Cannabis regulators concerned about predatory practices in Missouri’s social equity program

Cynara Velazquez became familiar with Michael Halow over the summer.

Velazquez is an organizer with the California not-for-profit called Cannabis Education Project that San Diego County hired in March to implement its social equity cannabis program. The group largely helps people who were imprisoned for cannabis apply for a license to sell or grow marijuana.

That’s how her team met Halow.

At one of the county’s informational sessions, organizers saw Halow pass out business cards, she said, that led to an online form for potential applicants and looked identical to the application form used by the county.

Halow or his brother Brandon would call the applicants, Velazquez later learned, and offer to help them navigate the system in exchange for 49% of the potential company’s profits.

“We called every single applicant,” to warn them, Velazquez said in an interview with The Independent. But a few applicants, she said, had already “fallen for the scheme.”

Then, she saw an article in The Independent last month about a Black disabled veteran who filled out an inquiry form to get a microbusiness license in Missouri and ended up signing a contract with Halow. She claims she didn’t realize the contract aimed to take full control and profits of the dispensary.

“We said, ‘Oh my God, these guys are even more insidious than we thought,’” Velazquez said.

Since Missouri voters approved recreational marijuana in 2022, state regulators have used a lottery system to award 96 microbusiness licenses — a program sold to voters as a way to help victims of the War on Drugs get a toehold in the burgeoning cannabis industry.

But of the 96 licenses issued so far, 41 have been either revoked or are currently at risk of being revoked. Another three are under investigation.

A majority of those 44 licenses are connected to groups or individuals who flooded the lottery by recruiting people to submit applications and then offering them contracts that limited their profit and control of the business.

Halow, for example, is connected to more than 700 of the 3,600 applications submitted for Missouri’s lottery since the program began. He’s associated with 22 awarded licenses, but every one has been either revoked or denied certification earlier this month by the Division of Cannabis Regulation.

In all those October notices of pending revocation connected to Halow, the division stated the licensee entered into an agreement that would result in someone besides the eligible applicant “becoming an owner of this and 15 other microbusiness licenses.”

In total, groups flooding the lottery have made up about 1,400 of the 3,600 applications submitted since the program began, meaning they’ve represented about 40% of what’s gone into the lottery and come away with nearly 40% of the licenses.

NAACP leaders in Missouri are calling it a “predatory attack” on the state’s social equity cannabis program, which voters intended to allow marginalized or under-represented individuals to participate in the legal marijuana market.

“If a Black license owner is not making the most money off the operation, then they’re being robbed of the opportunity to create generational wealth,” said Adolphus Pruitt, president of the St. Louis City NAACP. “That’s what the microbusiness program is about. And that’s what’s being robbed.”

Division of Cannabis Regulation director Amy Moore said her team shares the concern about predatory practices, and that’s why the division previously issued warnings to applicants.

“We put out quite a bit of education and warnings about predatory practices,” she said, “because we know that is happening, and it’s not just happening here in Missouri.”

By the time applications get to state regulators “a lot of agreements have been signed,” Moore said. “Financial transactions have happened. So, I really appreciate that there are other voices also speaking up, so that some of that damage perhaps could be prevented and mitigated before we get to applications being submitted to a government agency.”

In an email to The Independent, Halow denied that his actions are predatory and says he’s transparent with applicants he’s worked with in “a number of states.”

“Applicants engage me for the same reason people hire tax preparers,” Halow said. “Navigating through government paperwork can be a daunting task in any situation. I am very proud of the resources and expertise I provide across the country.”

Halow said the intake form on his website for San Diego was a “marketing tool,” and “it was not meant to mimic the county’s official process.”

“As for the criticism regarding ‘flooding the lottery,’ it’s important to recognize that more applicants is actually a sign of greater participation in a government program,” he said, “which is a positive outcome.”

By law, the state must award a total of 144 licenses to disadvantaged business owners. But there’s not a definitive deadline to meet that goal, Moore said.

Pruitt believes the division needs to reevaluate the rules around the application process to “fix the problem,” even if it means a delay in issuing the next round of licenses. A short pause, he said, could also give the NAACP and other community leaders an opportunity to try to create pathways to business capital so business owners aren’t as vulnerable to predatory practices.

“It’s a very simple question with a simple answer for me,” Pruitt said. “Or would you rather continue to try to catch everybody who’s speeding?”

More than half not certified

The state issued its first round of 48 microbusiness licenses last year.

These applicants were picked out of a lottery of 1,600 submissions, and then the division verified they met the basic qualifications — which includes having a low income, a nonviolent marijuana charge on their record, being a disabled veteran or living in a low-income ZIP code.

But getting the license is actually just the beginning of the verification process.

The licensees must then pass through a rigorous 60-day investigation into all financial and operating agreements to make sure the license will continue to be majority-owned and operated by an eligible person, as the state constitution requires.

After the investigations last year, the division ended up issuing 11 notices of pending revocation.

The licensees had a few months to respond to the division’s concerns, but ultimately all six licenses connected to Halow were revoked — along with two connected to a Michigan-based group — because they couldn’t prove the business would be run by an eligible person.

The revocations were the division’s attempt to prevent what some legal experts have called “fronts”, or arrangements where the profits and ownership weren’t going to people that regulators had certified were eligible.

“Most people’s reactions to our revocations was that it was a very strong move and was very clear why we did it,” Moore said. “So it seems that that did not have as much of an impact as we hoped.”

In July, the division awarded another 57 microbusiness licenses. But after the 60-day investigation that ended earlier this month, regulators sent out 32 notices of pending revocation.

Half of the 32 pending revocation letters went to licensees connected to Halow.

But Halow’s strategy is not unique. Neither are the results.

Last year, The Independent revealed a Michigan-based company called Canna Zoned was recruiting people on Craigslist to enter Missouri’s social equity license lottery using contracts forcing them to eventually relinquish all control — and profits.

The company landed two dispensary licenses last October and both were revoked earlier this year, though the company is appealing that decision.

Despite those revocations, Canna Zoned was awarded another license through the July lottery, and once again received a notice of pending revocation this month.

John Payne also received six notices of pending revocation this month for licenses where he serves as the designated contact. Payne led the campaign to legalize recreational cannabis in 2022 and is connected to nearly 500 applications and 12 licenses since the program’s inception.

But Payne has come under fire in recent months after The Independent revealed that for some applicants he’d recruited eligible Missourians and had them sign a 47-page contract that would ultimately give him and his partners 90.1% of profits and majority control of the business.

Despite only owning a fraction of the business, under state law the applicants would bear the lion’s share of the regulatory scrutiny. If they ever want to walk away from the deal, they would be required to pay a nearly $1 million fee.

In addition to the six notices of pending revocation this month, three current licenses connected to Payne are under investigation by state regulators. According to case documents for these three cases, the division questioned whether the eligible person who submitted the application will continue to be the majority owner and operator of the business.

“It’s certainly not in the best interest of individuals or in the interest of the program or the implementation of the law to be issuing licenses every round and doing notices of pending revocation for more than half,” Moore said. “So yes, we are considering what changes we need to make.”

Notices tripled from last year

Roz McCarthy, CEO and founder of the national organization Minorities for Medical Marijuana, said it’s troubling that the number of pending revocation notices the division issued has tripled from the first round of licenses a year ago to the second round this year.

The division or a legislative committee, she said, should hold a public meeting to get feedback from residents and social equity experts about how to address the issue.

Missouri regulators are looking into several solutions, Moore told The Independent. However, many of them would require a change in the state’s administrative rules –- and that would require a public hearing before a legislative committee for approval. It would also delay a third round of licenses, she said.

Having applicants take an online training course that addresses predatory practices is among the possible new requirements, Moore said.

“Those kinds of front-end educational efforts, they’re very good for individuals who are interested in them,” Moore said. “It just probably would have to be one factor of a bundle of actions.”

Velazquez said San Diego County will now likely require eligible individuals to submit the application themselves, and not through a consultant in order to curtain predatory practices.

Velazquez says she doesn’t want California to follow in the footsteps of Arizona’s social equity program — where Halow’s actions have also been criticized. Arizona Senate Majority Leader Sonny Borrelli, a Republican, spoke about Halow and other investors’ impact on the state’s program during a legislative committee hearing in February.

“We now have here in Arizona,” he said, “a situation where 24 of the 26 of these social equity licenses are now fully controlled by companies or people who do not belong in these special groups to get this license.”

Borrelli proposed legislation to return these licenses to their original owners, alleging private investors and cannabis corporations used predatory tactics to seize control of them. It passed the Arizona Senate but didn’t make it to a House vote.

Social-equity cannabis programs nationwide, McCarthy said, largely aim to provide business opportunities for people who reside in highly policed areas where cannabis has been criminalized.

A contract where an applicant only gets 9% or no profits of the business is “so unfair,” she said.

“People will take our community’s pain and then turn it around and create a business around it,” McCarthy said. “They do it under the guise of equity, but it’s a lie.”

Missouri Independent is part of States Newsroom, the nation’s largest state-focused not-for-profit news organization.