Divide opens over L.A. cannabis social equity licenses, management contracts

Los Angeles social equity dispute, Divide opens over L.A. cannabis social equity licenses, management contracts

Months of anger over prized marijuana social equity licenses in Los Angeles boiled over recently, when the California Minority Alliance (CMA) accused a Black cannabis executive and his company of exploiting other minorities through “predatory” business deals.

The CMA made the accusations against 4thMvmt in an email to the L.A. City Council and the Department of Cannabis Regulation.

4thMvmt, founded in 2018 to help applicants navigate L.A’s social equity program and fund their efforts, is headed by CEO Karim Webb, who is Black.

The dispute highlights just how competitive and vitriolic Los Angeles’ cannabis licensing has become, with applicants who share a history of discrimination finding fault with each other’s bids to obtain the coveted permits.

In its allegations, the California Minority Alliance charged that Webb and 4thMvmt “tried to take advantage of their social equity partners with predatory agreements.”

“Let’s be clear, (City) Council, if this was a White person taking advantage of a social equity applicant it would be thrown out,” the email read. “Predators can also come (from) within our own community.”

In an emailed statement to Marijuana Business Daily, Webb called the CMA’s allegations “unsubstantiated and false.”

And 4thMvmt spokeswoman Ralina Shaw provided MJBizDaily with detailed explanations about the situation as well as testimonials on behalf of the company.

The CMA provided a redacted copy of one of the agreements in question, which the organization said was signed by one of 4thMvmt’s social equity retail partners.

The company’s social equity partners are in line for at least 13 retail licenses from L.A.’s licensing round, which opened in September 2019 to award 100 retail licenses. The City Council recently doubled the amount of permits it will offer to 200.

In total, 4thMvmt submitted 32 business applications.

The California Minority Alliance noted several points in the redacted agreement that it claimed were objectionable, including:

  • The contract mandates that a management company run the retailer’s day-to-day operations and that, according to the CMA, the social equity applicant will therefore have no real control over the business.
  • The arrangement includes a buyout provision allowing 4thMvmt to purchase the social equity applicant’s share of the company for $200,000, which CMA argues is far below the fair market value of a majority share in an L.A.-based marijuana retail shop.
  • 4thMvmt would be able to sell its interest in the business at any point in time. If the social equity applicant wanted to sell, however, that person would need written consent from other company stakeholders, making it an uneven situation.

The CMA also alleges it learned from multiple social equity partners of 4thMvmt that they were given only one hour to review the proposed deal and either sign on or reject it entirely.

And, according to the Los Angeles Times, there was no real opportunity for an attorney to review the agreement.

Accusations disputed

Webb, 4thMvmt’s CEO, declined an interview request from MJBizDaily but issued a statement pushing back against the CMA’s accusations.

“The lack of Black social equity success stories in the media is stark and obvious,” Webb wrote.

“It is despairing to see respected members of the media knowingly print unsubstantiated and false accusations from questionable sources because (they) will get views, instead of the diverse stories of triumph and life-changing social equity progress,” he said. “Sadly, this is yet another example of the systemic racism that pervades all aspects of our society.”

Cat Packer, the executive director of the L.A. Department of Cannabis Regulation, didn’t address 4thMvmt specifically when asked if she’d seen the California Minority Alliance’s allegation-filled email.

Rather, Packer emphasized that new regulations adopted recently by the city have more stringent requirements about social equity shares and operational agreements such as 4thMvmt’s.

“We are aware of concerns that stakeholders have about predatory practices in agreements,” Packer said. “What Council voted into law … seeks to directly address concerns that stakeholders have raised about the equity share definition.”

4thMvmt’s Shaw noted that the redacted agreement is now outdated because the company altered its contracts based on multiple changes the City Council made to the social equity program.

But after seeing a copy of the updated agreement, CMA co-founder Virgil Grant said 4thMvmt’s changes were negligible.

The upshot, he added, is “still, the social equity applicant has no say over the business.”

Shaw disputed that claim, saying, “All of our (social equity) partners have the majority control over their businesses.”

She noted that the updated contracts conform with city regulations and many key provisions have been altered.

For instance, she said, the $200,000 buyout provision has been changed to require that “fair market value” be provided to the applicant if a buyout takes place.

The reason the agreements were originally structured that way, Shaw explained, was to deter social equity applicants who might have viewed the opportunity as a way to “get a quick payday” by selling the license, pocketing the profit and walking away – instead of working to build a solid business. 

As for why 4thMvmt gave social applicants so little time to review the operating agreements, Shaw said that situation arose from the timing of the licensing round and a city requirement that applicants already have real estate lined up.

Many of the property sales closed only two days before the application window opened Sept. 3, 2019, she said, so that left 4thMvmt – which paid for all the real estate – little time to finalize paperwork before the application deadline.

“Everybody said, ‘We’ve been with you for two years, we trust you, we’ll sign (the agreement),'” Shaw said, noting that 4thMvmt began recruiting and working with equity candidates in 2018.

Shaw countered the CMA’s allegations by providing testimonials from four of 4thMvmt’s social equity partners, including three who are in line to receive retail permits from the fall licensing round: Phyllis Dorsey, Khadijah Allen and Cameron Hart.

Outside lawyers split over nature of contract

Two attorneys who have worked on similar social equity contracts for other companies disagreed on whether the CMA’s allegations were backed up by the redacted operating agreement.

Ilya Ross, a lawyer who’s worked on social equity deals in Los Angeles and Massachusetts, sided with the CMA’s views of 4thMvmt’s agreements.

“It’s certainly not the most equitable arrangement I’ve seen,” Ross said, “and there are provisions in there that take advantage of the social equity partners more so than your average partnership agreement.”

He called some of the provisions “super predatory” and added, “giving them an hour without really the flexibility to negotiate, that is predatory.”

But Michael Chernis, a longtime marijuana business attorney based in Los Angeles, said the agreement was “on the whole, not that unusual.”

“The reality is that this is the social equity deal. You have one party putting up all the money … and the party that’s putting up all the money wants to protect itself,” Chernis said, referencing 4thMvmt.

“Nobody is going to put up millions of dollars for 50% of interest in a business and not try to protect its investment.”

Although Chernis viewed some of the provisions as “aggressive,” he said it appears the CMA “cherry-picked” information from the agreement.

“A lot of this,” Chernis said, “goes right back to: Did (the social equity applicants) have a chance to have this reviewed with a lawyer, and what the circumstances of that were.”

John Schroyer can be reached at [email protected]

For a sampling of organizations and efforts that support, foster and enhance social equity in the cannabis industry as well as opportunities for minorities, overall diversity and racial justice, click here

7 comments on “Divide opens over L.A. cannabis social equity licenses, management contracts
  1. Avis Bulbulyan on

    You can’t legislate your way to equality of outcome. Those that don’t understand business or finance can’t develop regulations to attract investment dollars. There’s a reason why no equity program has been able to get past the idea stage and it’s not due to a lack of interest or support. Making the restrictions tighter and adding ridiculous requirements only guarantees the continued failure of these programs.

    Every person should have the right to fail on their own. The only issue any of these departments, agencies, and city councils should be concerned about is actually providing the opportunity first and foremost.

  2. Dan Ripoll on

    Equity programs are clearly written by politicians and not experienced business people. As an African American born and raised in Los Angeles, I applaud the spirit of the program. But the rules have been written in a way that almost guarantees failure for the equity applicants.

    The city of LA awarded hundreds of cultivation licenses to equity applicants, The requirement that a Tier 1 maintain a minimum of 51% makes it almost impossible for those applicants to raise the millions of dollars needed to bring cultivation and manufacturing online. What investor is going to put up $5 million to start a brand new business for a minority interest and not have operational control? And if the company needs to raise multiple rounds of equity capital, only the non equity shareholders get diluted, not the tier 1 with 51%. This practically ensures that smart investors and operators who could build real value on top of these licenses walk away in search of a more sensible deal, leaving the equity applicants with licenses, but no support from the city or from outside investors. That’s what’s happening on the ground level.

    Furthermore, the programs were supposedly written to help equity applicants create generational wealth. But the rules don’t even allow for the transfer of licenses. Which means that even a successful equity business owner can’t leave the business to his/her children. If they can’t transfer the license, how can the equity applicant sell the business and generate any wealth for his/her family? .

    The requirement that a tier 1 own 51% places too much value on the license, and diminishes the value of the primary components needed to make a business work. A strategic vision, a plan, capital, leadership, and strong operators. These other components always require much more than 49%. Cannabis is no different.

    Even Elon Musk owned only 22% of Tesla by the time it went public. Why would LA expect an inexperienced equity applicant to build a successful business without the ability to create Similar space on the cap table for the investors and operators who actually make the dream happen? I don’t think Elon would call his team and investors predatory because they own the majority of the company he founded. This is how business is done. Multiple rounds of financing are required, and everyone is diluted when new equity capital comes in. (It’s worth noting that his minority interest in Tesla is worth more than $50B).

    To make these programs work, LA should reduce the ownership requirement to something more like 10-20%. This equity would reflect the value of a license that is otherwise difficult to obtain while also leaving room on the cap table to bring on investors and the operational talent to move the venture along. This way, equity applicants may own 10-20% of a substantial operation, rather than being stuck owning 51% of a license with no operations and no ability to attract investment.

    Sensible policy has to include opinions from real operators who are in the trenches every day building their businesses. Otherwise these programs will continue to due more harm than good to the communities they claim to serve.

  3. Pat on

    You all seem to make a decent argument regarding the deficiencies in the social equity program(s). But what most of you seem to not see, is that this whole thing was never meant to include anyone else but the original framers behind this corrupt law: Not Black, brown, etc.. Esp. folks with clean records. Now why is that? The state legislature allowed itself to be dominated by the special interests ( largely cartel/underworld types ) that had the money up front ( loads of often times really illegally gotten gains..) to sway the legislature to craft the the law that benefits them the most; if not exclusively. It’s the way that politics in this state is increasingly being played. No science; no public welfare; no public safety or protection of the environment is really involved. Just money. Money to be shared between the legislature and the special interests vested in the outcome of the current corrupt law.

    Why is it that when this law was passed, the equivalent of black market prices remained? Prices should have gone way down. The prices were really high per ounce ( $400-500 ) prior to legalization. So, why did the prices stay the same or even go higher in some instances after “legalization?” Meaning $400.00/oz used to be the price when it was all illegal. But, now that it’s legal, it’s still the same. Hmmmm… So, why so high? What are all of these regulatory agencies doing to work so hard for their money that it still sits at $400.00/oz? They’re not. It’s all fluff.

    It was all worked out behind closed doors as various ( an unnecessary multitude of ) agencies wanted in on the tax revenue. Including law enforcement. Law enforcement stood to lose a big chunk of their budgets with the legalization of weed in this state. And, this is the real reason why “social equity” will not occur in anywhere near the numbers that it should. Why? Had social equity been the driver of who gets licenses; and a lottery to go with it…. You would have a semblance of social equity conducted in a relatively fair fashion. Those that met the criteria to be eligible should have been awarded the vast majority of the licenses. But it’s not going to happen. Why again? Who is law enforcement going to get to go after? After all, they stood to lose big bucks by the legalization process. Ahh… If the state had allowed blacks, browns, and others from classic disadvantaged backgrounds priority status, then law enforcement’s hand would have been forced to go after an increasing number of well monied whites who would have largely gotten screwed out of the aforementioned licensing scheme: A limited number of licenses having gone to people of color and disadvantaged backgrounds. But, law enforcement unions would be stuck between a rock/hard place if an increasing number of whites ( esp. well monied ones ) were busted here and there ( as these white based cartels and the like weren’t going to stop operating, either ). And when has THAT ever happened? Never. So, the law was crafted in reverse. The vast majority that should qualify to compete for social equity licenses will be denied access to this market, under current ca. law. What then happens to them? They get thrown back to the wolves and are placed at risk all over again. Right? Most of them were the one’s that took most of the risk AND suffered its consequences. Usu. at the hands of law enforcement. In this manner, law enforcement gets their piece of the pie. As if nothing really ever changed for them. But, it’s the minorities/disadvantaged ( and everybody else that were playing by the rules/law right up to this laws’ passage… ) that are paying the price; as many of them are not going to stop doing what they were doing before, as well.

    In summary, this “law” was created by a select group of people, to benefit a select group of people only. ( And out of stater’s are allowed to compete in a ca. program. ). A club. Or some sort of secret society. But, it’s essentially an exclusive club. An extraordinarily discriminatory club that has no shame ( same goes for the legislature ) in promoting its own welfare under the color of law. It’s not really a law, if the law is not transparent, standardized, even handed, and equitable. But, moreover, democratically arrived at. This law is the antihesis of all that.

    • Avis Bulbulyan on

      When you talk about who controls these programs and their administration of the program, just look at the makeup of the powers that be in LA. Cat Packer is the executive director of the DCR and she’s black. The president of the city council and the main person spear heading this was Herb Wesson and he’s black. The individual council members represent all the different groups in LA including Asian, Armenian, Hispanic, and African American. Cat has had almost complete and total control over the entire program and she’s not able to put something together. It’s not because of politics or the police. It’s because she doesn’t know what she’s doing and she’s outside of her domain of competence.

      • Pat on

        I don’t disagree. However, would we be having any of this problems had social equity, or its equivalent, had been the driver of licensing awards? Meaning, most of those licenses having initially been awarded to blacks, latinos, and other’s from disadvantaged backgrounds whom were most affected by the discrimination inherent in the prosecution of this group of folks for petty weed “crimes.”

        Here’s the point.. The whole program/framework of the “law” pretty much excluded the aforementioned. Sure, you’re going to have pockets of well monied blacks, latino’s, etc.. However, who are the people that have been awarded the vast majority of licenses in ca? Esp. those that are the owners of those business? Is there honest tracking data avail? If not, just look around you. They are almost all white. Aren’t they?

        What happens when you pass such a law around weed; knowing how the business of weed works? Well, those mostly white people locked up the market. They’ve already made the key relationships/partnerships that will likely stay forged so long as there is money to be made. How much wiggle room do you think is left for those attempting to get in now? Esp. those attempting to come in on a social equity program? How much harder will it be for social equity qualified folks to compete in an already established market? They are essentially locked before they even get in. So, why would they even try?

        As I stated in my earlier post, this law was consummated with extreme socioeconomic and racist inherent in its legal framework and its administration by the state of ca. Had it been administered in the manner described above; you’d have the exact same thing going on among whites. Fighting to get an in via a “social equity” program. The whole thing should have benefitted the group I referenced initially, and everyone else using a reasonably derived social equity formula next in line, etc.. All of it subjected to a lottery. Right? Once a candidate is qualified, a lottery doesn’t discriminate from that pool. Your number comes up or it doesn’t. But, that’s not the way the special interest’s/legislature wanted it. So, it got quite corrupted. And, they have the nerve to refer to it as a “law.”

        When have you EVER seen the state of ca. comment on this site; or answer questions common to all that have shared concerns about this type of corruption? They never will; because they no they’re guilty as hell. Your best bet to all of you that were honest/good actors who got screwed with the passage of this crap; that invested in infrastructure over decades!!…. is to go rogue. Your govt. doesn’t give an F’ about you. Just wants to have its way with you. These social equity program attempts; don’t even approach the notion of tokenism. The special interests are going to see to it the whole thing gets as gummed up as possible. They don’t want the competition. And the legislature is helping them get their way.

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