What Maryland Tells Us About the Future Of Competitive Cannabis Licenses

Several weeks ago the Maryland Medical Cannabis Commission finally announced the top scoring applicants for the state cannabis grow and processor licenses.  These coveted licenses were awarded after an unusually long selection period that left many wondering if the wait would ever end.  For a great breakdown by the Washington Post of the companies selected for licenses, check out more information here.

Maryland’s decisions reflect one of the last competitive application processes as we have come to know them.  Both Ohio and Pennsylvania are on the horizon for a competitive medical cannabis application, and Arizona is shuffling through the 750 lottery applications they received for 31 licenses, but we most certainly are at the beginning of the end.

On the heels of similar decisions in Hawaii, Florida, New York, Minnesota, and others before them, what commonalities can we see in the results?

  1.  $$$.  For starters, there is no doubt these hyper-competitive processes require significant cash.  Non-refundable application fees of $25,000 and annual licensing fees of up to $200,000 set the stage for the kinds of resources that are required.  But these fees pale in comparison to the costs of establishing large-scale cannabis growing operations that can exceed $10,000,000 per facility.  If your team scrounges up the bare minimum financial backing required by regulators, chances are you will not be awarded a license.
  2. White Males.  There is no disputing that the competitive medical cannabis states have been sorely lacking in racial and gender diversity among their leadership.  As someone that helped create scoring systems to incentivize minority ownership among applicants in Illinois, it is an issue that I care deeply about.  There is no arguing that, so far, we have collectively failed to create industry ownership that recognizes and empowers those communities most harmed by the decades-old War on Drugs, let alone reflect the populations these medical cannabis businesses serve.  Kudos to Pennsylvania for including a mandatory diversity plan in their medical cannabis law and draft regulations.  For more context about minority leadership in the cannabis industry, check this out.  Hopefully this will not reflect a long-term trend (no disrespect intended for my fellow white guys out there).
  3. Local Ownership and Local Support – Regardless of whether your core team is born and raised locally, a recurring theme across these competitive states is that local investors and local community support are mandatory.  Some states have delegated a virtual veto-power to local towns that do not want cannabis businesses in their backyard (see Massachusetts).  Hawaii was an unusually residency-centric application process, and Florida set the eligibility bar by requiring floral nurseries with 30+ years experience growing plants.  As Ohio and Pennsylvania develop their regulations, expect explicit and implicit requirements for local support.  Any applicant struggling with local zoning needs to find a new town to hang a shingle.
  4. Selection Processes Work, But Are Messy – A fundamental question government regulators face when there is a limited number of licenses to award: “how do we pick winners and losers?”  If there is a better way than a merit-based, competitively-scored selection process, I’ve never seen it.  I take issue with the lottery system used in Arizona (trust me, watch this video), which means someone, somehow has to pick something approaching 1 winner for every 10 applicants.  Others have suggested an auction to the highest bidder (see #1 and #2 for why that’s problematic).  The odds vary depending on the state, region, type of license, etc., but ultimately a process must be created for licensees to be chosen.  The best selection processes have transparency (the public is informed about the process, clear articulation of the point system, criteria are plainly identified) and do absolutely everything imaginable to protect against actual or appearances of impropriety at a time when the public automatically distrusts government and assumes shady dealings.  Each selection process going back to Massachusetts and Connecticut have drawn criticism and lawsuits, but they have also generally identified the better (if not best) applicants in the pool.
  5. Building the Most Experienced Team – One trend that has received less attention is the increasing premium placed on an exceptional team of experts.  Consider, if you will, an applicant with $5 billion in assets and billions in debt (let’s call him Blonald Lump).  Mr. Lump has a decent grower from a recreational cannabis state who has been growing cannabis “for 30 years” (you do the math) and several former Wall Street bankers.  If Mr. Lump is facing a team with $7.5 million cash on hand, deep and longstanding ties to the local community, a cultivation and processing team that has years of experience in legal markets and an unblemished record, a nationally-recognized former law enforcement officer, and business executives from multiple industries, Mr. Lump loses even though he is used to “winning.”  Applicants are increasingly becoming more sophisticated in writing a great application narrative that appeals to regulators – and it is starting to all blend together.  The narrative itself is not a great way to choose licensees – it is the substance behind the applicant, and the experience of the team members that states are increasingly using to pick the best of the best.
  6. There Is No Guarantee, No Silver Bullet – If anyone ever guarantees you a license prior to a competitive merit-based selection, run in the other direction.  Applicants that were very successful in previous medical states often fail to get a license in future states.  Consultants that work with 10 teams in a state that issues 5 licenses is not likely to win any licenses for their clients.  Each state has been unique, and you need to take the time to understand the culture of the state, the intentions behind the regulations, and the goals behind the selection criteria.  Each new state looks to those that came before them for best practices, and traps to avoid.  I spent time speaking with every single medical cannabis program that came before Illinois, and I guarantee you new regulators in developing states will do the same.  Each state puts its own stamp on their program, and what worked in one state 6 months ago very well could hurt you in the next application.

If you are looking to apply in Ohio or Pennsylvania, or any future competitive state – study the regulations, focus on your real estate, and build the strongest team that you can.  It is an exhilarating process competing for a medical cannabis license in an industry that is truly helping people, and I wish you all the best.

 

A Cannabis Program Without Lawyers. What Could Possibly Go Wrong?

This blog has documented many of the unusual and challenging aspects of the cannabis industry.  Aside from lack of banking, inequitable taxation, and constant pressure from the federal government, we are increasingly seeing state cannabis laws implemented with lawyers forced to the sidelines.

How can this be?  In an area where state regulation is what keeps the feds at bay, and the legal risks and nuances are endless, who would want attorneys to be barred from assisting?

Yet, that’s exactly where we are headed in some states.

It has become common for new cannabis states to briefly grapple with how, and when, lawyers can assist cannabis clients.  For a thorough review of the problem, see our earlier guest blog here.  Typically a professionalism board will freak everyone out and suggest that a lawyer can’t help a cannabis client on a license application, or the lawyer can’t invest in a cannabis business – only for the state Supreme Court or comparable authority find a way to let lawyers do their job.

Until they don’t.

It was a close call in Hawaii as the application date approached, and Illinois had some lawyers sweating as we awaited a change to our Rule 1.2(d).  But some states are still on the fence.

New Mexico is giving lawyers indigestion with their latest advisory opinion which seems to allow limited attorney representation of cannabis businesses nine (9) years into their program.  And Ohio has (at least temporarily) frozen out lawyers from assisting businesses applying for medical marijuana licenses.  What does that mean, exactly?  Read for yourself:

Under Prof.Cond.R. 1.2(d), a lawyer cannot deliver legal services to assist a client in the establishment and operation of a state regulated marijuana enterprise that is illegal under federal law.  The types of legal services that cannot be provided under the rule include, but are not limited to, the completion and filing of marijuana license applications, negotiations with regulated individuals and businesses, representation of clients before state regulatory boards responsible for the regulation of medical marijuana, the drafting and negotiating of contracts with vendors for resources or supplies, the drafting of lease agreements for property to be used in the cultivation, processing, or sale of medical marijuana, commercial paper, tax, zoning, corporate entity formation, and statutory agent services. See also, Colo. Op. 125 (2013).  Similarly, a lawyer cannot represent a property owner, lessor, supplier or business in transactions with a marijuana regulated entity, if the lawyer knows the transferred property, facilities, goods or supplies will be used to engage in conduct that is illegal under federal law.  Even though the completion of any of these services or transactions may be permissible under Ohio law, and a lawyer’s assistance can facilitate their completion, the lawyer ultimately would be assisting the client in engaging in conduct that the lawyer knows to be illegal under federal law.

That is the equivalent of going into surgery to have a gall bladder removed, but your physician got tied up and couldn’t make it, so you’ll just use your cousin Earl who has watched a bunch of Grey’s Anatomy.

Alas, maybe our blood pressure is needlessly rising – looks like the Ohio Supreme Court may step up to fix the problem.

Perhaps the lesson here is that we may not appreciate the value of attorneys until we’re told we can’t use them – especially in an industry as risky as cannabis.