Oakland's MMJ Equity Amendment: Comments and Solutions from a Startup
May 12, 2016
We’d like to commend Oakland's City Council for its move to guarantee equity in the cannabis industry boom for those most disproportionately affected by the War on Drugs. It's a valiant effort and an important mission. However, the amendment is too narrow in its scope, and does too little to educate and support the Oaklanders it's intended to help.
While the Council’s actions were well-intentioned when voting unanimously to adopt Oakland’s Medical Marijuana Ordinance with the Equity Amendment attached, the policy once put into practice will likely:
Severely limit the number of new cannabis businesses in Oakland.
There will be a bottleneck of General Application permits while Equity Permit holders formulate business plans, raise capital, apply for licenses, pass inspection and wait for approval.
Stifle local innovation and stop the aboveground industry dead in its track.
Many existing businesses will be forced to stay in the shadows for fear of exposing their business while hung up in the General Application licensing queue.
Many of the existing unlicensed local businesses will eventually relocate to neighboring cities (e.g., Berkeley, Emeryville) with fewer barriers to entry and a clear path to a state license. Obtaining a local business license is the first step to applying for a state license — in fact it’s IMPOSSIBLE to obtain a state license without a local license.
New businesses will avoid Oakland and startup in neighboring cities with fewer barriers to entry.
Greatly reduce the amount of tax revenue and permit fees collected by the city.
Fewer applicants will apply for licenses.
Fewer applicants will be granted licenses.
Fewer businesses will be generating tax revenue for the city.
The permit program is designed to be one-for-one (Equity:General) and "at no time shall the number of General Application permits issued under 5.81 in total exceed the number of Equity Permits under 5.81 issued by the City Administrator.”
Equity Applicants must also meet strict requirements, coming from only a handful of high crime, low income areas of Oakland — primarily in East Oakland — and maintain a 50% share of equity in their company. Or, they must have been arrested in Oakland for a cannabis related offense and actually served time within the past 10 years.
How will people in these identified areas be informed of the business opportunity made available to them? What percentage of Oaklanders even live within these tracts? Then, how many of those will have the motivation, capital, skills and education necessary to start a small business? In all likelihood very few, especially those trying to launch a solvent-based cannabis extraction laboratory, a category lumped together with cultivation, distribution, transportation and edible manufacturers in the amendment.
Manufacturers: Extraction Labs vs. Edible Makers
Edible Manufacturer = Commercial Kitchen with lower barriers to entry.
Extract Manufacturer = Biotech Lab with higher barriers to entry.
Properly run, solvent-based extract manufacturers will be working with medical-grade solvents and equipment. This distinction is so important, as our business could be stopped in its tracks as we wait for other 5.81 Equity Permit applicants to be licensed.
There is a BIG difference between baking a cookie and extracting cannabinoids safely with solvents. It’s a matter of public safety that extraction labs have a clear path to a license, which includes robust fire and safety inspections.
We believe all solvent-based extraction labs should:
Have a chemist with a degree (preferably a PhD) at the helm.
Operate in a sterile lab environment with medical grade equipment and solvents.
Have robust Environment Health and Safety plans in place.
Will this category of Equity Permit applicants:
Have access to capital?
The pharmaceutical grade equipment for our modest extraction startup totaled nearly $250,000. To produce medical grade extracts safely, this equipment requires a very specific skill set.
Be able to navigate the turbulent waters of launching a small business in the cannabis industry with its near insurmountable barriers to entry?
It’s nearly impossible to find properly zoned commercial real estate with a cannabis-friendly landlord willing to sign off on the federally illegal activity of its tenant — Oakland’s commercial real estate vacancy is currently something like 3 to 4%. It took us over 6 months, and we finally had to purchase as no landlord would give us the time of day.
Build out costs are extremely high to create a sterile lab environment.
Lawyer and accountant fees are incredibly high due to the complex legal and accounting headaches of the industry.
Cannabis is still a federally illegal, Schedule I Controlled Substance. Even though the times are changing many are still not willing to take the risk.
Have the skills and education necessary to launch a successful extraction startup?
Extraction labs require an advanced knowledge of chemistry to be done properly — it truly is a matter of public safety. Extraction is a science, not an art form.
We believe all solvent-based cannabis extraction should be done by a chemist with a degree. We are still working in the realm of medical marijuana after all.
Maintain 50% ownership of the company?
Few startup founders maintain a 50% stake in their company unless they launch without a cofounder (or cofounders) and have extremely deep pockets.
Example: Two founders; 15% of shares reserved for future employees as incentives; and two investors, each with a 2.5% stake. Say the founders split the company 60:40, leaving their non-diluted (pre-Round A) stake in the company at 48% and 32%, respectively. That’s with only two founders and modest early stage financing.
Answer: It’s HIGHLY unlikely.
Expand access to Equity Permits for Oaklanders.
Include more of the city’s high crime, low income tracts in the amendment.
Allow Oakland residents convicted of a nonviolent marijuana offense anywhere in the state of California access to Equity Permits.
Allow Oakland-based spouses and children of individuals convicted of nonviolent marijuana offenses in California access to Equity Permits.
Reduce ownership stake to a more reasonable 25%.
Create a 50/50 license pool (Equity/General) and remove the 1:1 permit bottleneck.
Issue 100 new permits: 50 General and 50 Equity
50 Equity Permits are reserved indefinitely with possible incentives:
Lower 5% tax to 2.5%
Low or no permit fee
Low or no application fee
Issue another round of 100 permits after 50 Equity Permits have been issued.
To prevent a bottleneck, allow all General Applicants access to a license if they get stuck in the pool for longer than 6 months.
This license pool will allow the industry to grow, but not greatly outpace Equity Permit holders.
Bring current businesses out of the shadows by offering a clear path to a license.
With proof of operation, current Oakland-based businesses in good standing should be granted priority licenses, thus bypassing the 50/50 pool.
Mirror MMRSA, the state medical marijuana law, and allow all General Applicants that pass inspection to operate until either being issued or denied a license.
Create a city funded Oaksterdam.
Launch a program backed by tax money generated from the cannabis industry to help nonviolent drug offenders and people from designated area’s of the city get involved in the boom through educational programs.
Launch a community outreach program to educate Oaklanders about Equity Permits.
Offer educational programs on how to write a business plan, run a small business, cultivate cannabis, produce marijuana infused edibles, run a dispensary, etc.
Graduates would be granted priority licenses from the Equity pool.
Graduates could also have access to grants and small business loans — again, funded by cannabis tax revenue — to launch their small businesses.
Local businesses that hire these graduates could also be incentivized as employment and mentorship truly are the first step to becoming a successful entrepreneur.
There’s no doubt that the ongoing and highly discriminatory practices embedded within the War on Drugs have disproportionately victimized minorities and people of color. It’s an unfortunate and disgraceful byproduct of a decades-long failed drug policy. However, it is neither wise nor practical to penalize Oakland’s newly regulated cannabis industry with legislation that has the potential to hinder its growth because of the trickle down effects from flawed policies that stem from the Nixon administration.
Considering it took more than 16 months to craft the modified ordinances — with great collaboration between the city, the industry and the public — more time should certainly have been spent drafting, analyzing and debating the impact of the Equity Amendment and to ensure Oaklanders truly have a seat at the table.
We urge the Council to please pause and reconsider the effects of the amendment as drafted — it is so important the City of Oakland get this right. Please pull the amendments to 5.81 from consent on Tuesday to make certain the ordinance is drafted in a way that ensures maximum social equity impact while still allowing the industry to come into the light and flourish.