Limited-license marijuana markets hamper diversity and equity, study says

Twenty-seven states have limited-licensing schemes that lead to the lack of diversity in the marijuana industry, according to a new study on equity, underscoring a growing debate about how best to boost cannabis business participation among minorities and those affected by the war on drugs.

The issue of license caps has exposed a fault line in the multibillion-dollar cannabis industry’s effort to be inclusive, often pitting minority and entrepreneurial applicants against multistate operators better positioned to afford a pricey business permit in a limited-license market.

“The best thing you can do for social equity is open up the market,” said Amber Littlejohn, executive director of the Minority Cannabis Business Association (MCBA).

The MCBA on Thursday issued a sweeping study that examined equity in 36 state-legal marijuana markets. It identified limited licensing as one of the barriers to equity.

The 39-page report concluded that, so far, none of the 15 states with social equity programs have created an equitable cannabis industry.

Social equity provisions especially are prominent in young and emerging recreational marijuana programs such as Arizona, California, Connecticut, Illinois, Massachusetts, Michigan, New Jersey and New York.

Littlejohn stressed that limited licensing is one factor among many that hamper efforts to promote greater minority participation in the marijuana industry.

But a consensus is growing among many that state licensing caps – which is the prevalent regulatory framework around the country – is a fundamental obstacle to equity and inclusion.

“I think we’ve got it all wrong,” Demitri Downing, founder of the Arizona Marijuana Industry Trade Association (MITA), told MJBizDaily.

“We should be moving away from the paradigm of limited licensing,” Downing said.

“We should promote a free market that is also helping social equity applicants” with funding assistance and low barriers to entry.

A number of MSOs emphasize limited-license markets as core to their strategy to prosper and grow.

In regulatory filings, MSOs talk about pursuing highly populated, limited-license markets that also have recreational marijuana or are on the trajectory to legalize adult use.

Markets frequently mentioned include Florida, Illinois, Massachusetts, New York, New Jersey, Pennsylvania and Virginia.

Littlejohn noted that Illinois-based Green Thumb Industries (GTI) even used the word “oligopolistic markets” as part of its strategy in a 2018 annual report, but the company since has quit using that term.

For their part, MSOs increasingly are touting their efforts to promote industry equity.

“We do not believe that limited licensing as a barrier to entry is inherently anti-social equity,” Massachusetts-based Curaleaf Holdings wrote in a detailed email comment to MJBizDaily.

Curaleaf wrote that it advocates for license “set asides” for minority-owned businesses and noted that it has supported cannabis entrepreneurs through mentoring and legal and technical services.

As for limited-license frameworks, Curaleaf wrote, social equity recipients “can benefit from those restraints on unlimited competition – which if left unchecked could have an even greater impact on equity goals.”

The media representatives for several other MSOs – including GTI and Florida-based Jushi Holdings – were contacted for comment but didn’t immediately respond.

The MCBA report identifies a number of barriers to equity. In addition to state licensing restrictions, they include:

• Opt-out provisions that also limit the number of licenses. Of the nine states without state-level license caps, seven give local municipalities and other jurisdictions the option to opt out of allowing marijuana businesses within their borders.
• Lack of timely funding to support market entry and participation, either shutting out applicants or forcing them to turn to predatory partners who can take control of the business. Only six of 15 states with social equity programs provide funding beyond fee reductions and waivers.
• Lack of technical support. Only seven states offer technical support or training to social equity applicants.
• Proof of the right to possess or occupy a property. Twenty-two states require such proof as a condition of application or licensing. This can be prohibitively costly for less wealthy operators, especially if licensing is delayed because of litigation.
• Preferential treatment to existing medical cannabis operators. Eleven states provide MMJ operators with early access to adult-use licensing and sales, giving them a head start in the launch of a recreational market.

License-cap rationale

The general rationale for limiting licenses is to limit crime, avoid excess regulatory costs and prevent an excess supply of marijuana that could be diverted to the illicit market, according to the MCBA report.

But the report notes that many states simply choose a number of licenses to issue without regard to market demand and that localities are the “best means of limiting the over proliferation of cannabis businesses.”

The report also states that evidence doesn’t point toward increased crime as the number of retail outlets increase.

Billionaire conservative and libertarian Charles Koch has become an unlikely ally in the effort to both legalize marijuana federally and promote a free market.

His political advocacy group helped form the Cannabis Freedom Alliance, which also advocates for regulatory frameworks that promote “entrepreneurship in free and open markets.”

That includes low barriers to entry and “non-restrictive business licensing,” according to the Alliance’s website.

MSOs speak

The multistate operators’ viewpoint, though, is much different.

While MSOs stress their diversity efforts and desire for an equitable industry, they often characterize their business wins in terms of acquiring operations and gaining share in limited-license markets.

Investment analysts in the sector likewise often stress the same.

But, as Curaleaf noted in its detailed statement, “to advocate against growth is counterintuitive to everything anyone in this emerging industry (large, small or in between) is fighting for every day. We believe that big cannabis can be good cannabis, and good cannabis can be big business.”

The MCBA begs to differ, contending in its report that limited licensing can set off a vicious cycle.

The value of a license is inflated because of the limited number available, which, in turn, creates heavy competition for each license.

And that has led to litigation, often by large operators, the MCBA reported.

The lawsuits, in turn, can lead to delays or the elimination of social equity programs.

The delays can be prohibitively expensive for equity applicants who, for example, must pay rent or a mortgage for a property while they wait for a market to launch.

But if markets are open to greater competition, more entrepreneurs can enter, including those from the illicit, legacy market, according to the MCBA. Industry equity is increased.

Take Arizona, which capped business licensing.

The $1 billion marijuana industry is now predominantly in the hands of multistate operators and Arizona-based companies that are under pressure to become bigger to compete.

The state will be issuing 26 social equity licenses, but those operators will be at a disadvantage, experts say, because they will be entering the market last and will be able to sell only recreational marijuana.

Instead, Downing said, the market should be open and social equity applicants should get assistance to enter it.

He advocates a model where marijuana tax revenue generates social equity funds at the local level and local officials determine who should get assistance.

For example, in some areas of Arizona that might be comprised of Hispanics, in other areas, Blacks, in other areas Native Americans, and so on.

In an open market in Arizona with true equity, some of those who should benefit should be tribal members who were convicted of marijuana offenses, said Downing, a formal tribal prosecutor.

“Those are the entrepreneurs who should be awarded.”

Jeff Smith can be reached at jeff.smith@mjbizdaily.com.