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The cannabis industry in New York evolves rapidly, offering lucrative opportunities for investors. Marijuana still stands on legally shaky ground, so staying legally compliant is paramount for anyone seeking to navigate this dynamic market. Licensing is already a complicated area, but cannabis-related licenses are especially delicate. It is similar to other highly regulated substances like alcohol.

This article explores clear, actionable steps for investors who want to invest in New York's cannabis companies legally.

The Legality of Cannabis in NY

New York’s Marijuana Regulation and Taxation Act (MRTA) legalizes adult-use cannabis and establishes detailed regulations for marijuana distribution and use. To operate, cannabis businesses and investors must secure proper licensing and maintain meticulous records. Cannabis businesses must adhere to safety and quality control standards, and their investors have ownership limitations and financial disclosure obligations.

Many different offices are involved in regulating cannabis in New York. The Office of Cannabis Management (OCM) regulates cannabis activities, including cultivation, distribution, and sales. The Cannabis Control Board (CCB) oversees the licensing process and enforces regulations. The Department of Health (DOH) monitors public health implications. These agencies ensure industry compliance and protect consumer interests.

Understanding these laws and regulations helps ensure successful participation in New York’s cannabis market as an outside investor.

Types of Cannabis Investments

Investors can explore various options for investing in NY’s cannabis market.

Equity investments involve purchasing shares in cannabis companies, and shares equate to ownership stakes and potential profits. Investors can also explore debt investments, which entail lending money to cannabis businesses. In this arrangement, businesses repay loans with interest. Convertible notes allow conversion of debt into equity. They give investors flexibility and future profit potential. Public cannabis companies trade on stock exchanges, where shares are accessible to the general public. Private cannabis companies remain with limited ownership, where shares are not publicly traded.

Each investment type offers distinct risks and rewards. Equity investments, for instance, potentially yield high returns, but they entail market volatility. Debt investments, however, provide steady income through interest with lower risk. Convertible notes combine features of both equity and debt, offering versatility. Public company investments allow liquidity and market participation. Private company investments can offer higher control and long-term growth. Investors should consider their risk tolerance and investment goals when choosing among these options.

Types of Cannabis Investors

In addition to the different transactional forms an investment can take on, there are also different types of investors. The process for investing in a cannabis company is not necessarily the same as investing in any other business. It depends on the kind of investor an individual is. Investors in a cannabis licensee or a license applicant may be subject to regulatory requirements to obtain or maintain their cannabis license in New York.

Types of investors include:

  • Passive investors (PI)
  • True Parties of Interest (TPI), with a direct or indirect financial or controlling interest (DIFCI)

New York uses the 10%/50%/$250,000 (10/50/250) rule to determine whether an individual is a TPI or PI. A person with a DIFCI becomes a TPI in a license if, over the calendar year, they receive the right to or payment from a licensee exceeding the greats of:

  • $250,000; or
  • 50% of the payor licensee’s net profits; or
  • 10% of the payor licensee’s gross revenues.

Anyone who meets this test is considered a TPI and must apply with OCM. These applications primarily consist of disclosures about any TPI of the cannabis licensee or license applicant. For example, an investor who holds more than a 10% equity interest in a cannabis business would likely be considered a TPI and subject to applying for approval as a TPI in that cannabis licensee. A PI can also be subject to the application and disclosure process if they do not meet certain requirements.

Whether a PI must be disclosed depends on whether they exceed the following threshold requirements:

  • 5% or less ownership stake in a publicly traded licensee; or
  • 20% or less ownership stake in any other privately held licensee; or
  • 10% or less ownership stake in a privately held Registered Organization with Dispensary (ROD) or microbusiness licensee.

If an investor were to have control over a business entity that is a passive investor, then that investor would also be considered a passive investor. Any investor or investors who surpass the above requirements must also go through an application process similar to TPIs.

If you’re a TPI and need assistance with navigating this difficult process, contact Suri Law today.

Due Diligence and Compliance

“Due diligence” is the process of investigating and analyzing a business or investment opportunity. The goal of due diligence is to assess an investment’s potential risks and benefits. Thorough due diligence helps ensure that a cannabis investment is wise.

Due diligence in a cannabis investment involves:

  • Identifying any legal risks or red flags
  • Investigating ongoing or past legal issues
  • Assessing the viability of the business plan
  • Conducting background checks on key executives
  • Examining the company's financials and business plan
  • Scrutinizing financial statements for accuracy and profitability
  • Reviewing the company's licenses and adherence to state regulations
  • Confirming the cannabis company's licensing and regulatory compliance
  • Prioritizing transparent communication with the cannabis company's leadership
  • Confirming the company maintains proper records and meets reporting requirements

A comprehensive due diligence process protects investors from potential pitfalls and enhances the likelihood of successful investments.

Once the due diligence process is complete, and an investor wants to proceed, they should determine whether they would be a TPI or PI. Suppose the investor falls into either of the categories above. In that case, they should arrange for the transaction to be structured so that the TPI or PI can follow up the application process with OCM. They do so either with the license applicant or before actually acquiring an ownership interest in a licensee.

Steps to Invest Legally

Here is a broad, step-by-step guide for staying legally compliant when investing in cannabis in NY.

  1. Assess Investment Goals and Risk Tolerance
  • Investors assess personal goals and risk tolerance
  • Determine acceptable risk levels and desired returns
  • Match personal objectives with suitable cannabis investments
  1. Consult Legal and Financial Advisors
  • Engage legal and financial advisors. They provide expert guidance on compliance and optimal investment strategies and help navigate complex regulatory landscapes.
  1. Identify Potential Investment Opportunities & the Type of Investment
  • Research the market
  • Identify promising cannabis businesses
  • Evaluate potential growth and profitability
  • Focus on companies with strong management and solid business plans
  • Determine what type of ownership interest or financial interest you are interested in acquiring, and consult with legal counsel about the implications of the same.
  1. Conduct Due Diligence
  • Investigate legal risks
  • Document findings meticulously
  • Perform thorough due diligence
  • Analyze financial statements and business viability
  • Verify company licenses and regulatory compliance
  1. Structure the Investment
  • Align structure with personal goals and risk tolerance
  • Decide on investment type (equity, debt, or other options)
  • Ensure the chosen structure optimizes potential returns and mitigates risks
  1. Draft and Sign Legal Agreements
  • Secure signatures from all parties
  • Ensure compliance with state laws
  • Cover all aspects of the investment
  • Draft legal agreements with precision
  1. Make the Investment
  • Finalize the investment
  • Transfer funds securely
  • Monitor the investment regularly
  • Maintain proper documentation for all transactions
  1. Legal Compliance, if applicable
  • Consult with legal counsel
  • Participate in the TPI application process as needed
  • Determine what the license status of the business is
  • Determine whether you are a TPI or PI who surpasses the threshold requirements
  • Give your legal counsel the necessary information and documents needed for the TPI application

Ongoing Compliance and Monitoring

Monitoring investment performance requires regular financial reviews.

These reviews should involve the following steps:

  • Evaluate returns and profitability.
  • Reserve time for ongoing education.
  • Identify trends and detect potential issues early.
  • Maintain up-to-date records and documentation.
  • Stay informed on changes in cannabis laws and regulations.
  • Verify that all business operations adhere to current state laws.
  • Engage with legal advisors to resolve any discovered discrepancies.
  • Ensure continuous regulatory compliance by conducting periodic audits.
  • Adjust strategies and practices accordingly. Proactively address compliance gaps.
  • Monitor updates from the Office of Cannabis Management (OCM) and the Cannabis Control Board (CCB).
  • Safeguard your investment through diligent oversight and adherence to all regulatory requirements.

Suri Law can help you safeguard a cannabis investment, helping make sure you remain legally compliant in all aspects. We can also help you monitor your investment and make strategic decisions when necessary. To meet with our team, contact us online or call our office at (212) 444-8244.

*Please be advised that nothing in any of Suri Law's blog post publications constitutes legal advice and that all publications are purely for educational purposes. Suri Law's blog provides general information about legal topics but does not provide any specific legal advice nor does any individual’s reading of, commenting on, or reliance on this publication create an attorney-client relationship. No publication on this blog should be used as a substitute for legal counsel or advice from a licensed attorney who practices in the area and jurisdiction in which you seek advice or for legal research or consultation on specific matters. Additionally, please note that the law is constantly changing, so, while publications on the blog are accurate as of the date of publication or update, the law may change and portions of any publication may be rendered moot or inaccurate at any time thereafter. Please be further advised that Suri Law does not provide tax law or accounting advice. Please seek out an accountant or tax lawyer for specific advice on any tax-related matters.

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