The following article was first published by Shipman & Goodwin LLP in the News & Insights section of its website. It is republished here with permission.
You won the lottery for a cannabis food and drink manufacturer license, now what?
You have completed your license application for the manufacturer of cannabis-based foods and beverages for adult use and were lucky enough to be selected in the lottery as a recipient of one of only 10 provisional licenses.
What are the next steps?
Connecticut’s statutes governing adult cannabis regulation and regulations prescribe detailed steps you must follow to get your business running and receive a final license from the Connecticut Department of Consumer Protection.
In addition to cannabis-specific requirements, you must also comply with state and local regulations regarding food and beverage production. This article illustrates some of these steps.
Company structure
At this point, you may or may not have created a business to complete your license application. In case you haven’t formed a business, this will be your first step.
You will need to choose a business name, form an entity with the Secretary of the Connecticut State Office, and complete any additional paperwork required.
Here are some considerations on the high-level business structure:
- What is the optimal ownership structure?
- How will your entity be taxed?
- Do you have the proper training documents in place?
- What type of financing will your business seek?
- Is your business name available or already taken from someone else?
Legal and accounting professionals can help you answer these questions and guide you through the required paperwork.
Business plan
Your business plan should include all of your business goals, a budget, a marketing plan, a financing plan, and a list of strategic partners, among other things.
You should develop a business plan early in planning your business.
DCP will review your business plan as part of the interim licensing process.
DCP will review your business plan as part of the interim licensing process.
You can find more guidance on creating a business plan on the US Small Business Administration website.
Licenses, regulatory compliance
Cannabis is a highly regulated industry and infusing cannabis into food or beverages requires additional levels of regulatory compliance.
Overall, cannabis-based food and beverage manufacturers must comply with state cannabis laws, cannabis regulations for adult use, 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 relating to bakeries and food manufacturing establishments.
It is important to remember that while Connecticut allows the addition of cannabis to food and drink, federal law, specifically the Controlled Substances Act and the Food, Drug, and Cosmetic Act, prohibits the introduction of cannabis-containing foods or beverages ( or CBD) in interstate commerce, which means you cannot sell cannabis-based foods or drinks across state borders.
Assuming you have received a provisional license for the cannabis-based food and beverage manufacturer, you may need to obtain additional licenses or permits depending on the municipality you operate in.
Federal law prohibits the introduction of cannabis (or CBD) -containing foods or beverages into interstate commerce.
For example, the City of New Haven may require manufacturers and / or retailers of cannabis-based foods and beverages to obtain a food service establishment license.
The regulations also contain packaging and labeling requirements, as well as restrictions on the content of cannabis-based foods and beverages.
For example, regulations prohibit the sale of cannabis products that contain more than half of one percent alcohol.
Applicable regulations should be carefully reviewed and the business plan and product offerings developed accordingly.
Financing
If you are not funding your business on your own, you will need to start looking for alternative funding sources.
Funding can come from friends and family, from private equity, or from more traditional funding sources, such as loans.
As cannabis remains federally illegal, traditional funding sources will be limited.
Since cannabis remains federally illegal, traditional funding sources will be limited and it may be necessary to seek out ‘cannabis-friendly’ banks and credit unions or turn to cannabis financial brokers.
Different forms of financing work best with particular business structures, so you should consult with a legal counsel and accounting professional to explore your options.
Real Estate, Zoning Approval
To get a final license, you will need a physical location for your business and the approval of the local zoning council.
Each municipality will make an independent decision to allow or ban cannabis establishments within its borders.
Each municipality will make an independent decision to allow or ban cannabis establishments.
Some municipalities have already voted and published the applicable decisions. You can find an up-to-date list of jurisdictions that have voted to allow or ban cannabis establishments here.
Even if a particular municipality has decided to allow cannabis businesses, zoning regulations may limit the specific locations or areas where cannabis businesses can operate.
It is necessary to consult the planning regulations of the municipality where you want to locate your business and work with the local authority to obtain approval.
Hire a workforce
You will need to hire a team to run your business.
Here are some employment considerations to keep in mind when running a cannabis business. First, you’ll need to register as an “employer” with the Connecticut Department of Labor.
Second, all of your employees must register with DCP.
Key employees will need to pass a background check and obtain a license.
Third, key employees – the president / CEO, financial officer and compliance officer – will need to pass a background check and be licensed with the DCP.
Once employees are hired, you will need to prepare employment contracts, employee manuals, create a payroll system, and provide applicable training.
This will include cannabis specific training and state-mandated employee training. You will need to keep the DCP informed of changes to your workforce, as required by regulations.
Contracts with key suppliers
Since you’ve received a cannabis-based food and beverage manufacturer license, you’ll need to establish a supply chain to source your ingredients and align retailers.
There are stricter regulations regarding the production of cannabis products, so you will need to make sure that your facilities and those of your partners maintain rigorous standards of quality and safety.
You will be able to distribute your products only after receiving satisfactory results from laboratory tests.
Section 21a-XXX-26 of the regulations outlines manufacturing restrictions, such as chain of custody requirements, assigned ingredients, appropriate manufacturing equipment, acceptable forms of products, testing, etc.
You will be able to distribute your products only after receiving satisfactory results from laboratory tests, compliant with the International Standard for the Organization and the International Electrotechnical Commission 17025.
Intellectual property
Part of your business plan should include a marketing plan. Establishing and protecting intellectual property are key to successful marketing.
Since the Federal Controlled Substances Act prevents interstate trade in cannabis, all sales must be conducted within state borders only.
You will not be able to obtain federal intellectual property protection from the United States Patent and Trademark Office.
An additional consequence of federal illegality is that you will not be able to obtain federal intellectual property protection from the United States Patent and Trademark Office, which would allow you to protect your IP nationwide.
However, you can apply for a trademark in the state of Connecticut to protect your trademark locally. You are not allowed to sell your product with a brand until your brand has been registered with the DCP.
The regulations include specific indications on which products can be labeled with the same brand, depending on the ingredients used.
Environment, Energy
Food and beverage manufacturers need to understand the waste streams created by their operations and should consider whether the use of cannabis in the manufacturing process creates or changes an environmental permit requirement, such as air emissions, solid waste or wastewater.
Furthermore, many entities in the cannabis industry recognize that key parts of the supply chain require significant consumption of water and electricity, and many are making intentional efforts to reduce their carbon footprint.
Examples for manufacturers include energy efficiency audits, renewable energy sources, recycling practices and sustainable packaging.
Additional considerations
As a provisional license holder, you will also need to meet the criteria outlined by DCP and the Social Equity Council for the final license, including:
- A contract with the Cannabis Analytic Tracking System
- A labor peace agreement between the cannabis establishment and a bona fide trade union, to the extent that it employs union workers
- A certification relating to a project employment contract, if applicable
- Policies written to prevent the diversion and misuse of cannabis
- Adequate security measures to prevent the theft, diversion, loss and adulteration of cannabis
- A workforce development plan
- A social equity plan
These criteria must be satisfactorily met by the DCP and SEC within fourteen months of obtaining an interim license to obtain a final license.
Sarah Westby is co-chair of the Cannabis Team of Shipman & Goodwin LLP and a member of the company’s work and practice group. Sara Bonaiuto is an associate in the firm’s corporate activities and practices group.
For more information on Shipman’s cannabis practice, contact Co-Chairs Sarah Westby at (860.251.5503) or Vincenzo Carannante at (860.251.5096).