Social Equity Programs

CannaBlog Written by Cory Parnell, CPA, Chief Operating Officer

Bridge West CPAs & Advisors to the Cannabis Industry

The cannabis industry has a diversity problem. This problem traces its roots to early legalization initiative attempts to assuage fears about the risks involved in legalizing cannabis. Many of the ownership requirements to pursue coveted cannabis licenses in these early adoption states severely limited opportunities for participation from the very communities most acutely impacted by the War on Drugs. Several years ago, social equity programs in cannabis in states like Illinois began in earnest. Once it became clear that maturing markets were lacking in diversity, primarily attracting ownership that had capital readily available to risk in the emerging industry.

Critics have argued that these early attempts at social equity did not go far enough. They could be abused by having token diversity ownership or hires. These criticisms have lead states like New Jersey and New York to address not just the social equity problem within the cannabis industry but also within the states themselves. Here are the areas of focus that may benefit other social equity programs to include:

  • Addressing the barriers to entry that exist such as:
    • Drug-related convictions and other non-violent crimes
    • Lack of availability of financing
    • The cost-prohibitive nature of cannabis business banking
    • Lack of business resources to navigate the licensing process
  • Addressing the damage that has been done to communities because of unequal enforcement of cannabis drug laws by establishing licensing priorities tied to these communities, and
  • Increasing access to the process of expungement of criminal records that have up until recently prevented many from being able to join the state legal cannabis industry.

For their part, New York and New Jersey are automatically expunging records and opening the door for greater participation in the legal market.

Challenges That Impact Social Equity

Current Laws

Cannabis is legal for medical use in 36 states and four territories in the U.S., while cannabis for adult use is legal in 18 states and two territories, and DC. In the process of legalization, rules and regulations were established regarding ownership requirements that excluded from ownership opportunities anyone with certain felony drug convictions. These restrictions varied from state to state. As the lack of diversity in the cannabis industry became harder to ignore and the Cole Memo was no longer enforced, states began looking for ways to address the social equity issue. One area still being addressed is ownership requirements. One adjustment that was made to encourage diversity in ownership was to offer priority licensing for social equity applicants. California, Connecticut, Illinois, Nevada, and New York have regulations that offer priority licensing for social equity applicants.

Access to Banking

Banking in cannabis is an issue that is nearly universal, and whenever banking is available, it is expensive. We covered this topic in more depth in our “Cannabis Banking Insights” CannaBlog. In short, banks are hesitant to offer financial services to cannabis businesses partially because they need to develop robust internal compliance departments just for cannabis accounts. The banking issue is especially problematic for social equity applicants that have not historically had access to significant capital. Traditional loans and small business loans that would usually help social equity applicants compete are not available at this time, presenting a significant challenge to overcome.

Market Competition in Established Markets

In markets like California, Colorado, Nevada, Oregon, and Washington, where adult use has been legal for five years or more, any new licensing that addresses social equity presents an uphill battle for those applicants. This is due to regulations at the time that limited or excluded participation from owners with cannabis convictions and in some states, the requirement to show significant capital reserves. Applicants entering these markets will be competing with well-established companies and brands. Newer markets will be easier to enter and gain market share, but even established markets will always have room for innovation.

Opportunities

Despite the past and current hurdles that exist for social equity applicants, new opportunities are on the rise. States like New York and New Jersey are attempting to build programs that include community reinvestment to tackle disparities. Oklahoma has chosen to just make the barrier for entry lower and abandon the limited licensing model without including social equity programs. Each of these markets is an ongoing experiment worth watching for potential learning experiences. These markets present entrepreneurs with growth opportunities while presenting regulators with opportunities to see the effectiveness of these policies. Social equity, when done well, has the potential to address the harms caused by the War on Drugs and build a more diverse industry. Good conclusion!

Cory Parnell, CPA, is the Chief Operating Officer of Bridge West LLC, CPAs & Advisors to the cannabis industry. For more information about banking in the cannabis industry or to schedule a confidential consultation, contact Cory at cparnell@bridgewestcpas.com or 651-287-6327.