A marijuana campaigner in Missouri is facing scrutiny over his business practices in the new legal market. John Payne, a white businessman who helped lead the successful 2022 legalization effort in the state, is connected to over 300 new “microbusiness” applications submitted in 2024, according to an investigation by the Missouri Independent. This licensing pathway is supposed to be dedicated to helping people with cannabis-related criminal records or low-income backgrounds join the industry.
Some of the contracts offered by Payne and his partners reportedly guaranteed them 90 percent of profits and majority control of the social equity applicant’s business—with a $1 million penalty if the microbusiness partner walks away. Legal experts who reviewed one of the contracts for the Independent described it as potentially predatory. And there are concerns that that such contracts may violate state law, which requires a microbusiness to be “majority owned and operated” by the eligible person.
Social equity applicants contracted with Payne won six out of 24 dispensary licenses issued by the state on July 24.
Many other states have their own cannabis social equity programs, intended to redress some of the injustices inflicted on communities by marijuana prohibition. As legalization has spread to 24 states and Washington, DC, so has a demand that Black, Brown and other entrepreneurs from communities that have borne the brunt of marijuana arrests get a fair shot in the legal industry.
“There is a gaming of the system that was designed to provide support and an opportunity for people that were harmed by the War on Drugs.”
But many social equity applicants lack startup funds and face severe hurdles to opening their doors, without adequate state support. That’s when signing a highly unfavorable deal with a bigger player may become the only option. In this way, the issue of wealthy operators exploiting these programs for their own gain has become widespread.
“There is a gaming of the system that was designed to provide support and an opportunity for people that were harmed by the War on Drugs, but now we see a situation where these folks are in the line of more harm,” Mike Lomuto, board chair of the Minority Cannabis Business Association, told Filter.
Lomuto has examined similar cases in legal cannabis markets around the country. “It’s a little frustrating to see this happen yet again, not only in Missouri,” he said.
Lomuto just held a conference call with organizers about a separate scandal in New York. There, a planned $200 million social equity fund set up by the state to help cannabis businesses acquire and open storefronts has been suspended by Governor Kathy Hochul (D). Local reporting revealed troubling connections with a private equity firm that was offering loans with excessively high interest rates, threatening to overburden social equity businesses in debt. “It certainly seems predatory,” said state Senator Liz Krueger (D), a longtime champion of marijuana legalization.
Part of the problem, Lomuto said, is when activists, entrepreneurs and the media focus heavily on how many business licenses are issued in each state and who gets them. While getting a license is of course a difficult step, it’s really just the first step. Actually opening for business requires many additional and costly steps, which too many license recipients cannot complete alone.
“They’re not able to find the investment or real estate , which is what leads that person to make deals with someone that doesn’t have their best interests in mind.”
“The reality is most folks are not [following through on] those licenses in the first place,” Lomuto said. “We have looked at success in terms of how many licenses are held in the first place by a social equity licensee. What we need to look at is what is success in terms of that person’s exit, whether it’s taking on investor or selling the business entirely … They won the lottery and got the initial license but they’re not able to find the investment or real estate to start the business, which is what leads that person to make those deals with someone that doesn’t have their best interests in mind.”
As another example, Arizona—which legalized marijuana in 2020—has also faced similar concerns. According to a 2023 investigation by the Arizona Center for Investigative Reporting, in at least four cases, people who obtained a social equity cannabis license ended up losing it in legal battles with their business partners.
These instances included social equity owners being forced to take on millions of dollars in debt, partnering up with strangers to run their business, and having their license taken away by an arbitration council after refusing to sign a business agreement.
The investigation found that the biggest marijuana companies in the state funded hundreds of social equity license applications hoping to get an ownership stake in the future businesses. And when the state held a lottery for 1,300 applications, 10 out of the 26 licenses granted were to applicants connected to the major marijuana companies. All 10 of those social equity licensees are no longer part of those partnerships.
States’ rules and scrutiny regrading cannabis social equity programs can certainly improve. But in many ways, the extra hurdles—and scandals—associated with legal cannabis businesses are the result of its unique status as a drug: legal in dozens of states but still a Schedule I controlled substance federally.
“Descheduling would solve so many of the problems we’re seeing.”
That federal status makes it harder for businesses to get loans or work with major banks, forcing some dispensaries to operate cash-only (the issue has improved over the years, but not been fixed yet). Another problem is that dispensaries cannot deduct business expenses, because Section 280E of the federal tax code prevents such deductions for any business that “trafficks” a Schedule I or II drug.
President Biden’s efforts to reschedule marijuana to Schedule III would at least solve this problem. But descheduling marijuana and removing it from the Controlled Substances Act entirely would be far more helpful, according to Lomuto.
“Descheduling would solve so many of the problems we’re seeing,” he said. “The 280E relief would be dramatic for businesses. The other thing is you could get Small Business Administration loans. The SBA is one of the biggest funders in the entire world for small businesses.”
“It would also be a massive signal to other traditional lending institutions that they are okay doing business with cannabis,” Lomuto concluded. “That leads to more access to capital, so these predatory deals with high interest rates wouldn’t be the only ones available.”
Photograh via State of Connecticut