Connecticut legislators are looking at a bill which could affect how fast some cannabis businesses can be sold. State officials, however, are worried about the impact this might have on Connecticut’s fledgling pot 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.
In the last three years, at least 38 cannabis companies were formed in this way according to state records. Some social equity applicants that formed these partnerships now ask state lawmakers to allow them to cash out their investments after three-years.
Social equity applicants need to get the permission of their legislators because current state law prevents them from selling ownership shares in cannabis businesses after seven years.
Legislators created equity joint ventures to help ensure that individuals in historically disadvantaged areas could benefit from marijuana legalization and have the chance to be entrepreneurs.
Social equity applicants must prove they have at least 50% of their equity joint venture, and that they are from or were born in one of the historically poor communities where drug prosecutions are high.
Kennard Ray is a social equity owner who said that he understood why the lawmakers wrote this law in 2021. He explained that the law was written to protect people like him who entered into a business relationship with more wealthy individuals and companies.
The lawmakers didn’t wish for other investors or operators to rely on social equity applicants in order to get a license, and then kick them out once they had their dispensaries up and running.
Ray has a stake in multiple cannabis dispensaries and cultivation facilities operating under the Finefettle brand.
Ray says that now that his experience has grown, he believes the seven year ban to sell ownership shares is too harsh.
Ray and others who own social equity told lawmakers this year they wanted more flexibility in divesting when it made sense to them financially or personally.
The business owners requested that they be able to sell the company after three years.
Derrick Gibbs explained during an April public hearing to the lawmakers that in only seven years a great deal can change, particularly in a rapidly evolving industry.
In the next few years, the value of cannabis companies could be affected by federal tax policy changes, financial issues, and saturation on the Connecticut cannabis recreational market.
In any field, seven years can be a long time. Many things can change. Gibbs, a member of the House Committee on Finance and Public Accounts (HPAC), told legislators that seven years was a considerable amount of time to keep someone in a failing venture. On the other hand, if an enterprise is thriving, why shouldn’t a social-equity owner choose to sell at a moment that makes financial sense?
Ray explained it like this: “One can have a great day. You’re stock is rising. Your business may drop the next day due to a change in policy or because there is an oversaturation.
Rep. Roland Lemar, who chairs the General Law Committee of the Legislature’s General Law Committee said that he understood the reasons for which cannabis entrepreneurs like Ray and Gibbs want more flexibility in selling their stakes.
Lemar stated that he heard from joint venture owners who wished to capture some value in their stake. They felt they would lose out on value if their stake was held for an additional four years.
Lemar, however, said that he was still reluctant to change the 2021 cannabis law because it would have a negative impact on the entire industry.
Lemar explained that the requirement for social equity applicants holding onto their business for seven years was to encourage local ownership and ensure the cannabis market is not dominated by multi-state companies. He is also concerned that this goal will disappear if laws are changed.
What do you come up with after three years? How long will it take you to produce the final product after three years? What is the end product after just three years? Lemar asked. Lemar asked.
Lemar pointed out that people who created joint equity ventures and applied for social equity in the last couple of years were aware that they had to hold their ownership stakes for a period of seven years.
The state Social Equity Council (which oversees a part of licensing for the cannabis sector) also expressed concerns over such a move.
Brandon McGee (Director of the Social Equity Council) said at a meeting that the SEC was still deciding whether or not to endorse the proposal.
McGee did not respond to a phone call when contacted for this article, but he said that he was concerned about the possibility of social equity holders disappearing from the market.
McGee: “I’m aware of some social-equity entrepreneurs that feel it is better to just move the deadline arbitrarily up to three years, and then call it a night.” McGee said, “But this isn’t where we are right now.”
Ray, a cannabis shop owner in Connecticut, argues that other entrepreneurs in Connecticut are not restricted in selling their business in the same manner as social equity candidates.
Ray pointed to the fact that Benjamin Zachs – an executive at Fine Fettle – is not restricted from selling his part of the business. Only Ray is restricted from selling off his share of the business as a social equity candidate.
Ray has no immediate plans to sell the dispensaries that he runs in Manchester, and other cities and towns. However, he says he would like to be able to do so if the opportunity arises.
This article first appeared on CT Mirror and is republished here under a Creative Commons Attribution-NoDerivatives 4.0 International License.
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Mike Latimer provided the photo.
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