Cannabusiness Advisory

In just about one month from its release date to the public, Maryland’s proposed adult-use cannabis regulations, HBO556, have received rumblings of discontent and concern from interested industry participants. Following the first hearing on the matter conducted by the Economic Matters Committee last Friday, February 17th, the Bill still has a long way to go before being finalized – with anticipation of several additional readings and proposals before reaching finalization. Below are some key highlights to know about the first reading of the initial proposal of the Bill and its regulation by the Cannabis Regulation and Enforcement Division (the “Division”).

1. Application Review Process.

• Conversion of Medical. Medical cannabis growers, processors, and dispensaries will be converted on July 1, 2023, to licenses to operate medical and adult-use cannabis businesses, subject to payment of a conversion fee. Conversion fees will range from $100,000 to $2,5000 depending on gross revenue of such operator for FY 2022.

• Rounds of License Applications. By January 1, 2024, the first round of licenses will be issued, with the second round commencing as early as May 1, 2024. The program permits up to 75 marijuana cultivation licenses and 300 marijuana dispensary licenses. Interested participants are concerned that these caps are far from what the Maryland cannabis market will require and fear risk of oversaturation and over-supply. For example, an adult-use marijuana cultivation license allows up to $300,000 of canopy per license.

• Application Process/Requirements. The first round of the application process is reserved for social equity applicants. All application processes will run on a pass-fail basis, where applicants are graded on whether they have or have not met certain criteria to be developed by the Division. Applicants are not required to possess or own real estate at the time of the application.

2. Ownership restrictions.

• Owners. For the purposes of the regulations, the Bill defined an “Owner” as a “person with an ownership interest in a cannabis license.” The definition of “Ownership Interest” casts a slightly larger net to include “a direct or indirect equity interest in a cannabis licensee, including its shares or stock.” It’s unclear whether equity incentives like options or convertible interests will qualify under the ownership interest umbrella under the Bill.
• Owner Registration. “Owners” with an ownership interest of 5% or greater must submit certain information to the Division as required under Section 36-502 of the Bill.

3. Licenses and Transfer Restrictions on Adult-Use Licenses.

• Generally, adult-use licenses are valid for 5 years and shall be subject to renewal on a 5 year period.
• Initial adult-use cannabis licenses, including licenses converted from a medical-use to medical and adult-se cannot be transferred under the Bill for a period of 5 years. Converted license holders will not receive any grace period or credit given to the medical operators’ time in operator its medicinal business; each has a 5 year clock that will start on the date it was approved to commence operations as a medical and adult-use converted license holder.
• Ownership and change of control application requirements are to be forthcoming in regulations promulgated by the Division.

4. Protective Measures At the Local Level. The Bill does include some restrictions against local municipalities that favor cannabis operators. Local municipalities that host Maryland cannabis operators are prohibited from:

• imposing an additional tax;
• establishing zoning and other requirements that “unduly burden a cannabis licensee.”
• prohibit transportation through or deliveries within the local jurisdiction by cannabis licensees located in other jurisdictions;
• interfering with a converted cannabis operators conversion to a medical and adult-use licensee under the Bill;
• enter into a host community agreement with a cannabis licensee that requires such licensee to provide money, donations, in-kind contributions, services “or anything of value to the local jurisdiction.”

5. Requirements for Non-Cannabis Operators. Interestingly, the Bill also requires certain non-cannabis businesses that service cannabis operators to register with the Division, including

• Waste disposal companies;
• Security guard agencies;
• Transporters;
• And “any other type of cannabis business that is authorized by the division to provide plant or product-touching services to cannabis licensees.”

The Last category noted above may cause issues of interpretation with service business to cannabis operators. Considering many security guard type agencies are not typically involved in actual plant-touching activities, the language of the Bill renders the question of whether other businesses providing services to these cannabis operators will also have to register with the Division.

For more information about the Maryland cannabis regulations, contact the Burns & Levinson Cannabis Business & Law Advisory group.