Ensuring social equity takes work
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Recently, the Social Equity Council approved five cannabis retail license applications, 15 cultivator license applications and denied all 14 of the Equity Joint Venture, or EJV, license applications. It is clear the SEC has been working hard to ensure that Connecticut’s cannabis industry is being fairly and transparently operated when it comes to social equity. But the SEC needs help, and the denial of all 14 EJVs is an indicator of the need for that help.
It was in this column on April 2 that I warned of the dangers of minority fronts, or in this case, social equity front organizations. Fronts are organizations that claim a certain legal status but do not meet those requirements. Usually, front organizations are funded by someone or a company not eligible to participate in the program but employ/use someone that does, and most of the profits go to the noneligible owners. I do not know the specifics of why those 14 EJVs were denied provisional licenses, but I suspect they did not pass the smell test.
There are steps that EJVs can take to assure that the SE partner(s) in EJVs are substantial and meet the requirements of the law. First and foremost, the social equity participant in an EJV must have enough skin in the game to be legitimate.
This skin comes in two forms — cash and time. If the SE partner in the EJV does not have the cash to invest in the EJV, they need to buy their equity with time in the business. Either way, the SE partner must be eligible to receive a significant portion of the profits generated by the EJV commensurate with their ownership share. Any attempted EJV that does not provide adequate and appropriate profit shares will and should be denied a license.
The fix for this problem is for companies and organizations seeking EJV licenses to understand how to organize these companies to meet the requirements. Too often, these organizations attempt to cut corners on the issue of the full participation of investors who meet the state’s definition of SE investors. I have also argued in this column that the SEC should consider publicly owned cannabis retailers, particularly in the big cities, if EJVs are not going to be licensed.
Social equity in cannabis also requires those most negatively impacted by the illegality of cannabis to have employment opportunities in the industry. Thousands of Connecticut Black and brown men and women were arrested for cannabis possession who had their lives turned upside down. It would be fair if these individuals who may not be able to own firms in the industry should at least have opportunities to work in the industry. To accomplish these goals, the SEC needs the help of the governor and the General Assembly.
Because cannabis is illegal at the federal level, cannabis businesses and organizations that can support the achievement of social equity have their hands tied behind their back. For example, any nonprofit that receives federal support cannot use any of that federal support to support cannabis businesses or social equity workers.
Now you might ask: why do nonprofits want to support cannabis businesses? One reason is that we have an extensive workforce development infrastructure in the state designed to train workers. (I am a consultant to one of the larger workforce development agencies. The Workplace does provide worker training and could provide this training for SE cannabis workers.)
Connecticut’s cannabis law specifically has a goal to employ workers who were negatively impacted by the illegality of cannabis. Many of these workers are already being trained by workforce development organizations in the state, but none of these organizations can use the federal funds they rely on to train cannabis workers.
The long-term fix for this problem is for the US Senate to pass the HR 3617 “The Marijuana Opportunity Reinvestment and Expungement Act” that was passed in the House of Representatives in April. This law would remove cannabis as a controlled substance, thus eliminating the prohibitions of federally chartered banks from accepting deposits from cannabis businesses and allowing federal funds to be used to support programs designed to train cannabis workers who were criminalized by federal cannabis laws.
The short-term solution is for Gov. Lamont and the General Assembly to support the state’s workforce development organizations so that they can train impacted workers to find jobs in an industry that will create thousands of good-paying jobs in the state. Without state support for workforce development, many of the licensees will have no credible source to turn to for trained social equity workers. Some private and public universities might attempt to fill the training void, but this path is not as likely to attract workers with a cannabis criminal history because of the cost of training in academic institutions.
This support for the state’s existing workforce development system could be funded by license fees paid by license applicants and by direct payments by licensees to workforce development agencies.
The state also needs to support similar nonprofits that have a history of supporting businesses run by minorities and women. Social equity cannabis ventures will need financial, management, technology, and other support to be successful in what will be a very competitive industry. Unlike some of the national companies coming into the state, these truly social equity cannabis companies will have a short runway to become successful.
We must do more than say what we want to happen. To ensure social equity in cannabis we must invest in SE entrepreneurs and SE workers.
Fred McKinney is the co-founder of BJM Solutions, an economic consulting firm that conducts public and private research since 1999, and is the emeritus director of the Peoples Center for Innovation and Entrepreneurship at Quinnipiac University.
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