In May 2019 the Illinois state legislature passed a comprehensive adult use cannabis law called the Cannabis Regulation and Tax Act (CRTA). Illinois had already been the first state to pass comprehensive medical cannabis legalization by legislation as opposed to a ballot referendum. The Compassionate Use of Medical Marijuana Program Act, as the original legislation is called, was highly successful in introducing medical cannabis to the fifth largest US state. The Compassionate Use Act, however only authorized 20 cultivation centers and 55 dispensaries, and over time that small number, through acquisition and consolidation, became controlled by a small group of non-minority stakeholders.
The authors of the CRTA were determined to correct that and provide strong incentives to those who had become victims in the war on drugs or otherwise lived in areas disproportionately impacted by the war on drugs. The CRTA responded with a comprehensive and demanding approach to social equity.
Under the CRTA there were to be 75 new adult use dispensary licenses issued in March 2020 with of a total of 500 authorized altogether. Applicants were encouraged to apply as social equity applicants (SEA) because 20% of the available points (50 out of 250) in a competitive process would be awarded to SEAs. Accordingly, virtually every one of the more than 4000 applications, were SEA applications. The law allowed applicants to apply for as many applications as they wished and some applicant groups filed the maximum number of potential winners in each of the state’s 17 cannabis regions, thus filing as many as 75 applications. Some filed even more hoping to gain an advantage in the event of a tie breaking lottery, something that became important as I’ll explain later.
All of this was complicated enough, but still, there was a problem. Licenses would be awarded to those receiving the highest scores and thus every point was important. The social equity points were awarded to those SEAs that could demonstrate that 51% of the applicant entity was owned by the SEA members of the applicant group. To qualify for SEA status individuals had to demonstrate that they or a close relative had been arrested or convicted of a qualifying marijuana offense or lived in an area disproportionately impacted by the war on drugs. There’s also a provision, later dubbed the “master servant clause”, whereby 51% of at least 10 employees were SEA under the same criteria.
This comprehensive approach to encourage social equity participation was laudable, but there was a problem. In addition to encouraging social equity participation in the cannabis business, the CRTA encouraged veteran participation and awarded five points of the available 250 for those who were veteran applicants if the veterans also had 51% ownership and control of the business. So, 50 points for social equity with 51% ownership and control or, 5 points for veterans with 51% ownership and control; the choice was clear, social equity prevailed. Applicants soon realized however that in a very competitive scoring process every point would be necessary. How would it be possible to pick up the 5 veteran points without giving up the 50 SEA points? Presumably, that would require awarding 102% ownership and control to those two groups. Not only an impossibility but every other party would be excluded. Not to be deterred, clever applicants gave birth to the “social equity veteran unicorn”. This was a small group of veterans who also qualified as SEA. That single person, or qualifying group, could obtain 55 points with 51% ownership and control of the business. SEAs who were not veterans could only get 50 points.
After lengthy delays due to COVID-19 and some scoring difficulties, the Illinois Department of Financial and Professional Regulation, which ran the Dispensary program, in September 2020 announced the winners. It turned out that 21 groups had perfect scores of 252 points (250 points +2 bonus points) each with a social equity veteran and some maximizing 10 or more applications each. The result was 232 perfect score applications for 75 licenses. The default rules in the event of ties called for a lottery to determine the winners in each of the several regions across the state. Every other applicant was excluded.
Not surprisingly, there were numerous objections. Some people complained that “insiders” won licenses. Some commented that a former employee of the scoring consultant was on one of the winning teams. But mostly there was a complaint that the veteran unicorn situation set up a special class where only winners were applicants with perfect scores, an impossibility without a social equity veteran, giving that small group an advantage over everyone else, All other SEAs, those who were not veterans, but otherwise qualified, didn’t have a chance. The true intended beneficiaries of the CRTA social equity incentive, or most of them, were locked of the program.
No one was happy. Lawsuits were filed and the award of licenses was delayed. Meanwhile, the incumbent industry, that small group that was part of the original medical licenses, obtained the opportunity through the CRTA to sell Adult Use cannabis without new applications. As a result of they continued to expand and control the industry in Illinois devoid of any social equity obligations. What had been a solution to a problem of inequity and filled with excitement and opportunity turned out to be a huge benefit for the small incumbent class.
The Illinois legislature stepped in to fix the problem and created two new categories of licensees to be chosen from among those who had filed the original applications, but didn’t have social equity veterans. First, they added 110 new licenses to be issued to 2 groups in separate lotteries and reduced the qualifying scores to 85% of the total points. The first group of 55 new licenses would be awarded in the “Qualified Applicant Lottery”.
Participants in that lottery were applicants receiving 85% of the total points, 212.5 points altogether, thus assuring that SEAs with or without a veteran qualified. The next group of 55 new licenses would be awarded in the “Social Equity Justice” lottery. This was those receiving 85% of the total available points who applied as SEAs but not under the “master servant” clause, were eligible. The original group receiving perfect scores of 252 would still be eligible in the original lottery now called the “Tied Applicant Lottery”. The three lotteries were conducted in the summer 2021. Successful candidates were selected, but new issues arose, followed by more lawsuits and a judicial hold on issuing new licenses.
To this day all are unresolved, and no new dispensary licenses have been awarded in Illinois. It remains to be seen what will happen. It is possible that the court could throw out the entire lottery program and all the applications, and everyone starts over. An unlikely but still possible outcome. One thing that is clear is that the incumbent industry continues to thrive without competition.
Illinois, once a leader in the social equity movement is now an example of what not to do. But wait, there’s more. The CRTA also authorized 40 new craft grow opportunities 40 infuser licenses and an undetermined number of transportation licenses. More on that next week.