Authored By: Chris Nani

Published: 21 December 2018

What is social equity – specifically within the cannabis industry and why does it matter? First, I want to draw a distinction between the words equity and equality. Equity means dealing fairly and equally with all concerned1 while equality means of the same measure, quantity, amount, or number as another.2 Social equity programs are commonly misconstrued as programs that bring social equity applicants to the same point as normal applicants. Although ideally social equity programs could do that; they do not.

Social equity programs are designed to help communities, families, and individuals who have been impacted by the War on Drugs. Years of systemic racism, harsh drug sentencing laws, and disproportionate policing have all heavily contributed to the detriment of those in the cannabis industry. For example, nearly 80% of federal prisoners and roughly 60% in state prisons for drug offenses are African-American or Latino.3 Simply put, social equity programs are a significant step in helping those harmed by the War on Drugs re-enter the now legalized cannabis industry.

  1. Introduction

I realized there was a serious deficiency within the cannabis industry when states prohibited felons from applying for licenses in the industry effectively preventing a large amount of individuals from applying their knowledge and expertise. The very people that founded this industry before it was legal were prohibited from working in it post-legalization – imagine any other industry that bans elite talent. Can you imagine watching any professional sport with amateurs competing instead of professionals who have trained and worked in their sport their whole lives? To further add to the irony, the legal cannabis jobs that are available to convicted felons are entry to mid-level jobs. In Alaska, it is illegal for a cannabis establishment to be registered to any person who has been convicted of a felony less than five years prior or if they are still on probation.4

Social equity programs (SEPs) are designed to help alleviate this dilemma by, in part, expunging criminal records and allowing convicted felons earlier access to higher positions and roles. Because cannabis programs have been setup to exclude the founders of the industry, usually the owners and investors continue to make the biggest profit gains from exclusionary laws and regulations. For example, only 4.3% of cannabis businesses are owned by African Americans and only 5.7% by Latinx people even though they cumulatively represent 32% of the population.5 From the same study, only 17% of executive positions are held by minorities even though they account for almost 40% of the population.6 Social equity programs are designed to help remediate this apparent skew. Programs can be implemented at the state level or local level and require an understanding of the history of cannabis and drug laws to effectively implement.

Methodology

I started researching SEPs in-depth in the summer of 2018 as part of my job as a law clerk. I learned what SEPs were but only from the business perspective. I did not learn why they were important or why states wanted them. I began investigating the composition of SEPs and their importance in the preceding fall. I spoke with state regulators, policy-makers, think tanks, social equity applicants, dispensary owners, incubators, and stakeholders about their experiences with SEPs and the strengths and weaknesses of their respective programs. In total, I spoke to around fifty individuals in the private and government sector and developed an equation to determine the strength of a SEP on a rating system similar to a credit card score. The higher the number the ‘stronger’ the program is. Scores range between two-hundred and one-thousand points. In addition to rating existing programs, the equation can also serve as a guiding tool for creating future programs.

A Breakdown of My Social Equity Equation

Through an aggregation of my interviews and research, I was able to come up with this equation. My goal was to create an equation that was robust and comprehensive yet easy to understand so it could be applied nationwide. Accessibility is a variable with a value between 1.00 and 10.00. There are nine factors within Accessibility7 and each factor is rated between one to ten. Eight of the factors are weighted the same with educational services, the final factor, being the most heavily weighted because it is the key to successful businesses post-incubation when they should be independent. The second variable, Environment8, is similarly situated with each factor being rated and weighted in the same manner. Tax Revenue is either the expected revenue if the program is not yet functional or the actual tax revenue from the last full year. The Population is the amount of people within the geographical location the SEP is operating in while the Tax Rate is the fixed rate cannabis is being taxed.

Social Equity Score = Accessibility * Environment * Projected Tax Revenue / Population * (1 + Tax Rate)

It’s important to note that changing any variable can produce significant changes in the equation. On that same note, after a program is scored, the metadata from it – such as if the program is being undertaxed – can be used to help restructure the program to maximize its efficiency and increase its score. Conversely, a program can also overtax its population lowering the score or score poorly in either Accessibility or Environment. In essence, this equation can help policy-makers troubleshoot why their SEP is underutilized or inefficient and correct it without having to hire expensive external third party consulting services. Below I have further broken down each variable and the factors within it.

  1. Accessibility

Accessibility has nine factors within it: application process, educational services, expungements, outreach programs, protected licenses, shareholder/ownership requirements, technical assistance, and waivers/loans. Each factor is rated on a scale of one to ten which when aggregated and divided by ten will give the accessibility score for that city or state. Educational services are doubled the amount of points because I found it is the most influential factor in determining how successful a social equity applicant will be both short and long-term.

The application process is the actual work required to file an application to become a social equity applicant. I used my prior experience from working at a cannabis firm where I reviewed forms and predominantly researched different social equity programs in California to understand their complexity and how in-depth they were. From speaking with multiple law firms, I anecdotally found they can take weeks to complete and require cooperation not only from the applicant themselves but also potential disclosure from all of the investors/owners in the company.

Lack of education was the most common reason social equity businesses failed. I spoke with multiple incubators across California and of them only two provided any type of educational services. One incubator encouraged financial literacy and sought to help their social equity business learn to balance their budget, work on payroll, and predict future expenses. The other incubator is also the founder of a social equity organization and she had a history of successfully helping twenty-five applicants at the time we spoke. She accomplished this feat by having her applicants take classes she created with volunteers from law firms, businesses, and schools coming in to speak about skills they would need as well requiring all of the applicants to intern at another business for eighty hours so they could understand the different processes of running their own business.

A critical factor in allowing individuals to re-enter the industry is expungements. Expungements effectively remove a conviction from an individual’s legal record and seal them from the public. Because most states have regulations that prevent convicted felons from entering the cannabis industry for a specified amount of years9 the only way for individuals to re-enter are through lengthy expungement procedures. However, some states and cities have taken a progressive stance and automatically expunged cannabis-related convictions to save money and reduce the workload on the court system.

I noticed expungements were also highly contingent on the general public knowing they exist and how accessible they were. In San Francisco for example, only twenty-three petitions were filed in 2016.10 Outreach programs could help remedy this situation by hosting events or clinics that offer free expungements. In Los Angeles, one of their original proposals involved having ten clinics with ten attorneys working six-hour clinics to help expunge criminal records with an estimated yearly cost of $15,000. Granted, outreach programs can be as simple as providing short handouts about SEPs as well, there are a variety of ways to increase activism and awareness in a community.

Protected licenses are very similar to the ratio factor but differ in that protected licenses may be a numerical value that can be capped. Protected licenses are important to any community because it guarantees that there will be diversity amongst business owners, and the original goal of SEPs is met by allowing individuals harmed by the War on Drugs to reap the greatest amount of benefits from legalization in higher executive positions.

I noticed in a few reports, that many social equity applicants required additional funding to start their businesses – which is entirely normal. What shocked me the most was how investors leveraged extremely one-sided deals in their favor in exchange for funding. By doing so, they are able to take a controlling interest in the business and effectively circumvent the entire SEP by using one social equity applicant as a guise. Los Angeles appeared to have the worst amount of one-sided deals11, so I created Ownership Requirements as one of the factors to protect social equity applicants from losing autonomy of their business.

The final two factors, technical assistance and waivers/loans, are separate factors but highly interrelated. Technical assistance is essential for social equity applicants because they normally do not have the funds to hire a law firm or consulting agency to write their applications for them. On the same note of funds, fee waivers are necessary to allow applicants a chance to apply for the social equity program. In smaller cities like San Bernardino, application fees alone cost $8,000 without any legal services provided with fees exploding past $10,000 and larger cities.12 With legal fees, businesses can spend over a million dollars in return for help on their application, designs, and compliance.

  1. Environment

Environment has eight factors: predatory sponsorships, incubator program, eligibility, real estate/zoning rules & regulations, government responsiveness, ratio, political atmosphere, and community reinvestment fund. The incubator program and eligibility variables are weighted the heaviest because applicants must be eligible to get into the SEP and then have a developed incubator program for them to successfully run a business post-incubation.

The first factor, predatory sponsorships, involves non-social equity businesses using social equity applicants to circumvent the social equity program. Businesses ‘incubate’ a social equity applicant in exchange for priority licensing and some have even required equity in the applicant’s business or other deals. Businesses are supposed to provide support to help social equity applicants instead of gaming the system through them. An additional requirement I put in the factor is a reporting system to alert the governing authority to prevent any future predatory tactics by said businesses.

Incubator programs are essential to the growth and sustainability of a social equity business. Many applicants that do apply do not have a robust business background or the knowledge to run a business. Incubator programs that provide education services, free or greatly reduced rent, and actual mentoring are keys to success. I spoke with a particular incubator who had a set curriculum for her applicants, courses ranged from financial literacy to employee management and compliance. Part of the incubator program is mentoring, which is a loosely defined term most programs do not address. Ideally, mentoring should involve the business owner/management providing at least weekly meetings with the applicant and sharing their business knowledge with them along with answering any questions they have.

Eligibility is also weighted heavily under Environment because depending on how liberal the standards are will determine the amount of social equity applicants. In some areas, like San Francisco, requirements are strict and prevent many applicants from applying. In addition to broadly defining the scope of individuals who were harmed by the War on Drugs, some programs, like Los Angeles, also use a tiered approach with those most directly by the War on Drugs receiving higher priority status than an immediate family member of someone who was harmed by the War on Drugs. By allowing multiple avenues for eligibility, a SEP can help ensure it reaches as many individuals as possible.

Real estate/zoning rules & regulations have two purposes in social equity programs. The first is to ensure there will be room for businesses to build. Cities place caps or limits on the amount of licenses in their jurisdiction which can effectively prevent any new businesses from applying. A SEP that passes in a city is rendered meaningless without any additional licenses or zoning areas to build on. The second purpose is preventing landlords from taking advantage of applicants through one-sided leases. In Los Angeles, one social equity applicant reported that she could not find any land to build her business on without giving equity in her company to her landlord in addition to paying rent. In no other business or industry do landlords impose such intense conditions and because applicants do not have another choice, the SEP fails to meet its goal of helping applicants when their revenue is being earned by their landlord and not them.

Government responsiveness or simply put responding to feedback can help strengthen a program or, if ignored, ruin it. In Long Beach, California, policy-makers adopted a SEP and in addition required all adult-use businesses to have Equity Employees perform 40% of the annual work.13 The addition of the 40% requirement was in part because of public demand that the SEP itself was not enough for the large community of affected individuals from the War on Drugs. Government responsiveness is not only between the government and citizens but can also entail how fast pieces of the government work together within themselves for example state and city regulators working together.

The ratio factor is one of the toughest to implement because city size and demand for cannabis heavily affect it. Essentially, the ratio factor requires that for every certain amount of businesses that receive licenses, one must go to a social equity applicant. Ratios can be as high as 1:5 but normally hover around 1:3 and 1:2. The ratio factor is important because it forces regulators and the administration in charge of licensing applicants to consistently grade social equity applicants and gives them relevance throughout any licensing period.

Political atmosphere can best be described as how polarized a political body is. A city council that votes according to special interest groups or on political ideology without reflecting on the reality of the SEP receive the lowest scores while a council that votes based on the best interest of the public with consistent bi-partisan cooperation can score the highest. Additionally, intergovernmental relations play a role in the scoring of this factor. The enforcement/compliance division of the government must be able to effectively communicate with regulators and policy-makers to understand why the regulations are created and worded the way they are without allowing political differences to interfere with the quality of their work. When I worked in Colorado, the enforcement division did not work with the state government and resulted in multiple false compliance issues businesses had to spend money to remediate.

The War on Drugs has ravaged communities. One of the most effective ways to help those communities is to help build their infrastructure, provide more educational opportunities, and a better quality of living to the community as a whole. A community reinvestment fund could seek to do this with regulators in charge of how they see best fit to help their communities. Allocation of funding should be done as close to the local level as possible as those regulators and policy-makers should be most in touch with their communities. In Los Angeles, some of their reinvestment projects have included murals, playgrounds, and public events that appeal to the majority of residents.

  1. Other Factors

Tax Revenue, Tax Rate, and Population are essential to the SEP equation because each variable helps determine the limits of the program. Tax Revenue is either the total projected revenue from a program if it has not been set up yet or the total revenue from the last year. For example, when determining the score for a city in 2018, it would use the revenue from 2017 because it is the last full year. Programs do grow from year to year and the expected revenue from a new program is expected to grow exponentially from year one to year five, but, by using the last full year, policy-makers can conservatively estimate the amount of funding for a SEP with any additional windfall being reinvested into the program as it occurs.

The Tax Rate and Population are more directly related to each other. The population for a city or state is easily determinable from the government census.14 Even though the census only collects the amount of people that live in a location and not the amount of cannabis consumers, it is still valid because it sets the ground floor for a tax. The Tax Rate is the percent of revenue collected from cannabis taxes that goes towards social equity programs. The Tax Rate can also be adjusted within the equation to determine if the Tax Rate is too low or high based on how it affects the final score. A Tax Rate that is too high or low will cause the score to be lower than what it should be and is just one of the ways the equation can be used to provide feedback on a program.

  1. Appendix

In order of documents: Accessibility Metric, Environment Metric, and my one-pager. The one-pager is a brief outline of my SEP equation and why it is important. The primary purpose of the one-pager is to lobby in statehouses and gain endorsements from social equity groups.

Environment Metric
Accessibility Metric

 

A Model Social Equity Equation

Summary

The “Social Equity Equation” is a tool that elected officials, public policy-makers, and stakeholders can use to gauge the effectiveness of state and local cannabis social equity programs.

Background

In June 1971, former President Richard Nixon declared a “War on Drugs,” saying that drug abuse was the United States’ “public enemy number one.” As a part of his War on Drugs initiative, Nixon dramatically increased funding for drug control agencies, successfully supported harsh mandatory sentencing laws, and increased no-knock warrants.

After decades of waging war, primarily in low to middle-income and minority neighborhoods, the consensus among policy-makers is that the War on Drugs failed to address drug abuse or enhance public safety. Instead, these policies destroyed families and devastated entire communities, creating intergenerational poverty, lost lives, and missed opportunities.

Problem

In a recent study of local cannabis equity programs, which included interviews with over fifty social equity applicants, policy-makers, and stakeholders total, it was found that elected officials lack a way to determine whether or not these programs are creating real opportunities for disadvantaged individuals to participate in the industry.

Solution

The Social Equity Equation can be used as a tool to help to determine the strength of a social equity program, and more importantly, it can also be used to model a social equity program to ensure that individuals living in disadvantaged, underserved communities who have been negatively impacted by the War on Drugs are able to participate in the cannabis industry.

The Equation

The equation, developed by Ohio State law student, Christopher Nani scores equity programs on a scale similar to a credit score rating. With over twenty different factors, the equation offers a robust analysis of current programs as well as providing guidance on how to build a strong program. This equation can provide a quick glimpse into the effectiveness of an equity program and allows policy-makers to make real time adjustments to ensure quality public service.

The two main factors, “Accessibility” and “Environment” each contain roughly ten variables on a sliding scale that allow policy-makers to determine precisely what they can improve or focus on.

Current Case Studies
City NameScore
Sacramento858.66
Oakland657.23
San Francisco344.61

Preliminary Results


Scores typically range between two-hundred and one-thousand points.

For More Information

Christopher Nani – nani.4@osu.edu

1 Merriam-webster.com. (2018). Definition of Equitable. [online] Available at: https://www.merriam-webster.com/dictionary/equitable [Accessed 13 Nov. 2018].

2 Merriam-webster.com. (2018). Definition of Equal. [online] Available at: https://www.merriam-webster.com/dictionary/equal [Accessed 13 Nov. 2018].

3 Drug Policy Alliance. (2018). Race and the Drug War. [online] Available at: http://www.drugpolicy.org/issues/race-and-drug-war [Accessed 13 Nov. 2018].

4 Alaska Stat. § 17.37.010 (2017).

5 Marijuana Daily Business. (2018). Chart: Percentage of Cannabis Businesses Owned by Racial Minorities? [online]. Available at: https://mjbizdaily.com/chart-19-cannabis-businesses-owned-founded-racial-minorities/ [Accessed Nov 28 2018].

6 Id.

7 Please see the appendix for the rubric on Accessibility which covers all factors as well as a sliding scale on each factor.

8 Please see the appendix for the rubric on Environment which covers all factors as well as a sliding scale on each factor.

9 Alaska Stat. § 17.37.010 (2017); Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA). California Law. https://leginfo.legislature.ca.gov/faces/codes_displayexpandedbranch.xhtml?tocCode=BPC&divi sion=10.&title=&part=&chapter=&article; Code of Colorado Regulations. 1 CCR 212-2; 935 Code of Massachusetts Regulations. Cannabis Control Commission. https://www.mass.gov/files/documents/2018/03/27/935cmr500.pdf; Nevada Revised Statues (NRS). Chapter 453D. https://www.leg.state.nv.us/NRS/NRS- 453D.html#NRS453DSec230; “Marijuana Establishment Agent Card Application and Checklist.” State of Nevada Department of Taxation. Nov. 18, 2017. https://tax.nv.gov/uploadedFiles/taxnvgov/Content/Forms/Agent%20application.pdf; Oregon Revised Statues. Chapter 475B. Cannabis Regulation. https://www.oregonlegislature.gov/ bills_laws/ors/ors475B.html; Oregon Administrative Rules. Oregon Liquor Control Commission. Division 25. Recreational Marijuana. https://www.oregon.gov/olcc/ marijuana/Documents/Rules/OAR_845_Div_25_RecreationalMarijuana.pdf; Washington Administrative Code. Title 314. Chapter 314-55.

10 David Debolt, Thousands of Marijuana Convictions Could Be Reduced, Tossed Out Under Alameda County DA’s Plan, The Mercury News, Feb. 20, 2018.

11 Anecdotally speaking, I interviewed three social equity applicants who all told me they had been approached by investors seeking majority equity in their businesses in exchange for a guaranteed check. One applicant told me her equity in the company would go from 60% to 2.2% after they had passed the social equity program. In exchange, she would not have to work and would receive an annual salary of $100,000.

12 Brian Whitehead, Here’s How Much It Will Cost to Apply for a Commercial Cannabis Business Permit in San Bernardino, The Sun, Apr. 6, 2018.

13 http://www.longbeach.gov/citymanager/cannabis-information/cannabis-social-equity-program/.