The Road to Social Equity?

Greetings, Happy New Year! It seems like yesterday the e-ink was drying on Cannabis Quarterly #1. Now look at us, heading into the 4th year with a dozen letters and not too many gray hairs to show for it. We swear… Cannabis and regulation. Regulation and cannabis. These two concepts are inextricably linked – a Gordian Knot of political will, entrepreneurial spirit, and commercial drive. What regulation “giveth” through high entry barriers and lucrative profits, it also “taketh” through taxes, compliance fees, and other added costs. Regular readers will know that we’ve pulled no punches in our assessment of California regulation. Since it’s a new year, we’ll be gentle and say, much like our golf game: “well, it’s not the worst.” So, what should we make of the recent push by regulators into “social equity” policies? For those unaware, these policies seek to grant licenses to those most harmed by past cannabis criminalization, particularly low income and minority community members. Ideally, these programs begin to repair the harm caused by the “War on Drugs” and its disparate impact on such groups. Given our stated mission of deploying capital to build a sustaining, responsible, and healthy cannabis industry, thus ending the long-running, unregulated illicit market, we’ve been supportive of this concept, culminating in an investment targeting social equity licenses in Los Angeles. L.A. is an interesting market (and not just because of Lebron) because, with less than 200 total licenses, it’s surprisingly under-penetrated compared to other major cities. Furthermore, L.A. is unique in another way as well, having made the biggest push to date into social equity with ~100 new such licenses. Proving the old maxim that “the road to hell is paved with good intentions,” LA. stumbled during execution. It set up a “first come, first serve” process, and then mistakenly allowed a few license seekers to gain early access to its computer system. Not surprisingly, unsuccessful applicants objected, leading L.A. to halt licensing until a 3rd party firm completed a process audit. Meanwhile, successful applicants have been burning cash on rent, salaries, and fees without any sales. Across several other states, we have seen similar dynamics play out. Take Maryland, for example, where medical licenses were first issued in 2013. The first licensed growers did not launch until 2017, but there were zero minority-owned businesses amongst the licensees. After various delays and reviews, new licenses were issued in 2018, with priority given to minorities or those from financially disadvantaged backgrounds. However, the process was again plagued by technical issues and complaints of unfairness and bias. Consultants were again hired to review the process, with no end in sight for delays. Admittedly, it’s a tight-rope exercise for policy makers trying to execute these initiatives. First off, they raise profound social questions, especially around setting intangible (and hard to define) goals like “fairness” and “equity.” Second, they include significant monetary rewards, increasing incentives for profit seekers to bend the rules. Third, local governments are often short-staffed and working under tight timeframes. We are still cautiously optimistic about the road to social equity, despite the speed bumps. Given these experiences, we strongly encourage regulators to focus on transparency in setting goals and rules, and then following through with diligent and consistent execution. We are not certain that the delays, rule changes after the fact, and other policy gymnastics are helping to produce better outcomes. We are certain, however, that they are harming all participants and damaging the integrity of the process they are trying to protect. Thanks for tuning in, and we look forward to providing you with more industry and business updates in the coming months. Until next time! Cheers, Mike and Kip Co-Managers, Presidio View Capital