Our Impact

A Slow Start to Social Equity in the Cannabis Market

Posted by Catherine Burns and Kayla M. Siam, Seyfarth Shaw on July 10, 2020

Since 2012, an increasing number of states have legalized the medical and/or the recreational use of cannabis. In implementing regulations for legalized cannabis, many states have included programs to ensure that communities that historically have been disproportionately and adversely impacted by the previous criminalization of cannabis will now have a better opportunity to reap benefits from the new legal market. Known as social equity programs, these programs can include expungement initiatives, diversion of cannabis-related revenues and taxes to disproportionately impacted communities and social equity applicants, and allocation of greater weight to social equity applications during the licensing process.

In 2016, Massachusetts voters voted to legalize the use, commercial production and retail sale of recreational cannabis in the Commonwealth. [1] In 2018, when the legalization went into effect, the Massachusetts Cannabis Control Commission (the “CCC”) implemented the Social Equity Program (the “Program”) to encourage and enable people from communities that have previously been disproportionately harmed by marijuana enforcement to participate in the legal recreational cannabis industry. Applicants are eligible to participate if they have either: (i) lived in a disproportionately impacted area for at least 5 of the prior 10 years and makes less than 400% of the Area Median Income; (ii) been a resident of Massachusetts for at least the preceding 12 months and been convicted or subject to a continuance without finding of a controlled substance-related offense; or (iii) been a resident of Massachusetts for at least the preceding 12 months and also the spouse or child of someone convicted of or subject to a continuance without finding for a controlled substance-related offense [2].

The Program focuses on providing training, technical assistance, priority application status and reduced fees to participants by following a four-track program based on a specific applicant’s needs. Social equity applicants interested in establishing a cannabis business are placed on the Program’s Entrepreneur Track, whereas applicants looking to assume managerial roles in the industry are placed on the Program’s Core Track. The Entry Track is for those who wish to fill the industry’s entry-level positions and, finally, those who seek more indirect and supportive roles in the industry are placed on the Ancillary Track. [3]

Despite the effort and detail that went into creating the Program, it has yet to produce the intended outcomes.  As of January 2020, only 11 of the Commonwealth’s 309 cannabis licenses, or 3.5%, were granted to participants in the Program. As of July 2019, only 1.2% of the Commonwealth’s cannabis businesses were minority owned. These numbers are particularly alarming given that, in 2019, 11.5% of businesses comprising the “traditional” economy in Massachusetts were minority owned.

A variety of reasons have been proposed to explain why minorities and social equity applicants have been unable to break into the cannabis industry in Massachusetts as expected, but a common reason seems to be a lack of access to resources. Although most application and maintenance fees are reduced or even waived for social equity applicants, some of the components of the application process still require a large amount of capital.

For example, an applicant must disclose certain property identification and interest documentation in the license application.  This identification and documentation must consist of either: (i) clear legal title to the proposed site; (ii) an option to purchase the proposed site; (iii) a legally enforceable agreement to give title to the site; or (iv) documentation from the owner evidencing permission to use the premises. [4] Although the CCC suggests that this disclosure may not require an applicant to pay for use of the property during the license review process, such potential flexibility is limited at best. Moreover, given that the application review can take up to 90 days from submission, an applicant could incur months of operational expenses before it is even authorized to operate.

Additionally, the applicant’s Host Community Agreement Certification with the city or town in which it intends to do business, may also require a large amount of capital. These Host Community Agreements (“HCAs”) generally include standard fees such as hosting fees and sales tax, each of which the Commonwealth caps at 3% of gross sales. However, many of these HCAs include additional financial obligations, such as opening fees, mandatory charity donations, and legal fees, all of which can range from an additional $2,000 to as much as $600,000. In a recent review of 500 HCAs, about 63% of the agreements required more than standard fees from the cannabis business owner. The CCC and the Massachusetts Attorney General’s Office are at odds as to who should oversee HCAs, and the Legislature has introduced a number of bills to resolve this issue.

In 2018, the CCC conducted a survey to identify the barriers applicants from disproportionately impacted areas face in the application process. Although the survey only received just over a 20% response rate, the results showed that 44% of the respondents didn't apply for a license because of difficulty raising capital, 36% were still in the process of developing a business plan (also a required component of the license application), and about 33% had difficulty in obtaining an HCA.

Real Action for Cannabis Equity, a Massachusetts coalition formed to support minority communities in the cannabis industry, has publicly expressed their concern for the ability of minority applicants to compete with big businesses with deep pockets. The coalition has proposed solutions to improve minority participation in the industry, such as providing a similar priority status for applicants on the local level or allowing time for minority applicants to establish their businesses before opening the market to everyone.

In America’s free market system, successful businesses quite often achieve their status with a “survival of the fittest” mentality. But as demonstrated during the Great Depression, the Great Recession, and even during the COVID-19 pandemic, we can encounter circumstances where the free market system requires government intervention to operate fairly.

If states intend to offer relief to individuals and communities disproportionately impacted by the war on drugs by offering the chance to participate in the growing cannabis industry, it is clear that state intervention is required to obtain those results. Unfortunately, no state seems to have achieved social equity in the industry - yet.

[1] In 2012, Massachusetts legalized the use, production and sale of medical marijuana.

[2] Massachusetts Cannabis Control Commission Equity Programs

[3] Ibid.

[4] Massachusetts Cannabis Control Commission: Guidance on Licensure

Our guest blogs are written and produced by organizations within our membership. They  are not intended to reflect the views nor opinions of the Greater Boston Chamber of Commerce.