Marijuana’s Pay-To-Play Licensing Trend

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Setting up ridiculously difficult requirements for licensing eligibility prioritizes the high profits of a few over industry efficiency, true competition, and patient/consumer rights.

 

State-sanctioned medical marijuana operational licenses are increasingly becoming a “pay-to-play, greatest barrier to entry” model. In this sort of system, there is usually some combination of the following, all geared towards minimizing the number of licensed cannabis businesses and towards making sure all those who get such licenses are very well-funded:

To varying extents, Florida, Illinois, New York, Hawaii, Minnesota, and Nevada all have this sort of legalization regime.

Florida. In Florida, only five agricultural nurseries that have been in existence for at least the last thirty years were even eligible to be licensed as dispensing organizations under the state’s extremely limited medical marijuana program. From the few nurseries that qualified, the state prioritized financials in its scoring process and required all of the nurseries to post a $5 million dollar performance bond. In other words, if you weren’t a large and well-funded nursery that has been around for 30-plus years, forget about it. These five nurseries have nearly unfettered access to Florida’s population of 20 million and there’s a chance these five nurseries could end up being the sole providers of medical cannabis under Florida’s impending medical marijuana ballot initiative.

Illinois. Illinois allows only 21 cultivation centers and 60 dispensaries to serve all 13 million people in the state. Illinois set up a point system for judging cannabis licensing applicants based on their proposed security plans, their expertise in growing marijuana, and their plans for patient education. Cultivation centers were required to pay $200,000 for an initial license and have at least $500,000 in liquid assets, in addition to a non-refundable $25,000 application fee. Dispensaries were required to pay $30,000 for a license and have $400,000 in liquid assets, in addition to a non-refundable $5,000 application fee.

New York. Start-up costs for running a medical cannabis company in New York were estimated at around $25 million. The state required a $10,000 non-refundable application fee, plus a $200,000 refundable registration fee for each application. Those seeking a cannabis license also had to show they had the real estate necessary to produce cannabis or be able to post a $2 million bond. Only five operators are allowed to run up to 20 dispensaries throughout the state, and applicants had to produce a litany of documents for the state’s Department of Health that described, in detail, the applicant’s manufacturing processes, transporting, distributing, sale and dispensing policies or procedures. Not as exclusive as Florida, but that’s 20 dispensaries for 20 million people.

Hawaii. Hawaii kicked off its new MMJ legalization regime with a five-year residency requirement and the requirement that its MMJ companies be majority-owned by Hawaiians. Hawaii has some of the toughest, most protectionist cannabis regulations and barriers to market entry in the country. It is set to have only 16 dispensaries in the state, and business applicants also needed to show $1,000,000 “for each license applied for,” and “not less than $100,000 for each retail dispensing location,” all of which had to be under the control of the applicant for no less than 90 days prior to the date of application. There was also a $5,000 non-refundable application fee for each license. Applicants awarded with licenses had to pay $75,000 for each license within a week of approval. Dispensary licensees must also pay an annual renewal fee of $50,000.

Minnesota. Minnesota has an extremely limited medical cannabis program. First, only two operators serve the entire state for cultivation, manufacturing, and distribution. The two operators each operate four dispensaries in the state, for a total of eight. The two operators were selected after the state reviewed their personal histories and capabilities with respect to cultivation, manufacturing, and patient services — these folks even had to commit to having a licensed pharmacist on staff to distribute the cannabis (which makes little sense since cannabis cannot be legally prescribed). And, of course, the state also assessed their financial stability and business plans. One of the operators, Leafline, reportedly raised $12.4 million in investment from 113 investors. All of this for a state that, at the time, claimed to have only 5,000 registered qualifying patients.

Nevada. In Nevada, running a marijuana business is like running a casino — it’s capital-intensive and only a select few get to participate. Nevada requires local control of its cannabis businesses and its license applicants needed to show no less than $250,000 in liquidity. They also had to produce volumes of documents showing detailed floor plans, security, personnel manuals, and even advertising and marketing plans, all of which were scored against a strict point system. In addition, the application fee was a non-refundable $5,000, and the license issuance fee (per license) is $30,000.

All of the above states have created massive barriers to entering into their medical marijuana industries. On the flip side, all four states (Colorado, Washington, Oregon, and Alaska) that legalized recreational marijuana do not have nearly the barriers to entry as these medical states.

Though it makes sense for states to want to closely hew to the priorities set forth in the 2013 Cole memo, setting up ridiculously difficult requirements for licensing eligibility prioritizes the high profits of a few over industry efficiency, true competition, and patient/consumer rights. The medical marijuana states have set up uneven playing fields that give the already wealthy near monopoly power over medical cannabis. How is this a good system for anyone but the few who have bestowed with the spoils?

I can only hope that Colorado, Washington, Oregon, and Alaska will eventually serve as models in in showing how letting the marketplace choose cannabis winners and losers is preferable to patronage systems with high barriers to licensing. So far, these recreational-legal states are proving that market entry equality and the priorities set forth in the Cole memo can be squared.

 

Hilary Bricken is an attorney at Harris Moure, PLLC in Seattle