Winning a cannabis license is an intense and long process, but a license could be worth millions of dollars…
In many places, a license to open a cannabis dispensary or a cultivation facility in a state that allows recreational cannabis can be a ticket to riches for whoever wins a coveted license.
And the governments issuing these licenses know it. Different officials take different approaches to passing out the licenses, depending on the different objectives of their local and state governments.
This is not the case everywhere.
In states like Oregon and Washington, getting a license isn’t much more difficult than getting a license to open a liquor store – and the business is just as competitive as the liquor store business, since so many people go after those licenses.
But in states or countries where the number of dispensaries or cultivation facilities are limited, the states create permanent and intentional market imbalance; demand exceeds supply, prices remain high, and profits are correspondingly large.
In those states and countries, the government has to decide how to allocate those precious licenses.
But for a company that can hit the right criteria, cannabis licenses can be worth millions…
Understanding Government Objectives
Winning a license in a medical state is the same as winning the regular lottery.
Even if you are a smaller operator, a large company can knock on your door and start throwing money at you to take that license off your hands.
So, for companies that know what government officials are looking for in a business, they could be on the right track to strike it big.
In general, there are several objectives states have tried to achieve when they hand out licenses.
- The government can try to benefit historically disadvantaged communities and communities that have been disproportionally affected by the war on drugs. Governments can reserve some of its licenses for members of those communities or for people who will set up shop in those communities. Government officials can also award extra “points” in a competition for the licenses.
- Benefitting small businesses and in-state residents is often another goal of license allocation. Many places, at least for now, think they want to keep the big multi-jurisdiction operators out of the state.
- Rewarding early movers is sometimes seen as desirable. A state going recreational might want to “pay back” the companies that were willing to sell cannabis when it was a much smaller medical market.
- “Fairness” is yet another goal – the government sets up a bare minimum set of requirements and allocates the licenses by lottery.
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- As it happens, revenue generation seems not to have been a goal in the license process in a lot of different areas. I’m not aware of any jurisdictions that simply auctioned off the licenses the way the federal government auctions off wireless spectrum. Some places have big application fees. Some of them are $100,000 and non-refundable even if the applicant does not win a license. However, that’s a tiny fraction of the revenue a jurisdiction could generate by selling licenses outright to the highest bidder.
Most jurisdictions try to accomplish at least a couple of the goals above.
The Illinois Model
I’ve written a lot about Illinois and my high regard for the way in which it is allocating its recreational cannabis licenses.
It is giving “free” licenses to existing producers to reward them for being in the state when it had a very limited medical cannabis program. Illinois is also ensuring that at least some of the first-day operators have some cannabis experience under their belts.
The rest of the licenses will be allocated by a competition in which applicants get a certain number of points for various attributes: financial responsibility, commitment to hiring members of historically disadvantaged communities, business experience, citizenship in Illinois, veteran status, experience with security, waste disposal and other environmental backgrounds, and a few other things.
Ontario, Canada, by contrast, set up a relatively simple set of minimum requirements and held a lottery among the qualified applicants.
Understanding exactly how a state is allocating licenses can be a ticket to riches for those savvy enough to acquire the knowledge and to customize their applications to maximize their chances of winning.
But of course, there’s a dark side to the process, too.
With all that money at stake, there are people trying to game the system or even committing overt acts of corruption to secure the valuable licenses.
Next week, we will have a report on the license process in Ontario. Many have said that the most recent results from Ontario’s lottery looked a little fishy, and I want to make sure you know the true story of what is going on.
Executive Director, National Institute for Cannabis Investors
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8 responses to “The Cannabis License Competition Is Heating Up”
August 28 2019