Cannabis Licenses: What New Jersey Businesses Can Learn from Colorado

The proposed legalization bill drafted by Sen. Scutari (the “Bill”) outlines the types of licenses that will be available to marijuana businesses, but is generally silent on how to actually obtain those licenses.  The Bill intends to create a state agency called the Division of Marijuana Enforcement (the “DME”) and charge the DME with the task of promulgating legal cannabis regulations.   It will be the DME who determines the nuances of licensure – in other words, when it comes to license application and issuance, the Bill essentially tells the DME to “figure it out.”

Colorado New Jersey Flags Cannabis

While this lack of guidance is understandably upsetting for aspiring recreational marijuana business entrepreneurs, the license application process in Colorado provides a possible preview for what the DME may look for when screening potential marijuana business owners in New Jersey.  After all, it is fair to assume that New Jersey will use Colorado as a model in developing a regulatory framework for recreational marijuana businesses given that multiple New Jersey legislators traveled to Colorado to research its regulatory scheme, returning with favorable impressions.  This article will look at the license application process as it presently functions in Colorado and highlight the key aspects of obtaining a license in Colorado that may eventually also be requirements in New Jersey.

Will There Be A License Application Fee?

Colorado’s license application includes a necessary application fee.  The various application fees, listed in the Colorado license application fee chart, include both a fee due to the state and a fee due to the local municipality where the marijuana business will be located.  For example, for a dispensary (or a “Retail Marijuana Store”), a license application requires a $7,000 fee ($4,500 to the Marijuana Enforcement Division – the “MED” – and $2,500 to the local municipality).  As can be seen from Colorado’s chart, most license application fees run in the $5,000 range, which is consistent with some of the fees that New Jersey’s Division of Gaming Enforcement charges for license applications.

One noteworthy aspect of Colorado’s license application fees is the tiered approach for cultivation facilities.  Colorado imposes a threshold license application fee of $6,500 for cultivation facilities with 1800 plants or fewer ($4,500 to the MED and $2,000 to the local municipality), but for cultivation facilities that want to maximize their growth potential, Colorado offers multiple other cultivation license tiers depending on the number of plants grown.  For example, if a marijuana cultivator wants to grow 15,000 plants at a time, a Tier 5+ license is required, and the associated license application fee will be $7,000 in addition to the $6,500 imposed for Tier 1 licenses.  New Jersey’s proposed legalization legislation also suggests a tiered approach to cultivation licenses.  See The Bill, §14(b).

While the license application fees are somewhat inconsequential when compared to the potential of the recreational marijuana industry in New Jersey at large – projected to exceed $1 billion in yearly sales – it would be prudent to view the Colorado license fees as the minimum fee likely to be charged in New Jersey.  Historically, crime and corruption are larger problems in New Jersey than they are in Colorado, and the result will be that the DME will need resources to conduct thorough audits and investigations of license applicants. Also noteworthy are the fees connected with renewing licenses: marijuana entrepreneurs should anticipate continuing license fees and paperwork even after obtaining the initial license.

What Will Have to Be Disclosed on a License Application?

Colorado publishes its license application papers (“License Application”).  Colorado also requires an application from Associated Keys, a term referring to either investors in or officers or directors of recreational marijuana businesses, which are published.  These application materials contain certain requirements that will likely also be found in New Jersey license applications.

1.         Find Your Location Before Applying

The Colorado License Application includes the following request:

Attach a diagram of the premises to be licensed and outline or designate the area (including dimensions) which shows the licensed premises limited access areas, walls, partitions, entrances, exits and what room shall be utilized for in this business.  In a separate diagram, include security equipment locations.

If New Jersey follows the Colorado License Application, recreational marijuana businesses will run in to a potential chicken/egg problem: in order to be licensed, the business will need premises, but in order to obtain premises, the business may need a license.  In other words, landlords may be reluctant to agree to lease space to recreational marijuana businesses that have not yet been licensed.  Another thing to consider is that premises have to be obtained before applying for a license, even though a license may not be granted.  Clearly, this will be a difficult issue for marijuana entrepreneurs to resolve.  Therefore, it will be prudent for marijuana entrepreneurs to both (1) proactively research available premises and (2) closely follow this aspect of licensure in New Jersey.

Another key aspect of the License Application is that the applicant has to demonstrate that the recreational marijuana business will be secure and protected.  The Application requests businesses to identify (1) what each room is used for; (2) where the limited access areas are located (as opposed to public areas, e.g. a waiting room or lobby); (3) the entrances and exits; and (4) a separate security equipment diagram.  New Jersey will probably follow suit and require applicants to prove that their premises are secure. Therefore, it will be important for recreational marijuana entrepreneurs to take measures to secure their premises.

2.         Thoroughly Vet All Financing

In addition to requiring applicants to completely lay out the ownership structure of their recreational marijuana business, Colorado requires applicants to explain the source of all financing to ensure that it comes from legitimate and legal sources.  Not only is this a required component of the License Application, but Colorado’s regulatory scheme includes an “Associated Key” license application that must be submitted by both (1) “Any stockholder holding an interest in a marijuana licensee, or any officer or director, who acts as a Key executive, employee or agent while physically working in a licensed Medical or Retail business”; and (2) “A natural person who is a U.S. Citizen who owns less than 5% share(s) of stock.”

The Associated Key License Application requests general demographic information, but also requests information about personal finances, including salaries, dividends, amount invested in businesses, sources of investment income and documented proof of the foregoing (including disclosure of banks, securities, notes/accounts receivable, real estate, mortgages, vehicles and vehicle loans, credit card payments, etc.).  If a similar application process is implemented in New Jersey – and it is reasonable to presume it will be – recreational marijuana entrepreneurs should advise all potential investors the extent to which their personal and business finances will have to be disclosed.

The Colorado License Application requires production of signed authorizations on behalf of Associated Keys to release private, confidential business and financial information.  This may require coordination between different attorneys and accountants who all represent or service financiers.  Therefore, another takeaway from the Associated Key License Application is that applying for a recreational marijuana license in New Jersey will not be a “quick and dirty” process.  Instead, it will be time consuming and labor intensive process that should be done thoroughly and with the assistance of counsel.

What About Employees of Recreational Marijuana Businesses?

Colorado Grow HouseYes, they may have to be licensed as well.  Colorado requires a Marijuana Support/Key Occupational Employee License Application (“Employee License Application”).  The Employee License Application is less onerous than the Associated Key License Application, but still requires that the prospective employee (1) disclose demographic information; (2) disclose criminal history; and (3) authorize release of tax history.

In addition, Colorado’s Employee License Application requires an application fee of $75 per application.  Notably, under Colorado’s regulations, employees of recreational marijuana businesses must also be residents of Colorado.  If the same is true in New Jersey, this will be a key consideration for businesses, especially those located near New Jersey’s borders.

Summary

While it is impossible to flawlessly predict the DME’s future regulations, it makes sense to look at Colorado given the research our legislature has done on Colorado’s marijuana regulatory scheme.  The application process in Colorado is complex, but not impossible.  If similar regulations are developed in New Jersey, recreational marijuana entrepreneurs that take the time to adequately prepare their applications with the assistance of counsel (and possibly accountants and other consultants) will be at a competitive advantage.

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.