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When Cannabis Goes Legal

The role of social cannabis equity programs in the "Green Rush"

February 06, 2020 Photo

Righting the wrongs caused by the U.S.’ war on drugs is the primary catalyst to the social equity cannabis programs seen throughout the U.S. By providing the victims of this “war” the ability to be the first to capitalize on the “green rush,” the jurisdictions that have adopted these public policies hope to give back to the communities most harmed.

For instance, states like Massachusetts and Illinois have created state-wide social equity cannabis programs aimed at providing assistance to victims harmed by the enforcement of drug laws. Creating cannabis equity programs that will provide lasting impacts on the communities harmed by the war on drugs is a primary goal for these policies. Once federal prohibition of cannabis ends, the anticipated fast-pace of this new cannabis economy is motivating many U.S. state governments to consider adopting their own social cannabis equity programs.

Practical Insurance Issues and Considerations

There are many practical insurance issues to consider when working with state-licensed commercial cannabis businesses. The issue at the forefront is the federal prohibition of cannabis as a Schedule I drug (a definition that means there is no medical benefit derived from the plant and it is extremely harmful).

That means at any moment, the federal government may constitutionally seize and imprison every single state-licensed cannabis business owner and most of the people who provide those owners with ancillary business needs. The practicality of the federal government reining in the current cannabis markets, both medical and adult use, however, seems impossible. Cannabis as it currently stands is increasingly a bipartisan issue, and public support for the war on drugs has waned significantly in the last decade.

Commercial cannabis markets have been allowed to operate free from federal interference since 2014, and these businesses have developed standard operating systems and structures that need to be covered by traditional business insurance policies.

Cannabis business insurance comes in two options, however: bad, and very bad. Since the federal government prohibits commercial cannabis of any stripe, insurance providers have been able to add premiums to what would otherwise be standard general business liability policies.

Cannabis equity programs, such as the ones found in California, allow capitalized groups that would otherwise not qualify for a social equity program to participate in the market and acquire a commercial cannabis license by “incubating” or subsidizing qualified social cannabis equity applicants. This “incubator” and “incubate” relationship has been the primary source of funding for California cannabis equity programs. Cities such as Oakland, San Francisco, and Los Angeles have created unfunded, government-mandated programs that would stall if not for the cannabis incubators that wished to enter this fast-growing and lucrative legal industry.

For businesses in jurisdictions that allow social equity incubators to partner with social cannabis equity incubatees/applicants, it is important to make sure that they form a team with someone who they can work and communicate with. When an incubator partners with a social equity applicant to acquire a license they do not qualify for individually, the incubator bears the responsibility of ensuring that their business is continually supporting the social cannabis equity incubatee’s business. This is done in two standard fashions: The incubator and the incubatee may partner together under one entity, which typically requires the incubatee/social equity applicant to maintain 30-50 percent ownership of the entity; or incubator can subsidize and provide financial support and logistics to the incubatee’s business that is owned 100 percent by the incubatee. In return, the incubator may acquire their own license, which would be 100 percent owned by the incubator.

Both models produce the risk of falling out of favor with the social equity applicant. This is important to consider because an incubator is required to ensure the incubatee’s business is operating and moving forward. The incubator’s annual license renewal hinges on the continuation of the social cannabis equity incubatee. This means that the wise cannabis incubator maintains an active presence in both their own and their incubatee’s cannabis business. This includes the incubatee following all local, state, and federal employment laws.

Federal Cannabis Future

H.R. 420 is a bill being discussed in Congress that would provide the regulation of cannabis products and decriminalizes cannabis at the federal level, which would essentially regulate cannabis like alcohol. The Secure and Fair Enforcement (SAFE) Banking Act was recently passed on Sept. 25, 2019, in the House of Representatives, and the Senate is expected to take a vote on this matter in early 2020. These bills signify that interstate commerce is around the corner and no one should be surprised if and when Congress passes federal cannabis legalization that includes a national cannabis equity program.

New York showed us in April 2019 that if there is no cannabis equity, then there is no legalization, and thus no marketplace without social cannabis equity. New York's 2019 legislature did not include a budget for adult-use legalization, even though it was predicted to be passed by both chambers and signed by the governor. Illinois passed a state-wide adult-use cannabis bill that included social cannabis equity language.

On September 23, 2019, Eaze launched an accelerator program dubbed “Momentum” for social cannabis equity businesses. Eaze is a cannabis technology company that boasts a seamless e-commerce platform for local cannabis retailers to run compliant, on-demand delivery, including a marketplace for hemp-derived CBD products shipping to 43 states and the District of Columbia. Their Momentum program will include an inaugural class of 10 participants who will each receive a $50,000 grant to participate in a 10-week education program led by industry volunteer experts and allow access to Eaze’s market ecosystem.

U.S. commercial cannabis will soon become a national market economy. Cannabis social equity programs have been gaining momentum and ever-increasing political support. It will be important for a brand that wishes to have a national presence after federal prohibition ends to understand those markets with social cannabis equity programs.

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About The Authors
Dominic Ripoli

Dominic Ripoli is associate at Wood Smith Henning and Berman LLP. His firm recently agreed to a contract with San Francisco to provide technical legal assistance to the city’s cannabis equity businesses. WSHB has a national presence with offices in nine states with some form of commercial cannabis economy.  dripoli@wshblaw.com

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