How Missouri’s Cannabis Microbusiness Program Became Dominated by Out-of-State Companies

Missouri’s cannabis microbusiness program was born of good intentions, but critics describe a feeding ground for multi-state operators (MSOs) akin to that of Arizona’s Social Equity License Lottery Program.

Missouri’s journey into the realm of recreational cannabis, heralded by its legalization in November 2022, was not merely an expansion of its medical cannabis program initiated in 2019. It was a deliberate step towards fostering social equity and diversity within the burgeoning cannabis industry. A cornerstone of this initiative was the creation of the Cannabis Microbusiness Program, introducing a novel licensing mechanism tailored for small-scale cannabis enterprises. However, the recent revelations from the Missouri Department of Health and Senior Services (DHSS) paint a complex picture of the program, as it grapples with unforeseen challenges and loopholes, echoing concerns reminiscent of Arizona’s experiences with social equity lotteries.

The cannabis microbusiness license program, touted as a beacon for social equity, is exclusively to be issued to eligible individuals and entities who must meet specific criteria. These criteria include having a household income below 300% of the federal poverty level, a prior conviction for a cannabis-related offense, residency in areas disproportionately impacted by cannabis prohibition, or, significantly, a minimum 51% ownership by women, racial minorities, veterans, or individuals with disabilities.

In theory, the microbusiness license empowers its holder to engage in various cannabis-related activities, spanning cultivation, processing, manufacturing, testing, transportation, and retail, albeit within defined limits. For instance, a cannabis microbusiness can cultivate up to 150 plants, process 150 pounds of cannabis per month, and retail up to 150 ounces of cannabis per day. The associated fees are set at $5,000 for the initial license and $2,500 for annual renewal.

Indeed, Missouri’s cannabis microbusiness program was conceived with noble intentions – to dismantle barriers to entry and create avenues for marginalized or under-represented groups to actively participate in the legal cannabis market. However, a recent report by the DHSS’s Chief Equity Officer (CEO), published on January 3, 2024, exposes a stark reality.

The program, designed to promote social equity and diversity, has, in practice, become susceptible to the influence of out-of-state companies, manipulating eligibility criteria and the application process to gain an unfair advantage.

Similar to Arizona, out-of-state companies have capitalized on loopholes within the eligibility criteria and application process, potentially tilting the scales in their favor.

The report delves into the first round of microbusiness applications, accepted between July 27 and August 10, 2023. Out of the 1,178 applications, a significant 48% came from out-of-state entities, while the remaining 52% were from in-state applicants. More alarmingly, the report identifies three companies – one from Michigan, one from Arizona, and one from Missouri – linked to a substantial 43% of the applications, either directly or indirectly.

These companies employed various strategies, akin to those witnessed in Arizona, including establishing monopolies through multiple entities, using straw owners to meet eligibility criteria without genuine involvement, submitting false information, and demonstrating a lack of diversity in business plans and operating procedures.

Verification challenges further complicated the DHSS’s efforts. Ambiguities in terms like “disproportionately impacted area” and “cannabis-related offense,” difficulty obtaining records from other states, and resource constraints hindered the thorough review of applications, causing the program to fall short of its intended goals.

The report concludes that instead of achieving social equity and diversity, the cannabis microbusiness program concentrated licenses in the hands of a few well-funded companies, prompting questions about its efficacy. Recommendations include establishing clear definitions, demanding extensive documentation, implementing a random lottery system, increasing fees, and imposing stricter regulations on ownership and operation.

Drawing from the lessons of Arizona, the report suggests collaboration with industry stakeholders for feedback and program enhancement.

As Missouri grapples with the lessons learned, the experiences Arizona, in particular, serve as cautionary tales, revealing what could happen with the State’s own cannabis microbusiness program.

Arizona legalized recreational cannabis in November 2020, through the Smart and Safe Arizona Act (SSAA), which also established a medical cannabis program in 2010.

The SSAA included a provision for social equity licenses, which are reserved for applicants from communities that have been disproportionately impacted by the enforcement of previous cannabis laws. The SSAA mandated that the Arizona Department of Health Services (ADHS) issue 26 social equity licenses, in addition to the 130 existing dispensary licenses, by January 1, 2021.

However, the implementation of the social equity program in Arizona has been plagued by delays, lawsuits, and scandals, raising doubts about its legitimacy and effectiveness. One of the main sources of controversy has been the involvement of multistate operators and other parties with potential conflicts of interest in the design and execution of the program.

According to a report by the Phoenix New Times, several cannabis companies and industry groups that backed the SSAA had a significant influence on the drafting and shaping of the social equity provision, which was added as a last-minute amendment to the initiative. Some of these companies and groups also had ties to the ADHS or the governor’s office, giving them access and leverage over the regulatory process.

The report also revealed that some of the same companies and groups that helped create the social equity provision also applied for or supported hundreds of applications for the social equity licenses, using various strategies to circumvent the eligibility criteria and the lottery system.

For example, some companies offered to finance, partner with, or mentor social equity applicants, in exchange for a share of ownership or control over the license, rights groups allege. Meanwhile, other companies used multiple entities or individuals to submit applications for the same or nearby locations, creating a monopoly or a cluster of licenses. Others still used false or misleading information to claim eligibility, such as income, residency, or criminal history.

The report also highlighted the challenges and limitations that the ADHS faced in verifying the eligibility and suitability of the applicants, such as:

  • The lack of a clear definition or guidance on what constitutes a “disproportionately impacted community” or a “disproportionately impacted individual”
  • The difficulty of obtaining and verifying income, residency, or criminal records from other states or jurisdictions
  • The limited time and resources available to review and score the applications, which resulted in a reliance on self-reported information and a lack of due diligence

The report concluded that the social equity program in Arizona failed to achieve its intended goals of social equity and diversity, and instead created a situation where the majority of the licenses were awarded to a few large and well-funded companies, who were able to exploit the loopholes and weaknesses in the system. The report also noted that several lawsuits have been filed by applicants who were denied or disqualified from the social equity program, further challenging the validity and fairness of the program.

Arizona’s social equity lottery and Missouri’s cannabis microbusiness program each illustrate the challenges and opportunities of creating and implementing social equity programs in a cannabis industry that is dominated by multi-state operators. Both states have attempted to address the historical and ongoing harms of cannabis prohibition and criminalization, and to create a more diverse and inclusive market. However, both states have also faced resistance and manipulation from powerful and well-connected actors, who have sought to undermine or co-opt the social equity goals. These states have also struggled with defining and verifying the eligibility and suitability of the social equity applicants, and with ensuring the fairness and transparency of the application and selection process.

If nothing else, these cases demonstrate the need for more dialogue, and collaboration among regulators and the public, and less lobbying by the industry’s conglomerates, if there is any hope of improving the design and execution of social equity programs. To say that this should be a necessary requirement to ensure accountability and effectiveness would perhaps be an understatement. Social equity is not only a matter of justice and morality, but also a matter of economic and social development. A more equitable and diverse cannabis industry can benefit not only the individuals and communities directly involved, but also local communities, entire states and society as a whole, by creating more jobs, revenue and innovation.

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