The Future of Marijuana Licensing: Greater Barriers to Entry?

We’re starting to see a distinct trend with state-sanctioned marijuana operational licenses: the “pay-to-play, greatest barrier to entry” model. In this sort of system, there is usually some combination of the following, all geared towards reducing the number of cannabis businesses actually granted a license and towards making sure that those with licenses are very well-funded:

  • A difficult and time consuming license application process
  • High application fees
  • An unreasonably short application window
  • High minimum funding requirements

Florida, Illinois, New York, Hawaii, Minnesota, and Nevada have all, to some extent, followed this sort of legalization regime.

Marijuana LicensingFlorida. In Florida, only five agricultural nurseries that have been in existence for at least the last thirty years are eligible to be licensed to act as dispensing organizations under the state’s extremely limited medical marijuana program. The state’s MMJ statute itself does not even consider allowing in any outsiders beyond that very exclusive barrier to entry. From these few nurseries that might qualify, the state prioritizes financials in its scoring process and it requires that all nurseries post a $5 million dollar performance bond. In other words, if you are not a large and well-funded nursery that has been around for 30+ years, forget about it. These five nurseries will then have access to Florida’s population of 20 million.  This has to be one of the craziest (most corrupt?) methods for allocating a large-value asset in recent U.S. history.

Illinois. Illinois allows only 21 cultivation centers and 60 dispensaries to serve all 13 million people in the state.  Illinois also developed a point system  for judging cannabis licensing applicants based on their proposed security plans, their expertise in growing marijuana, and their plans for patient education. Cultivation centers were required to pay $200,000 for an initial license and have at least $500,000 in liquid assets (in addition to a non-refundable $25,000 application fee). Dispensaries were required to pay $30,000 for a license and have $400,000 in liquid assets (in addition to a non-refundable $5,000 application fee).

New York. Start-up costs for running a medical cannabis company in New York have been estimated at around $25 million. The state requires a $10,000 non-refundable application fee, plus a $200,000 refundable registration fee for each application. Those seeking a cannabis license must also show that they have the real estate necessary to produce cannabis or be able to post a $2 million bond. Only five operators will be allowed to run up to 20 dispensaries throughout the state; and applicants have to produce a litany of documents for the state’s Department of Health that describe, in detail, the applicant’s manufacturing processes, transporting, distributing, sale and dispensing policies or procedures. Twenty dispensaries for 20 million people, just think about that.

Hawaii. Hawaii will be kicking off its new legalization regime with a five-year residency requirement and the requirement that its MMJ companies must be majority-owned by Hawaiians. Hawaii has some of the toughest, most protectionist cannabis regulations and barriers to market entry in the country. It will only have sixteen dispensaries in the state and business applicants must also be able to show $1,000,000 “for each license applied for,” and “not less than $100,000 for each retail dispensing location,” all of which must be under the control of the applicant for no less than 90 days prior to the date of application. There is also a $5,000 non-refundable application fee for each license. Applicants awarded with licenses must pay $75,000 for each license within a week of approval. Dispensary licensees must also pay an annual renewal fee of $50,000.

Minnesota. Minnesota’s extremely limited medical cannabis program is a real mind-blower when it comes to the state’s licensing priorities. First, only two operators will serve the entire state when it comes to cultivation, manufacturing, and distribution. The two operators will run a total of eight dispensaries in the state, four each. The two operators were selected after a review of their personal histories and capabilities with respect to cultivation, manufacturing, and patient services — these folks even had to commit to having a licensed pharmacist on staff to distribute the cannabis, which makes little sense since cannabis cannot be legally prescribed). And, of course, the state also assessed their financial stability and business plans. One of the operators, Leafline, has reportedly raised $12.4 million in investment from 113 investors. All of this for a state that claims to have only 5,000 registered qualifying patients.

Nevada. In Nevada, running a marijuana business is like running a casino — it’s capital-intensive and only a select few get to participate. Nevada requires local control of its cannabis businesses and, as part of licensing with the state, applicants had to show no less than $250,000 in liquidity and they also had to produce volumes of documents showing detailed floor plans, security, personnel manuals, and even advertising and marketing plans, all of which were scored against a strict point system. In addition, the application fee is a non-refundable $5,000, and the license issuance fee (per license) is $30,000.

Ohio gets an honorable mention. Even though it does not yet have any medical marijuana laws, should its Responsible Ohio measure pass, it will likely be the first state to have created a straight-up American marijuana cartel. For more about Ohio’s proposed exclusionary cannabis system, see “O-High-O? The Buckeye State May Legalize Marijuana This Year.”

All of the above states have created massive barriers to entering into their medical marijuana industries. On the flip side, all four states (Colorado, Washington, Oregon, and Alaska) that legalized adult use marijuana do not have nearly the barriers to entry as these medical states.

Though we understand states wanting to stick with the priorities set forth in the 2013 Cole memo, setting up ridiculously difficult requirements for licensing eligibility prioritizes the high profits of a few over industry efficiency, true competition, and patient/consumer rights. These medical marijuana states have set up uneven playing fields that give the already wealthy near monopoly power over medical cannabis. If their goal is to propagate the existing elite and provide fertile grounds for corruption, these states have done well. But if their goal is to set up a competitive and innovative cannabis industry that serves patients and consumers with low-cost and innovative products, these systems are likely to be a disaster. Our cannabis lawyers have worked on marijuana licensing projects in all of these states with programs in place and we have seen firsthand how good and dynamic companies often choose not to participate in such difficult markets or back out of the application process simply because they lack the time or the money to continue.

Colorado and Washington (and soon Oregon and Alaska) will need to lead the way in showing how patronage systems with high barriers to licensing are unnecessary and how the better tactic is to just let the marketplace determine who succeeds and survives. These recreational-legal states are proof that market entry equality and the priorities set forth in the Cole memo can be squared.

What do you think?