State marijuana regulators increasingly are enforcing strict regulations involving dispensary caps, residency requirements and ownership rules – actions that could harm the reputations of cannabis companies and jeopardize lucrative licenses that are sometimes worth upwards of millions of dollars.
The increasingly assertive stance by regulators already has sparked legal skirmishes around the country, forcing some marijuana companies to surrender their business permits.
This costs those cannabis firms significant market opportunities and squanders the tens of thousands of dollars they’ve spent to secure properties and apply for licenses.
But there is good news for companies around licensing that ultimately could help marijuana businesses save money over the long term:
- Regulators seem more willing than in the past to work with cannabis businesses to fix problematic permitting and management agreements.
- Regulators and lawmakers also have shown they’re amenable to modifying rules that haven’t kept pace with marijuana industry realities. For example, Colorado passed legislation in 2019 allowing outside investors in recognition such a move also could increase access to capital for local MJ businesses.
“I’ve seen regulators learn from experience,” Charlie Bachtell, CEO of Chicago-based Cresco Labs, said in describing the trend.
Bachtell noted regulators have become more assertive “enforcing the spirit of the regs, not just the letter” but also are “equally interested in fixing a piece of regulation” standing in the way of a rule’s positive intent.
It might be too early to know, but the end result could be cannabis markets that better reflect regulatory intent – such as providing licensing opportunities to a broad swath of companies, including local entrepreneurs and minorities.
Give a little, take a little
Here are some recent examples of the push and pull between regulators and cannabis businesses:
- In Massachusetts, Acreage Holdings, a New York-based multistate operator, said in February it would rewrite loan and management agreements with two licensed operators so it wouldn’t find itself in violation of a state law that prohibits an entity from owning or controlling more than three stores.
- In Ohio, affiliates of Harvest Health & Recreation, an Arizona-based multistate operator, are in negotiations with Ohio regulators over whether three provisional dispensary permits meet the state’s economically disadvantaged program. Alex Howe, Harvest’s communications director, told Marijuana Business Daily that Harvest has “every reason to believe” that the issues over dispensary and cultivation permits will be resolved in the coming weeks.
- In Pennsylvania, Harvest agreed to surrender two medical cannabis dispensary permits after state regulators alleged the company exceeded the cap of five licenses.
Diane Czarkowski, co-founder of Colorado-based cannabis business consulting firm Canna Advisors, said marijuana companies should plan that such regulatory scrutiny will continue.
“People should expect rules to be enforced,” Czarkowski said. “I would never want a business to think there’s any margin for error there. It’s really a privilege to have these licenses.”
She attributed increased enforcement to additional regulatory resources and sophistication.
“You have to remember that state governments are building their teams,” Czarkowski said. “As they bring in more tax revenue and licensing revenue, they’re able to mature their staffs.”
In some cases, she said, states didn’t foresee the flaws or holes in initial regulations, so they have since clarified or modified rules to match the spirit and intent.
Dodging the rules is a terrible business choice
Czarkowski said she’s also seen cases where out-of-state entities tried to skirt the rules.
She noted some of her local clients were approached by outsiders who wanted to do “something different verbally than on paper.”
Czarkowski’s firm counsels clients to “absolutely not do that” or they could lose their cannabis license.
Bachtell added that he believes regulators are becoming more knowledgeable about the regulatory provisions and the implications of their decisions.
He said that if Cresco doesn’t agree with certain regulations – for example, the rules might be well-intended but not realistic – the company works with regulators on the issue.
Illinois, for example, instituted a requirement in 2013 for medical cannabis patients and caregivers to be fingerprinted.
Bachtell said Cresco had concerns about the ethics and constitutionality of the practice. The requirement was removed in 2018.
Tom Haren, partner at Ohio law firm Frantz Ward, sees the current regulatory trend a bit differently.
More permitting issues popping up
“I don’t know if they (regulators) are necessarily getting more assertive as much as the life cycle of the industry is now when these (licensing) issues are starting to crop up,” Haren said.
For example, he said, Ohio developed its medical marijuana regulations in 2016 and 2017, at a time when there were few publicly traded companies and little merger and acquisition activity.
“It was a different world,” Haren said.
Like many states, Ohio drafted strict ownership and license-transfer requirements, regulations that haven’t necessarily kept pace with industry realities.
Some states, for example, require clean criminal records for all owners of a business. That’s a requirement impossible to meet by publicly held companies with thousands of stockholders.
The reality is that the cannabis industry has evolved into one that reflects almost every industry, with fluid ownership, Haren noted.
“Some states don’t want licenses to be sold, but that’s not how business works, that’s not how markets work,” Haren said. “I think we really need to reevaluate how we treat the industry.”
“In my experience, companies are making every effort to comply with the rules,” Haren added. “No company wants to have to surrender licenses or get in trouble with the regulators.”
Jeff Smith can be reached at jeffs@mjbizdaily.com
