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Notes On Social Equity From a Former Cannabis Regulator

By Matthew J. McCarthy
July 11, 2022

Notes On Social Equity From a Former Cannabis Regulator

By Matthew J. McCarthy
July 11, 2022

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My tenure as counsel and regulatory enforcement prosecutor to the Maryland Medical Cannabis Commission from 2019 to 2021 allowed me a unique opportunity to witness the formation of the legal cannabis industry in Maryland.

As I noted in my prior article, the newness of the licensed industry is itself a source of many of the challenges that licensees and ancillary business owners will face.

Here, I share my observations on the multifaceted efforts by government and the business community to build this industry equitably, to keep the door open to minorities and women, and to foster equal opportunity, diverse ownership and employment opportunities.

In 2018, in response to the lack of racial and gender diversity among Maryland license holders, the Maryland Legislature passed a reform bill that sought to encourage diverse ownership by expanding the number of available grower and processor licenses — which are capped by statute — and mandated an application process that would favor awarding the new licenses to applicants from diverse backgrounds.

Prior to the open application period, the commission's staff and leadership conducted outreach sessions at public spaces across the state, mostly in communities of color, where prospective applicants had an up close and personal opportunity to discuss the possibility of entering the industry themselves.

The commission's new application and award process, which aimed to encourage long-lasting female and minority ownership, allocated additional points in the scoring process for diverse owners who demonstrated "real, substantial, and continuing" ownership of the business venture.

License hopefuls submitted details on their companies' ownership and finance structure, which the commission reviewed, awarding new licenses after an intensive and detailed review process.

This process was labor-intensive and time-intensive for all parties, and successfully yielded a more diverse set of license holders. However, the award process met significant obstacles, including accusations of favoritism — which were investigated and found to be untrue — and protracted litigation brought by unsuccessful applicants.

These stumbling blocks increased costs for all parties and highlighted several common roadblocks to a more inclusive cannabis industry. Because most jurisdictions strictly limit the number of available licenses, each open application period generates a frenzy.

Many social equity applicants find themselves frustrated with constantly having to compete with more highly resourced and nondiverse multistate cannabis companies in a scramble for so few licenses.

Financing also remains an enormous obstacle to a more equitable cannabis industry.

Without access to banking, due to federal banking law and the ongoing federal prohibition of cannabis, the cost of entry — application fees, the potentially millions of dollars in startup costs — often requires applicants to seek support from private investors.

This need for private capital provides an opportunity for multistate companies to obtain a social equity license by recruiting a qualifying applicant to stand in for the company, only for the company to later purchase the license as soon as law allows — a common method that gives rise to even more litigation, more cost and more controversy, and undermines the goal of increasing diversity within the market.

A recent Arizona case provides illustration. In 2020, Arizona voters approved Proposition 207, a ballot measure to legalize recreational cannabis in the state. The measure required the state to establish a social equity ownership program to promote the ownership and operation of marijuana establishments ... by individuals from communities disproportionately impacted by the enforcement of previous marijuana laws.

Acre 41, a consortium of Black businesswomen in the cannabis industry, sued Arizona for enacting regulations that did not preclude a social equity awardee from immediately selling the license.

The Superior Court of Arizona in Maricopa County dismissed Acre 41 Enterprises LLC v. Arizona earlier this year, noting that as long as Arizona awarded licenses in accordance with the statutory framework, the state had no obligation to safeguard against the immediate transfer of a license.

Intensive government effort to diversify the local cannabis industry is easily diminished. So what are some possible solutions to maintaining diverse participation?

Many stakeholders remain hopeful that the U.S. Congress will soon pass the Secure and Fair Enforcement Banking, or SAFE Banking, Act.

In its statement endorsing the SAFE Banking Act, the Minority Cannabis Business Association, or MCBA, noted that "[w]ithout access to capital from traditional financial institutions, minorities are often left without access funding necessary to participate in the legal cannabis market."

The MCBA also noted that by allowing all licensed cannabis business access to federally insured banking, small and diverse business would have cheaper access to capital, could avoid the hefty fees commonly imposed by the few banks open to working with cannabis companies, and would reduce security risks and associated costs by giving small business a place to keep its cash.

The SAFE Banking Act, if passed, would also mandate that the U.S. Government Accountability Office study and report to Congress on "barriers to marketplace entry, including in the licensing process" and access to financing for minority and women-owned cannabis businesses.

States, cities, businesses and professional organizations such as the MCBA have already begun regular data collection and reporting on social equity efforts. This information is itself an important element in building a more equitable industry.

Publicly available reports from local authorities, along with studies conducted by the MCBA and other interest groups, will serve as a resource to any policymakers working for fact-based solutions.

Banks and state regulators, for example, might use methodically compiled data from the federal government or professional organizations, for economic analyses, without having to start from scratch. This knowledge, when put to best use, can benefit all stakeholders in the cannabis industry, not just big business.

The very recent experience of legalization in New Jersey provides a fruitful example. In order to carry out Gov. Phil Murphy's commitment to rolling out a recreational market quickly, the New Jersey Cannabis Regulatory Commission issued its first recreational licenses mostly to larger multistate operators, highly experienced in the medical cannabis market, that could begin sales in relatively short order.

Soon after, to keep the door of opportunity open to smaller businesses and startups, the New Jersey regulator began issuing conditional licenses, interim licenses that give applicants 120 days to secure a location and municipal government approval before applying for conversion to regular, annual license.

Special licenses in the cannabis space are also available for New Jersey microbusinesses, those with 10 or fewer employees and 2,500 square feet or less of operation space.

New Jersey, having recognized the challenges of a one-size-fits-all approach, has diffused the licensing and application process, making less burdensome licensing processes available to entrepreneurs with fewer resources.

Furthermore, the commissioners — tasked by law with recommending how the governor should spend social equity taxes collected on recreational cannabis — have very recently recommended that a significant portion of taxes collected be allocated to subsidized training programs for people from communities most harmed by the war on drugs to gain qualifications and find work in the cannabis industry.

By recycling funds to provide a more economically and ethnically diverse pipeline of workers in the regulated industry, New Jersey has the potential to make significant and lasting progress in its social equity efforts.

The booming medical cannabis market of Oklahoma provides another alternative model. Because of its more market-based licensing process, with comparatively low costs of licensure and without any limit on the number of licenses available, Oklahoma has produced a significantly diverse group of license holders despite having no social equity program in place.

Crafting an equitable and open cannabis industry is a laudable and worthwhile aim for the long-term health of the industry. Cannabis was long forbidden and prosecuted as a vice, considered by the law as a danger and an evil.

Its legalization and regulation echoes the end of Prohibition in the 1930s, when liquor production provided deprived communities the opportunity to thrive by selling homebrew and moonshine, only to eventually find themselves locked out of the legal market.

Government and industry now have an opportunity to direct the emerging cannabis market in a fairer and more democratic direction, one that provides greater opportunity for a greater number of people. The reporting of data on social equity efforts should continue to be central to this effort.

Where experience is unavailable as a guide, methodically produced data is a preferred substitute. Hard, cold facts are always a better foundation for policy than mere speculation.

Continued outreach to communities that can provide a raw source of entrepreneurship and a reliable workforce is also elemental. An open door is more inviting and meaningful when paired with a welcome mat.

The legal cannabis market is still at its very beginning. These steps can keep the industry on a path to a more equitable future and help it establish itself as a force for social improvement.

Reprinted with permission of Law360.