State cannabis regulators fear investors are exploiting minority entrepreneurs
Photo | Monica Busch
Ross Bradshaw stands inside New Día, located in what were previously three different shop fronts, which were remodeled for the adult-use dispensary. The process to open the dispensary took several years, during which Bradshaw received offers from outside investors to help him through the process, although he spurred their offers in order to keep majority ownership.
Massachusetts marijuana regulators are concerned about a recent significant uptick in reports of potential industry investors who targeted economic empowerment and social equity program entrepreneurs with unfair contract terms.
In recent weeks, the state Cannabis Control Commission has heard a growing number of complaints about terms proposed during contract negotiations that put undue pressure on entrepreneurs and could violate the commission's regulations for marijuana business or even state law, officials said Thursday.
The CCC plans to boost its educational efforts and partner with other state agencies on enforcement where necessary to help those looking to open marijuana businesses -- particularly those disproportionately impacted by years of criminalization before the substance was legalized -- avoid being taken advantage of during negotiations with investors.
Commissioners have taken aim at inappropriate contracts in the past, and the latest round of reports over the past two months appears to be related to the developing marijuana delivery sector, according to CCC Chairman Steven Hoffman.
"This is an issue we've been concerned with for a while and focused on for a while and there has been a recent uptick," Hoffman told reporters after the commission's meeting. "The fact that there's so few alternatives available to some of these applicants means that they're probably more open to considering some of these terms than they would be if they had some other options."
CCC staff said they have received regular reports in recent weeks of negotiation efforts that could put unfair pressure on entrepreneurs or violate state regulations, such as attempts to hide true ownership with layered management fees or by imposing aggressive loan terms that could lead to an entrepreneur losing control of the business.
Hoffman said he could not put an exact estimate on how many incidents have occurred recently, but he said he personally has received between 10 and 15 complaints in the past two months, most of which are tied to negotiations over delivery operations.
Under a framework the CCC approved in November for adult-use home marijuana deliveries, social equity program participants and economic empowerment applicants for the first three years will be the only entities able to apply for delivery-only licenses with the ability to buy marijuana wholesale.
CCC Chief Communications Officer Cedric Sinclair said Thursday that proposed contract clauses that would put an investor in a position to control the establishment after that three-year period if the licensee cannot meet loan terms are a "recurring theme" in recent complaints the agency has received.
"The most concerning aspect of these contracts is the aggressive repayment terms that increase the likelihood of an entrepreneur's business being underwater, requiring them to activate the aforementioned clauses and potentially lose managerial control of the business," Sinclair said.
Hoffman said based on anecdotal reports, many of the potentially problematic negotiations involve proposals that could inappropriately obscure control of a business or might involve potential violations of state usury laws that limit interest rates.
Commissioners have debated in the past about whether their jurisdiction extends to negotiations or only to contracts signed, but Hoffman said Thursday that the CCC is prepared to find and punish any instances where investors violate regulations.
"I view today as kind of a salvo in that direction, putting people on notice that we are paying attention and will take action," he said.
The CCC previously released a memo warning entrepreneurs about red flags they might encounter when dealing with investors, and the agency plans to revise it with some of the newly raised concerns. While officials were hesitant to describe ways that proposals might be violating state law, they said the CCC will work with other state agencies on enforcement.
"Unfortunately, there will always be investors who design relationships that technically fall within compliance but are outside the spirit of our regulations and may ultimately amount to bad business decisions for the applicants and licensees," Sinclair said. "However, some of these terms and conditions appear to be afoul of state law and may lay within the jurisdiction of other commonwealth agencies."
The nascent home-delivery business for recreational marijuana is starting to take shape in Massachusetts. On Thursday, the CCC authorized We Can Deliver Boston LLC to receive the state's first final license for a "marijuana courier," one of two types of licenses created under the regulations.
"It will not be the last by a long stretch, but I think it's really important to recognize this milestone," Hoffman said during the meeting. "It's an incredibly important part, as you all know, of our quest for equity in this industry as well as being responsive to customer requests."
Couriers can deliver products from CCC-licensed retailers and dispensaries directly to consumers' homes. The other license type, marijuana delivery operators, will be able to purchase products wholesale from growers and manufacturers and sell them to their own customers.
Speaking with reporters after the meeting, Hoffman said the application for delivery operators should be posted by the end of the month, after which it could take several months to advance hopeful licensees from provisional status to final approval.
The home-delivery regulations initially faced a lawsuit from the Commonwealth Dispensary Association, but the group representing many brick-and-mortar marijuana shops dropped its legal challenge in January days after filing it in the face of public pressure.
"I view this as one of the most important decisions we've made as a commission and as big an impact on getting to equity in this industry as anything else we've done," he said.
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