The Future

Big business will always find a way into the cannabis industry

Many municipalities have attempted to set up equity programs to give a leg up to marginalized people who want an honest shot at selling cannabis, but they are still costly and byzantine.
The Future

Big business will always find a way into the cannabis industry

Many municipalities have attempted to set up equity programs to give a leg up to marginalized people who want an honest shot at selling cannabis, but they are still costly and byzantine.

In February 2018, Marshall Crosby was one of the cannabis industry hopefuls who gathered in Oakland’s city hall for a lottery drawing. The prize? A highly sought-after cannabis dispensary license — one of four that was set aside for those who qualified under the city’s equity program, which sets aside a certain number of licenses for those who have previously been convicted of drug felonies in America’s longstanding “war on drugs.”

People of color are disproportionately targeted for marijuana arrests, ending up behind bars and with criminal records that can make it difficult to access housing, education, and work for the rest of their lives. An Oakland analysis found that black people make up 30 percent of the population, but a whopping 80 percent of cannabis arrests from 1995 to 2015. Nationwide, nearly 600,000 were arrested for pot possession in 2017 — the same substance that the well-heeled are now profiting off of in the growing multi-billion-dollar marijuana industry.

So Crosby and three others were elated to win the coveted licenses. But more than a year later, only one of those businesses has opened. Due to administrative entanglements, Crosby has still not been able to take advantage of the license he was awarded; he’s left with the realization that the program designed to help people like him wasn’t all it was cracked up to be.

To qualify for an Oakland equity license, an applicant must have a cannabis conviction or have lived in a police beat with disproportionate cannabis enforcement for at least 10 of the past 20 years. Applicants must also make 80 percent or less than the average median income for Oakland. Crosby qualified for the program based on their income and residency. For retail licenses like the one Crosby applied for, applicants must partner with a “general applicant” — someone who is also applying for a license but does not meet the requirements of an equity applicant. In theory, this helps ensure that equity applicants who may not have much business experience receive support from entrepreneurs who can help them build a viable business.

“We want an equity program that works. We want an industry that is cognizant of its karmic burden,” said James Anthony, an Oakland-based cannabis attorney. “Is legalizing cannabis going to cure 500 years of racism in America? Come on. But… cannabis can do its part.”

Crosby’s application listed Cesar Angobaldo, a local businessman who served as the financial advisor to a medical marijuana dispensary and had additional experience opening small businesses, as his partner. “[Angobaldo’s] background in retail coupled with his knowledge of dispensary operations makes him an ideal candidate suited to partner with Marshall,” read the application.

But soon, it seems, that relationship soured. Whose fault it was remains up for debate.

Five months after the lottery, Crosby dropped Angobaldo and changed his business partner to Have A Heart, a large Seattle-based cannabis conglomerate with both recreational- and medical-marijuana dispensaries in six states that won an Oakland retail license. Crosby would give Have A Heart a total of two of the eight retail licenses available in Oakland — an equity version in addition to the general one it already had.

In June, Angobaldo and his business partner, Amber Senter, wrote a letter to Oakland Mayor Libby Schaaf outlining their concerns about the equity program. Their company, LL Products, was “one of the first minority- and women-owned small cannabis businesses in the region.”

“There were forces unknown to us that were determined to undermine ‘Oakland’s Equity Program,’ and they did,” read the letter. “Shortly after we submitted our final application, our ‘equity partner’ was offered a proposal NOT to honor his pre-contractual agreement with LL Products, Inc. and sign on with ‘Have a Heart.’”

Because equity applicants must meet very specific criteria to get a license, the license stays with them if they choose to split with their general-applicant business partner. Equity applicants like Crosby can drop their chosen business partners for any reason and choose a different business partner that might have more or different resources, whether that’s money, lines of credit, or operational and business relationships that will smooth the process. While Crosby included Angobaldo on his application for a license, he eventually updated his application with the city to remove Angobaldo and add Ryan Kunkel of Have A Heart as a co-owner and business partner.

“They’re coming in here and leveraging an equity program [created] to help people who have been disadvantaged.”

“This is really just a thing of big business vs. small business,” said Senter. “They’re coming in here and leveraging an equity program [created] to help people who have been disadvantaged. This is a tool to help locals.”

California’s recreational legalization of marijuana led to a flood of out-of-state investment by so-called green rushers hoping to cash in on the largest marijuana market in the country. And there are plenty of examples of how small businesses and farms in the state are struggling to compete with large, commercial operators.

At the time California passed a statewide equity bill in September of 2018, individual cities were already pioneering on this front. Municipalities including Oakland, San Francisco, and Los Angeles had set up their own equity programs with their own rules and regulations, and the new state bill gave resources to support such programs. The programs vary widely — for example, Los Angeles' equity licenses are awarded on merit according to a schedule, while those in Oakland were doled out through a random lottery drawing.

In Oakland, there are two types of equity licenses: one for retail licenses and one for other types of cannabis businesses. Both of these licenses contain incentives to get general applicants to participate in the equity program to bring bigger resources to the whole system to help marginalized equity applicants. A general applicant can partner up with an equity applicant on a retail license application, like the one Crosby submitted with Angobaldo. General applicants can also work with non-retail businesses like cannabis cultivators by, for instance, providing at least 1,000 square feet of space to an equity applicant for three years to help them overcome the major hurdle of securing a lease without large amounts of capital.

Oakland’s equity program set aside half of all available retail licenses exclusively for equity applicants. Under the program, general applicants are awarded a license in an industry that is otherwise inaccessible to them if their equity partner wins the lottery drawing. For non-retail licenses, general applicants can score extra points on their applications by incubating equity applicants. Equity applicants – who are by definition disadvantaged in some way — get to tap the networks and business acumen of general applicants. In theory, everyone wins.

But so far, the actual result of Oakland’s equity program has been the opposite. In forcing people who are effectively strangers into awkward or contentious business partnerships, the cannabis economy has stalled. General applicants may incubate or partner with equity applicants just to get a license, and may not genuinely care about the equity applicant's success.

"That is a shotgun marriage," Anthony said. "People are not doing it for the right reasons."

For retail licenses, a Big Marijuana Company can offer financial incentives to equity applicants to break their agreements with their smaller business partners

For non-retail equity licenses, well-funded cannabis companies could recruit several marginalized equity applicants to incubate in order to score more points on their application while being indifferent to those businesses' long-term prospects.

For retail licenses, a Big Marijuana Company can offer financial incentives to equity applicants to break their agreements with their smaller business partners — like what Senter and Angobaldo alleged that Have A Heart did (though both Have A Heart and the equity applicant Crosby deny this). Well-funded cannabis companies are in a position to offer substantial incentives to equity applicants, while small businesses would be hard-pressed to do the same. Because a license stays with the equity applicant, the original business partner would lose the equity license if the equity applicant decides to work with someone else, like in Angobaldo's case.

After Crosby updated his application to include Have A Heart as his owner and partner instead of Angobaldo, a public hearing was scheduled and the city approved of his new partner — with one condition.

The hearing office was not pleased with the operating agreement between Crosby and Have A Heart because it didn’t give Crosby any stake in the business, which is required by the terms of the license program. At most, it “provided Mr. Crosby with the ability to make suggestions regarding the operation of the dispensary.” Have A Heart had to resubmit its operating agreement giving Crosby an ownership stake in the business.

“My hats off to [Oakland],” said Ed Mitchell, the chief operating officer of Have A Heart. “They beat the crap out of us and made us do right by Marshall… The City of Oakland has the best record of I’ve seen in getting people into their equity program and making sure that the people who are supposed to be are helping them out.”

But those who are supposed to be getting help feel differently. Crosby said the whole experience was so frustrating that he considered walking away from the license. He felt that Angobaldo and Senter didn’t support him when he needed guidance, leading him to approach another company with which to partner. The change in partners prompted Angobaldo and Senter to speak to the press   about their story. The allegations troubled Crosby, who said that Senter wasn’t even on his original application.

“I thought this was a lottery. It stopped feeling like the lottery,” he said.

Depending on who you talk to, Crosby’s story is either one in which a big bad cannabis corporation swoops in to take advantage of a program meant to help disadvantaged communities, or one in which a cannabis company put investment dollars on the line in a genuine bid to help when an equity applicant’s business partner failed him.

When I first set out to report this story, I thought I would end up with a tidy narrative about corporate interests taking advantage of a well-intentioned government program. But the reality turned out to be much more complicated. When Crosby chose to end his partnership with Angobaldo, a POC-owned small business in Oakland lost its dispensary license to a much larger white-owned cannabis company from another state, but a marginalized applicant theoretically gained access to a larger pool of resources through a bigger business.

The city of Oakland made sure to look out for Crosby’s interests, insisting that Have A Heart come back to them with an operating agreement that gave him an ownership interest. But as the cannabis business percolates throughout the U.S., other programs might not be so vigilant or hard on big companies that barge in with tantalizing funding and resources.

“It’s a confusing situation,” said James Anthony, an Oakland-based cannabis attorney, after I described the story to him. “Nothing that you said indicated that anybody was lying or cheating or stealing.”

Anthony drew a comparison to how the well-off find ways to pay fewer taxes: “It’s illegal to evade taxes… it’s not illegal to avoid taxes or find ways to minimize your tax burden,” he said. ”Have A Heart plays chess better than Amber Senter… The story is rich white corporations are better at running the game than small minority businesses.”

In Los Angeles, fees and other requirements mean applicants must pony up nearly $40,000 just to apply for a license, explained Kathy Smith, the director of the California Minority Alliance. “There is there a deferment program, there is a discount when you apply,” she said, “… [but] if you don’t get the license, there is no refund. Not $1!”

Massachusetts, which launched the first state-wide equity program in June 2018, is running into similar problems. The state’s cannabis regulatory agency surveyed what it calls “economic empowerment applicants” over the summer and found that 44 percent of them didn’t apply for a license due to difficulties raising money. Many applicants have described trouble simply getting through the licensing process, especially with the excessive fees that some municipalities are demanding (and that well-heeled cannabis companies are in a position to pay).

“The regulated market is not feasible for people who were dealing drugs,” said Anthony. Real equity, he explained, looked more like Prop 215 — California’s unregulated medical cannabis law: There was no need to partner with bigger companies, no investment capital needed, and no frustrating, bureaucratic licensing process to go through.

At best, it will take several years to see the impact of these early equity programs. That people disproportionately of color are sitting behind bars for selling weed while cannabis execs went to Davos to schmooze with global elites is a disturbing incongruity.

Just getting a license doesn’t help economically disadvantaged entrepreneurs secure bank loans or investment dollars to help launch a business.

Giving those disproportionately harmed by prohibition a leg up in the flourishing cannabis industry is a noble goal in light of the racial disparities in drug enforcement. But just getting a license doesn’t help economically disadvantaged entrepreneurs secure bank loans or investment dollars to help launch a business.

Lawmakers are discussing other ideas for how to remedy the wrongs of the drug war through marijuana legalization. Senator Cory Booker previously introduced marijuana legalization legislation that would create a community reinvestment fund, taking marijuana tax revenues and spending it on things like job training, youth programs, and community centers in places that have been most affected by the war on drugs. A similar fund has yet to be implemented in California, and some lawmakers in New York are pushing the idea.

A coalition of advocacy organizations published an open letter on their websites last September outlining problems with legalization and advocating for specific measures to ensure an equitable industry. Their demands included reinvesting cannabis tax revenues back into communities harmed by prohibition, annual audits of equity programs, and corporate social responsibility requirements for businesses that profit off of the industry.

That’s likely a tough sell for large corporations, which are more dedicated to their bottom lines, and governments, which look to legalization for the promise of tax revenue that can be used for other purposes, rather than righting the wrongs of the drug war.

“I think the most important thing is funding the equity program and funding it well,” said Adam Vine, the co-founder of Cage-Free Cannabis who helped coordinate the Equity First Alliance letter. Vine suggested that “funds that… provide capital assistance to equity applicants” established by the municipalities themselves “would alleviate a lot of these problems with predatory lenders.”

In September, California Gov. Jerry Brown signed a bill that would allow municipalities to apply for grants to help entrepreneurs in equity programs. The bill allocated $10 million in assistance, a sum that pales in comparison to the hundreds of millions of dollars that other companies can raise in a single round.

They may not make up for all the racially disparate marijuana arrests, but early equity programs have at least moved the discussion forward. The Drug Policy Alliance put on the first cannabis conference focused on equity last December. Such topics are a sharp departure from the cannabis conferences that have popped up around the industry.

State lawmakers are starting to catch up to what equity programs cannot account for: Colorado approved a bill last year to allow those with past cannabis convictions to petition for expungement. Denver officials are taking that a step further, announcing plans to expunge an estimated 10,000 convictions themselves.

“This business right here brings in lots of money. It’s enough money for everybody — it’s enough for the state, for the city, enough money for us,” said Crosby. “The only thing we need to do is to think positive and do the right thing.”