May 3, 2022 - As we previously wrote, cannabis was the big winner of the 2020-2021 legislative cycle. In the Tri-State area, comprised of New York, New Jersey and Connecticut, this meant long-awaited adult-use legalization (in addition to a major overhaul of medical cannabis regulation).
New Jersey led the way in February 2021 when Governor Phil Murphy signed three bills into law that decriminalized cannabis and created a pathway for the adult-use cannabis market after a referendum-based constitutional amendment in November of 2020. New York and Connecticut quickly followed suit, enacting laws legalizing adult-use cannabis in March 2021 and June 2021, respectively.
Implementation of those laws — which includes the need to juggle competing goals, promulgating rules, and issuing various licenses — has not been speedy. It appears that we are still at least a year away from retail sales starting in earnest, but New York and New Jersey are inching toward a limited market enabled by conditional licenses (with New Jersey starting sales on April 21, 2022). Connecticut, for its part, began accepting license applications earlier this year, with a limited number of licenses to be awarded by year end. With this in mind, we will take a deeper dive into how each state is approaching this new market.
New Jersey has decided to jump start its adult-use market by issuing licenses to existing medical cannabis operators, referred to as Alternative Treatment Centers (or ATCs). Earlier this month, the Cannabis Regulatory Commission (CRC) voted to allow seven established ATCs — comprised of well-financed multi-state operators (MSOs) — to begin adult-use cannabis sales at 13 dispensaries around the state. The first sales occurred on April 21, 2022 (the day after "4/20") and, according to state officials, at least 10,000 people purchased recreational cannabis on the first day of sales.
In addition, beginning to lay the groundwork for the broader market, the CRC also recently approved 34 conditional license applications for cultivators and manufacturers, bringing the total number of approved conditional licenses in the state to 102. New Jersey's conditional license program, which is intended to help smaller, home-grown businesses break into the Garden State's adult-use market, offers an abbreviated and less burdensome application process (as compared to the state's annual licensing process). Pursuant to the CRC's recently adopted initial rules, applicants seeking a conditional license need only submit background disclosure information, a business plan, and a regulatory compliance plan to receive a conditional license.
If approved, applicants then have 120 days to find a site, receive municipal approval, and apply for conversion to an annual license. In addition, conditional licensees converting to an annual license are excused from certain sections of the annual license application that, under statute, require applicants to demonstrate past experience in a regulated cannabis industry.
By all accounts, New Jersey is poised to become one of the largest recreational cannabis markets on the East Coast (coming in behind New York). With an estimated 800,000 potential recreational cannabis consumers in the state, and another 800,000 potential out-of-state buyers, it is anticipated that annual sales could exceed $2 billion by 2026. And while New Jersey's tax revenues are expected to climb, it is not clear by how much. Governor Murphy's fiscal year 2023 budget estimates revenues of just $19 million in a nearly $49 billion budget. But in 2019, the Governor estimated about $60 million in tax revenue.
New York has taken a decidedly different approach to jump-starting its market, choosing instead to prioritize social equity applicants impacted by the war on drugs through its "Seeding Opportunity Initiative," while its regulator, the Office of Cannabis Management (OCM), keeps working on proposed rules for the wider market.
At the center of this initiative is the "Conditional Adult-Use Retail Dispensary" license. This license is directed to social equity entrepreneurs who have been convicted (or had a close family member convicted) of marijuana-related offenses and who have a background in owning and operating a small business.
Under the proposed rules published by the OCM, these applicants will be able to run a dispensary for four years under a conditional license, with a mandatory renewal after the first two years and an opportunity to convert to a full-fledged license once those become available. The rules are now in the public comment period, and the goal is to begin issuing these licenses toward the end of the summer of 2022.
In addition, Governor Kathy Hochul recently signed Senate Bill S8084A into law, which permits certain hemp cultivators and processors to apply for "Conditional Adult-Use Cultivator" and "Conditional Adult-Use Processor" licenses this year. These cultivators and processors will be the source of cannabis for the Conditional Adult-Use Retail Dispensaries.
As of April, New York's Cannabis Control Board (CCB) had approved 52 hemp farmers' applications to begin cultivating hemp. Regulators predict that sales from conditional license holders could begin as early as this fall. Retail sales from general licensed businesses, however, are not likely to commence until the end of 2022 or early 2023.
Many industry observers believe that New York will become the nation's cannabis capital in the coming years. By some estimates, the Empire State's regulated cannabis market could reach $4.2 billion by 2027, supporting over $10 billion in total economic impact and 76,000 jobs. And according to Governor Hochul's executive budget, which was released in January of this year, New York stands to generate more than $1.25 billion in cannabis tax revenue over the next six years.
Connecticut has opted not to issue conditional or temporary licenses, and instead Connecticut's Department of Consumer Protection (DCP) began accepting applications for certain adult-use cannabis license types in February of this year. While the exact timing is unclear, the licenses will be awarded through a lottery process in which six general retail licenses and six social equity licenses initially will be available. Thereafter, an equal number of licenses will be available to social equity and general applicants. It is anticipated that adult-use cannabis retail sales will begin in the Nutmeg State at the end of 2022.
Connecticut's recreational cannabis market is unlikely to match the size of New Jersey's or New York's. It is estimated that recreational sales in the state could total $250 million in the first full year and up to $750 million by the fourth year.
A 2020 study published by the University of Connecticut projects that, in the first year, recreational cannabis could add 5,000 to 7,000 jobs to the state's workforce and bring in $35 million to $48 million in tax revenue. That same study projects cannabis job growth will nearly double within five years of recreational legalization and raise up to $223 million in tax revenue. A more recent estimate from Connecticut's Office of Fiscal Analysis predicts that state and local tax revenues could grow to $73.4 million by 2026.