and sets forth a “marijuana transporter” license, defined as “an entity licensed to transport marijuana through and within the State of New Jersey and to maintain a warehouse.  This entity shall hold a Class 4 Transportation license.”  The practical impact of this license is:

a) even simply transporting cannabis requires a proper license; and
b) marijuana transporters may maintain a “warehouse,” presumably to store cannabis they transport.

Further Questions

The four class licensure scheme previews how the Legislature intends to regulate the recreational cannabis industry.  These licenses, which will only be the beginning of the regulations controlling the recreational cannabis industry, outline various areas for entrepreneurship.  There are certain aspects of the licensure framework, however, that require further analysis:

  • Is there any practical difference in a higher numbered licenses versus a lower numbered license?  Probably not.  The numbering of the license does not seem to indicate any higher threshold that must be met for obtaining a license.  It is more likely that the number of the class will merely be used for identification and not to create a license hierarchy.
  • Can any other license holder use a warehouse in connection with its recreational cannabis business other than a Class 4 Transporter?  Unlike Class 4 licenses, licenses for Classes 1-3 do not specifically state that warehouses may be used, which is inconsistent with how many of these businesses will actually operate.  Specifically, given New Jersey’s climate and abundance of warehouse facilities, marijuana cultivation facilities and manufacturing facilities will most likely be located in warehouses.  The likely intent of the inclusion of the “warehouse” clause in the Class 4 license definition is to allow transporters to have a base of operations where they are able to store cannabis before it is transported.  Nevertheless, the definition is not clear and will require clarification prior to the bill’s implementation.
  • Can wholesalers sell directly to consumers?  The likely answer is no, but the language of the bill is ambiguous on this front
  • Will additional licenses be created?  It is certainly likely that as the bill unfolds, the legislature will consider new licenses.  One key example is a license for a “marijuana testing facility.”  The bill’s predecessor – a previous draft bill proposed by Sen. Scutari – required licenses for laboratories testing cannabis for potency and safety, which are requirements under the bill before cannabis can be sold to the consumer.  The bill did away with the laboratory license, but kept “marijuana testing facility” as a defined term, meaning “an independent, third-party entity meeting accreditation requirements established by the Division that is licensed to analyze and certify the safety and potency of marijuana items.”  The “Division” is shorthand for the anticipated Division of Marijuana Enforcement, a to-be-created state agency that will oversee New Jersey’s recreational cannabis industry.  Moreover, the legislature may consider requiring licensure for cannabis paraphernalia manufacture or sale.

Overall, the bill and its popular and governmental support is creating an exciting atmosphere for entrepreneurship, the development of new and existing businesses and building new business relationships.  While the bill is not yet law and will likely change and evolve during the legislative process, it is a sophisticated approach to regulating a market that will develop quickly and boost New Jersey’s economy.  Many more questions must be answered before cannabis is legalized in New Jersey, and this blog will follow as the answers to those questions unfold.

Alex concentrates his practice on business litigation and counseling. Alex is the author of the New Jersey Cannabis Counsel blog where he tracks and analyzes developments in New Jersey’s efforts to legalize recreational cannabis and the potential impact on cannabis businesses in New Jersey. Alex is also a member of the New Jersey Cannabusiness Association.