By: David Standa, Esq.
Last week, Minnesota passed a new cannabis bill that significantly changes the industry landscape in the North Star State. The changes to the law largely mirror what the Minnesota Office of Cannabis Management (“OCM”) asked for based on its opinion that a merit-based licensing system would lead to lawsuits. In an effort to cut off future litigation, the legislature put a cap on the number of licenses to be issued, created a “vetted” lottery-based system instead of a merit-based system, altered the social equity qualifying criteria, and created a social equity pre-approval process that is intended to give social equity applicants a head start on getting operational. Specifically, the new social equity criteria include anyone who:
has lived for five years in a neighborhood where more than 20 percent of people are in poverty or on food stamps, or where the median income is less than 80 percent of the statewide or metro area;
has lived for five years in a neighborhood with high levels of social vulnerability as defined by the Centers for Disease Control;
is a military veteran or member of the National Guard;
was convicted of a cannabis offense in the past, or had a close family member convicted of an offense;
has managed a small farm with less than $100,000 in annual sales for the last three years;
has lived for five years in a neighborhood that has seen a “disproportionate” rate of prior cannabis enforcement, as determined in a forthcoming study by the Office of Cannabis Management.
Interestingly, the new legislation also changed the ownership requirement for entities looking to qualify as social equity applicants. Under the new law, an entity can qualify as a social equity applicant if the individual(s) with “at least 65 percent of the controlling ownership of the business entity” meet the social equity criteria. That is a significant change because previously the controlling ownership threshold was one hundred percent. This change now allows applicants to bring on pre-application investors and/or structure their entities in a way that will allow them to sell some equity in exchange for an injection of capital. The application window for social equity preapproval is on July 24, 2024 , and that application window closes on August 12, 2024 .
The OCM deserves credit for understanding that litigation can slow the rollout of new state cannabis industries (see Maryland, Missouri, Illinois, and New York as the latest examples), but it may be naïve to think that this new structure is going to insulate Minnesota from that same fate. Maryland, Missouri, and New York all opted for a lottery-based system over a merit-based system, and all three states are dealing with delays due to litigation over the lottery criteria and implementation. Minnesota is unlikely to be any different. Further, Minnesota’s decision to give social equity applicants a head start regardless of whether they are prepared to actually start operating is likely to lead to significant delays in the rollout of the industry.
Rep. Nolan West expressed his concern about these exact issues, saying “I, for one, am not optimistic about this. We are setting this market up for failure. I guess you can call this prediction time, I don’t think we’re going to have a smooth launch.” Rather than a market opening next spring, West said he thinks the end of 2025 or early 2026 is more likely for the first legal sales. “We put this new market entirely into luck,” the Minnesota lawmaker said. “Luck of the draw. Chance. It is certainly possible that these few licenses that are being distributed could be distributed to businesses—social equity or otherwise—that are simply incapable of operating in this new market. And then we have a bunch of failed businesses and a market that doesn’t work, and the black market gets on just fine.” West was not the only one with concerns. Potential applicants, including social equity applicants, called the new system a luck-of-the-draw system that could overlook prepared applicants and reward those who might never have the money or the skills to actually launch businesses.
While the system might not be perfect, it is not that different from what was utilized in New York or Missouri – both states where Greenspoon Marder’s cannabis team assisted clients in structuring entities to comply with the statutory requirements and successfully obtaining licenses. We are continuing to monitor things in Minnesota and are assisting clients in their efforts to obtain licenses there as well. If you are interested in pursuing a license in Minnesota, you can contact David Standa ([email protected]
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