Dysfunction in Social Equity Programs Indicates Concept Still Evolving

Dysfunction in Social Equity Programs Indicates Concept Still Evolving

After years of activism tying ongoing marijuana business permitting to reparations for harms wrought by the war on drugs, social equity as a concept has become nearly inextricably interwoven into the marijuana industry. And doesn’t appear to be going anywhere.

But it’s also a concept that has been undergoing near-constant evolution in terms of how exactly it works, in part because of many failed attempts to help a specific class of cannabis entrepreneurs.

Some social equity programs base eligibility on prior criminal convictions, while others focus on residency in heavily impacted ZIP codes or communities that were policed heavily. Some rely on race, while others don’t factor that in at all.

There was even a 2018 court case in Ohio brought by multistate operator PharmaCann that ultimately resulted in the state’s “racial quota” for cannabis licensing being thrown out as unconstitutional.

All of which begs the question: What’s the right formula for social equity programs?

The answer: Nobody really yet knows.

Moving Target

The question of exactly how to go about accomplishing the goals of social equity – namely, attempting to make whole those who were prosecuted and lost years in prison for nonviolent marijuana-related offenses, and giving them a decent shot at the newly legal industry – remains an elusive one for policymakers.

Each approach seems to have had some sort of fatal flaw to date, said Minority Cannabis Business Association President Kaliko Castille, in part because social equity programs have been too often tied directly to licensure itself in markets where licenses themselves are scarce. Even defining who’s eligible can be tricky.

That has created inherent problems for license recipients, who are often underfunded entrepreneurs with no easy way of raising the millions of dollars it can take to get a marijuana company off the ground.

“It’s hard to say that one person got it all right,” Castille said when asked for examples of states or cities that have the gold standard of social equity.

“It’s hard having this conversation in the middle of this New York fiasco,” she added.

Castille said that although New York had been held up at first over the past two years as a possible model for other states to follow, the legal and operational circus that has played out this year has made obvious the flaws in that approach.

While thousands of illicit cannabis shops have been operating with near-impunity, state cannabis regulators have managed to get only a few dozen legal dispensaries open. Those are are owned by “justice-involved” individuals, people who had criminal cannabis records and applied to be retailers.

That’s despite the fact that New York has issued 463 of the retail permits and is still pursuing new “social equity” permits in the now-open universal licensing window. Most of the initial licensees remain stymied by litigation.

“In an ideal world, in a vacuum, we don’t need social equity programs. We need low barriers to entry, making it as easy as possible for legacy operators to get into the industry,” Castille said. “The next thing we need is money, through low interest loans and grants … because they don’t have access to capital.”

Systemic Flaws

Former MCBA President Amber Littlejohn, now a private practice attorney, agreed and said one of the most pervasive issues for social equity licensees has been fundraising.

“The number of licenses issued versus the number active and the number that are still held by social equity applicants are going to be quite different. If you use Illinois (as an example), the number of social equity licenses versus issued versus operational, there’s a giant disparity there,” Littlejohn said. “That’s consistent across the country, and even more so as the market starts to deteriorate. It leads not only to greater challenges in funding, but also a more tumultuous legal environment.”

That’s something that more lawmakers and regulators have been taking into account. Again in New York, Gov. Kathy Hochul last May promised a $200 million state fund to help social equity retailers secure real estate.

Although that fund has had mixed success to date, it’s an important acknowledgement that money is a key component to social equity programs, Littlejohn said. That’s a fundamental lesson for future programs.

“The overarching theme is resources,” Littlejohn said. “The top issues we hear are funding. Next would be real estate. Those two are probably the biggest factors at play when it comes to getting businesses up and running.”

Predators Galore

The lack of funding is tied directly to one of the other common flaws: predatory financing agreements that change the social equity licensee into essentially a straw man, a face for the license application, while the actual business decisions are made by the partner who brings capital to the table.

That was a trend that emerged quickly in the early days of Los Angeles’ social equity program in 2018 and 2019, which one insider said was a “goddamn calamity.” Some social equity retailers in L.A. never opened, while others took several years.

Actor-turned-cannabis entrepreneur Madison Shockley, who just recently opened his social equity L.A. shop after partnering with financier Off the Charts, estimated to Green Market Report that only about 30% of his social equity peers had been able to open for business.

Shockley recalled there was a sense of excitement among many in the community who were eligible when the L.A. program launched, but that the excitement quickly “got corrupted with a lot of greed and fragmentation.”

“Behind the scenes, there were all these lobbyists and special interests having their way on what those laws were going to be. So it became very fragmented, with a lot of desperation in the social equity community, and that was driven by this tremendous money and land grab that took place,” Shockley recalled.

“A lot of applicants got caught up in deals that were predatory,” he said. “In the midst of the delays of that licensing process, a lot of those partnerships went through upheaval, as the equity partners started to realize how they were being boxed out of their own rights and interests in their businesses. There’s been a lot of lawsuits, equity applicants suing their investors and vice versa.”

The L.A. City Council also failed to provide adequate funding to staff the program properly, which made the rollout even more difficult.

“If any city can take a lesson from L.A., the two biggest lessons are maintaining trust with the community for one, but also properly funding the program,” Shockley said.

Similar predatory stories have played out in plenty of other states, Littlejohn said, and have even caused opposite problems, where regulators became “paternalistic” and proposed policies such as not allowing social equity licensees to sell their permits or even equity shares in order to raise operating capital.

“In trying to make sure that people weren’t just using these individuals as figureheads and divesting them of any meaningful benefits … in an effort to do that, they’ve gotten really prescriptive,” Littlejohn said. “When your criteria … starts pushing against the success of the business, then you’re going to have businesses that can’t even get open.”

Endgame

The bottom line is that social equity programs and licenses thus far have not truly lived up to the initial idea of creating new generational wealth for those who were imprisoned for nonviolent cannabis crimes, said Amber Senter, a longtime social equity proponent as well as the founder of Supernova Women and cannabis brand Makr House in California.

“The golden ticket comes with a lot of pitfalls and no guarantees and tons and tons of risk, and I don’t think that was properly communicated to people either,” said Senter, speaking broadly about social equity programs nationally.

Senter said there have been some success stories in social equity, particularly with brands that have simply survived and are still holding onto market share. But it’s taken collaboration with other social equity companies, she said.

“We’ve had to get very creative to figure out ways to pool our resources,” Senter said.

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