A Conversation with Massachusetts Cannabis Control Commissioner, Steven Hoffman – Part I

At last week’s State of the Cannabis Industry Conference, Frank A. Segall, Co-Chairman of Burns & Levinson’s Cannabis Business Advisory group and Chairman of the firm’s Business Law and Finance practices, sat down with Steven Hoffman, Chairman of the Massachusetts Cannabis Control Commission, for a wide-ranging interview that touched upon a number of hot-button issues regarding cannabis in the Commonwealth. Below is a transcript of the first half of their conversation. ________________________________________________________________________________________________________________________________________________________________________

COMMISSIONER HOFFMAN: From day one, we’ve said that we’re going do this right—we’re not going to adhere to an arbitrary deadline. There are some deadlines in legislation: We had to have final regulations populated by March 15th, which we did; we had to start accepting license applications by April 1st, which we did. We’ve always said that we’re going to try to hit the deadline [for recreational sales], but we’re going to do it right, and that’s more important to us. I’m very proud of the progress we’ve made—we’re doing it right, we’re doing it carefully, and I hope the citizens of this state care more about what this business looks like in July of 2019 or 2020, than arbitrary deadlines.

One of the things that’s most interesting to me about this is that we’re subject to the old meeting block, which requires that, any time three or more commissioners [of the five-member Cannabis Control Commission] are talking about anything relevant to our Commission, it has to be done in public. So all of our deliberation about what kinds of licenses to issue, how to structure the licensing process, the application process, the enforcement process, all of that has to be done in public. People can disagree with our decisions—and they do, and they’re often not shy about expressing their disagreement—but nobody can argue that these decisions have been made behind closed doors. We’ve been completely transparent, and I’m very proud of the process, as well as the outcome.

FRANK SEGALL: When do you actually see the first establishment opening in the Commonwealth, and how do you see your office handling all of the applications and getting them to market in an efficient manner?

COMMISSIONER HOFFMAN: We’re weeks away. We have a number of license applications pending, and while I won’t speculate as to the likelihood of their being approved, presuming that they are, there’s really just a few remaining steps in the process. Stores that are likely to open first are already licensed by the Department of Public Health as medical marijuana dispensaries; they’re simply adding an adult-use license. For them to get inventory into those stores, they need to get the DPH to allow them to transfer some of their current medical marijuana stock into the adult-use inventory system. The DPH is currently processing requests to transfer inventory promptly; and so, in my opinion, once a license is issued, it’s a matter of a couple of weeks. We’re getting very close.

FRANK SEGALL: And when you set expectations for people who are applying for licenses, how long should they anticipate the process taking?

COMMISSIONER HOFFMAN: Well, there are several steps in the process—some of which we control, some of which we don’t—so it’s hard to give a definitive answer. When we get a license application, the first thing that we do is conduct an intake review. There are four packets of information that are required when applying for a license. When we have those four packets, our staff go through and make sure there’s no information missing. If there is, we go back and request that missing information.

If we have everything, then three things start happening simultaneously. The first is, our staff does a review of the application. And we do that pretty quickly—it doesn’t take us more than a couple of days to complete our review. The other two things are outside of our control. One is, we have to send information to a vettor that performs background checks; everyone who submits a license application has to have a background check done, and those take about seven to 10 days to turn around. The other thing that’s a little less predictable is, we send a notification to the city or town in which the establishment is planning to operate, and request that the city or town tell us whether all of the local bylaws and ordinances have been met. They have 60 days to do that.

So before we can vote on a license, we have to conduct our own review, have the background check completed (which, presumably, results in no issues), and get notification from the city or town that everything on their side has been met.

FRANK SEGALL: What about the onboarding of the software and seed-to-sale tracking, and the requirement mandating that a certain system be used?

COMMISSIONER HOFFMAN: In Massachusetts, seed-to-sale tracking is done by a company called Metrc, which is used by a number of other states. Essentially, it’s an RFID (radio-frequency identification) tracking system; every time a plant gets to eight inches tall, it is given a unique RFID tag that stays with it all the way through the process. Whenever the plant moves from one room to another in the cultivation facility, when it moves from cultivation to manufacturing, when it goes through independent lab testing and arrives at retail, it’s recorded every step of the way.

The purpose of that is two-fold. First is, to ensure that everything sold in a licensed retail store in Massachusetts is grown in-state by a licensed cultivator. We can’t have things coming in across state lines. Second is, to ensure that everything grown in Massachusetts stays in Massachusetts—that it doesn’t go out of the state.

When you get your final license, you have to enter your inventory into the system. It’s set up, it’s ready to go, and everybody has been trained, so it should only take a day or two for that to happen. But it’s one of the requirements between final licensing and opening for business.

FRANK SEGALL: This is a much more complex industry than people realize—it’s very capital-intensive and it’s highly regulated. There’s a balancing act, in the Commission’s mission statement, between safety and open enterprise. The larger, more national companies have the capital and the expertise, but the state limits the amount of units they can own directly, which creates a certain tension and may lead these operators to question whether they want to be in Massachusetts at all. At the other end of the spectrum, there have clearly been cases of smaller enterprises with no experience that have created problems. Have the regulations been too restrictive?

COMMISSIONER HOFFMAN: It certainly is a balancing act, you’re absolutely right. And while we’ve tried to get it right, I don’t know that there’s any guarantee that we have. We understand that this is going to take a while, and as the industry rolls out, we may change regulations, alter some of the licensing structure, go back to the legislature and ask for some modifications—things will evolve, and that will happen over time.

But right now, we have very specific legislative mandates with respect to diversity and making sure this industry is populated by women, by veterans, by LGBT people, by minorities. We want it to reflect the diversity of the state of Massachusetts, in terms of employment, but also in terms of equity and ownership and management. There’s also a clause in legislation that ensures that those communities that have been disproportionately impacted by the enforcement of drug laws are full participants in the industry. We take that very seriously.

We have tried to make the licensing process user-friendly, to make it as low a barrier to entry as possible, but we have not relaxed our standards. It is a challenging process, particularly if you don’t have a lot of business experience, to navigate. And once you get through that, you need to be able to run and operate a successful business. So we need, and are working to develop, training and coaching and mentoring programs that help people understand the opportunities the industry presents and successfully complete the licensing process, and that also provide assistance once they’re up and running.

Frankly, though, the much more difficult challenge that we haven’t addressed yet is capital—this is an expensive industry. Even if you’re thinking about opening a small retail store, it’s not trivial in terms of the amount of capital that’s going to be required. We’re seeing a number of different approaches to funding prospective operators in disproportionately impacted communities, led by the private sector.

FRANK SEGALL: In defining what the legalized market looks like here in Massachusetts, you’ve undoubtedly looked at other states as examples. Who have you modeling yourself after?

COMMISSIONER HOFFMAN: It’s an amalgamation. Colorado, Oregon, and Washington State are the three most developed markets for adult-use marijuana, so those are the places that we’ve been reaching out to most. And they’ve been great—they’ve all been open, they’ve been sharing, and they’ve all been quite honest in saying, “Here are the things we got right, here are things we wish we could’ve done a little differently.” That’s been incredibly helpful.

I will say, you can’t just “lift and shift” from one state to another—the demographics of those states are obviously very different, but even more importantly, so is the legislation. Take basic things, like how taxes are collected—we’re collecting taxes only at retail, other states have a value-added tax all along the chain. Frankly, though, the biggest difference goes back to our commitment to helping communities that have been disproportionately impacted by previous drug laws. No other state has that in their legislation.

There are several states that legalized adult-use around the same time we did, most notably California and Nevada, and we’ve spent a lot of time learning from them, as well as Alaska and Maine. When adult-use launched in California, operators did not have final licenses and had not had background checks. There was also no seed-to-sale tracking system in place. People were keeping inventory records by hand—it took until September for the seed-to-sale system to be implemented.

Every state’s different, and I’m not trying to criticize any of them—I’m just illustrating how challenging getting this industry online can be. We’re learning from both positive and less-positive experiences, and we’re trying to do things in a way that works best for Massachusetts, because our state is unique and our law is unique.

FRANK SEGALL: When you look at Colorado, Washington, Oregon, there are no limitations on the amount of retailers that can operate there—in Colorado, there are more dispensaries than there are Starbucks—which results in incredible price pressure and competition. People think that every retailer that opens up prints money, and that’s not the case. It’s early in the game, but Massachusetts currently doesn’t limit the number of establishments permitted to operate; should it, or should the competition be allowed to “weed itself out?”

COMMISSIONER HOFFMAN: This is something that we’ve talked about in public and debated with people—although we decided against putting limits in place, there are a couple of things that we think serve as guardrails, or brakes, regarding the issue. One is, for retail stores, we require city or town approval. In the legislation, any city or town can limit the number of retail establishments to no more than 20% of the number of package stores. There are some cities and towns that are doing bans; there are some that have moratoriums in place. So the local part of the equation is a natural brake—you’re not going to see stores in every city or town, or on every street corner.

Another issue that’s come up, particularly in Oregon, is oversupply, from a cultivation standpoint. Oregon actually stopped issuing new licenses for cultivation because of a tremendous oversupply. In Massachusetts, we do not cap the number of cultivation licenses we issue. We did, however, put in place a “relegation” system, to borrow a term from English soccer. We have various tiers of cultivation, in terms of square footage that operators are allowed. Every six months, operators need to sell at least 80% of what their tier of production allows, otherwise they get relegated to a lower level.

We do this to ensure that people only grow what they can sell legally in the state. Again, I think this was the right thing to do—we talked about it extensively, we got input from other states, and we’re going to see how it works. This may not be the perfect solution, but we’re going to watch how the market evolves and make some adjustments to the regulations and legislation from there.

FRANK SEGALL: Talking about the local equation, have you had interaction with those communities that have moratoriums and bans in place? Are they reaching out to you? Are you seeing any movement in their thinking on the issue?

COMMISSIONER HOFFMAN: There are 351 cities and towns in Massachusetts, and while we have not talked to every one of them, we have talked to many, and we’ve participated in the Massachusetts Municipal Association’s annual meetings and so we’ve had a chance to interact at that level. Between me and the other four commissioners, we’ve probably had close to 100 conversations with cities and towns. And that’s been our philosophy: We’ll talk to anyone who wants to talk to us.

I group the cities and towns in MA into three groups right now with respect to this issue: There are the 40+ that have banned not just retail, but all marijuana enterprises, which is their right. There are a handful of cities and towns that are saying bring it on; they recognize that this is an enormous economic development opportunity, and they’re saying, “We welcome this with open arms, we think the regulations that the Cannabis Control Commission has put together are well thought out and strong and we want this in our town.” The vast majority are in the middle; they’re proceeding carefully. Many have moratoriums in place, which are all finite and have to be approved by the attorney general—only two extend beyond the end of this year, and the final statement that the attorney general made was that she was not going to give extensions. I’m expecting that most of the cities and towns are using moratoriums not as de facto bans, but as legitimate planning tools.

Again, marijuana operators won’t be on every street corner, but I think that, the more we show how careful we are, not just with the regulations but with the licensing process and the approval process, and the more people see these are professionally run businesses that are positive impacts on communities, the more cities and towns will begin to come on board. And of course, the 3% of local sales tax that can be collected from retail establishments is an incentive as well.