This story was written in partnership with Crain’s New York, the trusted voice of the New York business community.
by Mitzi Keating, Citrin Cooperman
What makes a regulatory environment successful? In a nascent industry such as cannabis, a federally illegal, highly regulated industry emerging from its legacy form, this question is asked by many but defined by few.
Each state that enacts a legal program, whether medical or adult use, faces a similar set of challenges in ushering this new industry into existence, including defining what constitutes success. Newly enacted regulators and staff face the difficult task of shaping the industry in their state in a manner that addresses the needs and the legislative intent of the laws enacted behind them.
Stakeholders to the industry come in many shapes and forms: business owners, regulators, social and economic equity market participants, investors, legislators, city and state budgets, consumers and patients. Considering that broad array, it should come as no surprise that the industry brings with it competing initiatives, and the enactment and creation of the regulatory environment surrounding the industry is a daunting task.
With the passage of the Marijuana Regulation and Taxation Act on March 31, 2021, the state of New York established the backbone for the industry to come. Subsequent regulations and laws, including those that administer the conditional adult-use retail dispensary, or CAURD, program and the conditional use cultivators and manufacturers, enabled the adult-use market to officially launch at the end of 2022 with the opening of the state’s first adult-use dispensary.
Though the CAURD program helped achieve New York’s goal of opening the state for adult use by the end of 2022, the success of such a program and the measure of its outcomes will play out in the years to come.
New York’s proposed regulations attempt to address many of the issues that have plagued more mature markets with regard to ownership and control concerns, with an aim to ensure that independent operators find success in the marketplace. The state has come out of the gate in the proposed regulations to address areas of potential control such as through contracted management service agreements, future rights to equity, and separation of ownership and control by license type.
In looking to address the disproportionate enforcement of cannabis prohibition, the regulations also address specific licensing tiers and opportunities for minorities and other economic groups. However, despite any regulator’s good intentions, the regulatory environment is only one of a few key economic drivers that will impact New York’s cannabis market.
Adam Smith’s invisible hand theory focuses on the hidden economic forces that impact free markets, typically based upon self-interest. While addressing potential control issues to craft a market that caters to individual license types rather than vertical integration, the state may have stymied the willingness of investors to provide capital to an industry where cash flow is difficult at best and economies of scale cannot be achieved.
In an economic environment that competes with the legacy market on a pricing perspective, the maturity of the market in this unlimited license state may lead to many more business failures while business owners cannot cover the onerous tax implications of the federal tax code 280E that belies the best of intentions on behalf of the regulators.
Success begins with a single step. In New York, the journey has just begun.
Mitzi Keating is founder of Cannabis Advisory Services at Citrin Cooperman.