The road to riches

Social equity delayed in pot business

click to enlarge ILLUSTRATION BY CHRIS BRITT
Illustration by Chris Britt

Dr. Lawrence Hatchett says he feels like he's stuck in a desert.

He grew up in Colp, a southern Illinois village once known as a safe place for African Americans amid sundown towns where folks who weren't white couldn't venture after dark. Basketball was his ticket out. Good enough to land a scholarship at Marquette University, he didn't star but went on to graduate from medical school at the University of Chicago. After a residency in North Carolina, he landed a fellowship at Harvard and ultimately returned to the region of his upbringing, where he practices urology in Marion.

"My best friend, he went to prison; I went to Harvard," Hatchett says. "He's still my most trusted friend."

If all goes well, Hatchett hopes to help folks like his friend by getting into the cannabis business – with a little help from the state and perhaps Doc Rivers, who coaches the Los Angeles Clippers and played college ball with Hatchett, who says he's contacted his former teammate asking if he'd like to invest.

Hatchett is waiting for the state to decide whether he'll get licenses to grow and sell weed. By now, he should know. The law says that 75 dispensary licenses were supposed to be awarded on May 1, and 40 licenses to grow pot were due on July 1. But, like hundreds of other applicants for pot licenses in what experts predict will be one of the nation's most lucrative weed markets, Hatchett is waiting long after deadlines have passed.

State regulators blame coronavirus for delays. Hatchett, who is seeking two grow operations and 10 dispensaries, says he's spent $200,000 on the venture with no guarantee of a return. Each application can consume hundreds of pages, fueling a cottage industry of lawyers and consultants to provide guidance and advice on negotiating regulations to come up with a winning plan. Those who want to grow pot must show they have sites available, which can mean paying for options on real estate if applicants don't already have property.

"I'm like a camel that's out in the desert, and I need some water," Hatchett says. "I'm at the point of no return."

Loopholes and going slow

Hatchett and his partners have plenty of company. The state has received thousands of applications for licenses to grow or sell pot, mostly from folks who claim social equity status under a provision designed to give the disadvantaged a leg up.

Dispensaries and cultivation centers now in business that began as medical marijuana operations are mostly white, and often corporate, undertakings. The state says it wants people impacted by the war on drugs to profit from pot, and so it has established a licensing system designed to benefit "social equity" applicants. With 20 percent of the grade based on whether an applicant qualifies under the social equity program, it is the single biggest consideration in awarding licenses.

Hatchett says that he's been approached by well-heeled investors who wouldn't qualify as social equity applicants. " 'Do you really want to do that application on your own – are you sure you don't want to join us?'" he recalls.

The Illinois Department of Financial and Professional Regulation has received 4,517 applications for dispensaries, with 4,400 coming from applicants who say they qualify for social equity points. Entities can have more than one license, and of more than 900 entities that have applied, more than 800 have claimed social equity status, the department says. The Department of Agriculture has received 853 applications to grow, transport and make edibles and other non-smokable products from cannabis, with 721 of the applicants asserting they qualify under the state's social equity program.

The numbers make Hatchett wonder.

"How can there be such a high percentage who say they are social equity applicants?" he asks.

Akele Parnell, attorney with the Chicago Lawyers' Committee for Civil Rights, has an answer: The law has loopholes, he says, and the definition of "social equity applicant" is overly broad.

"I've seen a lot that makes me wary," says Parnell, who was a lawyer for Green Thumb Industries, a Chicago-based marijuana company with stock traded on the Canadian stock exchange, before taking his current job last year.

click to enlarge Dr. Lawrence Hatchett has applied for licenses to start 10 dispensaries and two grow operations.
Dr. Lawrence Hatchett has applied for licenses to start 10 dispensaries and two grow operations.

People who've been arrested on marijuana charges but not convicted, whether as adults or juveniles, qualify, as do people who've been convicted. Spouses, parents and children of people who've been arrested or convicted of pot offenses also qualify. And so a wealthy person who hired top-notch lawyers to handle his son's arrest for pot possession would meet the standard, Parnell notes. He uses the example of George W. Bush, who was once arrested for driving under the influence: If it had been weed, Bush and his parents – if they were still alive – and his daughters would all qualify as social equity applicants if they moved here (the law requires that social equity applicants, but not other applicants, live in Illinois). Eric Clapton, who beat the rap in 1968, also would qualify, as would Snoop Dogg, who's been busted more than once.

Where someone lives, or has lived, can also make a difference. Based on demographics that include poverty rates and arrest statistics, the state has identified census tracts deemed to have suffered disproportionately from the war on drugs, and people who have lived in such areas for at least five of the past 10 years qualify. The areas include Jerome, which is adjacent to a dilapidated apartment complex that's been cleaned up, and Humboldt Park in Chicago, where gentrification has taken hold, Parnell says. And so a well-off Humboldt Park denizen who doesn't know anyone who's been arrested could qualify, as would Jerome Mayor Mike Lopez. Dr. Hatchett says he qualifies by virtue of living in a census tract deemed disproportionately impacted.

Parnell also sees a loophole in a provision allowing license seekers to qualify as social equity applicants if they have at least 10 employees and more than half live in areas deemed disproportionately impacted. Employees who've been arrested or convicted of marijuana offenses also count, as do employees who have spouses, parents or children who've gotten busted for low-level marijuana crimes. Parnell notes that there is no requirement that applicants keep such folks on the payroll once licenses are awarded. The entire provision, he argues, should be abolished: Ownership, he says, is what should matter, not whether applicants have hired disadvantaged people.

Parnell also argues for a tiered approach. A rich person with a relative who got busted for weed but was never convicted shouldn't be treated the same as a poor person who served time for pot. Instead, he suggests, give more consideration to people who have suffered the most.

"I think there's going to be a lot of folks who win who are not social equity applicants in the spirit of social equity," says Parnell, who predicts that nearly all of the licenses will go to social equity applicants. "My prediction is, less than 50 percent, maybe 25 percent, will be real social equity applicants. That's a little cynical. I hope that's not the case."

The law also rewards applicants who submit diversity plans that explain how they would provide opportunities in management, contracting and employment. In the case of grow operations, a diversity plan can earn an applicant 100 of a possible 1,000 points, more points than can be gained with plans to train employees or ensure product safety and accurate labeling. Points are awarded in 12 categories, with only social equity status, plans for security and recordkeeping, and business plans that include financing sources and evidence of business acumen carrying more weight than diversity plans. While operators will be required to submit diversity reports when renewing licenses, it's not clear how the state will ensure that diversity plans submitted by successful applicants will be carried out.

Applications are not subject to public disclosure, but the importance of diversity plans was evident last month, when backers of a proposed Pleasant Plains grow operation told neighbors that owners would concentrate on hiring minorities. Chris Stone, who's been in the pot business since the state legalized medical marijuana, explained the proposal to neighbors and said that employees who've been with the company for more than three years will get stakes through a stock ownership program after the business has been in operation for five years.

"The owners...want to provide opportunity for the creation of generational wealth for those that do not have these opportunities currently," backers wrote in a handout distributed to neighbors who attended an informational meeting.

Also, there is a question of scale. Each of the 21 existing cultivation centers established when medical pot was legalized can grow 210,000 square feet of marijuana for recreational use; there is no cap on how many square feet of medical marijuana can be grown. No more medical cultivation licenses will be issued under current law, and no additional large-scale cultivation centers for recreational pot are anticipated. New growers will be capped at 14,000 square feet at full build out. Parnell asks why startups shouldn't be allowed to establish grow operations as large as ones now allowed in an industry dominated by white people.

click to enlarge LInes are common outside Illinois pot dispensaries, where nearly $240 million worth of pot and cannabis products were sold  during the first six months of this year despite shortages. - PHOTO BY BRUCE RUSHTON
Photo by Bruce Rushton
LInes are common outside Illinois pot dispensaries, where nearly $240 million worth of pot and cannabis products were sold during the first six months of this year despite shortages.

"The larger ones are going to benefit from economy of scale: It's not a competitive business model," Parnell says. "Can you even survive and, if so, for how long? That's not something that's talked about a lot, but it should be, and it will be."

Toi Hutchinson, a former state senator who helped push the pot legalization bill through the legislature last year and now oversees the state's recreational cannabis program as an adviser to Gov. JB Pritzker, acknowledges that tweaks might be needed as the state gains experience.

"As a former legislator, I know there's no such thing as a perfect piece of legislation – I came into this knowing that my whole role would be to identify what we figured out in the beginning and what we're learning as we go," she says. "This is a growth industry that's going to adapt and change and move."

There's nothing to prevent successful applicants who meet social equity requirements from selling licenses, although reduced licensing fees as well as state grants and low-interest loans reserved for social equity enterprises would have to be repaid if licenses are sold within five years of being granted. Larry O'Hern, who owns a Fulton County cultivation center and an interest in a Peoria dispensary, says entities that stand little chance of winning licenses are watching. "There are multiple companies from out of state, like hawks on a fence, waiting for them to be awarded so they can pick them off," he says.

While Hutchinson says the state's cannabis program is set up to promote diverse ownership that endures, there are no guarantees, and licensees can do what they wish with licenses once they are awarded. "I do not want to reduce the property rights of a minority owner so they have less property rights than white counterparts," Hutchinson said.

Hutchinson said uncertainties are why Illinois has adopted a go-slow strategy. The limited number of Illinois dispensary and growing licenses each will come with five-figure annual fees to successful applicants. The law also decrees how many dispensaries will be allowed in given cities. Springfield, where two dispensaries now do business and licenses for two additional dispensaries have been issued, has been allotted one new dispensary in the initial round of applications. By the end of next year, the state is due to issue another 110 dispensary licenses and an additional 60 licenses to grow marijuana. Beyond that, the state has set a hard cap of 500 recreational dispensaries and 150 new recreational grow facilities.

Other states have issued far more licenses, more quickly, and without geographic restrictions. The law requires Hutchinson to deliver a report next spring on whether discrimination exists in the industry and what might be preventing people from entering the pot business.

"We'll be looking at how ownership changes, how it actually ends up growing and changing in real time," Hutchinson said. "These are all reasons why this is a slow, multiyear, phased approach. ... When we get through this phase, we will study this whole process, how it started, how the application process worked, who got licenses, where are the barriers, what does the industry look like."

"We're super-excited"

Dr. Hatchett lauds the goal, and he agrees with limiting the number of licenses. "I give credit to Illinois for this process – I really think they're trying to do it the right way," he says. But the wait has not been easy.

click to enlarge Former state Sen. Toi Hutchinson, who helped write the marijuana bill and advises Gov. JB Pritzker, says that starting slow is best.
Former state Sen. Toi Hutchinson, who helped write the marijuana bill and advises Gov. JB Pritzker, says that starting slow is best.

"It's stressful that we're being put on delay," he says. "We're praying for September."

Hutchinson blames coronavirus for delays in granting licenses that were due in May and last month. The General Assembly, due to a truncated session, didn't pass legislation setting tiebreaker rules in the event top applicants have identical scores, she notes. Absent rules written into statute by lawmakers, the state Joint Committee on Administrative Rules, which establishes rules necessary for agencies to oversee laws, must approve rules. The earliest that can happen is next month.

Also, the application scoring process has taken longer than expected. The state has hired KPMG, an accounting firm, to score applications for dispensaries and growing operations, and more applications were submitted than expected. According to a recent report in the Chicago Sun-Times, the state's contract with KPMG has ballooned from $2.5 million to $6.7 million. The newspaper also has reported that the contract required KPMG to physically pick up applications for dispensary licenses, which wasn't possible because the firm instituted a travel ban in response to the coronavirus pandemic.

Parnell says some applicants are skeptical that a travel ban could delay license awards for this long. "A lot of folks are suspicious, I'll say that," he says. "What's the real cause of it? I don't know." But Parnell doesn't dispute that rules to resolve ties are needed, in part to avoid litigation from losers.

Given the number of applicants, there will be plenty of losers. Still, experts say that Illinois is among the most promising marijuana markets in the nation, with predictions of annual sales ranging as high as $4 billion once there is sufficient product and retail outlets to meet demand. During the first six months of this year, nearly $239.2 million in weed, edibles and other cannabis products were sold in the state's 55 recreational dispensaries. Recreational pot isn't legal in any state that touches Illinois, and nonresidents accounted for $56.8 million of the total.

"With its permissive laws for visitors and intelligently constructed plan to make medical dispensaries the first (recreational) dispensaries, the state seems primed for an effective transition and the opportunity to bring in massive business from neighboring states," wrote attorneys for Thompson Coburn, a law firm, in a 2019 ranking of states based on how favorable they are for pot businesses. The silk-stocking firm, which provides legal advice to marijuana businesses, includes such past and present partners as John Cullerton, former Illinois Senate president, Kit Bond, former Missouri governor and U.S. senator and the late Thomas Eagleton, former U.S. senator from Missouri.

Illinois shot from number 18 to number 6 in the firm's rankings, thanks to legalization of recreational pot and a regulatory scheme the firm calls "expansive and canny." Other top-tier states include Oregon, Colorado and Nevada, which have granted far more licenses at lower cost and with less bureaucracy than Illinois. "I would say it comes down to your preference in business," says Michael Rosenblum, a Thompson Coburn lawyer who helped prepare the rankings. "If you feel you can acquire a limited number of licenses, barriers to entry will protect you." On the other hand, small businesses, he says, might prefer states with large numbers of licenses issued at low cost because it's easier to get started.

In a June appearance on "Mad Money," a CNBC television program on the stock market, Ben Kovlar, CEO of Green Thumb Industries, set the future value of the Illinois market at $3 billion. "There are going to be many, many, many winners," he said. "We're super-excited about the Illinois market."

click to enlarge Akele Parnell, a lawyer for the Chicago Lawyers’ Committee For Civil Rights, sees loopholes and predicts that fewer than half of licensees will meet the spirit of the law designed to create social equity.
Akele Parnell, a lawyer for the Chicago Lawyers’ Committee For Civil Rights, sees loopholes and predicts that fewer than half of licensees will meet the spirit of the law designed to create social equity.

GTI, which has two large cultivation centers and five recreational dispensaries in Illinois along with operations in 11 other states, plans to establish an incubator program for startups, which is one way established companies can meet a state requirement to provide financial assistance and otherwise help new licensees. Another way is to write checks for deposit into a state fund set up to provide loans and grants to social equity enterprises. In its most recent annual report, GTI says it has partnerships with other enterprises in four states, including Illinois. "The company structures its joint ventures on a case-by-case basis but generally maintains operational control over the joint venture business and a variable economic interest," the company says.

Partnerships are welcome, Hutchinson says. "It's a fact that small businesses are competing against very big businesses," she says. "I'm hoping to see a lot of these small enterprises hook up or partner. I love to hear entrepreneurs think about it in a very fulsome way."

It is better for regulators to go slow and small at the start than big and fast, Hutchinson says, because what happens now will define the future. "I can't erase the fact that the medical (marijuana) industry existed for six years before we did this," she says. The state, she says, needs to be cautious. "You can't go backwards, you can't unring that bell," she says. "Once they're there, they're there."

Meanwhile, applicants wait. Despite requirements that growers not discriminate in selling product to dispensaries, Hatchett says he needs a growing facility in addition to dispensaries to ensure an adequate supply of product. He isn't banking on getting everything he's asked for.

"If I get more than one location, I'll be tremendously happy," he says. "We're going to have diversity and we'll try to be as independent as possible and bring in people of color."

Contact Bruce Rushton at brushton@illinoistimes.com.

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