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

Below is the conclusion of the conversation that Burns partner and Cannabis Business Advisory Group co-chair Frank A. Segall had recently with Steven Hoffman, Chairman of the Massachusetts Cannabis Control Commission, regarding the state of the industry in the Commonwealth.
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FRANK SEGALL: Let’s talk about [the 3% sales tax incentive]. Host-community agreements have received some attention – for those in the audience, the regulations are pretty clear: Towns can charge up to 3% of gross revenue, with respect to costs that are associated – we’ll say directly, but it’s not clear – with operating an establishment. What we’re seeing is, it’s pretty much 3% flat, with no analysis as to the costs. And there are additional requests that towns have been making – we’d like that new fire truck, we’d like that new park – that have created some consternation and raised questions about whether the rules are being followed and the playing field is level. What are your thoughts on that?

COMMISSIONER HOFFMAN: This is a complicated issue – there’s been a lot of comment and feedback on this. We’ve looked at 15+ host-community agreements that we’ve signed thus far, and there are three things that we keep seeing as problems. First is, the 3%, in some cases, is not 3%. The law is explicit in that it has to be at most 3%, but in some cases, it’s just been a flat fee. Second is that it has to be related to incremental costs that the towns incur as a result of hosting one of these facilities. I assume that in the vast majority, there’s no documentation, no support for the number or the amount that’s being charged – as you said, no analysis. Third is, these agreements stipulate up to 3%, up to five years. I’ve seen a number of instances where it’s essentially “auto-renew.” So those three things pretty clearly, in my opinion, violate the specifics of the law.

The other thing you mentioned was voluntary donations – or buy-in operators building a playground or ball field. With that, it’s a little less clear. The law says, here’s what this 3% mitigation fee has to do – it doesn’t say there can’t be other parts to these host-community agreements. So it’s an interesting question, and everybody has a different opinion on this. My personal opinion, and what the Commission’s stance is right now, is that there are some problems with host-community agreements and the 3% mitigation fee.

There are two things that we need legislative help on, because present legislation just doesn’t make it clear. One is, the other payments – the “fire truck” payments. The second, and this may sound like a cop-out and I apologize, is that we don’t, as a Commission, have enforcement rights over these contracts – they are private contracts between the city or town and the marijuana establishment owner. We don’t believe we have regulatory authority or enforcement rights, although a number of people believe that we should. To me, the fact that there are so many differences in opinion supports the Commission’s belief that this is something that needs to be addressed through changes in legislation.

FRANK SEGALL: Do you feel you should have that authority?

COMMISSIONER HOFFMAN: I want these agreements to do what they’re supposed to do, which is literally reimburse cities and towns for the costs of implementing marijuana facilities – I want that to be enforced. I’m open-minded about what that enforcement mechanism should be, but I do want there to be a clear enforcement mechanism because I think that it’s very important that these agreements do what they’re supposed to do, and that they don’t become ways of tilting the playing field for the larger companies that have the lawyers and the money to buy that fire truck. I think the issue absolutely has to be addressed, and I understand that people disagree with me and the Commission on this – not everybody, but some – and it’s just a question of, what’s the right way to enforce the legislation?

FRANK SEGALL: The regulations are very specific on advertising, packaging, branding to the point where you can’t sell a t-shirt or a coffee mug with an image of a marijuana leaf. Is that, perhaps, over-restrictive?

COMMISSIONER HOFFMAN: Again, I think it’s one of those things that we’ll see the industry evolve on over time. I’ll tell you where it comes from: You asked a question earlier [see Part I of this conversation here] about what we’ve learned from other states. One of the things we learned from Colorado was, they had a real problem early on with edibles looking like candy and being attractive to people who should not be into these products. We decided very early on that we were going to focus on doing everything we could to keep this product out of the hands of people under 21. And so we’ve put in place very explicit – and, it could be argued, overly restrictive – requirements with respect to the appearance of the product, so that it doesn’t look like candy. Those requirements address how they’re packaged, how they’re labeled, how they’re advertised and marketed.

Our thinking is very much from a public-safety standpoint: It’s not that nobody under 21 ever gets into a store, but it’s that they’re not going to find this product attractive if they find it in their kitchen. All I can say is that we have tried every step along the way to use our best judgment, with the understanding that we see how this market evolves and make changes if we need to. People might accuse us of being overly restrictive, but we thought that perhaps that was better than being less restrictive than necessary.

FRANK SEGALL: Do you envision, along the way, having forums with operators, so that you can get feedback?

COMMISSIONER HOFFMAN: We get feedback all the time – nobody’s exactly shy about giving us feedback. We meet with operators all the time. I don’t view it as a hostile relationship – I think we’re very collaborative with all parts of the industry, actually, to learn, to understand problems they have; we’ve made some modifications to our licensing portal, based on feedback we’ve gotten and some challenges that people have had working their way through it. It’s really something that happens all the time – I don’t know that there’s a need for a formal feedback mechanism, I just think you talk to people all the time, and learn and make adjustments as necessary.

FRANK SEGALL: I would be remiss if I didn’t ask you about the topic of banking. It’s at the top of everybody’s list. Burns is trying to take the lead in terms of helping clients find accounts – we’re working with Safe Harbor, we’re working with GFA Federal Credit Union in Gardner. What’s your assessment of the banking situation, and do you have a plan B? Because one bank isn’t enough – two banks aren’t enough.

COMMISSIONER HOFFMAN: Banking is an incredibly critical issue. There’s the cash-management piece, and there’s the financing piece. I’m going to talk about the cash-management piece. Cash management is a gigantic public safety issue, obviously. We don’t want to have somebody closing a retail store at 9 o’clock at night, leaving with a satchel with $50 thousand in cash over their shoulder, and every criminal in the state knowing about it. We’ve been working on this really hard, and even though I have this exalted title of Chairman of the Cannabis Control Commission, I can’t force a bank to enter this industry.

We’ve been talking to the Cooperative Credit Union Association, the Mass Bankers Association, literally anyone we can to say, “Look, here is the way we’re going to regulate this industry – we’re doing background checks, and here are all the steps we’re taking to ensure that this is a professionally run, crime-free industry.” We’ve talked about the seed-to-sale tracking system – one of the problems with banks entering is that this is very expensive business to bank, because of anti-money laundering and fraud. To mitigate that, we’ve created an API (application programming interface), so that any bank can get into our seed-to-sale tracking system and monitor the inventory of their clients – obviously, with their clients’ permission.

I think it’s great that Safe Harbor and GFA made the decision to enter – I give them enormous credit for the courage they’re showing by participating in this industry. I will tell you that there are four other banks that we’ve had dialogue with that I think are getting close to following in GFA’s steps, which will help. Whether we get enough banks to cover this entire area, I don’t know. Colorado, five years after launch, has, I believe, four banks and about 80% coverage. So even after five years, they’re still not at 100%.

Our plan A is to keep talking to as many banks and lending organizations as we can, and hopefully we’ll see some more begin to come in. I think that, over time, more and more banks will enter. Plan B, which is not a very popular plan, is a state-owned bank. I’ve been pushed back everywhere I’ve raised that idea, but to me, given the federal prohibition, a state bank is an interesting option not just from a cash-management standpoint, but also from a lending and financing standpoint. There is no political support for that – five years ago, Massachusetts looked at having a state-owned bank for infrastructure, and decided it didn’t make any sense.

I think that we’re going get where we need to go, it’s just going to take a while. Hopefully, it doesn’t take as long as in other states. I’m very pleased that, before we had our first retail store, we had GFA come in and say we’ll service this industry. That was an enormous milestone for the Commission, and I hope that other banks follow in those footsteps.