Have cannabis residency requirements worn out their welcome?

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This story appears in the January issue of Marijuana Business Magazine.)

Montana voters passed a recreational cannabis initiative on Election Day that will require licensed operators to be state residents, as is now the case with its medical marijuana program.

In keeping this requirement, Montana is a rare breed. Several states have abandoned residency requirements in recent years, and similar mandates in other states are being challenged as unconstitutional.

It remains to be seen whether Montana’s residency requirement will face lawsuits as well.

But the issue raises questions about whether residency requirements in the marijuana industry eventually will become a thing of the past.

Worthy Purpose, Mixed Results

The original purpose of residency requirements in the marijuana industry seemed worthy enough: Advocates of the effort were concerned about corporate takeovers of the cannabis industry and believed that residents – rather than out-of-state investors – should derive the economic benefits of the nascent sector.

The architects behind the regulations also believed that residency requirements would help curb illicit markets.

But as many states have found, residency requirements can become a rather onerous form of economic protectionism and don’t necessarily repress illicit sales.

Instead, they can prevent the industry from developing or growing naturally by restricting the flow of capital.

Several states ditched residency requirements as a result:

  • Oregon, for example, initially required majority control of marijuana businesses by individuals who had been residents for at least two years. The state got rid of those requirements in 2016.
  • Colorado passed a law in 2019 that opened its marijuana industry to out-of-state investors.
  • An Idaho businessman is challenging Washington state’s residency requirement in the courts.
  • In Maine, legal action by an affiliate of New York-based Acreage Holdings prompted the state to abandon a residency requirement for adult-use licenses. The issue is still being fought in the courts.
  • Oklahoma, which otherwise is a wide-open medical marijuana market, is facing a legal challenge to its two-year residency requirement that allows nonresidents to own only up to 25% of an MMJ business.

New Priorities

Today, residency requirements arguably are being supplanted by social equity provisions as well as new license types such as small-grower permits – measures designed to try and ensure that minorities, women and small businesses get a fair slice of the licensing pie.

In Illinois, for example, entrepreneurs and businesses that qualify as social equity applicants are awarded extra points on applications for dispensary, craft grower, processing and transport licenses. They also can receive technical support, reduced license and application fees and access to low-interest loans.

Some of the applicants were directly impacted by anti-marijuana laws or live in communities disproportionately impacted by the war on drugs. Other applicants must be committed to hiring most of their employees from such neighborhoods.

When Illinois first launched its program, many in the industry believed the plan could become a template for social equity initiatives in other states. But the first retail licensing round is mired in litigation amid allegations
of an unfair process after only 21 applicants qualified for 75 new retail licenses.

Another big hurdle facing social equity applicants and small businesses in general is financing. Without cannabis banking reform, marginalized groups and small businesses likely will continue to struggle to access the capital needed to start and expand new business operations.

Vermont’s adult-use market might be one to watch in terms of trying to balance in-state and out-of-state interests without having a specific residency requirement. Multistate operators there hold three of five existing vertically integrated medical cannabis licenses in a state that prides itself as having a “Made in Vermont” ethos.

But small, homegrown businesses could flourish as well: Vermont’s adult-use marijuana law allows each licensed company to operate only one marijuana retail storefront.

There are no easy answers to ensure that small businesses run by residents can participate fully in the marijuana industry. As such, the dilemma is no different than trying to nourish local businesses in any retail industry.

But because of marijuana’s unique history with the war on drugs, it’s paramount that regulators and industry leaders continue to try.