Out-of-State Partnerships: What is a “Significantly Involved Person”?

New Jersey State Line

FLICKR/MATT HINTSA

Perhaps the most significant change in Sen. Scutari and Sen. Sweeney’s new adult use cannabis legalization bill is the change in residency requirements for cannabis license holders.  In earlier iterations of Sen. Scutari’s legalization bill, cannabis license holders had to be New Jersey residents for two years prior to the date of the license application.  The thought process behind this requirement was to prevent established cannabis businesses from jurisdictions that have already legalized cannabis from entering the New Jersey marketplace and establishing dominance before New Jersey citizens had an opportunity to gain a foothold themselves.

The new bill has changed that.  It creates a defined term known as a “significantly involved person” which essentially means a person or company with a 20% or greater stake in the company applying for a license.  § 9(a)(3) of the new bill states that “[a]n applicant shall have a significantly involved person or persons lawfully residing the State for at least two years as of the date of application to receive a license.”

The result of this new language is that the New Jersey residency requirement has been truncated to only represent 1/5 of the proposed company.  Unlike previous draft bills which required 100% of the principals of a proposed cannabis company to have lived in New Jersey for two year before applying, the new bill now allows people and companies from foreign jurisdictions to team up with New Jersey residents to apply for a license so long as the New Jersey resident is granted a 20% share of the company.

The New Jersey legislature continues to debate cannabis legalization, and it is not clear whether the current draft bill will be passed or changed.  If this aspect of the bill remains intact, the likely policy behind this change is to allow New Jersey residents to partner with more experienced operators from other jurisdictions to avoid problems associated with inexperience in a new market.  The drawback, though, is that true New Jersey applicants may be at a competitive disadvantage when compared to applicants who are primarily foreign, but who have added a New Jersey component to meet the application requirements.

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.