On March 31, 2020, Washington State Governor Jay Inslee signed HB 2870, which “creates a new social equity program that provides business opportunities to people from disproportionately-harmed communities so they can benefit economically from the cannabis industry and become a cannabis retailer.” We’ve covered the social equity program in Los Angeles pretty heavily, as our L.A. office has been working with applicants since the beginning, and in California, Oakland and San Francisco have also implemented social equity programs.

Washington, one of the first two states to legalize adult-use cannabis, is a relatively late adopter of a strategy for implementing such a program. However, according to HB 2870, the legislature is recognizing a truth that is being widely discussed:

… that individuals who have been arrested or incarcerated due to drug laws, and those who have resided in areas of high poverty, suffer long-lasting adverse consequences, including impacts to employment, business ownership, housing, health, and long-term financial well-being. The legislature also finds that family members, especially children, and communities of those who have been arrested or incarcerated due to drug laws, suffer from emotional, psychological, and financial harms as a result of such arrests and incarceration. The legislature further finds that individuals in disproportionately impacted areas suffered the harms of enforcement of cannabis-related laws. Those communities face greater difficulties accessing traditional banking systems and capital for establishing businesses.”

While the Washington State Liquor and Cannabis Board (the “Board”) will be responsible for adopting regulations to implement the legislation, we do have some guidelines regarding what the state’s social equity program will look like.

First, what will constitute a “social equity applicant?” A “social equity applicant” means:

  1. An applicant who has at least fifty-one percent ownership and control by one or more individuals who have resided for at least five of the preceding ten years in a disproportionately impacted area; or
  2. An applicant who has at least fifty-one percent ownership and control by at least one individual who has been convicted of a marijuana offense or is a family member of such an individual.

A “disproportionately impacted area” means: “A census tract or comparable geographic area that satisfies the following criteria, which may be further defined in rule by the board after consultation with the commission on African American affairs and other agencies and stakeholders as determined by the Board:

  1. The area has a high poverty rate;
  2. The area has a high rate of participation in income-based federal or state programs;
  3. The area has a high rate of unemployment; and
  4. The area has a high rate of arrest, conviction, or incarceration related to the sale, possession, use, cultivation, manufacture, or transport of marijuana.”

Some other important guidelines:

  • Applicants for retail licenses must be social equity applicants and must submit a social equity plan with their marijuana retailer license application.
  • If the Applicant entity is owned by more than one person, at least 51% of the proposed ownership structure must reflect the qualifications of a social equity applicant.
  • Persons or entities holding an existing marijuana retailer license or title certificate for a marijuana retailer business in a local jurisdiction that is under a ban or moratorium may apply for a license under the social equity program.
  • The Board will establish a “marijuana social equity technical assistance competitive grant program” to provide assistance to equity applicants in navigating the application process.
  • A legislative task force on social equity in marijuana is established.

Interestingly, the legislation also gives the Board what seems to be a good amount of discretion to evaluate applications and prioritize applicants “based on the extent to which the application addresses the components of the social equity plan.” Our hope is that this kind of flexibility and discretion will help to eliminate some of the issues we’ve seen with other social equity plans. In particular, there have been ongoing issues with companies taking advantage of qualifying social equity applicants in order to gain a toe hold in competitive licensing jurisdictions. We’ve seen questionable deals in which social equity applicants are stripped of their equity interests, or effectively have no control over the operation of a licensed business, which seems to run counter to the intent of these programs.

We’ll be monitoring the Board’s rulemaking process and will be providing updates as Washington’s new social equity program takes shape.

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