It can be challenging to start a business in this highly regulated industry. It requires a lot of planning, knowledge and preparation to understand and follow all the legal requirements expected of you. Do your due diligence before taking your first step toward owning a cannabis business. Get acquainted with the rules, regulations, and requirements at the state, city, and even possibly, the county level.
After your business is established, you can expect ongoing legal obligations, such as licensing renewals and changes to existing rules and regulations.
The process of actually scoring a cannabis business permit these days can seem a bit mystifying. Some places use a lottery and others a rigorous application process, while Oklahoma uses a “check the box” free market system. We break down the pros and cons to each permitting strategy.
Here’s a rundown of the pros and cons of the two most common processes — application processes and lottery systems — that people are going through to grow, manufacture and sell marijuana on the legal market. Then, we dive into the free-market alternative that Oklahoma is experimenting with, and what it could mean for a simpler permitting solution.
The Rigorous Cannabis Permit Application Process
We reached out to one of the nation’s leading authorities on cannabis licensing, Brian Vicente of Vicente Sederberg LLP, to explain why the merit-based application process is so prevalent in new cannabis markets. The law firm has helped people in 28 states and other countries get permitted to take part in the cannabis industry. Vicente leads the firm’s licensing division personally.
“I would say your most common form of licensing is probably your merit-based licensing,” said Vicente. “We just saw it in Missouri. They got 2,100 applicants on Monday for their limited licenses.”
Vicente says one of the main pros of a merit-based system is you’re going to end up with well-organized good actors.
“You’re putting them through a very intensive screening to get those folks through the door,” he said.
The cons are that it’s getting increasingly difficult to win these contests. Vicente believes only really deep-pocketed folks have a shot anymore because every part of the process is so intensive — and expensive, from the fees most applicants have to pay to lawyers and consultants like him.
“You’re going to spend a couple hundred thousand dollars to produce a winning application,” Vicente said. “If you’re not a rich person, especially if you’re a person that’s been disproportionately affected by the war on marijuana, you often don’t have those resources.”
NCIA Media Relations Director Morgan Fox told us that merit-based systems lead to success for bigger companies.
“The ranked selection system can theoretically result in a higher-quality local market, but tends to be weighted in favor of bigger and more established companies, even though they might not be the best fit for the community,” Fox said.
The Risky Cannabis Permit Lottery System
Vicente went on to say lottery systems aren’t as common, yet. He pointed to Arizona’s 2020 ballot language as evidence lottery systems are on an upward trend. The lottery will be for new licenses after existing medical facilities transition into the adult-use market. Vicente says one lottery system pro is the applicant pool can be more economically diverse.
“If you win the lottery, you win the lottery. It doesn’t matter if you have $10 million or $100,” Vicente said. “The other pro with the lottery system is there is going to be less lawsuits.”
Vicente says with the 2,100 people applying in Missouri, “believe me, some of those people that don’t win are going to sue. They’ll say that the merit system was rigged or wasn’t fair. We’ve seen that.”
In almost every state that has used a statewide merit-based system, Vicente says he’s seen lawsuits from applicants who lost. These lawsuits can cost the state money, and potentially slow down overall implementation.
“You just don’t see that in litigation around lotteries because there is not as much subjectivity,” Vicente said.
As for the cons, Vicente says with a lottery you can certainly end up with people that aren’t going to be the best business operators.
We asked how often people winning lotteries are more likely to pull a bait-and-switch, selling the permits and cashing out?
“I think it is more common for people to then flip the lottery licenses,” Vicente replied, “although there hasn’t been a ton of lottery systems across the country.”
Fox said that neither the merit-based application system or lottery system is great, because both impose an artificial cap on the number of licenses given out.
“The lottery system is fair in that as long as all applicants meet certain baseline requirements, they all have an equal shot at getting a license,” Fox said, “but excellent applicants who worked really hard to put together the best possible submission might get beaten by someone else who submitted the bare minimum and won’t necessarily be the best operator.”
The Unrestricted “Check the Box” System
Vicente says the third kind of licensing system is just the “check the box” license. He pointed to Oklahoma as an example where anyone with the fee, a clean record and a property could get a license. The marketplace will pick its winners.
“Those are the three main types and it’s yet to be determined which is the best. My rank preference would be ‘check the box’, then merit, then lottery. I think there are pros and cons on all of them,” Vicente said.
Kris Krane, who has been involved with cannabis reform for 20 years and now serves as president of multistate operator 4Front, says there are arguments to be made in favor of each system.
“In general, I think there is an argument to be made whether you want limited licenses or unlimited licenses and just let the market decide,” said Krane.
Krane thinks that’s more of a question for states than municipalities. He thinks states can set a relatively high bar for competency. So he sees the argument that with the level of competency required from each operator, there isn’t a need for limits on total permits.
Krane said it’s more reasonable for municipalities to set limits as to not be overrun with cannabis businesses. He said once you decide on whether there is going to be a cap or not on the licenses, you can get into the merits of the processes to determine the winners.
The “Qualified Lottery” Solution?
Vicente, Fox and Krane all pointed to some kind of qualified lottery as the solution.
“I think based on what we’ve seen around the county, the best system is a heavily qualified lottery,” Krane said. “You don’t want a lottery where anyone can just fill out a form and potentially win a license.”
Krane says what happens in those situations is you end up getting unqualified people winning licenses, people undercapitalized getting licenses, “and so they get licenses but they don’t end up getting open.”
Krane says the problem with going in a more restrictive merit-based direction is you end up with the legal challenges cited by Vicente.
Fox agrees: “The ideal process would be to remove license caps altogether, grant licenses to every applicant who meets the criteria, and let the market sort out the rest.”
Cody Bass — an NCIA board member and city council member in South Lake Tahoe, California — also weighed in on the debate. “Cities need to create zoning for cannabis which will limit the amount that can exist in a city,” he said. “They can create language around saturation as well. Then the free market decides who, where, and when.”