Cannabusiness Advisory

Since the era of cannabis legalization commenced, stakeholders, regulators, and ordinary citizens alike have been concerned about the lack of social equity and diversity in the cannabis industry.  Even prior to the modern era of legalization, the inextricable relationship between race, enforcement, and the origins of prohibition has served as a troubling reminder of our country’s systemic inequity, as we have previously noted. Therefore, in recent years regulators have attempted to address past social and racial disparities by ensuring that those from disproportionately impacted communities would not be blockaded from the legal market.  This week we will take a look at various approaches that state regulators have implemented to combat inequity in the industry.

While several states have made social equity provisions a part of their marijuana programs, jurisdictions have taken slightly different approaches and experienced myriad results.  Since 2016, at least six (6) states have enacted considerable measures to increase diversity in their respective marijuana programs by either eliminating or mitigating barriers to entry into the market (including, Massachusetts, California, Michigan, Ohio, Illinois, Washington). Moreover, with respect to adult-use marijuana, Massachusetts, California, and Illinois have each made social equity a key aspect of their legalization plans.

Massachusetts  

The Commonwealth was a trailblazer in its prioritization of Social Equity.  Through its regulations, the Cannabis Control Commission (“CCC”) sought to enable participation by people from disproportionately impacted communities by creating two separate programs. First, the CCC created Economic Empowerment status to provide prioritized review and licensing for those in communities disproportionately impacted by high rates of incarceration and arrest for marijuana offenses, etc.  Second, the Social Equity Program (“SEP”) is a free, statewide, technical assistance and training program that provides education and skill-based training. The SEP serves those most impacted by enforcement, prohibition, disproportionate arrests and incarceration, and provides education and entry across four areas: (i) entrepreneurship, (ii) entry and (iii) managerial-level workforce development, and (iv) ancillary business support. The SEP’s ultimate aspiration is that participants will gain the necessary tools and training to apply for and obtain a license.  However, it is important to note that the SEP is not its own designated license class and that completion of the program does not guarantee licensure by the Commission.

Applicants/licensees are eligible for the SEP if they can show at least one of the following criteria:

• Applicant income does not exceed 400% of Area Median Income and residency in an Area of Disproportionate Impact, as defined by the Commission, for at least 5 of the preceding 10 years.
• Applicant residency in the Commonwealth for at least the preceding 12 months and a conviction or continuance without a finding for certain drug offenses or an equivalent conviction in other jurisdictions; or
• Applicant residency in Massachusetts for at least the preceding 12 months and proof that the individual was either married to or the child of an individual convicted or continuance without a finding for certain drug offenses or an equivalent conviction in other jurisdictions.

Of note, the most recent application deadline for the SEP’s second class closed on May 1, 2020.

Illinois

Having been influenced by Massachusetts and other states’ social equity regulations, Illinois marijuana regulators also sought to foster diversity in cannabis business ownership. During the licensing process, applicants that can demonstrate one of the following are awarded additional points on their applications:

• The applicant originates from an under-resourced area or one disproportionately impacted by the war on drugs.
• The applicant or a family member of the applicant was directly impacted by police enforcing anti-marijuana laws.
• The applicant hires 51% of employees from a distressed neighborhood negatively affected by the war on drugs.

As is the case in any jurisdiction that has embraced social equity programs, regulators cannot be certain that the social equity program will bring the desired level of racial diversity to their industry.  For example, under Illinois’ program, an applicant may receive points for hiring 51% of the company’s employees from a disproportionately impacted area, irrespective of the positions those workers hold in the company.

Washington

This past March, Washington state Governor Inslee signed into law House Bill 2870, which creates a new social equity program that provides business opportunities to people from disproportionately harmed communities.

Under the new social equity law, license applicants must have: (i) 51% ownership of the business by someone who has lived for at least 5 of the past 10 years in a disproportionately impacted area; or (ii) 51% ownership of the business by someone who has been convicted of a marijuana offense or who has a family member that has been convicted of a marijuana-related offense. Further, the law defines a disproportionately impacted area as a community that has high rates of poverty, participation in income-based federal or state programs, unemployment, and law enforcement actions tied to marijuana-related offenses.

Michigan

Michigan regulators have taken a more decentralized approach in their reliance on municipalities to develop their own rules for social equity. Nonetheless, the state provides discounts for licensing based on social equity criteria, which can amount to up to 75% off of application and licensing fees:

• Residency in a disproportionately impacted community for at least 5 cumulative years within the past 10 years: 25% fee reduction.
• Conviction of a marijuana-related offense. Misdemeanor convictions: 25% fee reduction. Felony convictions: 40% fee reduction.
• Registration as a primary caregiver under the Michigan Medical Marihuana Act for at least 2 years between 2008 and 2017: 10% fee reduction.

Pitfalls and Potential Solutions

Despite the prevalence of social equity provisions across a number of states, the cannabis industry continues to suffer from a lack of diversity.  In Massachusetts, only 3 of the 70 social equity and economic empowerment licensees have opened their doors in the state nearly four years since legalization.  Given the internal differences among states, there is little chance of there being a one-size-fits-all approach to ensuring diversity in industry participation. Still, the major barrier to entry facing social equity licensees across almost all jurisdictions is access to capital.

Discounting licensing fees and expediting reviews are valuable policies, but they do not help cut the costs of real estate, legal, accounting, or other operational costs that all businesses face. Some industry insiders have proposed that states create programs to award grants or loans to minority licensees (perhaps, partially funded using cannabis tax revenue).  In July, Massachusetts CCC Chairman Steve Hoffman and Commissioner Shaleen Title authored an opinion column in the Boston Globe which outlined, among other proposals, the establishment of a loan fund for equity applicants.

Diverse applicants have additional obstacles to overcome in states that did not address social equity from the outset of legalization. In states like Washington, Oregon, and Colorado, the legal market is already established and highly competitive. It remains to be seen whether it is too little and too late for social equity initiatives to have a real impact in those markets.  In any event, while there are clearly various approaches to encouraging diversity in the industry, successful initiatives will likely be those that address the issue of capitalization.