NJ Legalized Adult-Use Cannabis: What Happens Next?

When Governor Phil Murphy took office in January 2018, he declared in his inaugural address that “a stronger and fairer New Jersey embraces comprehensive criminal justice reform—including a process to legalize marijuana.” On Feb. 22, 2021, more than three years after that statement, and with 67% of New Jersey residents supporting a ballot question on the topic, the governor signed legislation to legalize and regulate marijuana for adult use and reform the criminal justice process for minors possessing or consuming cannabis and alcohol. The now-enacted legislation regulating marijuana for adult use, Assembly Bill 21/Senate Bill 21, totaled 240 pages—the end result of six legislative committee hearings occurring over a 39-day span at the end of 2020.

The State must now create a regulatory scheme for a product still illegal at the federal level, and those interested in becoming licensed operators are eager to review the structures of that yet-to-be defined administrative process. While regulators have some experience in this area from the medical cannabis program that now serves roughly 100,000 patients, permitting sales to anyone over age 21 will be much more complex. Both the medical cannabis program and adult-use sales now fall within the scope of New Jersey’s newest regulatory agency, the Cannabis Regulatory Commission (CRC).

This article explores the recently enacted law legalizing cannabis, the regulatory process to be undertaken by the CRC, and the impact of the new adult-use law on medical cannabis.

The Complexity of Cannabis Licensure

The core of the new law is the licensure of the adult-use marketplace. The law establishes six classes of licenses:

• Class 1 cannabis cultivator licenses for growing and cultivating cannabis;
• Class 2 cannabis manufacturer licenses for manufacturing, preparing, and packaging cannabis items;
• Class 3 cannabis wholesaler licenses for obtaining and selling cannabis items to other licensees for resale;
• Class 4 cannabis distributor licenses for transporting cannabis plants and items in bulk;
• Class 5 cannabis retailer licenses for selling cannabis and related items to consumers, as well as permitting on-site consumption with an additional license endorsement; and
• Class 6 cannabis delivery licenses for providing certain retail and courier services for consumer purchases that are fulfilled by Class 5 cannabis retailers.

At least 35% of the total licenses issued for each class would be “conditional licenses,” which are temporary permits issued pursuant to an abbreviated application process, but require the entity to become fully licensed within a specific time period by satisfying all of the remaining criteria for full licensure. “Microbusinesses” must also receive no less than 10% of licenses issued per class, and no less than 25% of all issued licenses. A business must meet specific criteria regarding number of employees, size of operation, and ownership to qualify as a “microbusiness.” A business seeking to operate in an “impact zone” or planning to employ at least 25% of its employees from “impact zones” would be prioritized for licensure. “Impact zones” are specifically defined as municipalities that meet certain criteria, such as negative impacts from marijuana prohibition, unemployment, or poverty.

Ownership of the various license classes is also highly regulated. During the 24-month period following enactment:

• A retailer licensee can hold no other class of license, and no other licensee can hold a Class 5 license.
• A cultivator or manufacturer licensee can hold only up to two of these classes of licenses.
• A wholesaler licensee can hold only one distributor license.

After the 24-month post-enactment period, the ownership rules loosen slightly, such that an entity could concurrently hold a cultivator, manufacturer, retailer, and delivery license, but not more than one of each.

Individuals working for or on behalf of any licensee must be licensed as certified cannabis handlers. This includes any position where the person will be in possession, securing, selling, and/or transporting cannabis.

Lastly, the law creates a license for cannabis testing facilities to assess cannabis samples for purity and potency. Certain laboratories in New Jersey currently conduct tests of medical cannabis products only. These facilities would be authorized to test both medicinal and adult-use cannabis products under an existing license, so long as the laboratory can meet the requirements under the new licensing process.

The CRC – NJ’s Newest Licensing Authority

New Jersey has a long history of regulating industries deemed to be social vices. The Casino Control Commission, Lottery Commission, Division of Alcoholic Beverage Control, and State Racing Commission are just a few. Enter the CRC, the newest member of the State’s regulatory “vice squad.”

Although the legislature and governor created the CRC as part of the Jake Honig Compassionate Use Medical Cannabis Act, enacted in 2019 to reform the medical marijuana program, the CRC is only now beginning to take form, as the final members have been recently appointed. Its formation is critical, as the CRC will have the leading role in implementing the law.

The CRC’s mandate is to regulate all areas of the adult-use and medical cannabis industries. Specific to the adult-use industry, its responsibilities include issuing all regulations; issuing, denying, or suspending licenses; investigating and aiding in prosecutions of illegal cannabis activity; and taking actions to limit the sale of cannabis to minors and discouraging excessive use. The CRC is also granted authority to impose a social equity excise fee on the cultivation of cannabis, ranging from $10 to $60 per ounce, based on the average retail price of cannabis, which will be remitted back to the State.

The law requires that the CRC create and promulgate temporary enabling regulations for the adult-use cannabis marketplace no later than Aug. 21, 2021 (within 180 days of the law’s enactment). Because the initial rules from the CRC are not permanent, the law authorizes their issuance outside the normal processes required under the State’s Administrative Procedures Act (APA). Within one year, the CRC will be required to issue final regulations subject to the APA’s public notice and comment requirements.

The CRC can begin to accept applications for the various classes of adult-use cannabis licenses 30 days after the issuance of the temporary rules. Although the CRC’s rules will detail the application process, the law requires that the CRC score applications for licensure based on established criteria and conduct background checks and review financial disclosures of all persons with at least a 5% investment interest. Areas of specific review include the licensee’s operational and safety plans and the execution of a labor peace agreement with a bona fide labor organization. The CRC shall approve license applications that meet the qualification, unless it is determined by clear and convincing evidence that the applicant would be manifestly unsuitable to perform the activities for the license class.

The CRC cannot regulate whether a municipality will permit adult-use cannabis licensees to operate within its community. The law allows a town to pass an ordinance by Aug. 21, 2021 (within 180 days of enactment), prohibiting the operation of one or more classes of licenses within its borders. If a town fails to act within this timeframe, the community is prohibited from enacting such an ordinance for five years. Even if a town does permit the operation of any license class, it may still place restrictions on the number of facilities as well as the location, time, and manner of operations. The CRC will also confirm with the municipality that the licensee’s proposal comports with any applicable local ordinances.

Medical Cannabis in an Adult-Use World

Although New Jersey legalized medical marijuana in 2010, only six alternative treatment centers (ATCs) were operational when Governor Murphy took office in 2018. The Murphy Administration made a firm commitment to the medical marijuana program, and one of the governor’s earliest actions was reforming and expanding the program through executive actions. The State released two Requests for Applications (RFAs), one in 2018 and the other in 2019, after the enactment of the Jake Honig Compassionate Use Act. The RFAs in their totality sought to license 30 new ATCs, along with additional cultivation and processing capacity. The number of qualifying conditions also expanded, resulting in nearly four times the number of individuals becoming medical cannabis patients. New Jersey currently has 12 approved ATC operators, with the potential for more approvals in the coming months now that legal challenges to the 2018 and 2019 RFAs have been addressed. See I/M/O the Application for Medical Marijuana Alternative Treatment Center for Pangea Health and Wellness, __ N.J. Super. __ (App. Div. 2020); I/M/O the Application of Medical marijuana Alternative Treatment Center for Tetra Grow, No. A-1272-19 (App. Div. Feb. 18,. 2021).

Nothing in the adult-use law changes the State’s commitment to the medical cannabis industry. The medical cannabis program remains under a separate regulatory structure governed by the CRC, although some overlap will occur. For example, the ATCs approved at the time of the law’s enactment will be able to hold both medical and adult-use licenses. The law permits such an entity to sell adult-use cannabis only if the entity can certify that it has enough supply to meet its medical cannabis patient demand. The CRC will also have the authority to issue new RFAs and license more medical cannabis facilities based on patient needs.

Conclusion

New Jersey is one of 15 states and the District of Columbia allowing adult use cannabis. Cannabis operators located in other jurisdictions, as well as New Jersey-based entrepreneurs, are eagerly awaiting the issuance of the CRC’s temporary regulations and the opening of the licensure process. The first sales of adult-use cannabis could occur before the end of 2021, but supply in the early months will be limited, and demand remains unknown. Entities interested in pursuing an adult-use cannabis license of any class, or those looking to enter the medical cannabis program, would be well-served by starting the planning process for their operations in advance of any announcements from the CRC.

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Reprinted with permission from the March 15, 2021 issue of the New Jersey Law Journal. © 2021 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved. For information, contact 877-257-3382 or reprints@alm.com or visit www.almreprints.com.