The Arkansas Medical Marijuana Commission today finished the bulk of its discussion of draft rules for the licensing of cultivation facilities by establishing high financial hurdles for would-be growers to clear before they can claim one of the five licenses the commission will distribute later this year. In a reversal of a decision it made last month, the panel also decided to not require cultivators to spread out geographically across the state.
The amendment legalizing medical marijuana — which voters approved in November — allows for the creation of four to eight cultivation centers, in addition to 20 to 40 dispensaries, which will distribute the drug to patients (and will themselves be allowed to grow up to 50 plants apiece). The commission will likely begin its discussion of dispensary rules at its next meeting, on Jan. 10. Although dispensaries are the more likely point of entry for entrepreneurs looking to break into the nascent marijuana industry, the cultivation facilities look to be where the big money will be made.
The commission today voted unanimously to require any cultivation facility applicant to show a $1 million surety bond or assets worth $1 million and $500,000 in cash on hand before its application will be accepted. It also established the annual cost of a cultivation license at $100,000. That’s distinct from the initial application fee for growers, which the panel set at $15,000 during its last meeting (half of which is to be refundable if the application fails).
Previously, the commission requested information from staff about licensing fees in other states. “The numbers are all over the place,” Commissioner Ronda Henry-Tillman noted today after reviewing the information, “as low as $2,500 to as high as $185,000.” Commissioner Carlos Roman, who has advocated making the market more accessible, proposed setting the license at $15,000: “I would think we’d put them at the same rate as the application fee,” he said. The other commissioners said that was too small, worrying in part that such an amount would be too low to pay for the regulation of medical marijuana through the Alcoholic Beverage Commission, as envisioned by the amendment. “I think it’s got to be higher than $15,000,” Commissioner James Miller said. “$15,000 won’t get us there.”
At the other end of the spectrum, Commissioner Travis Story proposed setting the cost of a license at $185,000, equivalent to Connecticut’s. “It’s always easier to reduce fees once we figure it out than to increase them later,” he said. “This is where we want the best of the best, people who are well-capitalized coming in.” Story’s motion failed to garner a second, however, and so Miller proposed a $100,000 fee, which passed.
After working their way through the remainder of the draft rules prepared by staff, the commissioners then returned to two thorny topics it had set aside from earlier meetings: The question of statewide geographic distribution of cultivators, and the financial wherewithal it would require applicants to show.
On Dec. 20, the panel voted 3-2 to place one grow center in each of the state Health Department’s five geographic subdivisions. Story has argued against that, saying that it would effectively create five parallel systems and would hamper the selection of the most meritorious candidate; Roman vocally advocated for requiring geographic diversity. Today, however, Story’s viewpoint won out among the commissioners. Rather than requiring the cultivation centers to be spread out around the state, he proposed including consideration of the “economic impact” of the location of a cultivation facility among the many other criteria the panel will use when grading the relative merit of an application. His motion passed unanimously, with Roman’s support. (After the meeting, I asked Roman why he’d given up on that fight. He was trying to compromise, he told me, and said he was hopeful about amending the merit criteria to include geography. “If you’re going to put one in an underserved area, it should get the nod above one in a more economically developed area,” he said.)
As for assets, Story proposed a threshold of $2 million in assets, with at least $500,000 in liquid assets, noting similarly high bars in states like New York. Roman proposed setting the bar at either $1 million in illiquid assets or $500,000 in cash: “If they can do it for $2 million in New York, surely we can bring that down. … The labor cost is cheaper here, real estate is cheaper here.” The commissioners eventually compromised on requiring a surety bond of $1 million or assets worth $1 million and half a million in cash, in a motion that passed unanimously.
After the meeting, I asked Story why the bar needed to be so high. Since it’s still to be determined what the demand for the substance will be, why not start cultivators off small and scale them up later?
“Because we can’t afford failure,” he said. “It’s exactly to your point: We don’t know what demand’s going to be, so we don’t know how long they have to sustain themselves before they can make a profit. We’re not saying they have to use all that cash; we’re just saying they have to have the availability to keep going, because the last thing the commission or the state wants is one of these to fail.”
But don’t businesses fail all the time? “Yes, but in this case we’re talking about a very highly regulated product,” he replied. “The last thing we want is somebody to decide they’re going to have to go a different route to finance this, whether that be through the backdoor, finding investors that are less than reputable.” Story’s main concern seems to be that a financially struggling cultivator would be sorely tempted to offload its product at more lucrative black market rates rather than selling it above board. (It’s a valid point — but one might also note that establishing high fees also drives up consumer prices, thus making it harder for medical marijuana providers to compete with the black market.) And, Story noted, a large amount of cash on hand is necessary for a cultivator’s operations, since marijuana producers can’t access credit through banks, due to the substance’s ongoing federal prohibition. (This is true.)
I asked whether the asset test by definition limited this new industry to the already wealthy. Not necessarily, Story replied. “It limits it to the overall investment group that somebody can put together. So we’re requiring a high barrier to entry, but it doesn’t mean that we’re taking out the average person if they can go raise the funds or pull the investment group together, pull the assets together, then they would be fine. We’re not requiring it to be one person.”
I also spoke to Melissa and Gary Fultz after the meeting, who sponsored Issue 7 — the other medical marijuana initiative that was struck from the Arkansas ballot by the state Supreme Court just days before the election. “It’s a little disheartening,” Melissa Fults said of watching the commission, but she cheered Roman’s advocacy for lower fees. “As Dr. Roman has pointed out, all these high fees are going to cause the prices for the patients to be astronomical, which is inviting the black market.”
But perhaps surprisingly, they said they agreed that the financial bar should be set fairly high for cultivation facilities.
“There’s only five cultivation centers [and] we’re investing the future of people’s health with you,” Gary Fults said. “If you can’t keep yourself financially afloat for the first year? We run a restaurant, we understand what it’s like to not have enough money to make it all the way to the finish line — and the same thing applies. … You may be the best grower in the world, but if you can’t keep your employees paid and keep your water bill paid and all that stuff … you collapse. … I think that argument is valid, that you better be able to prove you can make it.” Melissa Fults said, “It’s going to take at least a million dollars. But not two million. This isn’t Connecticut and this isn’t New York; this is Arkansas.”
For the Fultses, the key issue is all about increasing access for patients, not about distribution of business opportunities. Both remain disappointed that the more decentralized cultivation model envisioned by Issue 7 — the plant would have been grown by dispensaries and also in small quantities by some patients with a geographic hardship — did not come to pass. But now that Issue 6 is the law of the land, they’re keeping a close eye on its implementation.