By Hannah King and Arin Aragona

Plans for Kentucky’s medical cannabis program took a significant turn last week with the passage of House Bill 829 and the implementation of emergency regulations related to licensing. They create limited licenses, a lottery system, a truncated timeline for licensing, restrictions on vertical integration and other limitations. The implications are substantial, impacting both prospective operators and the industry landscape at large.

On April 17, 2024, Governor Beshear signed House Bill 829 into law, which makes several changes to Kentucky’s medical cannabis law, including the licensing timeline, opt-outs by local jurisdictions and school districts, inspections and provisional registration for patients. The day after, the Cabinet for Health and Family Services issued new emergency and proposed permanent regulations setting forth the requirements and structure for cannabis licensing for operators. One of the most striking changes is the adoption of a limited license structure, deviating from previous expectations of a more open market. Through an initial licensing process, the Cabinet will issue 10 Tier I cultivation licenses, four II cultivation licenses, two Tier III cultivation licenses, 10 processor licenses and 48 dispensary licenses. For dispensaries, the Commonwealth was divided into 11 geographic zones, with most receiving four dispensaries each and zones containing Louisville and Lexington receiving six each.  Each county within a zone will have no more than one dispensary each, with the exception of Jefferson and Fayette, which will have two each.

If applications outnumber available licenses, which is surely to happen, licenses will be awarded through a lottery system. HB 829 accelerates the licensing process by six months so the application period will begin on July 1, 2024, and end on August 31, 2024. Applicants must provide standard information, such as operating agreements and ownership information, as well as the following:

• Documentation showing that the applicant has authority to use the proposed location for the business and a site plan for such location;
• Evidence of deposits or credit showing adequate capitalization, which is $50,000 for Tier I cultivation, $200,000 for Tier II cultivation, $500,000 for Tier III cultivation and $150,000 for processors, dispensaries and safety compliance facilities;
• Information related to any non-operating parties who are providing financial support to the business;
• Documentation demonstrating that the applicant is capable of successfully establishing and operating a cannabis business, which includes experience operating a business or non-profit;
• An attestation that the business will be able to comply with numerous additional requirements, including obtaining a $2 million general liability insurance policy and establishment of standard operating procedures; and
• Application fees of $3,000 for Tier I cultivation, $10,000 for Tier II cultivation, $20,000 for Tier III cultivation, $3,000 for safety compliance facilities and $5,000 for processors and dispensaries (plus additional fees if the licenses are granted of $12,000 for Tier I cultivation, $25,000 for Tier II cultivation, $50,000 for Tier III cultivation, $12,000 for safety compliance facilities, $25,000 for processors and $30,000 for dispensaries).

In another surprising move, the regulations place restrictions on vertical integration, with licensees permitted to hold licenses in only one business category. While the law provides for a producer license that is permitted to engage in both cultivation and processing, the Cabinet is not allowing such licenses in the initial application period, and how the limits on ownership in more than one license type will apply to such category in the future is uncertain. Despite the vertical restriction, licensees will be permitted to hold multiple licenses in a particular category, provided that each business is at a separate location.

HB 829 continues to permit local municipalities to forbid medical cannabis companies, including those already holding a license, provided that such prohibition is implemented by January 1, 2025. Following that date, prohibition is only permitted if a local business has not yet been licensed to operate in a municipality. HB 829 also requires that regulators prioritize the review of applications from existing Kentucky hemp businesses, although any benefit from that will likely be diminished by the newly announced lottery system.

With applications due between July 1 and August 31, 2024, there is little time for hesitation for those who are interested in participating in Kentucky’s program. While the regulations provide that the Cabinet will assess the need for additional licenses on a quarterly basis starting in 2025, it is unclear how restrictive future licensing will be. Accordingly, prospective applicants must swiftly mobilize their resources and prepare proper submissions to ensure a chance of securing any of the limited licenses.

With real estate and large capital requirements being gating items, the process certainly favors established business interests over small entrepreneurs.  Nonetheless, if applicants are able to  meet the minimum requirements, they will have the same odds of receiving a license as any others. Applications for cannabis licenses, and the requirements therein, have been around in other jurisdictions for many years, and there are numerous options for addressing what could be intimidating requirements. Having legal counsel or partners who have experience with such process will be invaluable for navigating the quick and detailed process in Kentucky over the next several months. With prudent planning and informed legal counsel, operators can mitigate risks and navigate the regulatory landscape effectively.

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About the Attorneys

Arin Aragona is a partner in Dentons’ Corporate, Private Equity and Cannabis practice groups. Prior to joining Dentons, Arin was general counsel and chief operating officer of a boutique private equity firm primarily focused on the US cannabis industry. He may be reached at [email protected]

Hannah E. King is a partner in Dentons’ Cannabis Law Practice Group. She advises clients across the country in the hemp and cannabis space on complicated licensing and regulatory matters and complex commercial and financial transactions. She may be reached at [email protected]