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The chairman of the Cannabis Control Commission raised concerns Thursday with what he said are “predatory financing deals” being offered by private lenders to minority marijuana entrepreneurs, and urged state legislators to address the issue.
As he opened Thursday’s meeting, Chairman Steven Hoffman noted that commissioners would be considering two delivery courier and seven delivery operator applications, license types that are currently available exclusively to participants in the CCC’s social equity program and economic empowerment applicants. The licenses were set up to help compensate for the damage done to minority communities by the War on Drugs.
Though he was pleased to see “such momentum” behind those delivery license options, Hoffman said he is “deeply troubled by continuing reports” of social equity and economic empowerment applicants being targeted by would-be investors with financing deals that include things like forced sales once the exclusivity period has ended, control over key hiring and personnel decisions and cash distributions significantly disproportionate to stated equity ownership.
“While we have no jurisdiction over private negotiations between investors and prospective applicants, once we receive an application we have the authority and we’ll continue to use that authority to look at all relevant contracts, including financing contracts, to ensure compliance with our regulations as they relate to cap limits, required [economic empowerment applicant] or [social equity participant] control and disclosure requirements,” the chairman said. “And if there are violations, we have the necessary tools to enforce compliance. I am determined to put an end to predatory lending practices in the industry and commit to use all the resources available to the commission to do so.”
But, Hoffman said, many prospective licensees also “feel that they have no choice but to agree to egregious terms” since there are few alternative sources of financing available to them. Only 11 banks and credit unions offer banking services to cannabis companies in Massachusetts, and although that number has grown in recent years one of the state’s biggest community banks – Eastern Bank – recently pulled out of the field due to the logistical and regulatory burdens in a line of business that’s still federally illegal. Eastern announced it would sell its marijuana banking business unit, acquired during its merger with Century Bank, to Needham Bank.
Industry experts say that, theoretically, the kinds of predatory financing deals private lenders and investors foist on marijuana firms create an excellent business opportunity for Massachusetts’ banks and credit unions.
“If I’m a cannabis business that had to borrow money at 30 percent last year, and I can find a local lender to take that loan out at 10 percent, that’s a win-win for both the bank and the cannabis business,” Stacy Litke, director of banking compliance with software company Green Check Verified, told Banker & Tradesman last week.
Still, Hoffman told his fellow commissioners that a publicly-run solution was necessary, and “implored” Beacon Hill to set up a “social equity fund” for minority entrepreneurs, saying the issue was one that he and former commissioners “have been beating our heads against the brick wall for a number of years on.”
Social equity fund proposals gained no traction during the last legislative session. The Joint Committee on Cannabis Policy held a hearing in June on a handful of social equity fund bills (H.158/S.63 from Rep. Dan Hunt and Sen. Nick Collins, H.166 filed by Rep. Hannah Kane, H.177 from Rep. Dave Rogers and H.178 filed by Rep. Jon Santiago) but none of the bills have emerged from the committee for further review and debate among lawmakers. The committee faces a deadline of Feb. 2 to make recommendations on bills under its review.
Access to the capital necessary to start a business has repeatedly been singled out as a serious impediment facing social equity program participants or economic empowerment priority applicants as they try to break into the industry. Out of more than 1,000 applications submitted to the CCC as of November, just 232 came from social equity program participants or economic empowerment priority applicants, CCC Director of Government Affairs and Policy Matt Giancola said in the fall.
Banker & Tradesman staff writer Diane McLaughlin contributed reporting.
