What are Cannabis Microbusinesses?

Colorado Grow HouseAs the debate about legalized adult use cannabis continues to take place in Trenton, a new proposal to the legislative bill represents an intriguing potential opportunity to cannabis entrepreneurs: microbusinesses.

As the various drafts of the legislative bills to legalize cannabis have evolved, the barriers for entry to the New Jersey cannabis market have been relaxed for out-of-state operators.  While early drafts of the bill made New Jersey residency a requirement, that is no longer a strict requirement so long as one of the proposed owners of a cannabis business is from New Jersey.  The legislature’s relaxation of this requirement makes sense: operators from other states have more experience and can help better establish New Jersey cannabis businesses.

But that comes with a very real drawback for New Jersey entrepreneurs.  It will not be easy for New Jersey entrepreneurs to compete with the experience and millions of dollars of funding that could potentially come from out-of-state operators.  The concept of microbusinesses may help level the playing field.

The recent draft of the bill includes a provision requiring 10% of cannabis licenses to be issued to microbusinesses.  In addition the provision provides additional protections for New Jerseyans: (1) microbusiness owners must be New Jersey residents who have resided in New Jersey for the past 2 years; and (2) at least 51% of the owners of the microbusiness must be residents of the town or the neighboring town where the microbusiness will operate.

What exactly is a microbusiness?  The four license types are the same, but an entrepreneur can apply for a reduced version of each license:

  • For cannabis growers, a microbusiness can grow cannabis with a canopy grow area of no greater than 5,000 square feet;
  • For cannabis processors, a microbusiness can process no more than 2,000 pounds of dried cannabis per month;
  • For cannabis wholesalers, a microbusiness can wholesale no more than 2,000 pounds of dried cannabis (or equivalent amount in other forms) per month; and
  • For cannabis retailers, a microbusiness can acquire for retail sale no more than 2,000 pounds of dried cannabis (or equivalent amount in other forms) per month.

The microbusiness provision also includes two additional protections for small business entrepreneurs.  Cannabis license holders who do not operate a microbusiness are not permitted to hold any significant beneficial interest in a microbusiness.  Second, microbusinesses are not permitted to sell or transfer their licenses.  Both prohibitions appear to be intended to prevent large cannabis businesses from trying to influence the microbusiness market.

At first blush, the optics of a microbusiness seem to present a wonderful opportunity for small business entrepreneurs who want to enter the recreational cannabis market.  However, further questions remain about the viability of microbusinesses.  The draft offers no insight into why or how the specific volume restrictions were created.  In other words, why are the 5,000 square feet and 2,000 pounds numbers the lines of demarcation for microbusinesses?  The draft bill does not have a provision requiring microbusinesses to only do business with other microbusinesses.  Without such a provision, microbusinesses could still be faced with real disadvantages.  For example, even if a microbusiness is licensed to grow 5,000 square feet of cannabis, can it realistically compete with a 50,000 square foot grow facility that can sell to the same dispensary customers at lower prices?

Microbusinesses represent an intriguing possibility for small business entrepreneurship.  This blog will continue to check in to evaluate what opportunities may arise for small businesses in the potential New Jersey cannabis market.