Missouri’s Division of Cannabis Regulation announced new proposed rules Monday afternoon for its marijuana microbusiness program designed to combat predatory practices during the application process.
The division published a draft of the rules on its website and is asking for public feedback before it submits the proposal to the Secretary of State’s office on January 6.
“These revisions are intended to ensure microbusiness licenses are issued to eligible individuals … and to address the trend of predatory arrangements in microbusiness licensing,” the division said in a press release announcing the proposed changes. “Specifically, these draft rule revisions should mitigate the ongoing efforts of ineligible entities to acquire licenses by taking advantage of eligible individuals.”
Since Missouri voters approved recreational marijuana in 2022, state regulators have used a lottery system to award 96 microbusiness licenses — a program sold to voters as a way to help victims of the War on Drugs get a toehold in the burgeoning cannabis industry.
But of the 96 licenses issued so far, 41 have been either revoked or are currently at risk of being revoked. Another three are under investigation.
A majority of those 44 licenses are connected to groups or individuals who flooded the lottery by recruiting people to submit applications and then offering them contracts that limited their profit and control of the business.
In June, four legal experts reviewed such a contract The Independent had obtained and concluded it was unfair and potentially predatory. All four agreed state cannabis regulators should reject any license application connected to the contract because it violates the constitutional mandate requiring licenses to be “majority owned and operated” by the eligible applicant.
In order to prevent numerous revocations, the division is proposing to adjust when its extensive application-review period occurs.
Among the changes include a requirement that the designated contact for a microbusiness applicant must be an eligible individual contributing to the majority ownership of the microbusiness license.
Additionally, any entity who was the designated contact for a license that was previously revoked for failure to comply with the ownership and operation requirements will no longer be allowed to be involved in any capacity in a future microbusiness application.
All microbusiness applications in which such former designated contact has any involvement would be denied.
“Majority owned and operated” would be defined as the eligible individuals who are listed as having majority ownership must have a level of operational control that would be expected of an owner.
Eligible individuals must have the power to order or direct the management, managers, and policies of the license, enter into agreements on behalf of the license, and otherwise make decisions for the business.
“A purported owner with little to no knowledge, control, agency or decision-making authority in an application or license does not meet the intent or meaning of the” constitutional amendment that legalized recreational marijuana and created the microbusiness program, the division said in its press release.
Applicants would also be required to take an online training course that addresses predatory practices, and eligible individuals would have to submit the application themselves and communicate directly with the state rather than through a consultant who often acts as the “designated contact.”
While the new rules may delay the full rollout of the program, Adolphus Pruitt, president of the St. Louis NAACP, believes it’s necessary.
“It’s a very simple question with a simple answer for me,” Pruitt told The Independent in October. “Or would you rather continue to try to catch everybody who’s speeding?”
Revoked licenses
The state issued its first round of 48 microbusiness licenses last year.
These applicants were picked out of a lottery of 1,600 submissions, and then the division verified they met the basic qualifications — which includes having a low income, a nonviolent marijuana charge on their record, being a disabled veteran or living in a low-income ZIP code.
But getting the license is currently just the beginning of the verification process.
The licensees must then pass through a rigorous 60-day investigation into all financial and operating agreements to make sure the license will continue to be majority owned and operated by an eligible person, as the state constitution requires.
After the investigations last year, the division ended up issuing 11 notices of pending revocation.
The licensees had a few months to respond to the division’s concerns, but ultimately all six licenses connected to cannabis investor Michael Halow were revoked — along with two connected to a Michigan-based group — because they couldn’t prove the business would be run by an eligible person.
The revocations were the division’s attempt to prevent what some legal experts have called “fronts,” or arrangements where the profits and ownership weren’t going to people that regulators had certified were eligible.
In July, the division awarded another 57 microbusiness licenses. But after the 60-day investigation that ended earlier this month, regulators sent out 32 notices of pending revocation.
Half of the 32 pending revocation letters went to licensees connected to Halow.
By law, the state must award a total of 144 licenses to disadvantaged business owners, over the course of three lotteries. The state has already conducted two lotteries, but there’s not a definitive deadline to conduct the final round and meet the goal.
Allegations of predatory behavior
Last year, The Independent reported on a Michigan-based company called Canna Zoned was recruiting people on Craigslist to enter Missouri’s social equity license lottery using contracts forcing them to eventually relinquish all control — and profits.
The company landed two dispensary licenses last October and both were revoked earlier this year, though the company is appealing that decision. A hearing will be held for these licenses in March.
Despite those revocations, Canna Zoned was awarded another license through the July lottery, and once again received a notice of pending revocation in October.
Cannabis consultant John Payne also received six notices of pending revocation in October for licenses where he serves as the designated contact. Payne led the campaign to legalize recreational cannabis in 2022 and is connected to nearly 500 applications and 12 licenses since the program’s inception.
But Payne has come under fire this year after The Independent revealed that for some applicants he’d recruited eligible Missourians and had them sign a 47-page contract that would ultimately give him and his partners 90.1% of profits and majority control of the business.
Despite only owning a fraction of the business, under state law the applicants would bear the lion’s share of the regulatory scrutiny. If they ever want to walk away from the deal, they would be required to pay a nearly $1 million fee.
In addition to the six notices of pending revocation, three current licenses connected to Payne are under investigation by state regulators. According to case documents for these three cases, the division questioned whether the eligible person who submitted the application will continue to be the majority owner and operator of the business.
NAACP leaders in Missouri are calling these practices a “predatory attack” on the microbusiness program, which voters intended to allow marginalized or under-represented individuals to participate in the legal marijuana market.
“If a Black license owner is not making the most money off the operation, then they’re being robbed of the opportunity to create generational wealth,” Pruitt said. “That’s what the microbusiness program is about. And that’s what’s being robbed.”
This story was originally published by the Missouri Independent, part of the States Newsroom.
