🔒Social equity component of CT’s new marijuana law could have major impact on industry’s formation

When state lawmakers were debating cannabis legalization bills this year, social equity measures were front and center.

From the creation of a powerful Social Equity Council to lower licensing fees for applicants who qualify for the state’s “social equity” designation, the law that passed includes a host of measures meant to ensure access to entrepreneurs from communities most negatively affected by cannabis marijuana criminalization.

Among those are features unseen in other legal cannabis states that encourage existing medical marijuana businesses to partner with smaller entrepreneurs who qualify for the state’s social equity designation.

Under the new law, medical growers and dispensaries that enter into “equity joint ventures” pay half the fee to convert their license to serve the adult-use market, and social equity applicants that partner with them get access to capital and other resources larger businesses can provide.

The social equity components of the law could have a significant impact on how Connecticut’s recreational market gets off the ground, and the players involved in profiting from it.

“The idea was really to provide another option to allow social equity applicants to enter the marketplace,” said House Democratic Majority Leader Jason Rojas, who played a key role in drafting and negotiating the legislation. “They’re going to need individuals with access to capital.”

Access to funding remains a big issue in the marijuana industry as the federal government still considers the drug an illegal substance. That’s left most banks and other regulated financial institutions sitting on the sidelines.

As of March of this year, only about five of the 146 banks and credit unions operating in the state were providing financial services to licensed marijuana operators, and to a limited extent, mainly focused on deposit services and cash management rather than loans, according to an industry expert.

Social equity landscape

The cannabis legalization statute took effect July 1, but the state still has to iron out many regulations within the legislation.

For example, regulators still need to determine how many production and retail licenses will be issued for the recreational market, but 50% will go to social equity applicants, and the other half will go to general applications.

The state will use a lottery system to determine which applications they review, but social equity entrepreneurs will be put in a separate pool.

Additionally, people eligible for a social equity license must earn less than 300% of Connecticut’s median income, and be from an area disproportionately affected by cannabis criminalization. But what constitutes a “disproportionately affected area” won’t be determined until the 15-member Social Equity Council is formed and studies U.S. Census tract data to specify which geographies apply by Aug. 1.

Social Equity Council members and regulators at the state Department of Consumer Protection also still have to hammer out some of the details surrounding equity joint ventures, but the law provides a framework of incentives and requirements for them.

Under the law, medical cannabis growers — of which four players currently exist, including Advanced Grow Labs in West Haven, CTPharma in Rocky Hill, Curaleaf in Simsbury and Theraplant in Watertown — have to pay a $3 million fee to expand their licenses and enter the recreational market; medical dispensary operators have to pay $1 million.

But if a producer establishes two separate “equity joint ventures” with social equity applicants, the fee is reduced to $1.5 million. Retailers that establish one equity joint venture pay a $500,000 fee to convert their medical license to sell to the adult-use market.

The rules stipulate the social equity partner must be either a person who qualifies for equity status, or a business entity that is at least 65% owned and controlled by people who qualify for equity status. The social equity partner must own and control at least 50% of the business for at least seven years.

The Social Equity Council and DCP must approve the terms of the joint venture, including the amount of resources the non-equity partner brings to the table.

Michael Cutler, a recently retired Massachusetts attorney who specializes in cannabis policy and campaigned for the Bay State’s legalization efforts in 2016, said the equity components in Connecticut’s law compare favorably to those in his state, which doesn’t have social equity ventures.

That Connecticut-specific policy could be a win-win for equity applicants and established companies, Cutler said. It gives entrepreneurs from underserved communities a chance to get into the market without necessarily having to raise funds. At the same time it allows the established medical producer or retailer to pay less money to enter the adult-use market.

However, he added, the devil is in the details, and DCP still has to define what, specifically, it means for the social equity partner to “control” at least 50% of the business.

“That’s what to watch, how scrupulously the regulator monitors the equity joint ventures,” Cutler said.

New territory

Some pro-legalization advocates in Connecticut have raised concerns over the potential for abuse of these partnerships. Jason Ortiz, executive director of Students for Sensible Drug Policy and immediate past president of the Minority Cannabis Business Association, said he thinks the setup gives too much power to the large companies involved in the partnerships.

“What happens if [the established partner] doesn’t hold up their end of the bargain?” Ortiz asked, pointing out the penalty for a company reneging on a venture it entered with an equity partner — it would have to pay the full $3 million or $1 million licensing fee instead of half — isn’t very steep for large companies. “You cannot run your business assuming everyone has the best intentions.”

Attorney DeVaughn Ward, a senior legislative counsel for the Marijuana Policy Project in Connecticut, also sees potential for abuse of the equity joint venture system, but said right now that’s hypothetical, and peoples’ ability to improperly exploit the system will depend on how closely regulators monitor the ventures.

“It’s all really new territory, this is new policy space,” said Ward, who is unaware of any other state with a similar program.

However, Ian Butler, an attorney at the Glastonbury office of Brown Paindiris & Scott LLP, said the law, as written, prevents the larger partner from selling or transferring the business unless the social equity partner agrees.

Additionally, Butler said, it’s expensive to establish a cannabis business as an independent entrepreneur, and having a partner who can bring up-front capital to the table reduces financial risk for the social equity player.

“From the [social equity applicants’] perspective, the benefit might be that you don’t necessarily have the funds to put into the business,” Butler said. “So your partner might put up money.”

Interested parties

Daniel Glissman, an attorney with Hartford law firm MacDermid, Reynolds & Glissman PC, said his cannabis industry clients are expressing interest in equity joint ventures.

We’re hearing from our clients that they’re interested in exploring what they have to do to create these social equity establishments,” Glissman said.

Tim Hawkins, vice president of retail field operations for Illinois-based Green Thumb Industries Inc., which owns Advanced Grow Labs in West Haven, said his company is “absolutely” considering establishing joint ventures with equity applicants. However, he’s waiting for more clarity on regulations.

“We’ll watch and see how the regulations are actually written, how the rules come out, until we see that, it’s hard to make plans,” said Hawkins, who added Green Thumb hasn’t yet decided whether it will convert its license to serve Connecticut’s adult-use market — although it has done so in multiple states that legalized recreational cannabis. “I think the way [the equity joint partnerships component] is written is wonderful, and we agree with it.”