Getting Your Cannabis Business Off the Ground
The following article was first published by Shipman & Goodwin LLP in the News & Insights section of its website. It is reposted here with permission.
You’ve won the lottery for a cannabis food and beverage manufacturer license, what now?
You have completed the adult-use cannabis food and beverage manufacturer license application and were fortunate enough to be selected in the lottery as a recipient of one of just 10 provisional licenses.
What are the next steps?
Connecticut statutes governing the regulation of adult-use cannabis and regulations prescribe detailed steps to follow to get your business up and running and receive a final license from the Connecticut Department of Consumer Protection.
In addition to the requirements specific to cannabis, you must also comply with state and local regulations regarding food and beverage manufacturing. This article outlines some of those steps.
At this point, you may or may not have formed a business to complete your license application. In the event that you have not formed a business, this will be your very first step.
You will need to choose a business name, form an entity with the Connecticut Secretary of the State’s Office, and complete additional required paperwork.
Here are some high level business structure considerations:
- What is the optimal ownership structure?
- How will your entity be taxed?
- Do you have the proper formation documents in place?
- What type of financing will your business seek?
- Is your business name available or already taken by someone else?
Legal and accounting professionals can assist you with answering these questions and guide you through the required paperwork.
Your business plan should include all of your business goals, a budget, a marketing plan, a funding plan and a list of strategic partners, among other things.
You should develop a business plan in the early stages of planning for your business.
DCP will review your business plan as part of the provisional license process.
You can find additional guidance on creating a business plan on the U.S. Small Business Administration website.
Licensing, Regulatory Compliance
Cannabis is a highly regulated industry, and infusing cannabis into food or beverages requires additional layers of regulatory compliance.
Overall, cannabis food and beverage manufacturers must comply with the state’s cannabis laws, the adult-use cannabis regulations, and the Connecticut Food, Drug, and Cosmetic Act, and sections 21a-91 to 21a–120 and sections 21a-151 to 21a-159 of the Connecticut General Statutes regarding bakeries and food manufacturing establishments.
It is important to remember that, while Connecticut allows cannabis to be added to foods and beverages, federal law—namely the Controlled Substances Act and the Food, Drug, and Cosmetic Act—prohibits the introduction of foods or beverages containing cannabis (or CBD) into interstate commerce, which means that you cannot sell cannabis-infused foods or beverages across state lines.
Assuming you have received a provisional cannabis food and beverage manufacturer license, you may need to obtain additional licensing or permits depending upon the municipality in which you operate.
For example, the City of New Haven may require cannabis food and beverage manufacturers and/or retailers to obtain a food service establishment license.
The regulations also contain packaging and labeling requirements, as well as restrictions on the content of cannabis-infused foods and beverages.
For example, the regulations prohibit the sale of cannabis products that contain alcohol in an amount greater than one half of one percent.
You should carefully review the applicable regulations and develop your business plan and product offerings accordingly.
If you are not funding your business on your own, you will need to begin seeking alternative sources of funding.
Funding may come from friends and family, private equity, or more traditional funding sources, such as loans.
Since cannabis remains illegal at the federal level, traditional funding sources will be limited and you may need to seek out specific “cannabis friendly” banks and credit unions, or look to specialty cannabis financial brokers.
Different forms of funding work better with particular business structures so you should consult with legal counsel and an accounting professional to explore your options.
Real Estate, Zoning Approval
In order to obtain a final license, you will need a physical location for your business as well as approval from the local zoning board.
Each municipality will make an independent decision to permit or prohibit cannabis establishments within its boundaries.
Some municipalities have already voted and published their applicable decisions. You can find a running list of jurisdictions that have voted to allow or prohibit cannabis establishments here.
Even if a given municipality has decided to allow cannabis businesses, zoning regulations may limit the specific locations or zones in which cannabis businesses may operate.
You must consult the zoning regulations of the municipality in which you seek to locate your business, and work with the local zoning board to obtain approval.
Hiring a Workforce
You will need to hire a team to run your business.
Here are several employment considerations to keep in mind when operating a cannabis business. First, you will need to register as an “Employer” with the Connecticut Department of Labor.
Second, all of your employees must register with DCP.
Third, key employees—that is, the president/CEO, financial manager, and compliance manager—will need to pass a background check and obtain a license with the DCP.
Once you have hired employees you will need to prepare employment agreements, employee handbooks, create a payroll system, and provide the applicable training.
That will include cannabis-specific training as well as state-mandated employee training. You will need to keep the DCP apprised of changes to your workforce, as required by the regulations.
Key Vendor Contracts
Since you have received a cannabis food and beverage manufacturer license, you will need to establish a supply chain to source your ingredients and line up retail vendors.
There are heightened regulations pertaining to manufacturing cannabis products, so you will need to ensure that your facilities and those of your partners maintain stringent quality and security standards.
Section 21a-XXX-26 of the regulations outlines manufacturing restrictions, such as chain of custody requirements, allotted ingredients, appropriate manufacturing equipment, acceptable forms of products, testing, etc.
You will only be allowed to distribute your products after receiving satisfactory results from laboratory tests, which comply with the International Standard for Organization and the International Electrotechnical Commission 17025.
Part of your business plan should include a marketing plan. Establishing and protecting intellectual property are key elements of successful marketing.
Since the federal Controlled Substance Act prevents interstate commerce of cannabis, all sales must be conducted exclusively within the state’s borders.
A further consequence of federal illegality is that you will not be able to obtain federal protection of intellectual property from the U.S. Patent and Trademark Office, which would allow you to protect your IP on a national level.
However, you can apply for a trademark within the state of Connecticut to protect your brand locally. You are not allowed to sell your product with a brand name until your brand name has been registered with the DCP.
The regulations include specific guidance about which products can be labeled with the same brand name, dependent upon which ingredients are used.
Food and beverage manufacturers must understand the waste streams created by their operations and should evaluate whether the use of cannabis in the manufacturing process creates or modifies an environmental permit requirement, such as air emissions, solid waste, or wastewater.
Additionally, many entities in the cannabis sector recognize that key parts of the supply chain demand significant water and electricity usage and many are making intentional efforts to reduce the carbon footprint.
Examples for manufacturers include energy efficiency audits, renewable energy sources, recycling practices, and sustainable packaging.
As a provisional license holder, you will also need to fulfill the criteria outlined by DCP and the Social Equity Council for final licensure, including:
- A contract with the Cannabis Analytic Tracking System
- A labor peace agreement between the cannabis establishment and a bona fide labor organization, to the extent you employ unionized workers
- A certification regarding a project labor agreement, if applicable
- Written policies to prevent diversion and misuse of cannabis
- Appropriate security measures to prevent theft, diversion, loss and adulteration of cannabis
- A workforce development plan
- A social equity plan
These criteria must be met to the satisfaction of DCP and SEC within fourteen months of obtaining a provisional license in order to obtain a final license.
Sarah Westby is co-chair of Shipman & Goodwin LLP’s Cannabis Team and a member of the firm’s employment and labor practice group. Sara Bonaiuto is an associate in the firm’s business and corporate practice group.
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