License Winners Sue Illinois Over Ownership Rules

This story was reprinted with permission from Crain’s Chicago and written by John Pletz

The seemingly never-ending saga of the state’s new cannabis-shop licenses is back in court.

Two winners of retail marijuana licenses who previously sued the state over alleged flaws in its application process are suing again. Having won retail licenses in lotteries, they’re suing the Illinois Department of Financial & Professional over rules that forbid licensees to sell those licenses or equity stakes in them until they build out their dispensaries and win final approval.

The state’s rule has been controversial, drawing criticism from license holders who say it’s preventing them from raising capital they need to open their pot shops.

Haaayy and WAH Group sued the department in Cook County Circuit Court yesterday, claiming the state’s cannabis law doesn’t prohibit the sale of licenses nor does it prohibit management service agreements with others to operate or help get stores up and running. They’re seeking an injunction to prevent the department from enforcing its rules. A hearing is set for next week.

In its lawsuit, Haaayy said the state’s rulemaking cost it a $5 million offer to purchase its license. WAH Group said three purchase offers for one of its two licenses were withdrawn after state regulators published guidance that precluded ownership transfers.

At the heart of the dispute is one of the quirks in the Illinois cannabis-licensing framework. Under the law, the state issues a “conditional” license to open a retail shop, with a final license awarded after the has been built out and passes final inspection by the state regulatory department to open.

The department, however, says conditional licenses can’t be sold, and those who are awarded licenses can’t add new owners beyond those who were included in their original applications until the final license is issued.

“(The law) does not authorize the department to approve changes of ownership during the conditional-license period,” a state spokeswoman said in a statement. “The administration is committed to supporting applicants who were awarded a conditional license based on their application submitted in the competitive-scoring process.”

The lawsuit underscores one of the issues that has bedeviled the new marijuana law from the start. It was designed to increase diversity in the marijuana business, which had been dominated by large, predominantly white-owned companies.

Gov. J.B. Pritzker and lawmakers have wrestled with how to allow minority license winners to cash in on their good fortune while ensuring that out-of-state companies don’t buy their way into the market and out-muscle those applicants who make a go of operating retail stores.

Deputy Gov. Christian Mitchell, who has been a point person on cannabis for the administration, said during an interview with WTTW two weeks ago: “On the one hand, you’ve got owners who are saying, ‘Hey, we want to change principal officers so we can raise capital right now because we need it,’ ” he said. “On the other hand, you have pretty much an equal number of folks saying, ‘Hey, wait a second. We’ve got principal officers who have been holding this for a couple of years; they’re people of color; we want that growth in this industry.

“What we don’t want is some of these predatory folks who are coming in and saying, ‘Hey, I’ll give you some cash, but you’ve got to give me a majority stake in your business.’ ”

Scores of lawsuits have been filed throughout the process that began when the Legislature legalized recreational marijuana three years ago.

Haaayy and WAH Group sued the state over its initial licensing rules, which awarded extra points to applicants who were military veterans. Those points ended up being crucial when the state resorted to lotteries because of so many high scores.

A Cook County judge ruled their argument had merit and prevented the state from issuing licenses. When the judge retired, the case was in limbo, holding up the process until WAH Group, which successfully challenged the application scoring and won licenses in lotteries, dropped the litigation.

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