In recent days I’ve been asked to meet with legislators, regulators, and activists in many states about how to write equitable legislation. Most people I talk to are familiar with the need for equity-related provisions (such as a fund for forgivable loans for capital, expungement, community reinvestment, and technical assistance, as well as ensuring that municipalities are incentivized to act equitably so that they don’t undermine state-level progress).
However, far fewer people are familiar with the need to limit the number of licenses that a person or company may own or control. None of the steps above matter if, during the time it takes to work them out, other multistate corporations dominate the state’s market so that there is nothing left for small businesses, POC-owned businesses, or farmers – something that has happened in many, if not every, legal marijuana state and is becoming a bigger problem each time.
To that end, I want to share some concrete statutory and regulatory language to create such limits, using Massachusetts as a model. In my opinion, any state legalization bill must contain a limitation like this or else it’s a dealbreaker:
No person or entity shall own or control more than 3 marijuana retailer licenses, 3 marijuana producer licenses, 3 marijuana cultivator licenses limited to a total of 100,000 square feet of Canopy*. (This is an adapted and combined version of the Massachusetts legalization statute, Section 16 of Chapter 55 of the Acts of 2017, and regulations, 935 CMR 500.050(b)(5).
The list of licenses is not crucial here; you can replace the list of licenses with the appropriate list of licenses from your state. The number 3 is also not crucial; I think anywhere from 1 to 5 is reasonable. The crucial parts are having a limit, using the phrase own OR CONTROL, and defining cultivation limit with both a number and total square feet of canopy (so you don’t end up with 1 million-square-foot facility that supplies the entire state under one license, for example).
The statutory language above is good, but it leaves several potential loopholes open. No doubt there will be more being developed and attempted, and probably more the moment I publish this blog. But when you include a provision like this, and each time you close a loophole, you make corporate domination that much more difficult.
Below in italics are relevant excerpts of the current Massachusetts ownership and control regulations which cover as many sketchy scenarios as possible, and close many of the loopholes, IF you have regulators who are willing to invest in enforcing these provisions and IF you have a culture that encourages people to report attempts to violate ownership and control compliance rules.
No Person or Entity Having Direct or Indirect Control shall be granted, or hold, more than three licenses in a particular class, except as otherwise specified in 935 CMR 500.000.
Person or Entity Having Direct Control means any person or entity having direct control over the operations of a Marijuana Establishment, which satisfies one or more of the following criteria:
(a) An Owner that possesses a financial interest in the form of equity of 10% or greater in a Marijuana Establishment;
(b) A Person or Entity that possesses a voting interest of 10% or greater in a Marijuana Establishment or a right to veto significant events;
(c) A Close Associate;
(d) A Person or Entity that has the right to control or authority, through contract or otherwise including, but not limited to: 1. To make decisions regarding operations and strategic planning, capital allocations, acquisitions and divestments; 2. To appoint more than 50% of the directors or their equivalent; 3. To appoint or remove Corporate-level officers or their equivalent; 4. To make major marketing, production, and financial decisions; 5. To execute significant (in aggregate of $10,000 or greater) or exclusive contracts; or 6. To earn 10% or more of the profits or collect more than 10% of the dividends.
(e) A Court Appointee or assignee pursuant to an agreement for a general assignment or Assignment for the Benefit of Creditors; or
(f) A Third-party Technology Platform Provider that possesses any financial interest in a Delivery Licensee including, but not limited to, a Delivery Agreement or other agreement for services.
Person or Entity Having Indirect Control means any person or entity having indirect control over operations of a Marijuana Establishment. It specifically includes any Person or Entity Having Direct Control over an indirect holding or parent company of the applicant, and the chief executive officer and executive director of those companies, or any person or entity in a position indirectly to control the decision-making of a Marijuana Establishment.
Close Associate means a Person who holds a relevant managerial, operational or financial interest in the business of an applicant or Licensee and, by virtue of that interest or power, is able to exercise a significant influence over the corporate governance of a Marijuana Establishment, an MTC or Independent Testing Laboratory licensed under 935 CMR 500.000. A Close Associate is deemed to be a Person or Entity Having Direct or Indirect Control.
Here are a couple other situation-specific scenarios regarding ownership and control to keep in mind:
- If your state has an economic empowerment program, social equity program, or other particular benefits for impacted communities, you want to ensure that there are some fair limits so that if a company is sold to new owners who do not meet the criteria, they will no longer enjoy the benefits. Here is some relevant language from Massachusetts which requires disclosure of all changes of ownership and control and notes that such a change may cause a loss of benefits. Note that you may want to go further, such as preventing transfers of ownership for a period of time after receiving certain benefits.
Priority Applicants Change in Ownership or Control.
a. Economic Empowerment Priority Applicants shall notify the Commission of any change in ownership or control, regardless of whether such change would require the applicant to seek approval [under other required circumstances].
b. When an Economic Empowerment Priority Applicant notifies the Commission of any change in ownership or control, the Commission shall review anew the applicant’s eligibility for economic empowerment certification status.
c. When an Economic Empowerment Priority Applicant implicates the approval process established in 935 CMR 500.104(1)(b)(1)-(2), the applicant shall seek approval by the Commission of a change in ownership or control, and shall undergo the approval process provided therein prior to making a change in ownership or control.
i. In order to maintain its status as an Economic Empowerment Priority Applicant, the Economic Empowerment Priority Applicant in its submission shall demonstrate that it continues to qualify as an Economic Empowerment Priority Applicant, as defined in 935 CMR 500.002.
ii. If the qualifications are no longer are met subsequent to the approved change, the applicant will no longer be certified as an Economic Empowerment Priority Applicant and will no longer receive any benefits stemming from that designation.
iii. The applicant may still seek approval of a change of ownership or control.
- If you have a social equity program or economic empowerment program, you might want to allow participants to accept investment and sell some percentage of the company while requiring that eligible participants in the program maintain majority ownership and control. Similarly, if you offer exclusive access to certain license types or during a certain initial period to participants in a program, you might want to ensure that access is only available to businesses with majority ownership and control comprised of people in those programs. Some relevant language:
Delivery Operator Licenses shall be limited on an exclusive basis to businesses controlled by and with majority ownership comprised of Economic Empowerment Priority Applicants or Social Equity Program Participants for a period of 36 months from the date the first Delivery Operator Licensee receives a notice to commence operations; provided, however, that the Commission may vote to extend that period following a determination that the goal of the exclusivity period to promote and encourage full participation in the regulated Marijuana industry by people from communities that have previously been disproportionately harmed by Marijuana prohibition and enforcement of the law has not been met; and the Commission may vote to expand eligibility for Delivery Licenses during the exclusivity period pursuant to [this section]. The Commission shall develop criteria for evaluating whether the goals of the exclusivity period are met, which shall include, but not be limited to . . . [see 935 500.050(11) for full criteria].
- For delivery licenses in particular, especially if you have delivery licenses that are exclusively for social equity/economic empowerment licensees as Massachusetts does, you want to ensure that software companies cannot exercise unlawful control over delivery licensees (for example, if customers are using an app and the app is directing them to certain licensees whom the app owns, and not listing others). Here are relevant limitations on that control:
A contract between a Delivery Licensee and a Third-party Technology Platform Provider shall be negotiated and entered into on an arm’s length basis. A Delivery Licensee may not accept any investment in the Delivery Licensee by a Third-party Technology Platform Provider with which they have a contract.
No Delivery Licensee may share its profits of the sale of Marijuana or Marijuana Products with a Third-party Technology Platform Provider, or otherwise provide a percentage or portion of the sale of Marijuana or Marijuana Products to the Third-party Technology Platform Provider.
I hope this is helpful! Feel free to use and adapt this language however you find useful in your own jurisdiction. Please note this post is limited to limits on ownership and control of licenses – there are many other related topics and model language outside the scope of this post. Everything I’ve excerpted here is from Massachusetts, but feel free to message me if you’ve seen better language on this topic or if there are provisions from other states related to other specific scenarios or loopholes that I should add.