Divide opens over L.A. cannabis social equity licenses, management contracts

Published July 22, 2020, by John Schroyer

Months of anger over prized marijuana social equity licenses in Los Angeles boiled over recently, when the California Minority Alliance (CMA) accused a Black cannabis executive and his company of exploiting other minorities through “predatory” business deals.

The CMA made the accusations against 4thMvmt in an email to the L.A. City Council and the Department of Cannabis Regulation.

4thMvmt, founded in 2018 to help applicants navigate L.A’s social equity program and fund their efforts, is headed by CEO Karim Webb, who is Black.

The dispute highlights just how competitive and vitriolic Los Angeles’ cannabis licensing has become, with applicants who share a history of discrimination finding fault with each other’s bids to obtain the coveted permits.

In its allegations, the California Minority Alliance charged that Webb and 4thMvmt “tried to take advantage of their social equity partners with predatory agreements.”
“Let’s be clear, (City) Council, if this was a White person taking advantage of a social equity applicant it would be thrown out,” the email read. “Predators can also come (from) within our own community.”

In an emailed statement to Marijuana Business Daily, Webb called the CMA’s allegations “unsubstantiated and false.”

And 4thMvmt spokeswoman Ralina Shaw provided MJBizDaily with detailed explanations about the situation as well as testimonials on behalf of the company.

The CMA provided a redacted copy of one of the agreements in question, which the organization said was signed by one of 4thMvmt’s social equity retail partners.

The company’s social equity partners are in line for at least 13 retail licenses from L.A.’s licensing round, which opened in September 2019 to award 100 retail licenses. The City Council recently doubled the amount of permits it will offer to 200.

In total, 4thMvmt submitted 32 business applications.

The California Minority Alliance noted several points in the redacted agreement that it claimed were objectionable, including:

The contract mandates that a management company run the retailer’s day-to-day operations and that, according to the CMA, the social equity applicant will therefore have no real control over the business.
The arrangement includes a buyout provision allowing 4thMvmt to purchase the social equity applicant’s share of the company for $200,000, which CMA argues is far below the fair market value of a majority share in an L.A.-based marijuana retail shop.
4thMvmt would be able to sell its interest in the business at any point in time. If the social equity applicant wanted to sell, however, that person would need written consent from other company stakeholders, making it an uneven situation.The CMA also alleges it learned from multiple social equity partners of 4thMvmt that they were given only one hour to review the proposed deal and either sign on or reject it entirely.

And, according to the Los Angeles Times, there was no real opportunity for an attorney to review the agreement.

Accusations disputed

Webb, 4thMvmt’s CEO, declined an interview request from MJBizDaily but issued a statement pushing back against the CMA’s accusations.

“The lack of Black social equity success stories in the media is stark and obvious,” Webb wrote.

“It is despairing to see respected members of the media knowingly print unsubstantiated and false accusations from questionable sources because (they) will get views, instead of the diverse stories of triumph and life-changing social equity progress,” he said. “Sadly, this is yet another example of the systemic racism that pervades all aspects of our society.”

Cat Packer, the executive director of the L.A. Department of Cannabis Regulation, didn’t address 4thMvmt specifically when asked if she’d seen the California Minority Alliance’s allegation-filled email.

Rather, Packer emphasized that new regulations adopted recently by the city have more stringent requirements about social equity shares and operational agreements such as 4thMvmt’s.

“We are aware of concerns that stakeholders have about predatory practices in agreements,” Packer said. “What Council voted into law … seeks to directly address concerns that stakeholders have raised about the equity share definition.”

4thMvmt’s Shaw noted that the redacted agreement is now outdated because the company altered its contracts based on multiple changes the City Council made to the social equity program.

But after seeing a copy of the updated agreement, CMA co-founder Virgil Grant said 4thMvmt’s changes were negligible.

The upshot, he added, is “still, the social equity applicant has no say over the business.”

Shaw disputed that claim, saying, “All of our (social equity) partners have the majority control over their businesses.”

She noted that the updated contracts conform with city regulations and many key provisions have been altered.

For instance, she said, the $200,000 buyout provision has been changed to require that “fair market value” be provided to the applicant if a buyout takes place.

The reason the agreements were originally structured that way, Shaw explained, was to deter social equity applicants who might have viewed the opportunity as a way to “get a quick payday” by selling the license, pocketing the profit and walking away – instead of working to build a solid business.

As for why 4thMvmt gave social applicants so little time to review the operating agreements, Shaw said that situation arose from the timing of the licensing round and a city requirement that applicants already have real estate lined up.

Many of the property sales closed only two days before the application window opened Sept. 3, 2019, she said, so that left 4thMvmt – which paid for all the real estate – little time to finalize paperwork before the application deadline.

“Everybody said, ‘We’ve been with you for two years, we trust you, we’ll sign (the agreement),’” Shaw said, noting that 4thMvmt began recruiting and working with equity candidates in 2018.

Shaw countered the CMA’s allegations by providing testimonials from four of 4thMvmt’s social equity partners, including three who are in line to receive retail permits from the fall licensing round: Phyllis Dorsey, Khadijah Allen and Cameron Hart.

Outside lawyers split over nature of contract

Two attorneys who have worked on similar social equity contracts for other companies disagreed on whether the CMA’s allegations were backed up by the redacted operating agreement.

Ilya Ross, a lawyer who’s worked on social equity deals in Los Angeles and Massachusetts, sided with the CMA’s views of 4thMvmt’s agreements.

“It’s certainly not the most equitable arrangement I’ve seen,” Ross said, “and there are provisions in there that take advantage of the social equity partners more so than your average partnership agreement.”

He called some of the provisions “super predatory” and added, “giving them an hour without really the flexibility to negotiate, that is predatory.”

But Michael Chernis, a longtime marijuana business attorney based in Los Angeles, said the agreement was “on the whole, not that unusual.”

“The reality is that this is the social equity deal. You have one party putting up all the money … and the party that’s putting up all the money wants to protect itself,” Chernis said, referencing 4thMvmt.

“Nobody is going to put up millions of dollars for 50% of interest in a business and not try to protect its investment.”

Although Chernis viewed some of the provisions as “aggressive,” he said it appears the CMA “cherry-picked” information from the agreement.

“A lot of this,” Chernis said, “goes right back to: Did (the social equity applicants) have a chance to have this reviewed with a lawyer, and what the circumstances of that were.”

John Schroyer can be reached at johns@mjbizdaily.com

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