According to Illinois regulators, conditional dispensary license holders are not only barred from selling their licenses until full operation, but they are also barred from taking on outside equity investment and from signing management service agreements. Last week a pair of attorneys who are also dispensary license holders, filed suit against the state, charging that the state’s ban on equity sales is unconstitutional and violates existing state law.
The state’s ban has, “obstructed social equity conditional license holders from successfully operating their companies, from considering and/or accepting purchase offers, from raising capital through investors, and from entering into MSAs or other strategic partnership agreements to become operational,” says the motion for a preliminary injunction filed by WAH Group and HAAAYY in Cook County Circuit Court earlier this week.
[Read the motion filed by WAH Group]
The core of the argument is over language in Illinois’ law creating cannabis licenses, 410 ILCS 705/15-25 (e), which stipulates that if a license is not made operational within 180 days of award, the state may withdraw it and reward the license to the next highest scorer from the application process. An August 24, 2022 advisory notice from regulators interpreted that section as meaning, “Conditional Licenses cannot be sold, transferred, or assigned.”
WAH Group, which is partially owned by and represented by attorney Mazie Harris, and HAAAYY, which is owned and represented by attorney Robert Walker, have been locked in litigation with Illinois regulators one way or the other since September 2020, when they first sued the state charging that the dispensary process was unconstitutional. WAH Group and HAAAYY dropped their suits when the state awarded it a license through a settlement earlier this year.
Barring conditional licensees from selling either the whole or part of a license impacts licensees in a big way, says Chicago NORML’s Edie Moore, as some investors believe they are not allowed to take an equity stake in these businesses. For many social equity license holders, equity investment is the only way they can finance their businesses. In addition, some license holders would like to sell their license to someone more capable of building out the license. In the suit filed, HAAAYY claims they were offered $5 million to transfer their license to another company, but they were forced to pass on that option due to the August advisory notice.
Moore says the law cited by the state is unclear at best, and why would the state choose to interpret the law in a way that goes against the spirit of the law, which is to support social equity license winners, she asks.
“If the clause is hazy, why err on the side that will hurt social equity businesses?” Moore asks. “I’ve been beating this drum all year. This isn’t real. They’re just making it up.”
In June, Chicago NORML submitted a letter to the Illinois Department of Financial and Professional Regulation, the agency that regulates dispensaries, asking for clarification on the law, and for the state to rule in favor of conditional dispensary license holders who would like to seek equity investment.
“One of the primary purposes when the General Assembly passed the Cannabis Regulation and Tax Act was to offer financial assistance and benefits to the communities most adversely impacted by marijuana criminalization and enforcement. The IDFPR can serve this purpose by creating and adopting transfer rules or guidance during the Conditional License phase, thereby empowering Social Equity Applicants to achieve their goals of either operating a dispensary or receiving what could be life-changing compensation by selling their equity,” wrote attorney Bryna Dahlin on behalf of Chicago NORML.
[Read the letter submitted to IDFPR]
But, Moore says, regulators never responded to the letter, and instead of writing a formal rule, it issued the August advisory notice, which Moore charges doesn’t have force of law.
Akele Parnell, an attorney and also an Illinois conditional dispensary license holder, says many license holders have been using debenture agreements that turn into equity as soon as a permanent license is assigned, as a work around.
But, he says, “I can theoretically understand why some investors may be hesitant to provide capital in exchange for equity that doesn’t transfer until the store opens.” Especially if the license holder does not have cannabis operating experience.
A hearing on the preliminary injunction is scheduled for 9:30 a.m. on Sept. 29.
