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Cannabis

A Front-row Seat

Bruce Stebbins remembers the time during his tenure on the Massachusetts Gaming Commission when that body was essentially subleasing some of its space on Federal Street in Boston to the recently formed Cannabis Control Commission (CCC), charged with overseeing an industry then — and in most all ways still — in its infancy.

While the two entities had separate quarters, the commissions and their staffs would cross paths often, he said, adding that there were lively discussions and some sharing of ideas between the two very different worlds.

“I was regularly running into my counterparts on their commission and staff while waiting for the elevator,” he recalled. “We actually had a lot of staff from our team having a lot of conversations with staff from their team, in part out of convenience — they were on the same floor. There was a lot of information going back and forth on the staff level … and it was the introduction of that new industry that was really exciting for me.”

Little could he have known at that time, but Stebbins, a former Western Mass. resident known to many in this region for his work with a host of economic-development-related agencies, would soon be on the front lines of that new industry.

Bruce Stebbins

Bruce Stebbins

“We have 267 cannabis establishments open in Massachusetts, most of them on the retail side. Unlike gaming, which had a limited number of licenses, there are no limits on the number of cannabis licenses; it’s an interesting structure because there’s been an effort to create opportunities for a local entrepreneur as well as larger operators who have significant experience in other states.”

Indeed, he would eventually trade his seat on the gaming board for one on the Cannabis Control Commission. And that puts him in a unique position.

Indeed, he’s able to talk firsthand (as no one else can, because no one else has sat on both commissions) about these two huge additions to the state’s landscape — and its business community. And he did just that in a lengthy interview with BusinessWest, during which he did a little comparing and contrasting of the two industries. But mostly he talked about his latest assignment, how it came about, and what he projects for a cannabis industry that is already having a profound impact on the state — nearly $2 billion in sales since the first retail establishments opened in 2018 — and, especially, individual cities and towns.

He said the industries are similar in that they are bringing millions of dollars in tax revenue to the state and adding thousands of jobs as well, but also different in some ways. There are only three casinos, obviously, while there are now nearly 300 cannabis-related operations doing business in the state. The casinos are owned and operated by huge international corporations, while the cannabis ventures come in all sizes, from huge, multi-state operations to smaller entrepreneurial enterprises.

And while the resort casinos have changed the landscape in Springfield, Everett, and Plainfield, the cannabis industry is reshaping dozens of smaller communities and bringing new life to idle real estate across the state (more on that later).

Named to the board in January, Stebbins said he’s still learning about the burgeoning cannabis industry in Massachusetts, and there is much to learn.

His education involves venturing out and seeing various operations in person, he said, and also listening to a large and intriguing mix of activists, stakeholders, physicians, parents, and those who have been in the industry, including some who have come to Massachusetts from other states that had legalized cannabis earlier, such as Colorado and Washington.

Overall, while it’s difficult to say how large and impactful the cannabis industry can become in the Bay State, he said there are essentially “no limits” on either the number of licenses or the bearing of this sector on the economy or individual cities and towns.

“We have 267 cannabis establishments open in Massachusetts, most of them on the retail side,” he noted. “Unlike gaming, which had a limited number of licenses, there are no limits on the number of cannabis licenses; it’s an interesting structure because there’s been an effort to create opportunities for a local entrepreneur as well as larger operators who have significant experience in other states.”

For this issue and its focus on the cannabis industry, BusinessWest talked with Stebbins about what he can see from his front-row seat, what he’s learning, and what he projects for an industry that is off to a fast start and shows no signs of slowing down.

 

On a Roll

When asked about how he wound up trading his seat on one commission for the other, Stebbins started by talking about the positions that became available on the CCC and his decision to apply for one of them.

Key to that decision is the why. As with the Gaming Commission, he was drawn to this board — and the cannabis industry — because of its broad implications for economic development within the Commonwealth.

“Part of my passion has been fueled by the opportunity to work with this new industry coming into Massachusetts,” he noted. “Similar to my interest in the gaming work that I did, I was looking for the economic-development aspects of this [cannabis] industry, whether it’s investment, jobs, small-business opportunity … I certainly saw that both gaming and the introduction of the cannabis industry was going to offer those opportunities. That’s where my passion lay with gaming, and it’s where it lies with cannabis as well.”

Surveying the scene in the Commonwealth, he said cannabis has come a long way in a short time in Massachusetts.

“I was impressed with the work of the commission and the staff … from the time the ballot question passed to the statute to opening the first retail, it was about two years; that’s very aggressive,” he said, adding that the industry is still ascending, with no real indication of just how high it can go.

“Right now, a big part of the agenda of our meetings is looking at renewals, final licenses for applicants, and also a healthy number of provisional-license applications that are coming through the door,” he said. “There doesn’t seem to be a slowing down of activity when it comes to people pursuing a license and people taking the final steps to opening their doors.”

Elaborating, he said there are a number of ways to measure the impact of this industry, with the number of licenses and the volume of sales being only a few of them.

Others include the positive impact on the real-estate market, with cannabis operations bringing a number of idle or underutilized properties — from retail storefronts to former paper and textile mills — back to productive life, with the promise of more at venues that include the massive former JCPenney property at the Eastfield Mall.

“Being from Western Mass., being from Springfield, and knowing Holyoke, I think one of the obvious returns has been investment in brick and mortar, whether it’s been an old mill building as a cultivation-and-grow facility to some of the new retail facilities that you see popping up,” Stebbins said. “There have been many healthy examples of how this has led to increased investment in communities that might have been struggling with underutilized properties that weren’t helping out the tax rolls.”

He cited examples of such dynamic reuse in Holyoke, Sturbridge, Southbridge, and several other communities, while noting that behind each of those walls are jobs that didn’t exist three years ago.

One of the industry’s best qualities, he went on, is the opportunities it offers to different constituencies, when it comes to both jobs and entrepreneurship — within the industry and supporting it as well.

“The cannabis statute obviously wanted to a heavy emphasis on hiring those who were disproportionately impacted by the war on drugs,” he explained. “We are in the middle of our application phase for our social-equity program, which gives individuals from those neighborhoods an opportunity to explore being an entrepreneur in this industry, looking at a management track, looking at an entry-level job track, as well as ancillary business; maybe you don’t want to actually be a cannabis retailer, but you might be an electrician, and what job opportunities and business opportunities are out there because of this industry?”

Stebbins acknowledged there are certainly some barriers to entering this industry, especially when it comes to capital and access to it, and he lauded the CCC and the Legislature for efforts to create loan funds — some of them from revenues generated by the industry — and other programs to ease access and remove some of those barriers.

“Some great work has been done, and we’re not taking our eye off the focus of making sure those opportunities are available for social-equity applicants,” he said.

These qualities separate the cannabis industry from gaming in some respects, he went on, adding that, while both have created jobs, the cannabis sector has created more opportunities in more regions and in more cities and towns — and also more types of opportunities.

“Cannabis has created a wide variety of jobs — testing jobs, cultivation jobs, retail jobs, product-manufacturing jobs,” he said. “And there’s also the fact that the industry has the ability to take root across the Commonwealth and not just in specific regions or specific, identified communities.”

 

Joint Ventures

Reflecting on the past several years, Stebbins said he’s had a remarkable opportunity — one that has placed him on the front lines in the development and maturation of not just one new industry within the Commonwealth, but two of them.

It’s been a rewarding experience — and a learning experience — on many levels, he said, adding quickly that he has a great deal of energy and passion when it comes to finding solutions and helping new businesses grow, reach their full potential, and be successful.

That’s true of both sectors, but especially his latest assignment — a cannabis sector that has certainly taken root, both literally and figuratively, but will inevitably suffer growing pains. u

 

George O’Brien can be reached at [email protected]

Law

MREs and HCAs

By Mary-Lou Rup

Under Massachusetts’ recreational-marijuana statute, those seeking to operate a marijuana retail establishment (MRE) must obtain a license to operate from the Cannabis Control Commission (CCC). Municipalities exercise local control over MRE applicants through ordinances or bylaws setting ‘reasonable’ controls on the time, place, and manner of operations and limiting the number of MREs within their borders.

During the first step of the licensing process, MRE applicants must obtain approval from the municipality, and the municipality and applicant execute a host-community agreement (HCA), which sets forth the conditions under which the MRE can operate. During the second step, the CCC determines to which approved applicants it will issue licenses, which in part requires a one-page certification that the applicant and municipality have executed an HCA.

Municipalities may require that MREs pay a ‘community impact fee,’ statutorily capped at 3% of the MRE’s gross sales for five years, to cover a variety of actual costs to the municipality reasonably related to the MRE’s operations.

“An appeal now pending in the Supreme Judicial Court (SJC) may resolve issues related to the degree to which municipalities exercise control over which applicants move on to the second step.”

In HCAs, many municipalities require additional payments by the MREs, often based on an additional percentage of gross sales and/or charitable donations to entities selected by the municipality. These additional costs have, for the most part, gone unchallenged by MRE applicants anxious to obtain the HCA necessary in order to be licensed to operate.

An appeal now pending in the Supreme Judicial Court (SJC) may resolve issues related to the degree to which municipalities exercise control over which applicants move on to the second step. The case involves Mederi Inc., which sought to operate one of five MREs permitted by the city of Salem. Mederi received the necessary special permit and alleges it met all other requirements of the city’s application process. A city committee reviewed the applications before entering HCAs with four applicants; Mederi was not among them and sued. Dismissal of that suit lead to Mederi’s appeal.

Two arguments made by Mederi are of interest. Mederi challenges the city’s authority to select with which qualified applicants it would enter HCAs, effectively controlling those which the CCC could then consider for licensing. Mederi also argues that the city exceeded its lawful authority by, among other actions, imposing as a condition of its HCA fees in excess of the 3% community-impact fee. Specifically, the city required five annual payments of 1% of gross sales to a ‘traffic-enhancement fund’ and at least $25,000 in charitable contributions to local causes.

Mederi posits that allowing municipalities to utilize these ‘pay-to-play’ provisions and to pre-select which qualified applicants it will allow to advance to the CCC adversely impacts the statute’s provisions giving priority to economic-empowerment applicants — provisions intended to assist areas of disproportionate impact disadvantaged by high rates of criminal activity involving marijuana.

In opposition, the city argues that it could properly decide with which applicants to enter into HCAs. It asserts that the local-control step of the MRE-licensing process allows municipalities to weigh competing proposals and exercise discretion in choosing the most suitable applicants. The city argues that its selected applicants were the “strongest possible operators” based on experience in the marijuana industry and intent to operate in the “least impactful locations” in Salem.

The CCC filed an amicus brief in the case. Pointing to competing legislative mandates, it asserted that, while the statute does not authorize it to regulate or participate in the initial local-control portion of the licensing process, the statute also requires that it give MRE licensing priority to existent medical-marijuana treatment centers and economic-empowerment applicants.

It noted that municipalities’ exclusive control of the HCA process seemed to advantage more experienced and better-resourced applicants, leaving economic-empowerment applicants at a competitive disadvantage, and, in effect, controlled those whose license applications the CCC is able to consider. The CCC has recommended amendments to the statute, addressing, among other matters, this issue and the additional fees imposed in HCAs. Its recommendations are presently under consideration in the legislature.

Stay tuned. The SJC heard arguments on Feb. 3 and, under its usual 130-day timeline, may be expected to issue its decision by early summer.

 

Mary-Lou Rup served as associate justice of the Massachusetts Superior Court until her retirement in 2018, when she joined the litigation group of Bulkley Richardson as senior counsel.

Features

What’s New?

By Isaac C. Fleisher

It’s that time of year again. On July 20, the Cannabis Control Commission (CCC) revealed the latest round of proposed revisions to its regulations. Following a period of public comment and review, the CCC is scheduled to take a final vote on these revisions on Sept. 4.

Last year’s round of revisions made waves with two new categories of licenses (social consumption and home delivery), but this year’s revisions are more focused on the owners behind the licenses. This is not too surprising because the demographics of license ownership has become a heavily debated (and litigated) topic.

When the CCC crafted its initial regulations (way back in the halcyon days of 2018), it included provisions intended to diversify the industry, such as a fast track to licensing for economic-empowerment (EE) applicants, as well as fee waivers, training, and technical assistance for social-equity (SE) applicants. Even the new license types that were created under last year’s revisions to the regulations are initially reserved for EE and SE applicants. However, as small startups slam into the economic realities of the cannabis industry, it has revealed a tension between the need for capital and the need for equity.

The CCC’s latest round of draft revisions would require economic-empowerment applicants to satisfy at least one of the criteria related to ‘majority equity ownership’ and then report any changes of ownership and control when renewing their license. EE status is revoked if fewer than 51% of the owners meet the EE criteria. Similarly, the draft revisions specify that the various fee waivers and discounts available to SE applicants only apply to licensees with at least 51% SE ownership.

Last year’s round of revisions made waves with two new categories of licenses (social consumption and home delivery), but this year’s revisions are more focused on the owners behind the licenses.

These changes would help prevent EE and SE certification from being turned into a commodity that could be purchased by investors that were never the intended beneficiaries. However, it would also further trap EE and SE applicants in the catch-22 of needing to raise millions in investment without giving up equity to investors that don’t satisfy the EE or SE criteria.

The draft revisions also seek to tighten the definition of what constitutes ‘control’ over a cannabis business. This is significant because Massachusetts prohibits any entity from controlling more than three licenses of any type. This restriction is a substantial departure from the trend in most other states that have legalized a recreational cannabis industry, and it has become a thorn in the side for cannabis investors trying to build a diverse portfolio, as well as for large, multi-state cannabis companies that rely on economies of scale. As a result, more than a few savvy investors and entrepreneurs have utilized creative corporate structures in an attempt to circumvent the limitations on control.

In 2019, the CCC made substantial updates to its definition of control, making it clear that it was serious about enforcing the three-license cap. The current draft revisions further expand the definition of control by establishing a precise dollar amount for the types of contracts that would be evidence of control; clarifying that anybody with the power to appoint 50% of the company’s board is in control of that company, whether the board members are called directors, managers, or anything else; and, in a possible sign of the times, establishing that a person appointed as a receiver for the licensee is in a position of control.

Additionally, the revisions would redefine the threshold for when control over a parent company constitutes control over the subsidiary. In the current regulations, anybody “with a controlling interest in” the parent company is considered to have control over the subsidiary, but the revised draft would change this to anybody “having control over” the parent company. This subtle change is potentially significant, as the “controlling interest” language has generally been interpreted to relate only to an actual equity interest, while the meaning of “having control” could include people with substantial decision-making authority, even if they are not actually a majority owner. These changes may not be nearly as substantial as the 2019 overhaul of the definition of control, but the fact that the CCC felt that additional changes were necessary at all is a sign that attempts to circumvent the license cap are still happening.

One prosed change that seems to cut against the trend of tightening restrictions on ownership is the revision to the craft marijuana cooperative license, which would actually loosen the requirement that a member of the cooperative filed a profit or loss from farming in the last five years (i.e. they’re a farmer). If accepted, the revisions would allow a cooperative to satisfy this requirement by merely leasing land from such a person. There are plenty of good reasons for this change, but ultimately it likely arises from the CCC’s recognition that the requirements for a craft cannabis cooperative are so burdensome and idiosyncratic that only three applications have been submitted for this license type, and of those, only one has even received a provisional license.

With nearly 550 applications receiving provisional or final licenses, and only 122 currently authorized to commence operations (and a shameful dearth of racial or economic diversity among these licensees), it is becoming clear there is a financial bottleneck in the licensing process. Most commercial financial institutions still won’t go anywhere near the cannabis industry, and cannabis entrepreneurs must therefore rely on venture-capital financing. The result has been an increase in the number of provisional licenses being ‘flipped’ as small startups are forced to sell out to simply cover their growing debt.

This trend toward market consolidation has put the CCC’s equity provisions and ownership limitations under tremendous strain. The draft revisions address that strain by attempting to close potential loopholes in the restriction. These changes would certainly help align the letter of the law with the spirit of the law, but ultimately, they do not address the actual root of the problem.

In order to build a cannabis industry that is stable, sustainable, and diverse, much more needs to be done to lower the economic barrier of entry, such as establishing a state lending program to provide SE and EE applicants with access to financing, or even just simplifying the licensing process so that applicants aren’t forced to submit hundreds of pages of plans, policies, and procedures, only to wait over a year just to obtain a provisional license. But those changes may need to wait for 2021.

Attorney Isaac C. Fleisher is an associate with Bacon Wilson, P.C., where his practice is focused on business and corporate law, with particular emphasis on the rapidly expanding cannabis industry. An accomplished transactional attorney, he has broad experience in all aspects of business representation in legal matters ranging from mergers and acquisitions to business formation and financing; (413) 781-0560; [email protected]

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