Look Before You Leap!

 

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By Gerry Fornwald 

 

Earlier this year, Minnesota enacted a whole new body of cannabis law, expanding the legal production, sale, and consumption of cannabis beyond hemp-derived products. In the process, Minnesota became the 23rd state to legalize marijuana for adult recreational use. While this change in Minnesota law certainly expands the variety (and potency) of THC-infused food and beverage products that will be available in the not-so-distant future, it also comes with licensing requirements and restrictions that haven’t applied in the past. Food and beverage manufacturers will want to charge ahead in this new gold rush—either for the first time or as a continuation of what they have been doing for the past year—but they will need to be made aware of certain regulatory pitfalls that could await them. 

 

When food and beverage products infused with hemp-based cannabinoids were legalized in Minnesota in 2022, one of the primary criticisms of the law-change involved the lack of accompanying regulation or enforcement. The Minnesota Board of Pharmacy was tasked with overseeing this new food and beverage frontier, but publicly decried its ability to do so. What ensued was a market that was only very loosely regulated, where THC-infused gummies appeared next to lip balm in grocery co-ops and health-food stores, cans of THC seltzers outnumbered pints of IPA in micro-brewery tap rooms, and your local pizza joint likely offered an array of tasty THC beverages to help that pepperoni pizza go down more smoothly—without needing a license of any kind. In the process, manufacturers and retailers pushed the ill-defined boundaries. For example, while the law limited manufacturers to 5 mg of THC per serving, limitations on how servings could be packaged were vague, leading some drink manufacturers to decide their pint-sized beverages were actually intended to be sharable with a friend . . . or nine. 

 

In many ways, the hemp-based THC food and beverage market (now called “lower-potency hemp products”) will look much the same going forward. Minnesotans will still be able to purchase gummies at their co-op and THC seltzers at their favorite restaurants, breweries and bars as long as the lower-potency food or beverage is served in its original packaging and is not mixed with an alcoholic beverage. The new law also clarifies a grey area in the previous legislation to expressly permit the holders of liquor licenses (for example, liquor stores) to also hold a lower-potency hemp product retail license.  

 

The Board of Pharmacy’s stint as the primary hemp-product regulator is over as abruptly as it began. Manufacturers and retailers of lower-potency hemp products will need to register with the Minnesota Department of Health by October 1, 2023, and eventually get licensed under the Office of Cannabis Management, once that agency is up and running. These regulating agencies will be tasked with enforcing much more robust—and clearer—cannabis laws. Minnesota’s new cannabis statute closes a number of “loopholes” that were present in the previous law, particularly with respect to permitted dosages in lower-potency hemp products. Those lower-potency foods and beverages still may only contain 5 mg of delta-9 THC or 25 mg of CBD per serving, but now the law also defines how “servings” may be packaged. Non-beverage edibles can have multiple servings per container as long as the serving sizes are clearly indicated and the container has a maximum of 50 mg of delta-9 THC. Beverages, however, can only have a maximum of two servings per container. In other words, the days of ten-serving, 50 mg cans of THC seltzer are now a thing of the past, and manufacturers and retailers will need legal guidance regarding what to do with unsold, non-compliant products. Finally, manufacturers of lower-potency food and beverages must now submit samples of each batch of product to an independent, accredited laboratory for testing – and be prepared to provide the test results to the Commissioner of Health, if requested. 

 

Certainly, most lawyers’ inclination will be to assist businesses with getting in on the ground-floor of Minnesota’s new legal cannabis market. But with the Office of Cannabis Management still being formed and regulations still undrafted, the full adult-use cannabis market is still at least a year away. In the meantime, the obvious first step for any new cannabis entrepreneur is to dip their toes into the lower-potency end of the pool. Or is it? 

 

A unique aspect of Minnesota’s adult-use cannabis law is that it substantially prohibits vertical integration by limiting the types of licenses that may be held by a single individual or ownership group. While the statute clearly lists different combinations of licenses that may be held by a single license holder, it expressly provides that a lower-potency retail or manufacturing licensee may not hold any other type of cannabis business license. 

 

The drafters didn’t stop there, and then went to great lengths to cut off potential workarounds by way of creative corporate structures. Namely, the law defines a “license holder” as “a person, cooperative, or business that holds” any of the sixteen available cannabis and lower-potency hemp business licenses. It then expands the prohibition against holding certain combinations of licenses beyond the specific license-holding-entity itself, and imputes the prohibition to “every cooperative member or every director, manager, and general partner of a cannabis business.”  

 

When advising businesses that are interested in immediately getting involved in the lower-potency food and beverage industry, make sure you also ask whether they have aspirations of being involved in the adult-use cannabis industry in the future. If a business seeks to be involved in multiple components of the cannabis market, there are four principles that every lawyer advising them should keep squarely in mind: First, consider to whom the prohibition against multiple licensures applies. Because the “license holder” extends beyond the specific legal entity that holds a cannabis license, and applies to ownership as well as management of the company, businesses must plan ahead in considering what licenses to pursue, and with whom to purse them. Second, consider the scope of information involved in the application process. Among other things, all cannabis business license applications require full disclosure of all owners and management, including their financial history, criminal background checks, and financing details regarding the prospective cannabis business. Third, the consequences of violating the licensure restrictions are severe, including license revocation and, potentially, permanent disqualification from ever holding a cannabis business license in the future. Finally, before filing a cannabis business application, form a clear understanding regarding which licenses may be held in conjunction, and which cannot. 

 

These are undeniably exciting times for Minnesota food and beverage manufacturers and retailers who have an eye on expanding into the now-legal cannabis market. At least one set of economic projections indicates the adult-use cannabis market in Minnesota will exceed $1 billion in revenues by 2027, much of which will be driven by food and beverage producers that have not yet manufactured a single square of chocolate or can of seltzer. Once mature, the cannabis market will include products and experiences that expand far beyond the candies and drinks that are currently available. Before long, cannabis will be ubiquitous in home cooking products like infused butters and oils, in drink mixes for your backyard happy hour, and even in fine dining experiences. In the meantime, cannabis entrepreneurs will be faced with the difficult decision of whether to join the first wave of lower-potency licensees, or keep their stash dry for future opportunities in the adult-use market. And attorneys throughout Minnesota need to be aware of how helping businesses obtain a cannabis license today could lead to a roadblock tomorrow. 

 

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