Canna-biz Sues Over ​“Social Equity” Rejection

A leading local weed-preneur has sued the state for denying her company’s bid for a cannabis cultivator license under a program aimed at helping people from communities disproportionately harmed by the War on Drugs.

That state court case is Kebra Smith-Bolden Et Al v. Connecticut Department of Consumer Protection Et Al.

Smith-Bolden, a native New Havener who runs the medical cannabis certification company CannaHealth, filed the lawsuit on Aug. 4 against the state agencies responsible for overseeing the rollout of Connecticut’s recently legalized adult-use recreational cannabis industry.

The lawsuit alleges that the Connecticut Department of Consumer Protection (DCP) and the Connecticut Social Equity Council (SEC) erred when they turned down the cannabis cultivator license application submitted by Acreage Connecticut Cultivation JV LLC. That’s a joint venture co-owned and run by Smith-Bolden’s company NoirEnVerte LLC and the Canadian-based cannabis operations company Acreage Holdings, Inc.

In particular, the lawsuit claims that state regulators misunderstood just how much legal ​“control” Smith-Bolden has over the new business in relation to the out-of-town investors with whom she partnered earlier this year in order to raise the $3 million required to cover the state’s cannabis cultivator license fee. The SEC turned down the joint venture as a ​“social equity applicant,” denying it the ability to get one of the first provisional licenses to grow cannabis in the state.

The stakes of such a finding, the lawsuit continues, are quite high for a newly legalized adult-use-cannabis market that promises to be lucrative for businesses that get in on the ground floor.

Under state law, ​“distinct licenses are required to grow, manufacture, or sell cannabis in Connecticut’s adult use market,” the lawsuit states. ​“Licenses of all types will be awarded with priority to social equity applicants as part of Connecticut’s effort to redress the disproportionate harm caused to communities of color by the war on drugs and criminalization of cannabis.”

The first such licenses that the state will award, the suit continues, are ​“cultivator licenses for cultivation facilities located in disproportionately impacted areas. These licenses are reserved for social equity applicants, and there is no cap on the number of licenses that can be awarded. Every applicant that meets the requirements established by statute will receive a cultivator license.”

The lawsuit calls on the court to declare that the state regulators violated the plaintiffs’ right to due process under the U.S. Constitution, and to stop the state agencies from issuing cannabis business licenses to other applicants until this Smith-Bolden’s case has been resolved. 

It also asks the court to find that Acreage Connecticut Cultivation LLC does indeed qualify as a social equity applicant, and to reopen the cannabis cultivator application process under clearer rules around the requirements to obtain such a license.

“The Court should fix the constitutional deficiencies in the process before anyone receives a license and begins growing cannabis commercially as part of Connecticut’s soon-to-launch adult use market,” the legal complaint reads. ​“If the winners who were arbitrarily chosen on July 13, 2022, are permitted to participate in the nascent market while the Company is excluded, this will cause irreparable harm to the Company and Smith-Bolden.”

Spokespeople for both the state Attorney General’s office and the state DCP declined to comment on the pending litigation. DCP Communications Director Kaitlyn Krasselt noted in her email response to the Independent that ​“ownership and control is defined and decided upon by the Social Equity Council. Any questions about ownership and control should be directed to the SEC.” A representative from the SEC did not respond to a request for comment by the publication time of this article.

The lawsuit comes several weeks after the SEC endorsed 16 cannabis businesses as social equity applicants — and rejected another 25, including Acreage Connecticut Cultivation JV LLC. It also comes as at least one another SEC-rejected business, the Hartford Cannabis Company, has already filed a similar lawsuit in state court protesting its denial.

Meanwhile, earlier this month, the Board of Alders approved a new comprehensive set of zoning regulations governing where state-approved cannabis businesses can operate in town.

Board of Alders President Tyisha Walker-Myers, meanwhile, recently penned a letter criticizing the state’s decisions about which licenses to grant, and not to grant, under the ​“social equity” initiative.

“As The Social Equity Council was developed in order to make sure the adult-use cannabis program is grown equitably and ensures that funds from the adult-use cannabis program are brought back to the communities hit hardest by the war on drugs, it was alarming when the successful applicants were announced and there were none from New Haven,” Walker-Myers wrote.

“This was even more concerning given the work that residents of New Haven like Kebra Bolden-Smith have put in to facilitate this effort through advocacy for equitable, recreational cannabis legislation, organizing with WomenGrow CT, and serving as president of CT United for Reform and Advocacy, which helped pass​An Act Concerning the Equitable and Responsible Regulation of Cannabis. New Haven has been at the forefront at every level yet somehow not one New Haven social equity applicant was successful. In the meantime, we hear that before the ink is even dry on legislation regulating cannabis locations in New Haven, large scale cannabis entities already have plans to start operations in New Haven.”

"Control" Definition Debated

Smith-Bolden’s suit focuses on the state’s definition of ​“control” when trying to determine the eligibility of a social equity applicant.

The state panel and the state-hired consultants found that Smith-Bolden’s joint venture does not meet the state law-defined criteria of a ​“social equity applicant.” 

Qualifying companies must be at least 65 percent ​“owned and controlled” by an individual or individuals who makes less than 300 percent of the state median household income and who have lived for a certain period of time (five of the last 10 years, or nine years prior to turning 18 years old) in an area ​“disproportionately impacted” by the criminalization of cannabis.

“This letter is to inform you that the Social Equity Council (SEC) has determined that you did not meet the criteria to qualify as a ​‘social equity applicant’ as defined under Public Act 2 1 – 1,” reads a letter sent by the SEC to Smith-Bolden’s company on July 13, and which is included as an exhibit to the lawsuit.

That letter states that a business partner ​“controls” a qualifying social equity applicant company if they can ​“exercise operational authority over daily affairs of the business” and if they have ​“the voting power to direct the management, agents, and policies and receives the beneficial interests of the business.” 

According to the SEC’s and CohnReznick’s readings of the joint venture’s application, Smith-Bolden — who otherwise meets the social equity applicant definition’s income and location requirements — does not ​“control” at least 65 percent of the joint venture. (CohnReznick is the private consultant that the SEC hired to evaluate the cannabis cultivator license applications.)

The letter identifies three specific ways Smith-Bolden fails to meet the threshold, according to the SEC:

• It states that an organizational chart submitted by Acreage Connecticut Cultivation JV LLC indicates that Smith-Bolden owns 65 percent of the company, while her investor-partner owns 35 percent. However, a ​“members schedule” included in that submission shows that Smith-Bolden owns 50 percent of the company while the investor-partner owns the other 50 percent. ​“Due to the conflicting information, it is not possible to determine whether the applicant owns the required 65% for a Section 149 application.” (Smith-Bolden noted in the lawsuit that the initial indication of her 50 percent ownership was a typo that she subsequently corrected. See more below.)

• The letter also notes that Smith-Bolden has only a 20 percent vote on ​“Manager matters plus the authority to appoint or remove, without cause, one other Manager who will hold 20% of the management vote.” The investor-partner, meanwhile, has control over 60 percent of the board. 

• Finally, the letter states that Smith-Bolden ​“does not have operational authority over daily affairs of the business, nor do they have the voting power to direct the management, agents, or policies and beneficial interests of the business.”

In the new lawsuit, Smith-Bolden and her co-plaintiff disagree with the SEC’s findings.

The lawsuit argues Smith-Bolden and her investor partners deliberately set up the joint venture in such a way to ensure that it would meet the state law’s social equity applicant thresholds. 

The lawsuit states that Smith-Bolden owns and controls 65 percent of the company, is responsible for managing the day-to-day business activities of the company, is the CEO of the company, is a member of the company’s five-person board, and she has the power to appoint one other member of the board.

All of these responsibilities should clearly add up to Smith-Bolden being recognized by the state as ​“controlling” at least 65 percent of the company, the lawsuit argues.

The problem, the legal complaint continues, is not with the way that the joint venture is set up, but rather with ambiguities, arbitrary reasonings, and ultimately faulty decision-making of the SEC and its consultant.

“The definition of control used in the denial letter — ​‘exercises operational authority over daily affairs of the business’ and ​‘has the voting power to direct the management, agents, and policies and receives the beneficial interests of the business’ — is not found anywhere in statute, regulation, or agency guidance,” the lawsuit asserts. ​“The first time the Company and Smith-Bolden were aware that the SEC would be evaluating applications based on this definition of control was when they received the denial letter.”

“Though their definition of control is arbitrary,” the lawsuit continues, ​“CohnReznick and the SEC are also wrong that Smith-Bolden does not have operational authority over the daily affairs of the Company. The corporate documents submitted in support of the Company’s application explicitly name Smith-Bolden as Manager and give her responsibility for day-to-day business activities.”

Smith-Bolden’s lawyers also write that a ​“typo” included in the joint venture’s initial application could have caused confusion that erroneously led to the company’s rejection by the SEC. That typo initially stated the Smith-Bolden owned only 50 percent of the company. The lawsuit states that the applicant fixed that typo in mid-May to accurately reflect Smith-Bolden’s 65 percent ownership. Nevertheless, come mid-July, the company’s application was rejected.