Over the last month, Mike Fourcher and I have been discussing what the new Grown In newsletter would look like. During those discussions, while we were brainstorming article ideas and generally charting our course in reporting, I brought up Connecticut and the state’s botched roll out of adult use licenses. At the time, I predicted that the Social Equity Council was probably going to be sued over the state’s licensing process.
Weeks later, my prediction came true with at least three lawsuits filed against the SEC in Superior Court between the Social Equity Council’s first approval of cultivation applicants on July 12 and the time of this writing about four weeks later. My guess was hardly the result of Nostradamus-level divining, and more the easiest conclusion to reach for anyone, such as myself, who has been watching the Social Equity Council over the last few months.
Technically, the Department of Consumer Protection is running the state’s cannabis market, but because social equity candidates get the first crack at licenses, the Social Equity Council is essentially serving as gatekeeper to the start of adult use sales.
Unlike all of the other proposed adult use cannabis license types, cultivation applicants were not subjected to a lottery. Instead, the applicant had to have at least 65% ownership and a majority control of the company, while also living in one of the 200 census tracts in the state that were deemed to have been disproportionately impacted by the War on Drugs. The other hurdle was that the license cost $3 million, despite being restricted to residents whose households made an average of $79,855 a year, the state’s median income in 2020, over the previous three years.
The Hartford Cannabis Company, The Goods THC and Nautilus Botanicals all filed superior court lawsuits against the Social Equity Council from July 22 through August 3.
[Download complaints from The Hartford Cannabis Company – The Goods THC Co. – Nautilus Botanicals LLC]
The first two companies had the same financial backer, according to their respective complaints. The third is from Nautilus Botanicals, which is unaffiliated with the first two companies and is led by Luis Vega, a hemp farmer who spent months being portrayed as the face of Connecticut’s social equity program.
In all three cases, the spurned applicants say that the state failed to properly share the ownership and control requirements before assessing applications, and then failed to properly interpret their respective paperwork.
“Specifically, the SEC misread Nautilus’s Operating Agreement and erroneously failed to consider the SEA’s role as Chief Executive Officer and his possession of 65% of the ownership and voting interests in Nautilus,” said the lawsuit from Vega’s company.
Meanwhile, the Hartford Cannabis Company lawsuit challenges the way the SEC developed and implemented its ownership and control rules.
“Hartford Cannabis is further aggrieved by the SEC’s Decision because the SEC violated CGS 21a-420g(a) by failing to inform applicants of the ownership and control requirements that would be applied to social equity applicants prior to the start of the application period”
The SEC official started the clock on the applications period when it approved the final licensing rules on Jan. 14, 2022, meaning that applications could be submitted in February. The Council then waited until March 14, to post a memo clarifying that ownership and control of the day to day business would both have to be 65% in the hands of social equity candidates.
The state’s Social Equity Council is in the process of approving applicant lottery winners so that those applicants can then obtain a provisional license from the Department of Consumer Protection.
So far, the Social Equity Council has approved 16 cultivators and 5 of 6 retail lottery winners – One of the six was deemed ineligible by CohnReznick, the consulting firm that SEC handed the analytic work over to, so now the consulting firm must look at the seventh lottery winner.
Considering those barriers, of course, many of the successful applicants appear to be owned and/or under the control of out of state entities.
For example, three applications were approved under business names of already existing out of state operators, INSA, MariMed and Nova Farms. To be fair, it is entirely possible that these companies are financing their Connecticut counterparts, while handing control and a 65% ownership stake over to someone who actually lives in one of the state’s Disproportionately Impacted Areas.
INSA’s paperwork claims that the manager of their Connecticut operation lives in the state, but she lists INSA’s Chicopee, Massachusetts location as a business address and the fact that she was referred to as an employee of INSA in Massachusetts as recently as June, raises questions about how much she actually owns or controls the new cultivation venture.
At least three other Social Equity winners are backed by out of state companies, such as The Yard Connecticut, which lists a Pennsylvania business address and River Growers CT, which uses a business address in New York state.
Meanwhile, winning applicants included a current city councilor from Hartford and the former director of the state’s Department of Consumer Protection – the same agency that oversees the cannabis market.
Several winners also list managers or owners who do not live in DIAs. In theory, this would disqualify them from social equity status, though the Social Equity Council has been unclear on how it approached the possibility of applicants renting second apartments in DIAs in order to qualify.
“Day One Buds is curious how our connections feel about licenses getting fast tracked for existing millionaires from other states, while Connecticut owned small businesses and residents get screwed over?” wrote Day One Buds in a Linkedin post the day the 16 winning companies were announced.
As of this writing, the Social Equity Council still had to approve lottery winners for the rest of the license types, assuming those respective lotteries have even taken place. Which brings us to another nagging problem from Connecticut, a lack of transparency.
So how did the SEC determine whether or not cultivation applicants qualified? They farmed that task out to consulting firm CohnReznick. The national consulting firm has a general accounting and auditing services contract with the state of Connecticut.
“Based upon review of the documentation that was provided, we could make a reasonable determination that they meet the criteria in terms of residency, income, ownership and control,” explained CohnReznick senior manager Geoffrey Magon during the SEC’s July meeting.
Basically, CohnReznick analyzed the applications and the SEC voted based on the company’s report.
The Council unanimously voted to approve the 16 successful applicants with little discussion, who must now undergo a background check from the state’s Department of Consumer Protection before they are provided with a provisional license.
As if simply voting on approval was not enough, the Council then voted to deny the remaining 25 applicants which was when Council members seemed to betray their lack of understanding about what was going on.
“So what are we voting on here?” asked Council member Corrie Betts, during the July 12 meeting. “I don’t think it’s fair for us to be voting on anything when it is not clear.”
The Council struggled to get clarity about which applications were rejected for clear residency or income reasons, or if it was a more ambiguous problem with control of the company.
Magon said that CohnReznick did not feel that it was their place to request clarification from applicants
The Council took about 30 minutes to discuss CohnReznick’s process – months after the company had already been approved by the Council to do the work.
The seeming lack of understanding from the Council is nowhere near the first instance of struggling to function in its full year of existence.
A common trait of new cannabis regulatory bodies is to seek a legislative solution for various growing pains. In the case of Connecticut, the Council needed the legislature to require that Council members actually show up to the monthly meetings.
Heading into the summer, the Council also suddenly stopped allowing public comments during meetings. Perhaps because they were tired of hearing consistent complaints of mold levels in the state’s medical cannabis program – but that’s another story.
The Council then began discussing topics in closed sessions, such as when it voted to approve new bylaws before they were shared with the public.
All of this means there will be plenty of different things for burned applicants to complain about in court, if and when they decide to get litigious, much like in Illinois, Ohio, and Missouri.
Illinois has faced a series of lawsuits over its applicant scoring system and its lottery for dispensary and craft grow licenses. Meanwhile, last fall Rhode Island faced short-lived legal action over how it conducted its lottery for six new medical licenses, just as Missouri faced legal action over its cap on medical licenses.
Basically, there is precedent that half-assed cannabis licensing processes always leave failed applicants salty, who in turn never struggle to find a lawyer to take their case.
Considering the SEC, DCP, and Cohn Reznick had already started ducking credit for the approval process, before the first lawsuit dropped, none of this should be surprising to them, either.
