Unintended Consequences: How the Cannabis Administration and Opportunity Act Restricts Access to Capital for Social Equity Businesses

As drafted, the Cannabis Administration and Opportunity Act (“CAOA”) could make it federally illegal, and an unfair trade practice, for vertically-integrated retail cannabis businesses and non-retail cannabis businesses to invest in, assist or incubate social equity-qualified cannabis retailers. This would cut-off access to a large pool of capital and expertise for social equity businesses seeking to partner with established cannabis operators as strategic investors. The available pool of capital currently available to such businesses is already far too shallow, thanks in part to Congressional inaction on the SAFE Banking Act.

While the intention of Senators Schumer, Booker and Wyden is to support social equity businesses, these unintended consequences reveal the blind spots that even the most well-meaning legislators can have. Meaningful industry input from a wide swath of operators and stakeholders IS A MUST, so I encourage everyone to provide your comments to the authors before the September 1st deadline at Cannabis_Reform@finance.senate.gov.

In this short article, I identify the specific provisions of the CAOA that are at the root of my concern, and propose language to avoid the unintended consequence of unduly restricting social equity businesses’ access to capital.

I. Problematic Provisions of the CAOA

Here’s the language that I find problematic in CAOA Subtitle B—Federal Cannabis Administration:

SEC. 511. FEDERAL CANNABIS ADMINISTRATION.

The Federal Alcohol Administration Act (27 U.S.C. 201 et seq.) is amended by adding at the end the following: …

‘‘SEC. 304. UNFAIR COMPETITION AND UNLAWFUL PRACTICES. (a) IN GENERAL.—It shall be unlawful for any person engaged in the business of importing cannabis into the United States, or cultivating, producing, manufacturing, packaging, or warehousing cannabis, or purchasing cannabis for resale at wholesale, directly or indirectly or through an affiliate, to do any of the following: …

(2) TIED HOUSE.—To induce through any of the following means, any retailer, engaged in the sale of cannabis products to purchase any such products from such person to the exclusion in whole or in part of cannabis sold or offered for sale by other persons in interstate or foreign commerce, if such inducement is made in the course of interstate or foreign commerce, or if such person engages in the practice of using such means, or any of them, to such an extent as substantially to restrain or prevent transactions in interstate or foreign commerce in any such products, or if the direct effect of such inducement is to prevent, deter, hinder, or restrict other persons from selling or offering for sale any such products to such retailer in interstate or foreign commerce:

(A) Acquiring or holding (after the expiration of any existing license) any interest in any license with respect to the premises of the retailer.

(B) Acquiring any interest in real or personal property owned, occupied, or used by the retailer in the conduct of his business.

(C) Furnishing, giving, renting, lending, or selling to the retailer, any equipment, fixtures, signs, supplies, money, services, or other thing of value, subject to such exceptions as the Secretary shall by regulation prescribe, having due regard for public health, the quantity and value of articles involved, established trade customs not contrary to the public interest and the purposes of this subsection.

(D) Paying or crediting the retailer for any advertising, display, or distribution service.

(E) Guaranteeing any loan or the repayment of any financial obligation of the retailer.

(F) Extending to the retailer credit for a period in excess of the credit period usual and customary to the industry for the particular class of transactions, as ascertained by the Secretary of the Treasury and prescribed by regulations by him.

(G) Requiring the retailer to take and dispose of a certain quota of any of such products.”

(Italics added.)

II. Interpreting Section 304(a)(2)

While on its face, the CAOA’s addition of Section 304(a)(2)(A) to the Federal Alcohol Administration Act (“FAAA”) seems to preclude vertical integration, that is not the intent. The language in Section 304(a)(2) was adapted from Section 105(b) of the FAAA, and so should be read in conjunction with TTB regulations implementing the parallel provision of the FAAA. The applicable TTB regulations regs on Unlawful Inducements are found at 27 C.F.R. §§ 6.27 and 6.33 and include a carve-out for retailers that are wholly-owned by another company; however, they also include the language potentially penalizing a minority ownership stake in a social equity retailer (which is the only type of stake permitted by many local social equity ordinances):

§6.27   Proprietary interest.

(a) Complete ownership. Outright ownership of a retail business by an industry member is not an interest which may result in a violation of section 105(b)(1) of the Act.

(b) Partial ownership. Less than complete ownership of a retail business by an industry member constitutes an interest in a retail license within the meaning of the Act.

§6.33   Proprietary interest.

(a) Complete ownership. Outright ownership of a retail business by an industry member is not an interest that may result in a violation of section 105(b)(2) of the Act.

(b) Partial ownership. Less than complete ownership of a retail business by an industry member constitutes an interest in retail property within the meaning of the Act.

(Italics added.)

III. Proposed Language Preserving Access to Capital

If you do plan to submit comments to the authors of CAOA, please ask them to incorporate language substantially similar to the TTB regulations cited above (rather than waiting until rulemaking for TTB to clarify), permitting retailers to be wholly-owned by vertically-integrated retailers and/or non-retail cannabis businesses. Additionally, it’s imperative that the authors incorporate language explicitly accommodating the ability of social equity-qualified retailers to receive investments, assistance and incubation from other established cannabis businesses. Such aid should not trigger the punitive application of Sections 304(a)(2)(A) through (F) of the FAAA (as amended by Section 511 of the CAOA). I’ve drafted the following addition to incorporate at the end of Section 304(a)(2), which I hope will help—please feel free to borrow and/or improve to advance the ball (though attribution is always appreciated):

“Complete ownership of a retail business by a non-retail cannabis business is not an interest which may result in a violation of section 304(a)(2) of the Act.  Less than complete ownership by a non-retail cannabis business in a retail business (which retail business otherwise qualifies as ‘a small business concern owned and controlled by socially and economically disadvantaged individuals’) where local or state regulations prohibit such non-retail cannabis business from taking a greater ownership stake in such retail business, constitutes neither an interest in a retail license nor an interest in retail property within the meaning of Sections 304(a)(2)(A) or (B) of the Act. Furthermore, it shall not be a violation of the Act for any non-retail cannabis business to provide the types of assistance set forth in Section 304(a)(2)(A), (B), (C), (E) or (F) to such retail business, provided such assistance is being provided pursuant to applicable state and/or local social equity ordinances.”