A $29 Billion Weed Market Fights to Diversify Amid Legal Hurdles

Michael Diaz-Rivera’s experience simultaneously represents the promise and failure of social equity licenses for the cannabis industry.

Diaz-Rivera’s conviction in 2006 for marijuana possession made him eligible when Colorado agreed in 2020 to set aside licenses for members of historically marginalized communities disproportionately impacted by drug laws.

Denver’s zoning ordinances, however, limited the locations where brick-and-mortar dispensaries could open. Even with seed money from the city, Diaz-Rivera couldn’t arrange financing and was priced out of the market.

Frustrated by the hurdles, he’s trying to survive with his marijuana delivery business, Better Days Delivery. “I came from the legacy market and gave it all up to be legit,” he said.

Recreational marijuana is now legal in half the states, and many have turned to social equity licenses to help diversify an expanding but overwhelming White industry worth nearly $29 billion last year, according to a report from Colorado-based marijuana staffing company Vangst and analytics firm Whitney Economics.

But the rollouts have been flawed, sparking criticism and legal challenges.

Beyond facing restrictive zoning laws, the typically cash-strapped newcomers have had to struggle with limited access to banking services, in part because the federal government hasn’t recognized legal marijuana. They’ve also seen shadow investors use straw applicants to snatch up the licenses.

For cannabis reform advocates and industry entrepreneurs, the disappointing early results take deeper resonance amid the ongoing backlash against workplace diversity, inclusion, and equity efforts.

“It’s like you’re swimming upstream,” said Ernest Toney, founder and CEO at BIPOCann, a Denver-based firm launched in 2020 to offer consulting services to social equity applicants and licensees.

Minnesota, which passed legislation this spring that more sharply defines criteria for awarding social equity licenses and governing the program fairly, could set a new benchmark, hopeful observers say.

“This industry is led by local entrepreneurs, so I think the expectations of what’s possible here have been different,” said Leili Fatehi, a partner at Minnesota-based cannabis consulting firm Blunt Strategies.

At the same time, other states are battling claims of missteps that critics say have undermined the intent of social equity licensing programs.

Arizona lawmakers earlier this year considered more changes after reports that outside investors now own or control almost all of the original 26 social equity licenses granted to diverse applicants from the state.

“They’ve all been gobbled up,” said Jimmy Cool, an Arizona-based attorney at Frazer Ryan Goldberg & Arnold LLP who represented the Greater Phoenix Urban League and social equity company Acre 41 in an unsuccessful suit asserting state mismanagement of the program.

Social equity programs are supposed to be “a form of reparations,” Cool said. “It’s an acknowledgment that for decades, as a country, we exploited and abused certain communities through the application of punitive and onerous drug laws.”

State of Play

Massachusetts became the first state in 2017 to require equity in its legal cannabis industry. Illinois, two years later, was the first to codify a social equity program through legislation. Arizona, Connecticut, Michigan, New Jersey, and New York are among those that have followed.

The programs aim to deliver economic justice by rectifying past harms caused by the enforcement of drug laws that incarcerated Black, Latino, and other minority Americans at a higher rate than White Americans despite similar usage rates.

Measuring their success is difficult in part because states operate their programs in silos. They also have varied criteria for obtaining the licenses, including specific household income levels, previous cannabis arrests or convictions, residence in areas with high drug arrest rates, and membership in a socially or economically disadvantaged group.

There’s no exhaustive nationwide data on the racial or ethnic backgrounds of business owners with social equity licenses. Industry group Leafy found in a 2021 survey that only 1.2% to 1.7% of marijuana business owners were Black. As a group, Black Americans represent roughly 13% of the US population.

Only Arizona, California, and Michigan consider race as a factor in their social equity licensing process, according to the Minority Cannabis Business Association.

Advocates say more direct educational outreach could help applicants and business owners navigate licensing procedures and regulatory requirements.

The web of regulations and zoning rules obstructing applicants from marginalized communities are “kind of a slap in the face,” said Rachael Z. Ardanuy, an attorney and founder of RZA Legal, a Denver-based boutique cannabis business law firm. She said the barriers there essentially sent a not-so-subtle message from the city: “We’ll give you a license—but good luck.”

Many aspiring business owners lack an understanding of industry operating costs, said Toney of BIPOCann, “and they don’t have the relevant relationships and business connections.”

Improving the financing options is critical, said Tahir Johnson, the president of the Minority Cannabis Business Association.

“Once access to capital is fixed to get people in the game, it will get better,” said Johnson, who in July is set to open New Jersey’s first Black-owned recreational cannabis dispensary.

Lawsuits Cause Delay

Compounding the issue are legal challenges from mostly out-of-state White and wealthy investors that question the fairness of social equity license requirements.

California-based attorney Jeffrey Jensen and his wife, Justyna, sued Rhode Island marijuana regulators last month to block the state from issuing licenses to any social equity applicant.

The O’Melveny & Myers LLP alum, who is White, had already filed similar challenges with other social equity business partners in California, Maryland, New York, and Washington state. He contends that the states’ licensing processes prioritize state residents for social equity licenses in violation of the US Constitution’s dormant commerce clause, which seeks to prevent states from unduly restricting interstate commerce.

The US Court of Appeals for the First Circuit was the first federal appellate court to endorse this argument when it struck down Maine’s residency requirement in 2022.

A lawsuit brought by a company Jensen co-owned halted New York’s social equity program in Brooklyn, central and western New York, as well as the Finger Lakes and Mid-Hudson regions, for several months last year. State regulators ultimately settled the case and agreed to award Jensen’s company a cannabis business license.

Jensen’s main argument is that he satisfies all requirements for a social equity applicant except the states’ residency requirement.

Jensen didn’t respond to a request for comment.

A separate lawsuit brought this year by the conservative legal group Pacific Legal Foundation sought to gut the New York program for allegedly giving preferential treatment to racial minorities and women.

The named plaintiff in that case is a company owned by upstate New York brothers William and Emmet Purcell, who claim they unfairly faced a “severe disadvantage” in getting a license solely because they’re White men.

The New York Office of Cannabis Management, which oversees the program, has urged the court to dismiss the case, arguing the brothers failed to show how the program would harm them. The Purcells would still have little chance to qualify for a license, its lawyers argued, “even if every minority-owned and women-owned business with a more favorable position in the application queue were removed.”

There are also growing concerns about deep-pocketed White investors and multi-state business operators who wouldn’t qualify on their own for such licenses but are using their wealth to undermine social equity efforts and gain traction in the marijuana industry.

Missouri in March revoked cannabis licenses for at least eight applicants after determining they lied or provided misleading information about the licensees and owners, some of whom were really from out-of-state.

In Arizona, which requires social equity applicants to own just 51% of the business, lawsuits and lawyers claim investors have recruited qualified applicants and then used predatory business agreements to pressure them to sell their businesses or give up majority control.

Almost none of the 26 social equity licenses Arizona allocated are still owned by the original applicants, state Sen. Sonny Borrelli (R), who introduced legislation to address the issue, asserted at a hearing this year.

“The social equity program in Arizona does not include social equity,” said Cool.

Eyes on Minnesota

Minnesota’s governor signed legislation last month that advocates said minimizes the social equity legal issues faced by other states.

Among other things, the changes to the recreational marijuana law grant social equity status to qualified applicants if 65% of a company is owned by individuals who meet the criteria. This allows new entrepreneurs with little access to capital to bring in investors.

It also gives social equity license holders an early start on their businesses, allowing them to begin growing cannabis this year while requiring other licensees to wait until 2025. Qualified social equity entrepreneurs are also permitted to sell their businesses to non-social equity applicants after three years of operation.

Minnesota has “done a good job of learning from” other states’ missteps, while also weighing aspects of social equity most likely to end up in court, said Anthony Newby, a prospective applicant from the Minneapolis area.

Fatehi, who helped lawmakers pass the recreational marijuana law last year, agreed.

“We are very intentional about the law here in Minnesota to be as exclusionary as legally possible of multi-state operators,” she said.

But the law has its shortcomings.

Amid a growing number of challenges to DEI provisions in other states, Minnesota opted not to include race as a specific factor in awarding its social equity licenses, Newby noted.

“There’s no reason to think that this licensing scheme, without a mention of race, is going to do anything but exacerbate the racial disparity gaps in the state,” he said.

Optimism Remains

When she was young, Monique Numa viewed marijuana as bad. But that changed after she saw how medical marijuana helped comfort a friend who had knee surgery in 2020.

Numa, a Navy veteran from Bowie, Md., began reading about the plant and its potential business opportunities.

“I started digging more into it,” said Numa. “It opened my eyes a bit more that it’s a White-dominated career field. From there, I went on a passionate journey.”

Last month, she joined more than a dozen other aspiring marijuana business owners in Baltimore for a weekend seminar on how to navigate the state’s upstart legal cannabis industry. The seminar, organized by the MCBA, was held at Murphy Falcon & Murphy, Maryland’s oldest active, Black-owned law firm.

Numa’s eligible for one of Maryland’s new social equity licenses in part because she lives in an area disproportionately impacted by past drug laws.

She’s partnering with four longtime friends, all Black women with experience in technology and business management, to build a cultivation business they’ve named La Famille Rage LLC. Their goal isn’t just a profitable business, but also to build community and a platform to support women’s shelters and homeless veterans.

“We are excited about the opportunity to be part of this journey,” Numa said. “Before social equity, we had committed to getting into the cannabis industry. We knew it was going to be a heavy lift. We had heard about the cost of entry. Social equity came up, and we were able to fit into that arena.”

Photo: A cannabis plant. Photographer: Patrick T. Fallon/Bloomberg