New York lawmakers have reached a deal to legalize marijuana for adults over the age of 21.
Text of the bill was released on Saturday. State lawmakers, including Sen. Liz Krueger, said they expect a vote as early as this Tuesday. If it passes, New York would become the latest state to legalize cannabis, following in the footsteps of its neighbor New Jersey.
It's the third time state legislators have tried to legalize marijuana, though hang-ups over taxation, impaired driving, and social-equity provisions prevented earlier iterations from passing. Medical cannabis is already legal in New York.
Adult-use cannabis won't be available immediately. Andrew Carter, an analyst at Stifel, said he expects adult-use sales to begin in late 2022. Analysts from Cantor Fitzgerald and Stifel estimated that New York could become a $5 billion cannabis market by 2025.
Here's what you need to know about the bill and how to invest
Stocks to buy
Right now, there are 10 medical-cannabis licenses in New York. The legalization bill gives some benefits to companies that already operate in the state.
Of those 10 licenses, five are owned by publicly traded cannabis companies with either strong recent financial performance or deep-pocketed backers: Cresco Labs, Acreage, Columbia Care, Curaleaf, and Green Thumb Industries.
Pablo Zuanic, an analyst at Cantor Fitzgerald, said in a note earlier this month that these stocks could pop when New York legalizes.
Canadian cannabis giant Canopy Growth also has an option to acquire a majority stake in Acreage Holdings, once it's federally permissible to do so.
Vivien Azer, an analyst at Cowen, has long said that New York's legalization would give a big boost to existing operators. She said Green Thumb Industries, Curaleaf, Cresco Labs, Columbia Care, Acreage Holdings, and Vireo are companies that would benefit.
Deal mania
Some of those 10 companies — or at least their assets — could be acquisition targets for cannabis companies looking to enter what's likely to be one of the bigger cannabis markets in the US. Other states that have recently legalized adult-use cannabis have seen a boom of M&A activity as cannabis giants have made deals to expand their footprints.
Cannabis lawyers told Insider earlier in March that private companies and struggling multistate operators looking to sell off assets to stabilize their balance sheets are likely to be acquisition targets. The companies that fit this bill include privately held Etain Health and PharmaCann, as well as unprofitable public companies MedMen, iAnthus Capital, and Acreage. The MSO Ascend Wellness said in February that it would take a majority stake in MedMen's New York assets.
Major cannabis firms have already used deals to build their presence in New York over the years, in anticipation of legalization. Valley Agriceuticals was acquired by Cresco Labs in August 2019, and Green Thumb Industries acquired Fiorello Pharmaceuticals around the same time for $60 million.
Taxation and revenue
Cannabis products would face a 13% sales tax, with 9% going to the state and 4% going to the local municipality, the bill said.
In addition, the state would levy an excise tax based on milligrams of THC — the chief psychoactive component in marijuana — meaning higher-potency cannabis products would be subject to more taxes. There is expected to be a 0.5 cents per milligram excise tax for flower, a 0.8 cents per milligram excise tax for concentrates, and a 3 cents per milligram excise tax for edibles. This tax is expected to be paid by distributors.
Taxes from the legal cannabis industry could add up to $350 million to New York's coffers as soon as a year after legalization, analysts from the investment bank Cowen said.
Social-equity fund
Forty percent of tax revenue from cannabis sales would go toward a new fund to support economic and social-equity programs.
Another 40% would go to the state education fund, and the remaining 20% would go to drug-education programs. This is a win for Democrats who had pushed for social equity to be a component of legalization.
New York Gov. Andrew Cuomo's original bill had proposed setting aside a $100 million fund for social-equity causes, while the remaining tax revenue would be earmarked for the state budget and other needs.
Oversight and regulation
The bill would create an Office of Cannabis Management and a Cannabis Control Board to regulate the industry. The board is expected to have five members, three of whom would be appointed by the governor. Each legislative house is expected to choose one member.
It's not yet clear who would serve in these roles. But Norman Birenbaum, New York's director of cannabis programs, and Axel Bernabe, an assistant counsel to Cuomo, have been the governor's point people on cannabis reform and are expected to have a big hand in the state's cannabis program moving forward.
Licensing structure
The licensing system gives some advantage to incumbent companies.
Each existing license holder may be able to open four more medical shops, bringing its total number of dispensary locations to eight. Three of those medical locations may be allowed to sell cannabis for adult-use as well.
The Cannabis Control Board is expected to have the authority to "grant some or all" of the existing operators in New York's medical market access to adult-use licenses. The 10 operators in the state are expected to go after access to adult-use as soon as they are able. The fees these existing operators pay to enter the adult-use market could be used to help fund equity programs, the bill said.
Since all the companies in New York are vertically integrated, meaning they control every part of the supply chain from seed to storefront, the bill provides the option of a "one-time special licensing fee" to let existing operators attain an "adult-use cultivator processor, distributor retail dispensary license."
New entrants may not be allowed to be vertically integrated, apart from "microbusinesses," which are smaller operators who can control multiple parts of their own supply chain. The exact criteria for a microbusiness are expected to be determined by the board, executive director, and chief equity director, the bill said. The legislation said that these licenses are geared toward promoting social- and economic-equity applicants.
The bill has a goal of 50% of licenses going to equity applicants.
Analysts expect these small businesses to focus on selling cannabis, instead of growing it. That could give larger operators an opportunity to supply these shops.
"From an operating perspective, the existing MSOs look to have been given an advantaged position in the market, where their vertically integrated operations will be grandfathered in," Azer said in a Monday note.
New York's new adult-use market is expected to be a two-tier system where operators may either be cultivators (allowed to process and distribute their own products) or retailers (barred from cultivation). The exceptions to this may be existing medical operators wishing to transition to adult-use and microbusinesses.
New retail operators may be allowed a maximum of three dispensaries. There is not yet a cap on the total number of licenses allowed in New York. This number may be left up to the Cannabis Control Board, the bill said.
Store locations
The legislation would allow existing license holders to colocate medical- and recreational-marijuana shops, meaning companies that have already spent lots of money on expensive real estate for medical shops would likely have an advantage.
Growing at home
New Yorkers over the age of 21 would be allowed to grow up to six cannabis plants at home, with a maximum of three mature and three immature plants per adult. Each household, no matter the number of adults, is expected to be limited to 12 plants.
On-site consumption
The state plans to set up a new license that would allow people to consume marijuana on-site at various locations. Licenses for on-site consumption may be limited to three per person, and owners of these licenses may not be able to qualify for other licenses, such as cultivation or retail.
Consumption lounges must be 500 feet away from school grounds and 200 feet away from houses of worship, the bill said.
Expanding New York's existing medical-marijuana program
The bill also expands New York's existing medical program. The list of qualifying medical conditions for medical cannabis could be expanded, along with product options. Flower products, which are not allowed under New York's medical program, may be permitted under the expansions.
Carter, the analyst at Stifel, said in a Monday note that New York's 10 operators are likely to enjoy a "strong first mover advantage" because of their existing operations coupled with the state's expanded medical system. This advantage may be "further enhanced if potential competitors endure bureaucratic bottlenecks."
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