Efforts to Make Legal Cannabis Industry Equitable Are Falling Flat

December 2, 2022 · Wall Street Journal

More than a dozen states have created programs to give minorities who were disproportionately affected by the war on drugs a chance to participate in their legalized cannabis industries. 

So far, those efforts haven’t worked. 

Black and Latino entrepreneurs seeking to capitalize on the new market have been tripped up by steep application fees, lawsuits and state programs that have favored entrenched players. Even when minority businesses do obtain a prized license to sell or grow marijuana, they face a paralyzing problem: little or no access to cash.

“We’re walking into a headwind,” said Akele Parnell, a 38-year-old Black entrepreneur in Chicago. His company, 11th Level Inc., last year was granted licenses to grow and sell cannabis in Illinois. A legal challenge to the state’s program kept all work on his company and other minority-owned enterprises in the state frozen until June. Now he is struggling to raise the $8 million to $10 million he said he needs to set up a grow operation and dispensary. 

The situation in states like Illinois has prompted states like New York to reassess policies governing an industry that is projected by 2026 to reach $42 billion in annual sales nationally. New York officials say they are trying to set up a licensing program that avoids what they say are shortcomings of other states’ social-equity initiatives. 

Marijuana is legal in some form in 37 states and the District of Columbia, but remains illegal under federal law, a designation that bars operators from traditional funding sources such as banks and Small Business Administration-backed loans. Large institutional investors also generally avoid the sector.

The policies of the first states to legalize marijuana often favored large, publicly traded companies with operations in multiple states, such as Cresco Labs Inc., Green Thumb Industries Inc. and Curaleaf Holdings Inc. In states such as Colorado, Massachusetts and Nevada, lawmakers barred some people with felonies from working in the industry. Some states capped the number of licenses. 

Black-owned businesses made up less than 2% of the roughly 40,000 cannabis companies in the U.S. as of June 2021, according to a report from Leafly, an online cannabis marketplace, and consulting firm Whitney Economics. 

Between 2010 and 2018, a Black person was on average 3.6 times more likely to be arrested for marijuana possession in the U.S. than a white person, even though Black and white people used marijuana at similar rates, according to an American Civil Liberties Union analysis of Federal Bureau of Investigation data.

Given the large racial disparity in marijuana arrests, and the opposite dynamic in marijuana-business ownership, many states in recent years have attempted to make access to the industry more equitable.

States that have created such programs include Massachusetts, which created a trust fund this year to provide grants and cheap loans for social-equity cannabis businesses. Arizona set aside 26 social-equity licenses out of about 170 total cannabis licenses as part of its legalization plan. Michigan, Colorado and other states have programs to issue grants or loans to minority businesses, lower application fees or pair licensees with mentors. 

But minority businesses trying to participate in the legal cannabis industry in these states and elsewhere across the country still face a host of obstacles.

Ambrose Jackson left his job as a hospital administrator in 2021 to start the 1937 Group with five other partners. The Chicago-based, minority-owned company won cultivation, retailing and transportation licenses from Illinois. It received a $500,000 low-interest loan through an incubator program started by Cresco, which is trying to boost minority businesses.

Charlie Bachtell, Cresco’s CEO, said the industry needs to address what he called the “hypocrisy” of legalization. Companies such as his are making money selling a drug legally while minorities are in prison for doing the same thing.

The 1937 Group is seeking roughly $25 million to open two cultivation operations and eight dispensaries within the next 12 months.

When Illinois made recreational cannabis use legal as of January 2020, it immediately granted licenses to existing medical marijuana sellers, including large, publicly traded operators. Smaller, minority-owned businesses were due to get licenses in May of 2020, but the process was frozen by a state judge after some business owners sued over what they called an unfair application process.

The stay was lifted in June, allowing companies such as Mr. Jackson’s to start work on their locations. By then, a head start for the large companies that was supposed to last a few months had stretched out to two years.

Since recreational cannabis became legal, licensed businesses in Illinois have sold more than $3 billion worth of marijuana as of August, according to state data. None of them were owned by minorities.

The state is still dispersing licenses and plans to cap the number at 500. Once all the licenses are granted, the large companies’ market share should get diluted by minority businesses, said Illinois Deputy Gov. Christian Mitchell.

A state program that set aside $36 million for low-interest loans for social-equity licensees stalled because the state is struggling to get favorable terms from financial institutions. As of Nov. 1, the state hadn’t lent any money under the program, but Illinois Gov. J.B. Pritzker said last month he is making $8.75 million of forgivable loans available for social-equity licensees through a new program. 

New York has reserved its first 150 recreational marijuana retail licenses for applicants who are “justice-involved,” meaning they or a close relative were convicted of a marijuana-related offense, and for nonprofits that work with formerly incarcerated people. 

New York has established a $200 million fund from which the justice-involved licensees can borrow at a rate of about 14%. The state is leasing the store locations and subleasing them to licensees.

Some social-equity advocates have criticized New York’s plan because applicants in the first round of retail licenses must also own 10% in a business that was profitable for two years. The second requirement could be a greater hurdle for minority candidates, they said.

Chris Alexander, executive director of the state’s Office of Cannabis Management, said the criteria were designed so that the state’s first recreational marijuana licensees would have prior business experience. Of the 28 justice-involved applicants approved so far, 19 belong to racial and ethnic minority groups, a spokesman for the office said.

Existing small cannabis businesses also say they are being hampered by federal tax rules that punish them for operating in a federally illegal industry. Cannabis businesses can’t deduct routine business expenses such as payroll, electricity, rent and depreciation of equipment. 

Wanda James, CEO and co-founder of Colorado cannabis dispensary Simply Pure, said her business generates about $4 million in sales every year. Its federal tax bill is about $1.4 million. Ms. James estimates that the federal restrictions on cannabis cost her $1 million more in taxes every year than she would pay if she were running any other type of business.

Ms. James, a former Navy officer, restaurateur and political organizer, was among the first Black cannabis licensees in Colorado. Her brother has served time in prison in Texas for marijuana-related offenses, which prompted her to enter the business.

“Cannabis was built on the backs of people who look like me,” Ms. James said. (Full Story)

In categories:Dispensaries Entrepreneurs
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