Predatory investors hijacked the cannabis social equity program in Arizona, where only three of the original 26 license winners still have a stake in their businesses, according to allegations filed in court and repeated in the state Legislature.
Despite outrage over this controversy, a state lawmaker’s reform proposal aimed at returning the coveted permits to their original winners failed to pass the Senate last month, in part because of interference from Gov. Katie Hobbs’ administration, observers told MJBizDaily.
The situation is notable for its strange political alignments:
- An ultraconservative lawmaker who says social equity is “a scam” agitating on behalf of social equity licensees.
- A Democratic governor whose chief of staff worked on the state’s adult-use legalization initiative defending what critics say were coercive techniques reminiscent of the subprime mortgage crisis.
But the failure of Arizona’s Senate Bill 1262 is also a major setback for the legal marijuana industry’s broader social justice efforts.
Social equity subverted
For regulators and cannabis advocates, the fiasco in Arizona is the latest demonstration of how the social equity process can be subverted and how difficult it can be to prevent such gamesmanship.
“Large retail chains and marijuana farms are exploiting the very community that the social equity license process was designed to protect,” Arizona Rep. Alma Hernandez wrote in a July 2023 letter to the Department of Health Services, which regulates marijuana in the state.
“Although this program was well-intentioned, in practice it has failed to achieve its originally stated goals.”
For other observers, it’s an object lesson that equal participation in legal marijuana markets remains elusive, if not impossible.
“The reality is, what happened is what the law and the rules and regulations allowed to happen,” Demetri Downing, the founder and president of the Arizona Marijuana Industry Trade Association (MITA), told MJBizDaily.
More broadly, he added, “social equity is like trying to social engineer reality.
“The concept was doomed from the beginning.”
Legalization meant limited opportunity
Social equity was baked into Arizona’s adult-use legalization law.
Proposition 207, the Smart and Safe Arizona Act approved by voters in 2020, guaranteed 26 retail licenses would be set aside “to promote the ownership and operation of marijuana establishments … by individuals from communities disproportionately impacted by the enforcement of previous marijuana laws,” according to the initiative.
The law also capped the number of overall cannabis retail store permits using a unique formula: one marijuana store for every 10 licensed pharmacies.
In effect, that meant the 130 existing medical marijuana dispensaries – most run by multistate operators such as Harvest Health & Recreation, later acquired by Trulieve Cannabis Corp., and Curaleaf Holdings – would be converted to adult-use stores with little in the way of “new” business opportunities beyond the social equity permits, MJBizDaily reported at the time.
Those permits were awarded by lottery in April 2022, when 1,506 applicants vied for the 26 licenses.
The scarcity meant each permit was potentially worth “millions,” the Phoenix New Times reported.
And it created intense competition, including from unscrupulous players, according to later allegations.
‘Once-in-a-lifetime opportunity’
In the months before the lottery, bilingual flyers in English and Spanish began appearing in the mailboxes and on the doorsteps of homes in low-income neighborhoods where residents were eligible for social equity permits.
Some also reported investors and representatives from marijuana companies going door-to-door, promising “a once-in-a-lifetime opportunity” to people such as Rene Mendoza and Anavel Vasquez.
By law, the social equity applicants would hold 51% interest in the permits, with any outside interest – such as an investor fronting capital to pay the $5,000 application fee, acquire real estate or build out a store, an outlay of six or seven figures – limited to 49%.
Majority owners also were not to have “entered into any pre-arranged, tentative or final agreement or promise to sell or otherwise limit the(ir) ownership interest,” according to state law.
Vasquez won a permit via lottery. Her minority partners, Wyoming-based limited liability companies Helping Handz and Investing in the Future, also had backed 203 other lottery entrants, according to New Times; individuals connected with those LLCs won five of the 26 social equity permits, court documents allege.
Since state law limited hopefuls to no more than two applications, this meant they “gamed the system,” Rep. Hernandez told Department of Health Services Deputy Director Jennie Cunico in her July 2023 letter.
Within a year, those partners would seize total control of the license, according to a lawsuit Mendoza and Vasquez later filed in Maricopa County Superior Court against both their former business partners and the Department of Health Services.
Claiming Vasquez violated her fiduciary duty, Helping Handz and Investing in the Future triggered an opaque and one-sided arbitration proceeding, according to records shared with MJBizDaily.
Mendoza and Vasquez claim they did not participate in the proceeding and learned about it only after the license had been transferred out of their control.
Mendoza told MJBizDaily the arbitration also left them saddled with more than $600,000 in attorneys fees.
‘The greedy felons won’
Mendoza and Vasquez have since sued Michael Halow, the principal in the LLCs whom they alleged masterminded the scheme, as well state regulators, which they accused of transferring the permit without their knowledge.
Halow declined to comment to MJBizDaily through a spokesperson.
In court filings, Halow and Helping Handz said that Vasquez signed a term sheet that allowed disputes to be settled by arbitration and that the arbitrator merely thwarted Vasquez’s effort to transfer the permit to a third entity she controlled.
On Feb. 21, a Maricopa County judge upheld the arbitration award, though litigation is ongoing.
Other social equity license winners told similar stories in accounts published by the Arizona Center for Investigative Reporting and The Arizona Republic.
One large marijuana company, Mint Cannabis, managed to snag four coveted equity licenses that it’s currently sitting on as “placeholders,” the Republic reported in February.
Those stories drew the attention of state Sen. Sonny Borrelli, the Republican Majority Leader, though he is no fan of social equity.
Despite believing “from the beginning the social equity program was going to be a scam,” as he said during a March 6 Senate hearing, Borrelli sponsored SB 1262.
The measure would have prompted the state attorney general to investigate whether lottery winners such as Mendoza and Vasquez were victims of predatory tactics.
If they were deemed to be victims, the original lottery winners would be allowed to reclaim their licenses or transfer them to someone else.
But since the social equity program is enshrined in the marijuana voter initiative, any effort to change it requires a 75% majority vote in the state Legislature.
Borrelli needed 23 out of 30 votes; he got only 18.
“The greedy felons just won,” he said on the Senate floor. “I’m actually embarrassed to be here today.”
Through a spokesperson for the Republican majority, Borrelli declined to be interviewed by MJBizDaily.
‘It makes people wonder’
In the weeks preceding the vote, staffers in Gov. Hobbs’ administration allegedly circulated an email to state lawmakers outlining problems with Borrelli’s bill and advocating a “no” vote on SB 1262.
According to the memo, the state Department of Health Services “advised (lottery winners) they have a valuable property right, which they can sell just like any other person who holds an interest in a limited liability company.”
At the same time, they “were prohibited from entering into agreements prior to the issuance of the license and applicants attested, under the penalty of perjury, that they did not.”
“If any of these attestations are proven false,” state regulators already have the power to revoke a license or impose fines, it added.
MJBizDaily could not confirm the legitimacy of the email, and Hobbs’ office did not respond to requests for comment.
The email’s purported author did not respond to MJBizDaily requests for comment, and a spokesperson for the Department of Health Services did not respond to questions.
One theory is that Hobbs is reluctant to support a bill critical of an executive-branch agency.
After all, because the Department of Health Services oversees permit transfers such as those included in the Mendoza lawsuit, the administration ultimately would be culpable in allowing a predatory arrangement to proceed, noted John Mendibles, an Arizona lobbyist who supported the bill.
Other observers point out that Hobbs’ current chief of staff, former state Rep. Chad Campbell, chaired the Proposition 207 campaign and might be similarly loath to admit fault with the law.
“It makes people wonder,” Mendibles told MJBizDaily.
But even if SB 1262 had eventually passed, the only guaranteed outcome would have been a flurry of lawsuits, Ethan Minkin, a Phoenix-based attorney with Harris Sliwoski, told MJBizDaily.
“There were issues with the social equity program,” Minkin said.
“I just don’t know if these changes will end up fixing things versus just creating more conflict.”
‘Short end of the stick again’
For advocates of social equity, the chaos in Arizona is the latest in a string of setbacks that leave the goal of equitable and meaningful minority participation in the U.S. marijuana industry unrealized.
“Unfortunately, the people most impacted by the war on drugs are getting the short end of the stick again,” said Celeste Rodriguez, principal at Arizona-based marijuana social equity company Acre 41.
Rodriguez had predicted Arizona’s program would be subverted.
“Wealthy corporations have swallowed up virtually every social equity license and, in turn, revictimized Black and brown people,” she said.
The governor, she added, “turned her back on us, and it will not be forgotten.”
For harsher critics such as MITA’s Downing, the episode demonstrates fatal flaws in an effort that might be otherwise well-intentioned, starting with Arizona’s choice to limit entries into the market.
“The real problem – and people just don’t get this – is licensing caps,” he said.
“I’m not sure if it’s possible to address the issues absent opening up the marketplace to every participant.
“If you want social equity, remove the barriers to entry.” (Full Story)