New York – Emerge Law Group

Exceptions to New York’s True Party Rule

May 30, 2023
in Cannabis Industry Group, Jay Purcell, Local Government, New York, Recreational Marijuana
Emerge Law Group
New York

Authors: Jay Purcell, Shareholder; Duncan Delano, Shareholder; Natalie Diaz, Law Clerk

New York’s True Party rules are intricate and evolving. Here, we analyze some of the concepts implicit in New York’s True Party regime and its exceptions, based on the 5/23 Proposed Regs. This analysis is based on proposed regulations; in other words, this analysis will become obsolete as soon as final regulations are promulgated (likely second half of 2023).

Additional True Party Concepts

“Control” means “expressed or reserved…power to order or direct management, operations, managers or policies.”[1] Like the other definitions, it is capacious and lacks bright-lines. Notably, the definition of Control is silent about negative covenants; in other words, an investor without whose consent a licensee cannot do X, Y, or Z might reasonably argue that she lacks Control.

“Financial Interest” is an umbrella term[2] that means holding any form of equity or security in a licensee, including unexercised options and warrants, SAFEs, convertible notes; and, the right to compensation that exceeds 10% of a licensee’s revenue, 50% of its net profit or $250,000 annually. Financial Interest may also include the investments and compensation of a person’s parent, children, spouse and domestic partner.[3] We can’t predict the future, but the family-relations component of this definition is likely to change, because it is impossible for regulators and licensees to verify an investor’s parents’ and children’s participation in the New York cannabis industry. It is also bizarre public policy.

“Major Compensation” means 10% of a licensee’s revenue, 50% of its net profit, or $250,000 annually.

“Passive Investor” is the key exclusion from the True Party regime. A Passive Investor holds a Financial Interest that does not reach the level of a True Party, because the ownership interest does not exceed 5% of a public company licensee or 20% of a private company licensee and the ownership interest lacks Control or Influence. [4].

Plain English Meaning

There are exceptions to New York’s True Party Rules
Passive Investor means a Financial Interest not exceeding 5% of a public company and 20% of a private company, and lacking Control. Passive Investors are not True Parties.
True Party means holding a Financial Interest, having Control, having a right to Major Compensation, or being spouse of any of the foregoing.
- Control means power to order or direct management, operations, managers or policies; and, serving as an officer, director, managing member, or similar role.
- Financial Interest means holding any investment or security (including unexercised options) or holding a right to Major Compensation. Every Financial Interest is either a True Party or a Passive Investor.

[1] 5/23 Proposed Regs 118(28).

[2] 5/23 Proposed Regs 118(42).

[3] 5/23 Proposed Regs 118(42) (“… actual or future right to ownership…of voting stock or equity investment, or compensation …either directly or indirectly, through…, spouse, domestic partner, parent or child”)

[4] 5/23 Proposed Regs 118(76); also excluded is a less commonly occurring 10% holder in a private ROD or microbusiness.

New York’s True Party Rule is Promiscuous

May 30, 2023
in Cannabis Industry Group, Duncan Delano, Jay Purcell, Local Government, New York, Recreational Marijuana, Regulatory Compliance and Licensing
Emerge Law Group
New York

Authors: Jay Purcell, Shareholder; Duncan Delano, Shareholder; Natalie Diaz, Law Clerk

Overview. Section 80 of the New York Marijuana Regulation and Taxation Act splits the cannabis business between two so-called tiers: cultivation, processing, distribution and microbusiness (collectively “Cultivation”) on the one hand; and, on the other hand, retail, on-site consumption and delivery (collectively, “Retail”). New York prohibits an individual from participating in both Cultivation and Retail; one must choose either Retail or Cultivation, and that choice triggers a prohibition on participating in the other tier. In a perfect world, New York would promulgate clear regulations about participation; if someone does ABC, that’s enough to trigger the prohibition; and if someone does DEF, that’s not enough. New York selected for a different outcome, however, and in three different rulemaking proposals, New York mumbled.

True Party Defined. Instead of definitions, New York offers multi-step examples, with multi-step exclusions. The output, a “True Party in Interest,” is defined in the 5/11/23 proposed regulations at Section 118(105) (the “Proposed Regs”). Simply, a “True Party” is someone forbidden from participating in one tier, because of her involvement in another. In offering examples of True Parties, but not definitions, New York intends for the True Party label to reach a sea of unsuspecting cannabis market participants (and their spouses). In evaluating these proposed regulations, that’s the first key takeaway: New York’s True Party rules are promiscuous.

Put differently, by attaching the label to meagre and major actors, the True Party rule is loose. All of the following are True Parties: a small investor on the Board of Directors; contractors earning over $250,000; persons with “unexpressed” power; LPs, GPs, and all their spouses. We note that the Proposed Regs are not yet final and we predict New York will amend the definition of “True Party” many times in the future. For now, it’s useful to conceptualize True Party as one of four persons:

A large investor in a licensee (more than 5% of a public company or more than 20% of a non-public company[1]); and, everyone with equity in the large investor[2];
Someone entitled to large sums of money (10% of a licensee’s gross revenue; 50% of its net profit, or $250,000 annually);[3]
Someone with power: managers, officers and directors, and people who may exercise control, or direct the management, managers or policies of a licensee[4]
Someone who guarantees a licensee’s debts[5]

Key Exception. New York’s exceptions are muddled, too.[6] The key exception is the “Passive Investor,” someone holding, at most, 5% of a public company’s equity, 10% of a private ROD or microbusinesses’ equity, or 20% of a private licensee’s equity; and lacking control or influence.[7] [More on the Passive Investor exclusion here]

Summary

Being labeled a True Party in one Tier (Cultivation or Retail) triggers complete prohibition on any participation in another Tier[8]
New York applies the True Party label promiscuously. Albany’s goal is applying the label as often as possible because this definition triggers investment caps.
To retain power, New York’s rules are poorly drafted on purpose.
New York will face challenges in collecting, storing and using all the information it demands licensees provide (especially regarding families)
The 5/23 Proposed Regs are not final. Whatever happens next, OCB will amend Section 118 again.
Despite inevitable amendments, plan on New York continuing promiscuity for the True Party concept

Note to readers: this analysis is based on proposed regulations; in other words, this analysis will become obsolete as soon as final regulations are promulgated (likely second half of 2023).

Next: Read About Exceptions to New York’s True Party Rule

[1] 5/23 Proposed Regs 118(76)

[2] 5/23 Proposed Regs 118(105)(i)(b)-(c)

[3] 5/23 Proposed Regs 118(105)(i)(d) (landlords are excepted at 105((ii)(a))

[4] 5/23 Proposed Regs 118(105)(i)(a), (f), (i)

[5] 5/23 Proposed Regs 118(105)(i)(g)

[6] Regulators provide eight examples of non-True Parties. These are persons for whom the licensee is a minor part of its overall business activity: a real estate broker, a landlord, a branding or staffing agency, a bank, a passive investor, a consultant; and, someone with a right to receive smaller sums of money (a bonus or commission that doesn’t exceed 10% of a licensee’s gross revenue; consultants earning less than 10% of gross revenue, 50% of net profit, or $250,000 annually (5/23 Proposed Regs 118(ii)(b),(d),(e)).

[7] 5/23 Proposed Regs 118(76).

[8] See 5/23 Proposed Regs 123.3(f); 123.5(i); 123.9(j)

Redlining New York’s May 2023 Proposed Regs

May 22, 2023
in Cannabis Industry Group, Jay Purcell, Local Government, New York, Recreational Marijuana
Brittney Nelson
New York

Authors: Jay Purcell, Shareholder; Duncan Delano, Shareholder; Natalie Diaz, Law Clerk

At a meeting on May 11, 2023, the New York Cannabis Control Board circulated new proposed regulations, for Sections 118, 119, 120, 121, 123, 124, 125 and 131 (5/23 Proposed Regs). The May proposals are updates to regulations proposed in December 2022 (12/22 Proposed Regs). Unfortunately, New York did not circulate a redline showing what’s revised in the proposals. Here’s the redline (Redline May-23 x Dec-22).

There are some major updates in here, especially On-Site Consumption; Goods/Services Agreements, Undue Influence, and Municipal Regs. We’ll circulate an analysis of the Proposed Regs shortly.

Posts Tagged:New York

Exceptions to New York’s True Party Rule

New York’s True Party Rule is Promiscuous

Redlining New York’s May 2023 Proposed Regs

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