The state published new draft rules for the voter-mandated marijuana social equity program last week that expand eligibility requirements for Arizona's remaining 26 dispensary licenses.
Representatives of a coalition of several pro-cannabis groups trying to influence the state's creation of the program say they like this version better than the first, but that it still contains the potentially fatal flaw of allowing people who obtain the licenses to immediately sell them. The licenses are worth millions apiece.
Despite the many changes in the latest draft, the coalition is sticking with its previous assessment that the program, which aims to set aside licenses for communities that have been disproportionately impacted by the War on Drugs, is "designed to fail," said Julie Gunnigle, director of politics for the National Organization for the Reform of Marijuana Laws of Arizona.
"We're creating extremely lucrative lottery tickets," she said. "The number of folks who win the lottery and sell immediately is going to be astronomical."
(Applicants will need to cough up a nonrefundable $5,000 to enter the contest, which will take place in mid-December. No lottery will occur if there are fewer than 26 applicants for the 26 available social equity dispensary licenses. But Gunnigle said that with each license worth an estimated $7-10 million or more on the open market, the number of applicants expected is "well into the thousands.")
Last month, 355 applicants applied for 13 standard medical and recreational licenses that were given away in a lottery designed to bring dispensaries to rural parts of the state. That brought the total number of licenses in Arizona to 143. The social equity license program, mandated by Arizona's successful 2020 recreational marijuana initiative to help bring relief to communities "disproportionately impacted" by the war on drugs, is the next chance for people who want to break into the cannabis industry.
The social equity rules were released May 19 by the DHS, which has met with stakeholders like NORML and other groups as it creates a program that attempts to do what voters wanted. The law ordered the state to come up with final rules by June 1. Cannabis advocates generally panned the state's first attempt at draft rules for the program. The two basic criteria in the first draft rules were that applicants had to have a low-level cannabis conviction and an income of no more than twice the federal poverty limit.
The new version, now 15 pages instead of 12, requires that all applicants must be Arizona residents who have lived in the state for three of the last five years. Applicants, who would need to own at least 51 percent of the license, would have to meet three of the following five conditions:
* Earned income can be no more than four times the federal poverty limit. That's currently $51,520 for an individual and $106,000 for a household of four people.
* You must have a conviction for a state or federal marijuana violation on your record, and it must be expungable under Arizona's new pot law, and you have to have applied for that expungement by the December 1 deadline for applications. People who have been busted for 2.5 ounces or less of flower or 12.5 grams of concentrates like hashish are eligible to apply for expungement of their records starting July 1. (People with violent felonies on their record are excluded.)
* If you don't have a state or federal cannabis violation, you can still apply if you can show that one of your family members has been convicted of a state or federal cannabis violation.
* You have to have completed a DHS-provided educational training course that includes information on how to run a dispensary.
* You have lived for three of the last five years "in a community that has been disproportionately affected by the enforcement of Arizona’s previous marijuana laws; or..." The potential rule stops there. The state won't decide how they'll define those communities by the June 1 deadline, the text indicates, but "will be added in a subsequent iteration of the rules prior to September 1, 2021."
That's all well and good, Gunnigle said. But with no prohibition on selling a license to a non-social-equity-qualified entity, "we'll have a program for days or weeks."
Besides NORML, the coalition includes the Black Cannabis Trade Association, the Asian American Chamber, the Maricopa Branch of the NAACP, and the national Minorities for Medical Marijuana. The thinking behind Proposition 207's social equity clause was to make up for the racial and ethnic imbalances seen in marijuana arrest and conviction rates, help affected communities, and give less wealthy people an entry into the dispensary industry, according to advocates. There seems to be diminishing hope that such a system will arise in Arizona.
The program being developed will "invite investors" from the outset, Gunnigle said, who points out that creating a retail cannabis store requires millions in investment.
Some states offer social equity license holders a way to obtain a low-interest loan for their initial capital investments. Without that, license holders must find millions of dollars to locate and build a retail shop, pay for lawyers and zoning fees, and grow, manufacture, or otherwise acquire the substantial inventory needed to open the store. The big, multi-state marijuana companies will be there to swoop in and take over, critics say.
Possible solutions include delaying any transfer of the license for several years, or prohibiting it outright. But tying an owner's hands might not work. The new draft already attempts to protect a social equity license holder from being snookered by a savvy, wealthy industry player with new verbiage that prevents a license holder's profits and voting rights from ever being set to a lower percentage than the interest in the license. That means a qualified social equity license applicant can't simply be a 51 percent or higher owner just on paper — the person must actually receive at least 51 percent of whatever profit blooms from the license, and wield at least 51 percent of the decision-making power.
Yet the state needs to carefully consider if it really wants to "cuff" license holders by restricting what kinds of financial arrangements they can enter into as they try to establish a business, said Laura Bianchi, a local cannabis industry attorney and adviser. A provider of capital will want to have veto power over any big financial decisions, since it will be their money on the line.
"You're boxing them into a corner," she said.
Bianchi said she's "disappointed" in how the rules are shaping up because they don't have any component that accounts for the minority populations affected unequally by past enforcement. She'd like to see one of the criteria for license applicants be race or ethnicity in a future draft of the rules, and thinks it might be good to allow applicants from other states. She also thinks that requiring dispensaries to be located physically in certain communities would be nice to see.
"We need to make sure these are going into communities that have been disproportionately affected," she said. "That’s more of a long-term positive effect. If we’re hiring from the community, if we’re giving people access to get into the industry, rise up the ranks, and become executives — that’s how we get to long-term diversity."
Sure, if the state takes chances with the criteria it might spark some people to sue, she said, but the winners of those lawsuits will help the program evolve.
Eric Foster of Minorities for Medical Marijuana knows how tough it is to create a social equity program for marijuana licenses that actually works. He's been doing it for years. Arizona is going to be a particular challenge, said Foster, a Michigan-based lobbyist who works as the group's national policy director for cannabis and hemp policy. His group submitted a 10-page letter to the DHS with numerous suggestions for the social equity program but added that rules alone could not make a good program. The law needed to be changed to end restrictions on the quantity of available licenses and ditch the lottery system in favor of a "compliance approval model."
"You are starting behind the other entities that are already open and licensed," Foster said. "They have a financial advantage, brand, economy of scale ... to undercut you pricing. So you have an artificially controlled regulated market that doesn't really have the proper structure for free market capitalization."
In other words, there's little chance these businesses will get off the ground without significant financial help. Yet changing a law created by voter initiative in Arizona is difficult, requiring a three-quarters majority of the Legislature and that the change further the purpose of the law.
In Foster's view, five states have done a good job creating equity in their still-young legal cannabis industries: Maryland, Massachusetts, Michigan, Colorado, and California. There, the states' approval of licenses is more tied to compliance with certain rules. Some states give preference to people who come from a community with certain racial, socioeconomic, or geographic designations, which can "really get you to minority operators," he said.
Maryland, for instance, has a cap on licenses like Arizona, but established policies to help people in minority groups get qualified, providing technical support and assistance in finding locations for the stores, he said.
Foster's group encourages the idea of allowing a group of several qualified people to form an entity in which no one person might hold 51 percent of a company, but together they hold that or more. The people within that group might include a Black owner from outside of Arizona, he said, or maybe the social equity group will partner with a Native American tribe, creating a "100 percent social equity applicant."
"You've got to get creative," he said. "This first pass is probably not going to get the results that people wanted. But sometimes, failures have to happen to contribute to the evolution toward success."
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