Written by Have you read Shaleen Title‘s article on cannabis monopolies and federal legalization? You should! It provides excellent perspective on a future national market and offers many lessons for state-level policy and regulations.
Title makes eight recommendations for federal policy and enforcement (find a link to the article at the bottom). Massachusetts operators would be well-served to think about these recommendations as they plan for expansion and scaling in the face of potential regional and national commerce and regulation.
Let’s look at these recommendations and the ways in which they already exist, or not, in Massachusetts:
1) Permit reasonable homegrow. A small number of plants for a personal homegrow is neither a threat to commercial-scale businesses nor does it materially feed the unregulated market. Massachusetts allows adults (21+) to grow 6 plants, and up to 12 per household. Anecdotally this seems like a fair number of plants. It’s enough so that novice growers can make mistakes, kill off some plants, and still get a decent harvest, but it’s not so much that a person can make a living selling their homegrow on the unregulated market. MA permits gifting of homegrow, but not sales.
2) Prohibit vertical integration. While vertical integration is an important strategy for minimizing the impacts of 280E and increasing profitability, it can feed monopolization. While Massachusetts initially required medical marijuana companies to be vertically integrated, there are some barriers to such integration in the adult use market. Separate licenses are required for each type of licensed conduct (i.e., cultivation, transportation, manufacturing, retail, etc.). And some of the ownership limitations prohibit vertical integration. For instance, a microbusiness or cooperative owner cannot have ownership in other licenses (although the coop regs are nuanced and permit the coop itself to hold additional licenses). Some licenses also have residency or social equity requirements which inhibit vertical integration. That being said, there are plenty of MA companies that have achieved vertical integration.
3) Don’t cap total license numbers, but do cap how many licenses an individual or business can control. This makes sense, right? It’s like basic kindergarten rules: bring enough to share and don’t take too much. Massachusetts employs the ‘rule of three’, which limits individuals/entities to controlling no more than three licenses of each type, and requires disclosure of individuals owning 10% or more of a company, or having control over that business. The rule of three does not apply to a sub-10%, non-controlling owner. What should we think about individuals who have less than 10% ownership in a large number of licenses and whose names are not disclosed anywhere? Is this problematic? Or does it encourage the kind of investment possibilities that many small businesses desperately need?
4) Create incentives for states to license small or disadvantaged businesses. MA has been trying a number of strategies on this point, to mixed reviews. The social equity and economic empowerment certifications provide various benefits. Applications by disadvantaged businesses (i.e., those owned by minorities, women, and veterans) also provides incentives. And delivery licenses are initially reserved for equity applicants. Incentives typically include reduced licensing fees and expedited application processing – important issues for poorly-capitalized startups, but perhaps not significant enough to really move the needle. This is best seen as an ongoing experiment as there is a strong argument that the incentives offered fail to overcome the barriers to entry or to level the playing field with large MSOs. Nor is it clear that “disadvantaged businesses” is properly defined: Should LGBTQ+ owned businesses be given such recognition? Is it fair that a business that does not have 51% ownership by any single diversity category, but is owned by 1/3 women, 1/3 minorities, 1/3 veterans cannot be certified DBE? Does it make sense to only reserve the least profitable license type (delivery) for equity applicants?
5) Enforce ownership limits and review mergers. Massachusetts requires regulatory approval prior to a change of ownership of a license. Making ownership structures and contractual agreements transparent and subject to regulatory oversight is essential to deter monopolization. However, many advocates, and regulators, argue that without genuine sources of capital available on equitable terms, it will be nearly impossible to cut out the predatory agreements that subvert ownership limitations. There are increasing efforts in Massachusetts to establish a state-administered fund for social equity applicants.
6) Disqualify corporations from the cannabis industry if they are bad corporate citizens. Title argues that state and federal regulators should loosen some of the individual disqualifications (such as those for cannabis-related crimes) but tighten exclusions of corporations that commit criminal or fraudulent acts, or that cause real harm to public health (like Big Tobacco companies). Massachusetts has a list of disqualifications for owners and employees. While it is important to keep bad actors out of the industry, these standards can require significant nuance to achieve policy goals. We at Willow Street Legal know an individual who received Social Equity Certification from the CCC, yet has a drug-related mandatory disqualification that will prohibit the person from controlling a license. This scenario should give the regulators pause. While the regulators have discretion and powers of investigation, and there are basic requirements of corporate good standing, there is not a similarly enumerated list of offenses or disqualifying conduct for corporate entities. Should alcohol and tobacco companies be prohibited from operating in cannabis?
7) Create a multi-agency task force to enforce anti-monopoly limits. License holders would do well to act as though all state-level regulators share information regarding licensees. Given the variations in regulations and enforcement between different state jurisdictions, we would not want to see bad actors being pushed, or running into, a state that has lax enforcement. And given the complexities of the industry, it would be a mistake to think that a single agency can effectively monitor for all violations. While not directly related to monopolization, Massachusetts operators continue to suffer difficulties caused by the apparent inability of the Cannabis Control Commission (CCC) and Dept of Agriculture (MDAR) to communicate about overlapping issues. We should expect all government agencies involved to work together with a shared purpose.
8) Authorize states to continue to ban or delay interstate commerce to preserve state-level advantages to local businesses. This is an important concept for all operators to keep in mind. Federal legalization will not necessarily mean instant interstate commerce. Doing so would effectively wipe out small businesses. We agree with Title, that states should be given the authority to continue to tweak and experiment with programs and policies, and that states should have control over how and when they open their borders. We see a potential for the emergence of regional state compacts prior to full federal interstate commerce. For instance, the Northeast and New England could institute regional trade, reconcile material differences in testing, labeling, product types, etc., prior to opening the doors to competition with the West Coast. Businesses should consider the implications of these various scenarios when building their long-term plans.
If you’ve made it this far, you are probably a stakeholder of some kind in the cannabis industry. Which means you can have a voice and play a part in what happens next. I’ll leave you with Shaleen Title’s closing comments: “It is up to us to build a fair market where everyone has an opportunity to compete and thrive. Let’s reap the benefits of competition and enjoy an innovative market that respects workers, consumers, and the cannabis plant itself for generations to come.“
** Find Shaleen’s article at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4018493