The Emerging Cannabis Industry Needs Targeted Capital and Is in Danger of Suing Itself to Oblivion

When Illinois passed its adult-use cannabis legislation in June of 2019, the future for the business in the state looked bright. Since then, though, it has hit the rocks, mired down by a failure to achieve social equity goals and a string of lawsuits that have held up licensing, especially in the areas of craft growers and retail dispensaries. Even a cursory glance at the OBEDIO™ data and analysis that can be found at thcregs.com shows that things are moving a lot slower than hoped in the state. The state still hasn’t added to the initial 110 retail licenses issued, and even they are now in question following the most recent lawsuit filed.

There is hope. The Illinois legislature has refined the lottery rules for the latest round on or before December 21st this year, when they will issue fifty additional dispensary licenses. That will help with the immediate issues, but there are more fundamental problems that need to be addressed.

The Problems

The two main problems causing the delays are inherently linked and are also indicative of problems in the emerging cannabis industry elsewhere. Illinois, like other states, attempted to give an advantage to communities and individuals disproportionately affected by the “war on drugs” and to local residents, by giving both groups a scoring advantage in the rating system used to allocate licenses to applicants. The problem is that when you give one group an advantage, that obviously means that you disadvantage others and that, according to the basis of the most recent suit, violates the constitution.

I am not a lawyer and do not intend to get into the legal merit of the case, but the very fact that it exists, along with countless other suits both in Illinois and elsewhere that have been filed to protest social equity measures in adult-use legislation, is itself a problem for the industry. The Law is many things, but speedy is very rarely one of them, and delaying the opening of businesses is sucking enormous amounts of capital out of a very young and undercapitalized industry. For potential small business entrepreneurs, including most of those social equity applicants, that is often fatal.

As I said, this is not confined to Illinois. A San Francisco study in 2020 found that two years after the licensing process began there, only the 37 licenses granted to existing medical dispensaries were operating. For most small businesses, two years of paying rent, salaries, and other expenses before a dime of revenue is brought in is an impossible hill to climb, and even those that survive will start operating at a huge disadvantage to larger, better capitalized concerns. If you add massive legal fees that are becoming the norm to that mix, the size of the problem is obvious.

There are two separate, but linked issues here. The first is that, after literally centuries of discrimination, there just isn’t enough money in disadvantaged communities to provide the kind of capital required for success without more conventional outside funding. This can be addressed, as it was with regulation in the brokerage industry that mandated a percentage of business done by minority brokers. It took time in that case and was far from perfect in the early days, but ultimately led to some degree of equity in a business that had typically been inaccessible to minority communities.

The second is that, while lawsuits from those who feel that they are now being discriminated against are understandable, they are short-sighted and risk destroying the young industry before it gets going. The cannabis business is not without its enemies and using lawsuits to effectively concentrate the benefits from it into the hands of big business helps them. It reinforces the belief that the industry is about the exploitation of the poor and weak to benefit the rich and strong. That was the case in the illegal market but if the industry is to grow, both in size and acceptance, it cannot be so as legalization moves forward.

One answer may be to adopt the approach of Florida, legislation without any social equity component. The problem there, though, is also one of image. Much of the support for adult-use proposals comes from those who believe it can be an agent for positive change in wealth disparity between communities. Without it, you risk losing their support, particularly at the federal level, and once again reinforce the exploitation argument.

The Solutions

The first problem, a lack of capital, particularly among social equity applicants for licenses, can be addressed to some extent by grants and funding, although the experience of Oakland, CA where defaults on interest free loans are becoming a problem, suggests that that too can create its own problems. As with so many issues in the industry, a change to federal law that would give access to traditional banking and make federal grants and assistance possible is probably the best way forward.

The answer to the second problem is relatively obvious and simple but is in some ways less likely to happen. The adult-use cannabis industry needs to stop eating itself by filing lawsuits that really benefit only the lawyers, and to start prioritizing the long-term success of the industry over perceived short-term gain. Given the oft-quoted litigious nature of America and the equally well-covered short-sightedness of the modern business community, though, I’m not holding my breath while I wait for that to happen organically. That means that future laws and regulations need to be written with potential litigation of that nature in mind. This too would be helped by federal recognition of the industry that would enable some protections to be written into the laws of the nation.

Young industries are competitive by nature, but they are also often vulnerable and, ultimately, federal law needs to change to make adult-use cannabis fulfill its true potential. At the very least, federal decriminalization of the business is needed to give the industry access to traditional banking and capital markets. For now, though, it is important that states and entrepreneurs protect their already substantial investment in adult-use cannabis themselves and a good start on that front would be for local authorities to make provisions to close the capital gap, and for the industry to stop suing itself into oblivion.

This article was written based on the data and analysis available to potential investors in the cannabis industry at thcregs.com. Click on the link for more information.