June has been a busy month for the cannabis industry in Maryland! Read on for updates regarding statutory and regulatory changes that will shape the industry moving forward. The most significant developments include:

• Approval of Emergency Regulations
• Criminal penalties imposed for straw ownership and new definition of “Genuine Ownership”
• Updates to political subdivisions' ability to control licensees’ locations with respect to setbacks

Keep reading for details about the changes.

Legislative Changes

Three new bills were approved during this year’s legislative session that will impact the cannabis industry. HB272, now chaptered at 36-101, and 36-1103, and HB805, now chaptered at 36-405 and 36-410, both became effective on June 1, 2024. As discussed below, these legislative changes impact ownership and control provisions, as well as local control. These changes will affect corporate structuring and the locations where licensees can operate.

In addition, HB253, which institutes a myriad of changes to the Cannabis Reform Act, became effective on April 25, 2024. Continue reading for important highlights from this provision.

HB272: Cannabis Licensing and Registration – Use of Straw Ownership – Prohibition

This bill adds section 36-1103 to the Cannabis Reform Act and prohibits a person from applying for or holding a cannabis license if the ownership is nominal, or without the benefits and risks of genuine ownership, or for the limited purpose of satisfying the requirements for a cannabis license. A person in violation of this law is guilty of a misdemeanor and, on conviction, is subject to a fine of up to $2,500 or imprisonment up to one year, or both. Importantly, this section also includes a new definition of “Genuine Ownership”:

IN THIS SECTION, “GENUINE OWNERSHIP” MEANS AN OWNERSHIP INTEREST IN AN APPLICANT, A CANNABIS LICENSEE, OR A REGISTRANT THAT IS EVIDENCED BY RECORD OWNERSHIP IN WHICH THE OWNER, REGARDLESS OF THE AMOUNT OF CAPITAL OR ASSETS THAT THE OWNER CONTRIBUTES TO THE APPLICANT, LICENSEE, OR REGISTRANT, ENJOYS THE CUSTOMARY INCIDENTS OF OWNERSHIP AND SHARES IN THE PROFITS AND LOSSES OF THE CANNABIS LICENSE OR REGISTRATION PROPORTIONATE TO THE PERCENTAGE OF THE OWNER’S INTEREST IN THE CANNABIS LICENSE OR REGISTRATION.

KEY TAKEAWAY: In contrast to prior iterations of the law and regulations, this section appears to require that profit sharing of the cannabis business aligns with ownership percentages. The regulations were previously silent in this regard. Given this substantive change between the time that initial applications were submitted and the effective date of the law, we recommend reviewing all current agreements to ensure compliance under this new statutory authority.

In light of the potential criminal penalties, it is imperative that all applicants ensure strict compliance with the law.

HB805: Cannabis – Licensee Locations – Restrictions

This bill prohibits political subdivisions from adopting an ordinance establishing zoning requirements for licensed dispensaries that are more restrictive than zoning requirements for a retailer dealer (e.g. liquor stores) licensed under this article. It also prohibits political subdivisions from adopting an ordinance for a licensed grower cultivating cannabis outdoors that is more restrictive than any zoning requirements that existed on June 30, 2023, governing a hemp farm registered under Title 14.

Notably, it expressly allows political subdivisions to increase the distance limitation for dispensaries from 1,000 feet to up to a half-mile. It also allows political subdivisions to establish distance limitations for residential zones (up to 100 feet) or to apply the distance requirements applicable to alcoholic beverage retailers from residential uses to dispensaries.

KEY TAKEAWAY: This change's trickle-down impacts will play out at the local level through amendments to zoning provisions. Please contact us if you need assistance coordinating with County or Municipal officials when site searches commence.

HB253: Cannabis Reform – Alterations

This bill includes a number of amendments to the existing cannabis reform act:

• Amends the definition of cannabis to include “seeds, seedlings, immature plants, and cones.”

• Adds the definition of a “cannabis nursery,” which is a business that provides cannabis seeds, seedlings, immature plants, or clones to cannabis businesses. Cannabis nurseries will be required to register with MCA to provide services (similar to transporters and waste disposal companies).

• Expressly prohibits cannabis companies from engaging in event sponsorships unless 85% of the audience is reasonably expected to be at least 21 years old as determined by reliable data.

• Allows current licensees (converted from the medical program) to continue delivering to patients through July 1, 2025. After that time, a partnership with a micro-dispensary will be required to offer delivery services.

KEY TAKEAWAY: These updated provisions expand existing licensees’ ability to offer delivery services through July 1, 2025 and create a new class of Cannabis Registrants, Cannabis Nurseries, who are permitted to sell immature plants to cannabis businesses. If this is something you are interested in exploring, please contact us.

Regulatory Changes

Emergency Regulations were filed with the Joint Committee on Administrative Executive and Legislative Review on March 11, 2024. As of June 6, 2024, the Emergency Regulations were APPROVED and are effective through August 30, 2024.

Proposed permanent regulations were also published in the Maryland Register on May 3, 2024. The public comment period closed on June 3, 2024. All public comments are now available for review on the MCA’s website. Additional action on the permanent regulations is pending, but given the expiration date of the Emergency Regulations, final Permanent Regulations are expected to become effective in September.

Key Takeaways from the Emergency Regulations That Are Now In Effect

Below, we’ve compiled the top things you should know from this new set of cannabis regulations. Read a full summary here.

Demonstration of Funds

• Licensees must demonstrate adequate capitalization within 6 months of being issued a conditional license

Management Agreements

• A “Management Company” means any entity providing management services to a licensed entity. These companies must be registered with the MCA and in good standing with the State Department of Assessments and Taxation

• Management agreements may not require a licensee to:

  • Operate under a marketing plan/system that is associated with the trademark, service mark, trade name, logotype advertising, or other commercial symbol that designates the licensee as the same or similar to the management company

  • Offer, sell, or distribute cannabis or cannabis products under a marketing plan or system prescribed in substantial part by the entity providing the management agreement

  • Limit the offerings of cannabis or cannabis products to another licensed entity holding a direct or indirect financial relationship in the management company

  • Sell or transfer ownership interest in the license at a later date to the management company

• A management agreement constitutes a transfer of control if it conveys to a management company unilateral control or the right/authority to make major marketing, production, and financial decisions, including:

  • The right or authority to operate under a marketing plan/system that is associated with the trademark, service mark, trade name, logotype advertising, or other commercial symbol that is the same as the management company or another licensee

  • The right or authority to purchase a controlling interest in, or control of, the license at a later date

  • The right to or actual payment from the licensee over the course of a calendar year exceeding the greater of 25% of the licensee’s gross revenue, 50% of the licensee’s net profits, or $250,000

Employee Incentive Equity

• A licensee may issue employee stock options as part of an employee compensation plan.

• Prior to issuance, the licensee must submit a detailed employee stock option plan for each employee to whom it intends to issue stock for MCA approval and pay all associated fees. Stocks issued to employees may not change the control structure of the licensee or exceed 5% total ownership to one individual.

Changes to Transfer of Ownership

• All licensees may now transfer equity without MCA review and approval if the transfer is for less than 5% of a cannabis license and the proposed transfer will not result in the transferee holding 5% or more of the licensee.

• MCA will deny transfers if, prior to the licensee being licensed and operational for a period of at least 5 years, the transfer would convey to the transferee the right or authority to obtain a controlling interest in the license at a later date (this appears to prohibit certain option and convertible debt transactions).