Illinois Cannabis Law Needs Revisions to Level Playing Field for Minority Owners

LP Partner Kevin Slaughter writes for Cannabis Business Executive.

As the market for the recreational use of cannabis develops in Illinois, more work needs to be done to give minorities a fair shot at ownership of dispensaries. Since the Illinois’ Cannabis Regulation and Tax Act went into effect on Jan. 1, no minorities have secured licenses to operate a dispensary. While the law has good intentions, with provisions designed to allow minority-owned businesses access to licenses, no African Americans or other people of color currently have one.

As drafted, the legislation contains a few loopholes that established cannabis operators can exploit to their benefit. A few changes to the statute would create a more level playing field for minority owners in Chicago and the rest of the state.

It would be the fair thing to do. Minorities in urban areas have been disproportionately affected by the war on drugs, a failed policy that criminalized possession and dealing of banned substances. Their communities were eviscerated by the incarceration of people of color, especially African-American men who turned to drug dealing as a way to earn money.

Legislators have taken this history into account. Laws in Illinois and other states have included “social equity” provisions in legislation legalizing cannabis, which are intended to help populations harmed by past drug policies to access the economic benefits of cannabis legalization. The Illinois law uses various tests to determine whether a business qualifies as a “social equity applicant.” Under one test, an applicant can qualify if control of the applicant, and at least 51% of its ownership, are held by one or more individuals who have resided in an “disproportionally impacted area” for at least five of the last 10 years (these areas are census tracts that meet one of several criteria, such as having a poverty rate of at least 20%, having 75% or more of its children participate in the federal free lunch program, or having an average unemployment rate that is more than 120% of the national average). Applicants can also qualify if 51% of their ownership is held by individuals arrested or convicted for crimes eligible for expungement under the act. Alternatively, applicants with at least 10 full-time employees qualify if 51% of current employees either reside in impact areas, or if those employees themselves have records eligible for expungement.

Unfortunately, these provisions make it too easy for white owners to exploit.

Here’s how it works: under the Illinois law, applications for conditional adult use dispensing organization licenses are scored on a scale from 0 to 250. Social equity applicants automatically receive 50 out of 250 possible points. That’s a nice head start, especially when the difference between a successful application and a losing application can be one point or less.

This makes it all too tempting for white applicants to game the system. Some recruit “owners” who help them qualify as social equity applicants, only to have those “owners” magically disappear after the license is granted. I’ve heard stories of people getting paid as much as $25,000 to stand in for that purpose. White-owned businesses can also just hire enough low-paid budtenders to reach the employee demographics required to qualify for social equity advantages. In many cases, you can’t fault people because they’re following the rules to the letter technically, but the intended benefits aren’t being realized. That’s a problem.

There are signs states are catching on to these tricks. Last year, Ohio revoked the cultivation license of Harvest Health and Recreation Inc., over suspicion that it had falsely claimed to be owned by an economically disadvantaged group. Harvest also surrendered permits for two dispensaries in Pennsylvania for allegedly misrepresenting its business there.

It’s a start, but much more work needs to be done. In the patchwork of states that have legalized cannabis, there is a lack of minority participation at all levels of the supply chain, from cultivation to processing to retail. They are steps to take, both legislatively and in regulatory enforcement, to ensure that social equity applicants can obtain licenses and thrive in the years to come. And while no law is perfect, there are specific ways to make the Illinois legislation more fair to social equity applicants. Here are six:

1. Apply MBE rules to social equity. Cannabis social equity provisions should borrow from the stringent rules that are used by states for applicants seeking contracts as minority business enterprises (MBEs). Many states require that 51% of individuals in management are minorities, or that 51% of compensation is paid to minority employees. Local governments can enforce this. For example, Chicago’s Department of Procurement Services looks at MBE entities and their certification process in excruciating detail.That same level of attention should be applied to reviewing the organizational documents, and support and management agreements submitted in cannabis applications, to really understand who actually controls the applicant and how the economics flow.
2. Improve economic assistance. Applying for a cannabis license is an expensive endeavor, and the state needs to make assistance available to minority-owned applicants before they get a license. The need for funding is particularly acute given that cannabis businesses are denied access to a banking system skittish over federal law that continues to prohibit the sale and use of cannabis. Illinois’ application is complicated—about 400 pages in length—requiring the hiring of consultants and legal counsel. While the current law makes a “Cannabis Business Development Fund” available for “qualified social equity applicants,” it doesn’t include assistance for those applying for a license.
3. Add market protections for social-equity shops. Legislators need to address the power of established cannabis businesses, which have the potential to squeeze out smaller shops. Industry concentration is a real threat, especially given that federal antitrust protection doesn’t apply to activities deemed “illegal” by the federal government. Moreover, some large cannabis cultivators and processors have used draconian and unrealistic commercial terms that hurt small retailers, such as high-dollar minimums or requirements to buy extra product. In order to create a more level playing field, suppliers should be required to sell to social-equity businesses at fair prices and on fair terms. Otherwise, the suppliers could shut out small social-equity shops.
4. Tighten rules on sale of social-equity businesses. The law currently states that licensees may not sell until Dec. 21, 2021, which is just two short years away. This could lead to a wave of social-equity retailers accepting lucrative offers from deep-pocketed purveyors, putting the industry in the hands of a few players. Amendments to the law could restrict to whom social equity owners could sell. A total ban on the practice wouldn’t be fair to owners, but we need more safeguards to ensure that there will be a respectable number of social-equity participants in perpetuity.
5. Relax state preemption rules. A lot of the damage of the criminalization of cannabis happened in cities, down to the neighborhood level. While state legislators touted the new law last year, the Black Caucus of Chicago’s City Council had no authority to make it easier for local entrepreneurs to take part in the first round of the awarding of licenses last November. Instead, white-owned medicinal cannabis dispensaries scooped up the best locations downtown, on the North Side, and in the West Loop. The Black Caucus was limited in its ability to accommodate the concerns of its local constituents because state law preempts the City of Chicago’s home rule authority, which members of the Chicago City Council rely on in order to accommodate the needs of their local communities.

Legislators had good intentions in enacting the cannabis law, but improvements are needed. Pursuing the above changes would be a good start to creating a more fair and just competition for those intended to benefit from social equity programs. Given the history of criminalization of the use and sale of cannabis, and its devastating effects on urban communities of color, the changes wouldn’t just make economic sense for these areas, but would be the right thing to do.