Cannabis Social Equity Programs Are Fundamentally Flawed

Cannabis Social Equity Programs Are Fundamentally Flawed

By Avis Bulbulyan (November 13, 2019, 4:54 PM EST) 

In 2016, Californians voted on and passed adult-use cannabis regulations effectively creating what will be a robust licensed supply chain and industry. Running parallel to the 2016 legalization movement, the effort to support communities disproportionately impacted by the war on drugs began gaining traction. 

In a historic first of its kind, the city of Oakland, California, developed a social equity program to address past disparities by providing communities disproportionately impacted by the criminalization of cannabis an opportunity to participate in the newly regulated, licensed industry. Cities including Sacramento and Los Angeles followed suit. 

Illinois is currently in the process of administering their second round of state licensing wherein all available licenses have a social equity requirement. 

As cannabis legalization sweeps throughout the country, social equity has taken center stage in discussions among stakeholders throughout the industry, legislative circles and communities. Politicians have adopted the cause as a platform, well-known celebrities have signed licensing deals with cannabis companies to promote social equity and advocacy organizations have declared “equity or war!” 

With all the vocal support any cause could ask for, why are equity programs across the country failing? 

Social equity programs are failing because they are fundamentally ill-conceived and flawed. When the fundamentals of a program are flawed, the administration of it will be nothing short of sloppy, divisive and perhaps, worst of all, damaging to the communities the program intends to serve. 

 

In theory, providing a business opportunity in what is perceived as a lucrative industry should be straightforward. In spirit, it’s the right thing to do. In practice, when the tools to succeed are absent, what qualifies an individual for a social equity program is the exact opposite of what would qualify the average person to own and operate a multimillion-dollar business. 

The issue isn’t a question of whom to provide with the business opportunity. The issue is how to provide it to extend beyond feel-good, yet ineffective policies — in a way that is practical and aligned with the spirit of what this movement was intended to accomplish. 

At a fundamental level, all social equity programs have the following core requirements in one form or another: 

  • The social equity applicant must have a prior cannabis conviction; 
  • The social equity applicant must have at least five years residency in an area of the city that was disproportionately impacted by the war on drugs; 
  • The social equity applicant must be low-income; 
  • The social equity applicant must own 51% of the equity in the company applying for the license. 

Conversely, the business opportunities these programs intend to make available to qualified social equity program participants require millions of dollars in startup capital, extensive business experience, financial wherewithal to manage millions of dollars (in cash no less), intense regulatory compliance requirements and a myriad of other needs standard for any startup business. All this under the umbrella of conflicting federal and state regulations with no access to banking or traditional loan programs. 

Social equity programs are failing because the core requirements necessary to qualify an individual to participate in the program are exactly what’s preventing social equity applicants from participating in the business of cannabis. 

Current social equity programs desperately need a realignment of the program’s original intent with public policies that are conducive for starting and scaling a business. The creation of generational wealth, community programs to benefit impacted communities and opportunities for those that may not have it are results of a program, not the program itself. 

Fortunately, existing core requirements of these programs are not statutory in nature and revisiting them is relatively straight forward. Understanding complications created by existing core requirements through a business lens ultimately leads to identifying solutions. 

Current Core Requirements 

The requirement for a five-year residency in a disadvantaged area should not be tethered to a requirement that the applicant must also be low-income. The residency requirement does a great job of identifying potential applicants; however, the low-income requirement has the unintended consequence of barring a qualified individual and further limits the prospective pool of candidates from that community, countering the intent. 

If an individual is from an impacted community or meets the guidelines through a prior cannabis conviction, and yet that person managed to overcome their financial struggles, why would any requirement be adopted preventing that individual from giving back to his or her community or to the cannabis community as a whole? Instead of incentivizing the best able, best positioned candidates and welcoming the opportunity to learn from and follow established leaders, restrictions like this shut those individuals out and limit their scope. 

In the context of licensing and business opportunity, it is not equitable for a person to qualify for priority in business licensing for no other reason than because that person happened to get caught for smoking cannabis in the past. However, this qualifier would rightfully benefit certain individuals that have prior convictions as a result of prior enforcement for circumstances and conduct beyond simple possessions. 

This requisite should have additional contingencies to account for the experiences of many individuals that were arrested because of raids on their collectives, or those from communities in the Emerald Triangle going back decades that have otherwise been deprioritized. 

Prior cannabis conviction requirements are a great tool to identify individuals that have prior 

cannabis conviction records that should be expunged. However, when using a prior conviction record as a blanket prerequisite to receive priority in licensing, the program will consequently have unintended beneficiaries as well as disadvantage those more qualified that are not part of the social equity program, such as existing non-equity companies. 

With respect to the 51% equity ownership requirement, social equity programs intended to identify individuals who meet certain eligibility requirements should not further dictate through public policy the terms of a private business relationship. Just as the equity programs seek equitable participation in the cannabis industry, terms of a business relationship between multiple parties also require equitable contributions — specifically, when the other half of the equation is expected to invest millions in capital in a startup in an unstable industry barely crawling out of its infancy. 

In standard everyday business practices, one wouldn’t invest in a business without control instruments in place to safeguard their investment. Unless a company is well-established and scaling, safeguard controls are almost always in the form of majority control of the company and board. Everyday businesses routinely deal with this reality. Unless well- established, any company, in nearly any industry, in the process of raising capital has to deal with this fact. 

When a capital source is evaluating a business or investment opportunity, they’re taking into consideration the risk profile, future equity allocation needs to disburse to talented executives, and future capital requirements that require available equity to raise against. If the only contribution a person is able to bring to a business partnership in a newly formed startup is priority in licensing, that contribution is not going to be sufficient enough to retain 51% majority equity ownership. Alternatively, it is not going to be a sufficient contribution to the relationship to secure an investment partner. 

Existing social equity programs offer a public perception of opportunity, but the reality is the opportunity is layered with obstacles legitimate applicants cannot overcome. Instead of attempting to legislate business practices, the programs should clear the way for business opportunities. Currently, the requirements are roadblocks to business opportunities. The more that exist, the higher barriers to entry become. The more restrictions placed on the license itself, the more the value of the license will diminish. 

Several years ago, when many of the social equity conversations started, the license was the business. The industry has evolved to the point where a license simply authorizes an activity. Currently, with the exception of an arbitrary resale value, the license is only as valuable as the business model and concept it facilitates. With more jurisdictions making more licenses available, the value of the actual license continues to diminish in value. 

For example, with a manufacturing license, a company can be in the business of third-party contract manufacturing, they can be a co-packer or they can be a fulfillment center. However, a company does not need a license to have a product, brand or company. Social equity programs assume no opportunity to participate in the industry beyond license ownership. 

On the contrary, production facilities have a different revenue model than consumer goods companies, that’s different from a company that owns a brand or a concept they could license out to a facility. An individual may have an idea for a subscription delivery model business that when forced into a license ownership situation would not succeed. 

That individual may want to focus on developing their brand and not deal with the activities 

requiring a license such as manufacturing, distribution and delivery. Any one of those is complicated enough on its own and a specialized field in itself. 

It’s important to understand that owning a license and having a business in the cannabis industry, even plant touching, are not mutually exclusive. By hyper focusing on license ownership, a significant majority of opportunities in the cannabis industry are being discarded. 

When public policy presumes to make decisions on behalf of individuals, a net negative result is inevitable. To succeed, eligibility requirements of existing programs need to be narrowed in focus and the threshold lowered, with exposure to the different opportunities expanded. 

Recommendations 

An incentive program and request for service providers to provide legal and business guidance and financial planning services to qualified social equity participants will net more than enough qualified professionals to provide services and protections against predatory practices to the applicants. Currently, the primary experts sought are experts in licensing to help applicants submit their application while the support part is expected to come from nonequity applicants and financiers without much incentive to do so. 

The equity programs should identify business opportunities in the industry beyond license ownership and create separate programs that applicants meeting eligibility requirements could elect to participate in. Going beyond license ownership and even brand ownership without a license, a significant amount of opportunity exists in the labor sectors at every level including director, vice president and C-suite. 

Not everyone looking to participate in the industry wants to own a company. Many people looking to advance within a sector can do so if the equity programs open doors to other cannabis businesses that will support equity through their community hiring plan. 

These are incredibly, well-paying jobs (often unionized) with health benefits and retirement packages. As individuals gain exposure and knowledge about business and the industry, they’ll have the tools to pursue any path they choose and will be more equipped to do it on their own terms. 

Additionally, a business council on behalf of the equity program that could guide investors towards equity applicants that have developed a business model or business idea could support developing the applicant’s abilities and business knowledge through mentorship. 

Several associations, many focused on driving applicants towards license ownership, are doing great work in providing these development services to applicants. A handful of associations is also providing legitimate funding sources, access to investors and training bootcamps for eligible applicants. In general, many have their limitations, be it funding, access to experts or limited knowledge of the given subject matter. 

A stinging reality in the world of business is that most startups fail. With the obstacles inherent in the cannabis industry, there is no reason why licenses should be limited. As it may be, at a minimum, additional obstacles should not be placed on available licenses. If social equity programs focus on providing resources to those eligible, the program will be successful. 

It is important to understand that no single policy or handful of licenses is going to be enough. A system must be created that systematically churns out opportunity after opportunity. 

The success of the program is a function of the tools it can provide to its participants.

Avis Bulbulyan is the CEO of SIVA Enterprises. He was president of the Los Angeles Cannabis Task Force and is a member of the California Cannabis Advisory Committee. 

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice. 

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