A Close Look at the Arizona Draft Social Equity Regulations (Comments Due Today!)

New York Cannabis Licensing, Part 3: The Social and Economic Equity Plan

The Arizona Department of Health (the “Department”), which is the Arizona cannabis regulator, has released the draft regulation for the Social Equity Opportunity Program (“SEOP”). Click here to view the draft regulation. Comments on the draft regulations are due by Sunday, May 16, 2021 (that’s today!).

Arizona will issue a further 26 licenses as part of the SEOP. Pursuant to the Revised Arizona Bylaws (“ARS”), the SEOP provisions apply to:

The creation and implementation of a social justice ownership program to promote the ownership and operation of marijuana facilities … by individuals in communities disproportionately affected by the enforcement of previous marijuana laws. ARS § 36-2854 (A) (9).

In addition, there is not much information about the SEOP in the statutes. Did the draft regulations advance this stated goal, which was endorsed by the Arizona electorate? It appears that there are other ways to further the intended aim of the SEOP.

Reduction in license fees

Let’s start with the good news. Under the Adult Use Program, the initial license fee is $ 25,000. However, the department has now suggested that the initial SEOP license fee would be $ 5,000. The lowering of the fees certainly promotes the goal of “social justice”.

Who can be the owner, general manager and / or board member?

The next question is who may be the owner, officer, and / or board member of an SEOP licensee. Before answering this question, the draft regulation requires that at least one or more of the officers or board members own at least 51% of the equity of the SEOP licensee. AAC § R9-18-303 (B) (1) (draft). Seems simple enough.

Not so fast. There are two additional requirements for any officer or director who is part of the 51% stake. First, these individuals must petition the court to have previous marijuana convictions removed from their records. AAC § R9-18-303 (B) (2) (a) (draft). Second, in 2019 these individuals must have a family income that “does not exceed two hundred percent of the federal poverty guidelines”. AAC § R9-18-303 (B) (2) (b) (draft).

Do the draft regulations require that an officer or board member who is part of the 51% ownership group be previously convicted of marijuana? Since this section of the draft ordinance is written subjunctive (see AAC § R9-18-303 (B) (2) (a) & (b) (draft)), every element must be fulfilled. So it appears that only those officers and board members with a previous marijuana conviction who apply for expulsion are allowed to be part of the 51% ownership group.

Can you remove an officer or a board member?

The next interesting question is whether a senior executive or board member who is also part of the 51% ownership group can be removed from their positions. Typically, a company’s organic documents (e.g., articles of association, works agreement, etc.) provide for when a senior executive or board member can be removed from their position. However, as part of the SEOP application process, the proposed licensee must provide the department with documentation demonstrating that an officer or board member who is also part of the 51% ownership group cannot be removed from their positions without (a) that person’s written consent or (b) a court order removing that person from their position. AAC § R9-18-303 (B) (2) (a) & (b) (draft).

While there are other requirements under the SEOP, the foregoing summarizes the major changes from the adult use program.

How will it work?

To illustrate how the foregoing will work, a hypothesis may be helpful. Let’s say Paul, Otto, and Tom start a company in Arizona called POT, Inc. Suppose further that Paul, Otto, and Tom each own 33.3 percent of POT, Inc. and will each serve as an officer and board member. Paul and Otto have previously been convicted of marijuana, and Paul and Tom are millionaires, while Otto has been unemployed since 2017. Will POT, Inc. get a SEOP license? The answer is “no” under the draft regulation. Since only Otto meets the federal poverty guidelines and his ownership interest (33.3%) is less than 51%, POT, Inc. does not qualify as a SEOP licensee.

If we change the hypothesis so that Paul has a previous marijuana conviction and is also unemployed since 2017, POT, Inc. would qualify as a SEOP licensee. Under this revised hypothesis, Paul and Otto, who together own 66.6% of POT, Inc., meet the requirements of the draft ordinance because (a) they have previously been convicted of marijuana and can apply for deportation, and (b) both have an income Levels under the federal poverty guidelines.

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The draft regulation provides a starting point for a discussion about whether they promote “social justice”. There is no doubt that many people will comment on the draft regulations. Hopefully the department will take into account the various comments and find ways to improve “social justice” for deserving Arizonans. Get yours today!