As of September 25, 2023, Bill A4151 was approved by the New Jersey Senate and is now law in New Jersey. This approved bill amends the existing New Jersey recreational cannabis regulatory landscape. Bill A4151, or P.L. 2023, c.162, (the “Amendment”) revises and waives certain restrictions currently imposed on owners of cannabis establishments. Prior to the enactment of the Amendment, Class 5 retail license holders and their owners, were prohibited from holding interest in other Class 5 retail licenses because horizontal expansion is otherwise prohibited under the state’s cannabis regulations. However, the Amendment opens the door for owners (holders of 5% or more equity) in an existing cannabis license holder, including a Class 1, Class 2, or Class 5 license holder (and/or an owner (or owners) thereof) to obtain up to 35% equity in up to as many as seven Class 5 retail licenses, so long as certain requirements are met.

Specifically, the Amendment allows an entity issued a Class 1 cannabis cultivator license, Class 2 cannabis manufacturer license, or Class 5 cannabis retailer license, or an alternative treatment center, or an individual associated with the ownership or management of any such entities (each referred to herein as a potential “Investor”) to provide significant financial assistance, technical assistance, or access to and use of intellectual property in exchange for equity of up to 35% in as many as seven Class 5 retail licensed entities (an “Investment”). The terms of the Investment must be “commercially reasonable.”

Notably, an Investment may be made by an Investor to obtain equity in a Class 5 license applicant; provided that, the Class 5 license applicant possesses a certificate from the State as a certified: i) a minority business, pursuant to P.L.1986, c.195 (C.52:27H-21.18 et seq.) (MBE); ii) a women owned business, pursuant to P.L.1986, c.195 (C.52:27H-21.18 et seq.) (WBE); or iii) a disabled veterans’ business, pursuant to P.L.2015, c.116 (C.52:32-31.2(2) (VBE)) (each a “Qualified Class 5 License”). The Amendment does not permit an Investor to make an Investment in a Class 5 license applicant (or license holder) that has the following designations: social equity, impact zone, and/or general license applicants and/or license holders.

In order to obtain any equity pursuant to the Amendment, a Qualified Class 5 License must be involved and the Investment must first be set forth in a written agreement mutually agreed to by the parties and submitted along with the Class 5 license application to the New Jersey Cannabis Regulatory Commission (the “NJ CRC”). The agreement must meet specific requirements in order to be approved by the NJ CRC during its review. The agreement must have “commercially reasonable” terms and it must include language that requires the respective Class 5 cannabis retailer (receiving the Investment) to pay back the value of the assistance they receive, including any applicable interest and fees. The period during which the Class 5 cannabis retailer must pay back the value is dependent on the purported value of the assistance received. The Amendment outlines the following payback periods:

1. If the purported value of the assistance being provided by the Investors is less than $100,000, then the Class 5 cannabis retailer must pay back such amount within a minimum of five years.
2. If the purported value of the assistance being provided by the Investors is between $100,001 and $250,000, then the Class 5 cannabis retailer must pay back such amount within a minimum of seven years.
3. If the purported value of the assistance being provided by the Investors is between $250,000 and $500,000, then the Class 5 cannabis retailer must pay back such amount within a minimum of ten years.
4. If the purported value of the assistance being provided by the Investors is above $500,000, then the Class 5 cannabis retailer must pay back such amount within a minimum of ten years, along with any terms imposed by a lender.

Because of the requirement in the Amendment for the NJ CRC to review and approve any and all agreements used to memorialize an Investment, it may be prudent for the parties to not execute the agreement prior to submitting the license application to the NJ CRC. In the event the NJ CRC determines the terms of the agreement are not commercially reasonable or consistent with the fair market value generally applicable to the services to be provided under the agreement, the NJ CRC has the authority to withhold approval of the license application until the parties renegotiate a new agreement that, as determined by the NJ CRC, is commercially reasonable and consistent with the fair market value. Once the agreement is approved by the NJ CRC, the agreement can be executed and the Investor will obtain the pre-determined ownership interest, and any such interest can be maintained through and after the payback period. The Amendment also states that the controlling interest of a Class 5 license applicant cannot revert to the Investor in the event of a default or breach by the Qualified Class 5 License holders; therefore, this type of term should not be included in the agreement between the parties. Additionally, should there be a desire to transfer the controlling interest of a Qualified Class 5 License holder, the Amendment states that such controlling interest can only be transferred to a certified MBE, WBE, or VBE. However, it is unclear when and how a WBE / MBE / VBE controlling interest can be transferred pursuant to the Amendment given the existing transfer limitations in N.J.A.C. 17:30-6.8(k) state that “the majority share of the license applicant's ownership interest, including the ownership interest that qualifies it as a diversely owned business . . . shall remain the same from the date of submission of a conditional license conversion application or submission of an annual license application until two years after the commencement of cannabis business operations.”

If you are interested in being an Investor (or investor group), or you are a Class 5 license applicant looking to make an Investment, or receive an Investment, it is imperative for you to seek counsel from a trusted legal advisor who understands the existing cannabis regulatory landscape.