Maryland’s New Cannabis Regulations Are Problematic for Stakeholders, Investors

There are murmurs of serious discontent regarding Maryland’s proposed cannabis regulations – HB0556/SB0516 – which had their first readings earlier this month, kicking off a legislative process that has a long way to go and contains myriad opportunities for the bills to be amended to address the concerns of critics. Whether that happens or not remains to be seen, of course, but the first indication of how much work remains to be done will come Friday, Feb. 17, at 1pm ET, when House delegates will hold a hearing to discuss HB0556. It will be the first chance for industry stakeholders and others to weigh in on a bill that some believe will send Maryland down a rabbit hole of market dysfunction similar to New York. Included in a litany of complaints, we were told the bills already paint Maryland as an unattractive destination for capital.

The stakes are so high that the individuals Cannabis Business Executive talked to for this story spoke off-the-record. Their reticence was less out of fear than a determination not to undermine any negotiations during the session that could influence the final version of regulations that will determine the course of the market. Suffice to say, however, opposition to these regulations as written is vehement and apparently widespread.

In a nutshell, this regulatory scheme is seen as the antithesis of limited-license and the definition of cultivation, production, and retail license overkill, with the requisite undesired results that other states have experienced. A more extreme reaction is that it represents a government take-over of Maryland’s industry and only reinforces the state’s reputation as hostile to business.

Girding that is the sense that the rules were changed in the middle of the game, with the result that a market could be created that makes the success of social equity applicants all the more difficult to achieve, and then locks them into a five-year commitment that could inhibit their road to generational wealth rather than enable it. More licenses do not automatically translate into greater opportunity, we were told; in fact, today’s cannabis market all but dictates that the reverse is true – limited-license markets are the only environments where a workable cannabis market can currently exist. Add to all that the more mundane but very real concern that the timeline of the proposed regulations does not make sense, and the whole thing has the makings of a big mess.

Beyond the deep disappointment that the state appears not to have learned from the experiences of other states and is now poised to repeat similar mistakes, there also is a palpable frustration stemming from months of negotiations among regulators and stakeholders that resulted in regulations that came as a surprise to people involved with the process. Not a recipe for trust, to say the least, but one we have seen visited before upon unwitting saps… er, citizens.

And, as mentioned, there is immediate concern about the fact that, as we were told, word is already out in the investment community that Maryland is a state to avoid. That said, it is less the frame of the proposed regulations than the high numbers being allowed that is the most pressing problem. If they can be modified, the seeds of compromise exist, if the state is listening. But the clock is ticking. If it takes the entire session to resolve these issues, that will leave only ten weeks or so for regulators to prepare for the launch of adult-use sales on July 1.

Regarding the House hearing this Friday, we were told it would be streamed live, and we will update this article with a link to the stream when and if it is made available.

What’s in HB0556/SB0516

Below are bullet-point features of the legislation, courtesy of Vincente Sederberg LLP and their break-down of the bills.

Key takeaways from the bills:

• Medical licensees will be able to convert to adult use on or before July 1, 2023.
• Conversion fees for existing licensees will range from $100,000 to $2,500,000 depending on gross revenue for 2022.
• New adult use licenses will be available on or before January 1, 2024, with a second licensing round scheduled to begin May 1, 2024
• The First Round of Licenses will only be available to Social Equity Applicants
• The Division is prohibited from requiring applicants to have property at the time the application is submitted.
• Applications will be reviewed on a pass/fail basis, and then submitted to a lottery.

Other noteworthy elements of the legislation include:

• Applications will be determined to have met or not met minimum qualifications. Qualified applications will be entered into a lottery.
• Applicants will be limited to one application per license type and two applications total in any licensing round.
• Disclosure requirements exist for individuals with ownership interests of five percent or greater.
• There is a five-year prohibition on license ownership/control transfers, including those medical licensees who undergo the conversion process.
• A sliding sales tax begins at 6% in Fiscal Year 2024, increasing by 1% each year and capped at 10%.
• Local jurisdictions are prohibited from imposing an additional tax.
• The Office of Social Equity will be responsible for identifying geographic areas that have been disproportionately impacted by the prohibition of cannabis

A Few Key Concerns

These are just a few of the issues people have with the current iteration of the newly released adult-use regulatory scheme being proposed by Maryland.

Cultivation

Considering the size of the state, we were told the plan as written, with a cap of 75 Standard cultivation licenses, allows for far too much cultivation. The allowance for 300,000 square feet of canopy per licensee also was characterized as excessive. Missouri, by comparison, with about the same adult population as Maryland, allows for 90,000 square feet of canopy per individual operation, a difference that could easily make the difference between enough supply and over-supply. Rather add more cultivation and saturate the market, it was suggested that the state should instead evaluate demand as licenses already approved under HB2 but not yet operational come online, and then add new licenses if needed. Existing cultivators, on the other hand, would certainly be able to expand capacity to meet immediate demand much faster than new licensees could come online.

Retail

Again, the number being permitted (300 Standard Retail Licenses) was characterized as above the amount the market will require, but retail is also an area where the state needs more stores in areas that are currently under-served. It was suggested the state should immediately add 50+ new dispensaries, and that those licenses should be prioritized over cultivation or production licensees in the application process.

License Fees

The fees charged to current medical licensees in the state that want to add adult-use is scaled from $100,000 up to $2,500,000 depending on prior year gross revenue. The assumption from the state is that these amounts are pocket change for the companies. The reality, we were told, is that with a bear market, increased expenses, and the ever present burden of 280E, companies do not have the cash flow necessary to afford those amounts.

Micro Licenses

With a micro license, of which 200 will be issued, someone can cultivate 10,000 square feet of canopy and below, process under 1000 pounds of trim material a year, and operate a delivery service rather than a storefront as long as there are ten or fewer employees. The concern here is that the delivery service aspect will mean an indirect removal of delivery rights from storefront-based dispensaries.

Finance

We were told in no uncertain terms that a liberal-license market in Maryland will drive capital investment from the state, and that even the suggestion that such a law could pass has already chilled enthusiasm for Maryland, which was considered a great investment opportunity before the proposed regulations were released. It’s safe to say that of all the concerns surrounding these bills, the idea that already scarce capital could flow elsewhere rather than to Maryland weighs the heaviest because it would adversely impact everyone, including the state. If that does not encourage a modification of the regulations, nothing will.