Minnesota Marijuana Regulators Disqualify Two-Thirds Of Social Equity Applicants Ahead Of Next Month’s License Lottery

“We saw people who were trying to game the system in order to improve their chances in the lottery.”

By Peter Callaghan, MinnPost

Minnesota cannabis regulators have started giving bad news to about two-thirds of the 1,817 social equity license applicants that they will not be entered into the first license lottery that is now expected to be held the week of December 2.

Conversely, those one-third who will be moving on to the lottery—about 640 applicants—will be getting that word officially within two weeks. And that means their odds of getting one of the 280 so-called pre-approval licenses just got a lot better. But wait for the letter, the Office of Cannabis Management said, because there is still a tiny chance something could be discovered to knock them out.

Those getting bad news failed to complete the complex applications process or engaged in improper actions such as making multiple applications—dubbed flooding the zone—or were disguising the true investors or the so-called true party of interest, the agency said.

“While the disappointment is understandable, the basic proxy for readiness is your ability to submit a successful application,” said Charlene Briner, the interim director of the Office of Cannabis Management (OCM). The state “gave the answers to the test ahead of time” by detailing what is required inside the law revisions passed in May as well as how-to guides by OCM staff.

“We’ve always known this is a highly complex regulated space, and we heard concerns about readiness so the people who get into the lottery are qualified,” Briner said.

A lot of the rejected applicants are “zone flooders or predatory applicants or who do not meet the letter of the law around ownership requirements and expectations.”

“We want to make sure the right universe of fully qualified and vetted applicants are in the mix so they will get an affirmative notification from us,” said Briner. Those good-news letters should go out in no more than two weeks, and the first lottery will take place within a day or two of that, she said.

Briner termed Monday “an inflection point that gets us closer to the lottery.”

An attorney for some applicants said the denial notice does not provide details about the reasoning.

“It’s frustrating and concerning, especially since I can review the material I submitted and believe it to be fully compliant with OCM’s stated requirements, but these denials are presented as final,” attorney Jen Reise wrote Monday. “In my opinion, this a significant misstep by OCM, and I encourage them to promptly allow denials made in error to be challenged and reversed.”

OCM staff pointed out that state law does not allow appeals of decisions to deny access to the pre-approval lottery, though it does allow rejected applicants to request a review of their records as long as it is made within seven days.

“An applicant whose application is denied or not selected in a lottery may not appeal or request a hearing,” the law says.

At least three license types will not trigger a lottery because there were fewer qualified applicants than the number of social equity licenses provided by the Legislature. They are: cannabis wholesaler, cannabis transporter and cannabis testing facility. The most applicants are for cultivators, manufacturers and licenses that allow the sale of products to customers. Briner said the agency will provide a new list of active applicants by license type once the approval letters are sent out.

Pre-approval licenses for social equity licensees—that is, applicants from groups or neighborhoods that suffered disproportionately when cannabis use and sale was a crime—are meant to help those applicants get a head start on business preparations before the expected opening of the legal market in the spring. But for applicants who win licenses for cannabis cultivation, microbusinesses and mezzobusinesses, it also means they can get seeds in the ground as soon as they are licensed. That May law change is meant to get cannabis supply ready sooner, so the springtime rollout won’t feature open doors to empty stores.

Briner broke down those who will receive denial notices into four groups:

“We saw people who were trying to game the system in order to improve their chances in the lottery,” Briner said, saying some violators were discovered through routine OCM reviews and some from whistleblowers.

“We saw a couple of hundred applications that were virtually identical, including the business plans and the projected profits for the first year,” Briner said. “There were multiple people with the same address. They were using a domain name that is unregistered and inactive. Some have a phone number that ties back to the same individual.”

Briner joked that they were so brazen, she thought, “Are you kidding me?”

Another OCM discovery of bad actors—all out-of-state applicants—came via a tip from a whistleblower who had been approached to recruit people to submit applications and then be paid off if they won the lottery. State law does not allow the purchase of pre-approval licenses and includes provisions to slow or prevent license transfers.

“I think this individual was concerned about being implicated in something,” she said. It came after the individual read an earlier MinnPost article detailing how OCM would be examining true party of interest both before the lottery and more intensely after the lottery but before licenses are issued to winners. “The individual became concerned and got cold feet when they realized this was in blatant violation of Minnesota law.”

Briner said the agency is evaluating its options, which could include blocking those deceitful applicants from being licensed in the future when the market is opened to all applicants. And depending on the breadth of the violations, OCM is looking to see “if there are enforcement actions that could be taken by agencies outside of OCM,” she said.

The May revisions to the 2023 recreational cannabis law gave OCM a to-do list complete with deadlines to get the social equity lottery conducted, hopefully by the end of 2024. It set up a summertime application period for social equity status and then an application window that closed August 12. Since then, OCM has been culling through the 1,817 initially qualified social equity applicants to see if they have valid business plans, adequate financing that includes at least 65 percent from social equity eligible people, to assure that they are not making multiple applications  and to ascertain that the stated investors are the actual investors. The latter is termed “true party of interest.”

The law says people can have only one license. That is, a single person can’t be an owner of more than one store, or a store and a cultivator. That, too, was meant to discourage corporate interests or deep-pocketed investors from controlling too much of the new market.

This story was first published by MinnPost.

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Photo courtesy of Chris Wallis // Side Pocket Images.