Legalizing equity

Wednesday, August 14, 2019
Chicago Reader

Advocates say the adult-use cannabis legislation doesn’t go far enough to help diverse entrepreneurs enter the budding market.

If not for CBD, Marcy Capron Vermillion wouldn't have been able to stand on her own.

After injuring her spine in a kayaking accident, she had trouble standing without leaning on anything. The cortisone shots and other treatments weren't working, and she was left contemplating surgery. A couple of years ago, around her 30th birthday, her aunt gave her a bottle of ResQ organics cannabidiol, or CBD, oil. Only a few days after she consumed the CBD, she felt optimistic, a surprise for her as a person who'd suffered from clinical depression for a decade. Thankfully, her back pain had been greatly reduced.

From then on, she "got really religious" about CBD, experimenting and researching. A year later, she met serial entrepreneur Coco Meers, and together the two founded Equilibria, a women-focused CBD wellness product company.

Vermillion is one of many Illinoisans watching how the cannabis sector evolves now that the state legislature passed HB1438, which legalizes adult cannabis consumption and includes provisions for cannabis conviction expungements and resources for diverse entrepreneurs. While the bill somewhat lowers the barrier to entry to the cannabis industry, some worry that it gives the mostly white cultivators and dispensary owners an edge in the budding marketplace. Advocates also say it doesn't go far enough in its cannabis conviction expungement provisions, and could lead to discrimination against POC cannabis consumers.

It's difficult to determine just how homogenous Illinois's legal cannabis market is. The Compassionate Use of Medical Cannabis Pilot Program Act has provisions that require medical and adult-use cannabis companies to disclose their ownership demographics, but the diversity of the state's current market has largely been concealed. Under the state's medical marijuana law, agencies are forbidden from disclosing the contents of cultivation centers and dispensary application information.

To understand how many diverse applicants were denied entry into the state's cannabis market, the Reader filed FOIA requests for figures outlining how many dispensary and cultivation center applications the Illinois Department of Financial and Professional Regulation and the Illinois Department of Agriculture had denied from people of color, women, veterans, and people with disabilities.

The IDFPR denied the Reader's request for records, citing the law's prohibition of application information disclosure, but the Illinois Department of Agriculture said it had denied 22 applications from women, 11 from people of color, nine from veterans, and none from people with disabilities.

"We cannot speak to the decision of the previous administration to not track the demographics of dispensary applicants in a more consistent manner," an IDFPR spokesperson said in an e-mail. "The focus of this administration is to have the best data possible to track minority participation in the cannabis industry and to promote policies that remove barriers to entry for those communities."

The IDFPR spokesperson confirmed that about 4 percent of people with ownership stakes in cannabis dispensaries operating in the state are people of color, but the current law prevents the department from sharing their identities.

When asked whether the Illinois Department of Agriculture had made efforts to assist diverse entrepreneurs in establishing cultivation centers, the IDA spokesperson said the department couldn't provide assistance to any permit applicants in order to "ensure the integrity of this competitive selection process."

Some worry that the current cannabis companies will have too much power to expand. Current dispensaries aren't in predominantly Black or Hispanic neighborhoods, and they'll likely be able to expand into communities of color by the time craft growers and dispensaries enter the market, said Donte Townsend, communications director of Chicago NORML, a Chicago-area chapter of the national cannabis advocacy and education organization. The existing growers have the advantage of being able to stock up on plants and product, thus taking a larger share in the market, he added.

"To have 1 percent of shelf space in a dispensary, how much of a win is that?" Townsend said. "Take these crumbs, and if you can make some bread with it, a'ight."

Vermillion said existing cannabis companies with more money have the ability to lobby legislators for permission to open more dispensaries and create a monopoly. "If you decide to open a dispensary a mile away from one of theirs and you're like the mom-and-pop equivalent, they'll put you out of business easy," Vermillion said. "They'll be excited to do it."

Her instinct about the political influence of cannabis companies wasn't wrong. The Chicago Tribune reported that existing companies, their executives, and lobbyists have spent approximately $600,000 on political contributions since 2017.

Under the adult-use cannabis bill, existing dispensaries and cultivation centers are required to pay fees aimed at subsidizing newcomers from diverse backgrounds, including those from communities that have been upended by cannabis criminalization, said Illinois deputy governor Christian Mitchell. Existing dispensaries must pay $30,000 toward the Cannabis Regulation Fund, and existing cultivation centers must pay $100,000 to grow and sell cannabis for recreational consumption.

Luckily, Meers had put aside money to start a cannabis company. That funding plus Meers's personal connections enabled the company to acquire a farm for growing, researching, and developing their cannabis products. "We've been lucky that we've been able to use existing connections to raise capital and be in a place that's a little further along. But if all these things didn't come together, no, I don't think the company would exist," Vermillion said.

State representative Kelly Cassidy, the lead house sponsor of the adult-use legislation, said allowing existing cultivation centers to start growing cannabis for recreational use was the only way to ensure that there would be cannabis available by January 1, 2020. It can take a year or two for cannabis companies to find land that adheres to local zoning restrictions, not to mention that cannabis plants for recreational use will take time to grow.

Waiving 50 percent of fees for social equity applicants felt like a fair compromise between lowering the barriers of entry for disadvantaged cannabis entrepreneurs but also ensuring that they can run their business, Cassidy said. "That fee waiver is about trying to make sure that we put it in the realm of possible for folks," Cassidy said. "You do need to be able to come up with something. There does need to be skin in the game."

Though the bill provides reduced fees and financing for social equity applicants, some say establishing cultivation centers and dispensaries may still be cost prohibitive.

The funding for social equity applicants will at least curb the need for traditional bank loans. According to a 2017 Federal Reserve analysis, one in four Black-owned firms declined to apply for credit, with 56 percent of those Black-owned businesses stating that they didn't want to rack up debt and 60 percent saying they anticipated being denied. Out of the 17.7 percent of Black-owned businesses that applied for loans, financial institutions denied 53.4 percent of their applications, the analysis also found.

Beyond the pervasive gender and racial lending gap, many banks are apprehensive about serving companies in the cannabis industry. On the day that Vermillion spoke with the Reader, she said her company had problems with payments processors. While the 2018 Farm Bill legalized CBD hemp farming, dispensaries have an even worse time handling their money, because they can only accept cash, she added.

The costs levied by the state to enter the industry are steep. Under the adult-use cannabis legislation, cultivation center applicants must pay a nonrefundable license fee of $100,000, plus 5 percent of their total sales between July 1, 2018, and July 1, 2019, or $500,000, whichever is less. Dispensary license applicants must pay a $60,000 licensing fee plus an application fee of $5,000. Infusers must pay a $5,000 license fee and $5,000 for the application fee. Social equity applicants will have their fees reduced by 50 percent.

Although many entrepreneurs draw on family wealth to start a business, that option may not be available for Black entrepreneurs. For one thing, a 2017 Economic Policy Institute analysis of 2013 Survey of Consumer Finance data found that white Americans have an average of $678,737 in wealth compared to $95,261 for Black Americans. Even among college degree holders, the median wealth for white Americans was $180,500 compared to $23,400 for Black Americans, and the median wealth for white Americans with graduate degrees was $293,100 compared to $84,000 for Black Americans, the analysis found. Meanwhile between 1950 and 1970, Black home buyers bought 60,100 homes purchased under predatory contracts and paid on average at least $587 more in today's dollars per month than they would've paid with FHA loans, thus losing between an estimated $3.2 billion and $4 billion in today's dollars, according to a 2019 report by the Samuel DuBois Cook Center on Social Equity at Duke University.

Equilibria grows its industrial hemp at a farm in Commerce City, Colorado, and began selling its initial round of CBD products last fall. Owning its own farm allows the company to maintain quality control over its product makeup, Vermillion said. Opening a dispensary but getting cannabis from another farm could potentially compromise the quality of their products while saving them money and time in the short-term, she said.

"The response from the majority of my friends in this industry was that even the loans and the subsidies and various things they're trying to do to make it equitable were not enough," Vermillion said.

As entrepreneurs prepare to descend upon the cannabis market, individuals with cannabis convictions will begin navigating the expungement process. Though the state is authorizing the mass sale of recreational cannabis, the Illinois state legislature opted to offer expungement options based on the nature of the conviction, a sign of the lingering conservatism in lawmakers' attitudes toward cannabis legalization.

For people with minor cannabis offenses, meaning violations involving 30 grams or less, law enforcement agencies will automatically erase the violation from their records. Individuals with offenses involving more than 30 grams will need to petition the court to have their record expunged, or state's attorneys can move to expunge the convictions on their own.

Both Mitchell and Cassidy pointed out the oddity of imposing separate expungement processes for more substantial cannabis offenses under the new adult-use cannabis law given that the state will allow licensed businesses to sell cannabis in large quantities.

"With any legislative measure, you have to figure out what is the most relief you can get for the most amount of people while still being able to pass the bill," Mitchell said. "For more conservative Democrats and Republican legislators who are supportive in the house and the senate, that 30-gram line of something that's now going to be affirmatively legal under this legislative measure was what made sense for those folks."

Vermillion's husband, a combat veteran who suffers from PTSD, had gotten into some legal "trouble" when he returned home and was wrongfully convicted of a crime, she said. He is currently undergoing the expungement process.

As people with cannabis convictions pursue a clean slate under the new bill, advocates and business owners say there will need to be a broader education process for both consumers and aspiring cannabis entrepreneurs.

Chicago NORML plans to continue education efforts to inform people about how they can and cannot consume and produce cannabis once the law takes effect next year, Townsend said. Under the adult-use cannabis legislation, for example, only medical patients can grow cannabis at home. That was a blow to casual cannabis consumers looking to grow their own, but it was understandable for patients whose conditions make it difficult to go to the state's current dispensaries, Townsend said. The homegrown provision nearly killed the bill in the state legislature several times; the pushback against the homegrown provision stemmed from law enforcement officials who were concerned about the emergence of another black market, Cassidy said.

"There's just this perception that five plants is going to be enough for someone to become a major dealer," Cassidy said. "There's a fair bit of 'reefer madness' out there still, and that's what we were up against."

Chief among the things that cannabis consumers need to remember is that they can consume the substance at home but not in public spaces. The bill allows local governments to decide where to allow social use spaces for cannabis consumption, which is akin to allowing cigar clubs or hookah bars in certain areas, Cassidy said. Law enforcement will be watching for consumers and entrepreneurs to do something wrong, which means consumers of color especially need to be aware of what the rules are, Townsend said.

It's also important to have a proper protocol for determining how impaired someone is after consuming cannabis, especially given that cannabis highs are not the same as alcohol impairment. "Until we come up with a really good impairment protocol, that part does make me a little bit nervous that we're going to wind up with, to be honest, mostly people of color being pulled over and getting tossed into prison cells because they possessed something they bought legally and then someone says, 'I think you're impaired,'" Vermillion said.

Another potential problem with the new law is that workplaces can enact a zero-tolerance drug policy. Cassidy said cannabis consumers can report concerns to the Illinois Department of Human Rights or the Illinois Department of Employment Security if they feel they're unfairly targeted for drug testing or they have been wrongfully fired from their job. Given that marijuana remains federally illegal, some of the discrimination issues will be resolved by the courts, Mitchell said.

On top of being behind the established cannabis cultivators and dispensaries, new entrants into the recreational cannabis market will have to learn how to operate a business to be successful, said Seke Ballard, managing director of Good Tree Capital. His firm is looking to finance cannabis entrepreneurs who have shown potential to be successful business owners. "The head start that existing licensees get is probably the most disappointing component of the bill," he said.

Though the bill makes considerable strides toward shepherding diverse entrepreneurs into the market, industry insiders say up-and-coming cannabis companies could use other resources to get their businesses on the right track. For example, entrepreneurs in Oakland, California, and Texas can access incubators for cannabis entrepreneurs. Cannabis entrepreneurs will likely need help navigating the licensing application process as well as education on back-end business functions like accounting, managing inventory, and assessing metrics, Ballard said.

Commercial real estate doesn't come cheap in Illinois, and the existing coworking spaces aren't always the best fit, Vermillion said. "It would've been nice to have somewhere where we could've been like on a three-month lease and have warehouse space with it," Vermillion said. "My biggest complaint would be lack of community, lack of space to get started."

She said she was glad that the state has legalized cannabis, but she stressed the importance of making the market accessible to as many diverse entrepreneurs as possible to keep up with the state's demand for products and make cannabis accessible to everyone. Many of her company's clients are mature women, usually in their 50s or 60s, who are turning to CBD for help with sleep, pain, and anxiety. Those women might not feel comfortable with the environment of a typical dispensary, and "budtenders" might not even think to ask older customers whether they're taking additional medications, which taking cannabis products could inadvertently impact.

"We must have companies run by the same types of people that it is being sold to in order to have an equitable and fair way we handle the industry," she said. She paused for a second, searching her memory for any cannabis dispensary owners of color she knew. She couldn't think of any. 

 

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