Cannabis Industry Social Equity Is Falling Short: Can CPAs Help?

At the most basic level, social equity is any social policy concerned with justice and fairness. In the context of cannabis, social equity is the idea that regulators and leaders have an obligation to right the wrongs of cannabis prohibition and aid populations that were disproportionately impacted by the War on Drugs and ensure they’re included in the emerging legal cannabis industry.

As a result, more than a dozen states and cities over the past few years, including Illinois, have developed cannabis social equity programs—programs designed to connect persons and communities that have been historically impacted by arrests and imprisonment for cannabis offenses (primarily people of color) to procure and retain a cannabis business license.

Kenneth “Kenny” Mason, CPA, MBA, CEO of Equibis, founded his firm specifically to help cannabis clients after seeing the impact the War on Drugs had on the community where he grew up: Chicago’s South Side. “Cannabis is a complicated industry,” he says. “People who aren’t as business savvy need more support in getting a cannabis business off the ground.”

Mason notes that social equity cannabis licensees face greater challenges than the average entrepreneur—there’s a lack of capital, connections, and resources that make getting licensed seem almost insurmountable.

Of course, states and cities are taking on cannabis social equity issues in different ways. Jessica Velazquez, CPA, CFE, managing partner and CEO of Indiva Advisors LLP, says “some states have created funds to aid social equity entrepreneurs with necessary capital needs while others don’t offer any capital support. Some states also lower or waive fees while others carve out particular license types.”

In January 2020, Illinois made history by becoming the first state to prioritize a social equity program for business licenses through legislation. The program’s criteria requires that applicants:

• Be owned or controlled by someone who lived in an area disproportionately affected by the War on Drugs.
• Have history of an arrest or conviction for marijuana possession or delivery that no longer is illegal.
• Have family members that meet the criteria.

Another facet of Illinois’ social equity licensing program is the Direct Forgivable Loan Program. Rolled out in November 2022, the $8.75 million fund provides loans that are fully financed by the state and available to all conditionally approved social equity loan applicants. The goal is to provide immediate access to capital. Pending the completion of a simplified documentation process, forgivable loan amounts between $50,000 to $500,000 are available.

Yet, despite these efforts, cannabis social equity still has a long way to go in Illinois. According to 2022 data, Black and Latino-majority owned dispensaries make up just 1% of dispensaries in the state. Also of note, by January 2021, one year after legalizing cannabis in the state, not a single license had been issued to a business that was majority-owned by a person of color.

THE SLOW MOVE TOWARD PROGRESS

One of the drivers that’s impacted progress in this space was the pandemic, which delayed the issuance of new cannabis business licenses. At that time, social equity applicants were also at a disadvantage compared to established medical marijuana dispensaries who were already set up to sell recreational cannabis immediately once it became legalized. Other issues slowing down progress include the fact that lottery drawings were used to award available licenses that saw nearly 1,700 applicants enter to win just 75 licenses, and there remains a general lack of cannabis social equity regulation and guidance.

Velazquez serves on the board of the Minority Cannabis Business Association (MCBA), the first national nonprofit trade association supporting minorities in the cannabis industry. “When the organization was founded in 2015, we knew social equity was an issue,” she explains, pointing to states like Colorado, Washington, and Oregon, which already had established adult-use cannabis markets but no regulation to address minority participation.

In response, MCBA created a model state legislation and model municipal social equity ordinance that helped guide equity law and policy throughout the United States. In addition to creating model policies, MCBA directly advises industry and lawmakers to help shape laws at all levels of government. “We knew if we didn’t come to the table and push state regulators to look at this issue, we’d [minorities] be completely left out,” Velazquez says.

The hope was that Illinois’ social equity program would be the proverbial white horse. “We had high hopes because Illinois created an actual fund, and at that time, no other social equity programs had done that,” Velazquez says. “It’s a great start, but the entire $8.75 million fund could maybe only benefit a couple cannabis businesses due to the high cost of starting one. That amount of capital isn’t nearly enough to help the many minority entrepreneurs looking for funding.”

An additional challenge with Illinois’ program comes from the requirement that social equity applicants must have 51% minority ownership. “Investors don’t like that,” Velazquez says. “Investors who put millions of dollars into a business want majority control.”

Though, Velazquez isn’t knocking the Illinois program by any stretch. “There are many things that make it challenging for any state to effectuate its goal and mission to provide services to the social equity participants they intend to help,” she says. “No one is really having success yet.”

MIRED IN RED TAPE

Nathan Summers, CPA, audit principal at Miller, Cooper & Co. Ltd., says for social equity licensees to succeed, the process needs to be more expedient. “The social equity applicants began this process in 2020 and now, three years later, they still aren’t operational,” he says. “As an applicant, you put resources and efforts into this business opportunity, you raise capital, and build a team to hopefully get a license—you can’t just sit for two or three years waiting for something to happen.”

Mason has worked with several people who applied for the social equity conditional license and agrees the turnaround time is problematic. “We helped applicants put together their financial information, and then there’s a long, drawn out wait—and no one is sure why. At that point, are the licensees even still able to move forward?” he questions. “Folks are missing opportunities.”

Summers says social equity programs also need more standardization. “It’s unclear if everything is looked at within the same lens from applicant to applicant,” he stresses. “We need more transparency, urgency, more emphasis on moving this forward—and we need to do it quickly.”

HOW CPAS CAN HELP

Mason says CPAs serving the cannabis industry are already uniquely qualified to help potential social equity licensees. CPAs can help by:

• Assisting with license paperwork and financial documentation. Social equity cannabis applicants may need more help than the average cannabis client—whether it’s with the license application itself, putting together financial projections, securing investors and financing, or preparing the necessary tax returns. Cannabis entrepreneurs may also need help explaining to investors how the investment funds will be used. “Applicants know they need money, but I often find they’re not prepared for in-depth investor questions,” Velazquez adds.
• Understanding industry intricacies. Velazquez says working in the cannabis space, and especially with social equity clients, means understanding the dos and don’ts of a state’s social equity program. She encourages CPAs to understand the intricacies, not just of these programs, but for cannabis licensing in general.
• Creating connections. CPAs can also provide valuable connections. “Be the bridge for these folks and connect them to one another,” Velazquez says. “There could be opportunities for your cannabis clients to collaborate, pool resources, and exchange information with others in the cannabis industry.”
• Being an advocate. Summers says social equity applicants need advocates. His firm met with Illinois legislators to explain the tax issues facing cannabis operators. The General Assembly ultimately decided to decouple from the federal code with regards to Section 280E, which kept cannabis businesses from deducting most expenses—a big step forward.

“Anything we can do for these entrepreneurs is important, whether that’s helping legislators understand challenges, connecting clients with potential investors, or providing resources,” Summers emphasizes. “We’re here to do all of that. Our expertise as CPAs goes a long way.”

Diversity matters in all industries, Velazquez adds, and cannabis is no different: “I think providers who serve the cannabis industry generally care about seeing it unfold into something we’re all proud of.”

Mason’s hope is that disadvantaged individuals and communities can find their place in the cannabis industry they helped build in the unregulated past.

Ultimately, social equity needs to improve everywhere cannabis is legal, Summers asserts: “The goal is to give folks who haven’t had the same opportunities as others the ability to share in the industry’s upside going forward. There isn’t a perfect system yet, so everyone in the industry needs to give attention to getting this right.”

Related Content:

• The Green Rush: What CPAs Should Know Before Considering Cannabis Clients: As the cannabis industry grows, more—and more complex—opportunities for CPAs arise. Before rushing into serving this unique client base, here are some challenges and risks CPAs and their firms should consider.
• Illinois’ Cannabis Industry: What Accountants Need to Know: As more states move to legalize marijuana, accounting professionals must stay ahead of the curve to help serve this unique, complex niche.