Warning That “Unscrupulous Businesses” Are Using Social Equity Candidates As Fronts

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Lawmakers warn ‘unscrupulous businesses’ are using social equity candidates as fronts in bid to get new pot licenses in Illinois.

One social equity applicant said a venture capital firm wanted him to be “like a front for them … but I wouldn’t have any real control over it.”

Fearing that “unscrupulous businesses” could partner with social equity candidates to get a leg up in the competitive application process for licenses to open new pot shops, a group of minority lawmakers are pushing to ensure those applicants profit from partnership agreements and aren’t simply used as front men.

While Illinois House Deputy Majority Leader Arthur Turner Jr. introduced a bill in February that addresses the issue, he and other legislators have urged Gov. J.B. Pritzker and members of his administration to take immediate action as they evaluate the current crop of applicants for dispensary licenses.

Stressful situation for potential owners
The “schemes” outlined in a letter the lawmakers sent to Pritzker and his cohorts last month sounded eerily familiar to Michael Malcolm, a social equity applicant from Morgan Park who has applied for 10 dispensary licenses.

In November, the real estate broker and pot blogger was first approached by a venture capitalist from Chicago who invited him to a meeting at a Trump Tower and proposed an arrangement to partner together on a pot shop.

“They wanted me, I feel, to be like a front for them and for me to put my name down as being a social equity applicant,” Malcolm said. “But I wouldn’t have any real control over it.”

Three months later, he rejected another offer from a cannabis company from Michigan that asked him to partner on a small-scale cultivation center.

“They basically wanted me to put my name down as being the majority owner and then in two years, they take over 80% of the company,” said Malcolm, who declined to provide the names of the companies fearing he may face backlash in an industry he hopes to enter.

“It was a very stressful situation because I was new to it all,” Malcolm said. “And while I wasn’t sure how things were supposed to work, I knew they were trying to take advantage of me.”

In an effort to bolster minority participation in the overwhelmingly white weed industry, the state legalization law grants extra points to qualifying social equity applicants that live in an area adversely affected by past drug policies, have a pot-related criminal record or have a family member that meets the criteria

But the law only requires those applicants own 51% of a cannabis business. And if a social equity applicant sells a license to someone who doesn’t qualify in under five years, the new license holder only has to cover any fees that were waived and pay back any outstanding state loans or grants.

Black Caucus presses governor
Turner, along with six fellow members of the Legislative Black Caucus and two leaders in the Latino Caucus, appealed to Pritzker and administration officials last month to apply recommendations from Turner’s bill to the applicants seeking the next round of 75 recreational dispensary licenses, which were delayed indefinitely just days before they were set to be awarded on May 1.

Concerned that licenses “will be granted to unscrupulous businesses who have no intent on treating their social equity applicant members as legitimate partners in the business,” the lawmakers penned a letter urging officials to consider whether the current round of social equity applicants immediately vest in their ownership interests and whether they could be forced to sell their stakes or restricted from selling or transferring ownership if they choose to do so. The letter also pushes regulators to determine whether those applicants give preferential returns or profits to the other owners and have an opportunity to profit from a sale.

Toi Hutchinson, a former member of the Legislative Black Caucus who co-sponsored the legalization law and now serves as Pritzker’s senior adviser for cannabis control, said the recommendations haven’t been applied to the current dispensary applicants, who submitted their applications before the bill was filed.

Though Turner’s bill has stalled in committee in the wake of the coronavirus outbreak, he plans to work with Hutchinson “to ensure we can continue moving forward to meet our goal of social equity in the cannabis industry.”

Hutchinson committed to addressing the concerns in the letter and said Turner’s bill “elevates the public dialogue” around cannabis equity, but she made it clear that input from stakeholders and community groups and an upcoming disparity study will ultimately “inform what additional efforts are needed.” That study, which will determine whether additional pot licenses should be issued, will commence when the outstanding dispensary, craft cultivation, transportation and infusion licenses are awarded.

Applicant had to push for job
Meanwhile, social equity applicants are anxiously waiting for them to be issued. After his earlier experiences, Malcolm decided to partner with New York-based Columbia Care, a multi-state cannabis firm that operates a dispensary in Jefferson Park.

Malcolm said it was important to work with a company that operated in Illinois and had access to product, though he and his attorney had to negotiate to get the right deal. Most importantly, Malcolm said he needed to push for a job managing his prospective shop to earn a steady paycheck.

“They didn’t push back too hard on it, but I had to let it be known,” he said.