Connecticut lawmakers are considering a bill that could change how quickly some cannabis business owners can sell their companies, but state officials are concerned about what effect that might have on the state’s fledgling marijuana industry.
The bill, House Bill 7178, deals specifically with what are known as equity joint ventures, which are business partnerships between well financed cannabis operators and “social equity applicants”—people who grew up or live in parts of the state that were hit hardest by the war on drugs.
State records show at least 38 cannabis businesses were created in that way in recent years. But some of the social equity applicants who formed those partnerships are now asking state lawmakers for permission to cash out after three years.
They need the legislature’s permission because state law currently prevents social equity applicants from selling their ownership stakes in cannabis businesses for seven years.
The creation of equity joint ventures was one of several ways that lawmakers tried to ensure individuals from historically disadvantaged communities benefited from the legalization of marijuana and had the opportunity to become entrepreneurs in the new industry.
To get a license, social equity applicants need to show they own at least 50 percent of the equity joint venture and prove that they live or were raised in one of several historically impoverished communities with a high rate of drug-related prosecutions.
Kennard Ray, one social equity owner, said he understands why lawmakers wrote the law that way in 2021. He said it was meant to protect social equity applicants, like himself, who were entering a business partnership with wealthier companies and individuals.
Lawmakers didn’t want other investors and operators to use social equity applicants to obtain a license and then force them out of the business once their dispensaries, cultivation facilities and delivery services were up and running.
“I do appreciate the many protections that have been put in place to ensure that folks aren’t just barreled over and pushed out of the business,” said Ray, who has an ownership stake in a cannabis cultivation facility and multiple dispensaries operating under the Fine Fettle name.
But now that he has several years of experience in the industry, Ray said he thinks the seven-year ban on him selling his ownership stake is too strict.
Ray and other social equity owners told legislators this year that they want more flexibility to divest when it makes sense for them, financially or personally.
They requested the ability to sell their businesses after three years of operations.
Derrick Gibbs, who helped found Budr Cannabis, explained to lawmakers during a March public hearing that a lot can happen in seven years, especially in an industry that is still maturing and evolving.
The value in a cannabis company could be impacted in the coming years by regulations, federal tax policy, financing issues or saturation in the recreational cannabis market in Connecticut.
“Seven years is a very long time in any industry, and much can change. If a venture isn’t doing well, seven years is a significant length of time for a person to be locked into an operation that is struggling,” Gibbs told lawmakers. “On the flip side, if a business is doing well, why should a social equity owner be prohibited from choosing to cash out at a time most advantageous financially?”
Ray put it this way: “One day you can be on a high. Your stock is up. And then the next day, whether through policy change or just because there’s an oversaturation of product, your business drops.”
Rep. Roland Lemar (D), who chairs the legislature’s General Law Committee, said he understands the reasons why cannabis business owners like Ray and Gibbs are asking for more flexibility to sell their stakes.
“I heard from a few joint venture holders that they wished they were able to sort of capture some of the value inherent in their ownership stake,” Lemar said. “They felt like they were likely to lose out on a lot of value if they had to maintain their ownership stake for the additional four years.”
But Lemar said he is still hesitant about changing the cannabis law that was passed in 2021 because of the effect it could have on the industry as a whole.
Requiring social equity applicants to hold onto their businesses for at least seven years, Lemar said, was also aimed at fostering local ownership in the industry and ensuring the market wasn’t dominated by large multi-state cannabis companies. And he said he is concerned about that goal disappearing if the law is changed.
“What do you end up with? What is the product you end up with after just three years? Is it more corporately controlled and less of the community-owned, community-supported ventures across the state?” Lemar asked. “I am really worried about this.”
The people who applied as social equity applicants and created equity joint ventures in the past couple of years knew at the time that they were required to maintain that ownership stake for seven years, Lemar noted.
Members of the state Social Equity Council, which oversees part of the licensing process for the cannabis industry, also voiced concerns about such a change.
During a recent meeting, Brandon McGee, the director of the Social Equity Council, said he was having discussions about the proposal but said the SEC had yet to decide whether it supported the proposal.
McGee, who did not return a call for this story, said one of the concerns was that social equity owners would disappear from the cannabis market altogether.
“I know that there are some social equity entrepreneurs who feel like we should just arbitrarily move it to three years and call it a day,” McGee said. “But that is not where we are at the moment.”
Cannabis store owners like Ray argue that no other entrepreneur in Connecticut is restricted from selling their company in the same way that social equity applicants are.
Ray pointed out that his partner Benjamin Zachs, an executive with Fine Fettle, isn’t barred from selling off his side of their jointly owned business. It’s only Ray who is limited from divesting as the social equity applicant.
Ray doesn’t have any immediate plans to divest from the dispensaries he operates in Manchester and several other towns and cites, but he said he wants to know he has that ability if the right opportunity comes along.
This article first appeared on CT Mirror and is republished here under a Creative Commons Attribution-NoDerivatives 4.0 International License.
Photo courtesy of Mike Latimer.
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