Co-ops and Cannabis: Does the Craft Marijuana Cooperative License Live up to Massachusetts’ History of Cutting-Edge Co-op Laws?
What is the Massachusetts Craft Marijuana Cooperative license?
At the time of this writing, there are only three Craft Marijuana Cooperatives that have submitted an application. No Co-op has yet received a final license. Contrast this with the approximately 250 cultivator applications. Why so little interest in the Co-op license type? Let’s take a look at what this license actually is.
In the Law from the Beginning
The original intent of the Co-op license was, in part, to make sure that local farmers would have the ability to cultivate adult use marijuana on their farms. Small farms are at the heart of the culture, history, and economy of Western Massachusetts, so why are there no licensed cannabis Co-ops? The answer is both complex (money, town politics, zoning, legal structures, regulations, and money) and simple (money). But the object of this blog is to review the current regulatory requirements for the Co-op license.
Since this is supposedly a legal blog, let’s start with the statute.
Chapter 94G section 4 reads:
The commission shall […] adopt regulations consistent with this chapter for the administration, clarification and enforcement of laws regulating and licensing marijuana establishments. The regulations shall include: […] (xxvii) procedures and policies, in cooperation with the department of agricultural resources, to promote and encourage full participation in the regulated marijuana industry by farmers and businesses of all sizes, which shall include creating a schedule of cultivator license fees commensurate with cultivation size and regulations to create a craft marijuana cultivator cooperative system including, but not limited to, the following: (1) a limitation on ownership interests in a marijuana cultivator cooperative; (2) a limit on the total marijuana produced by a craft marijuana cultivator by the number of plants, surface area used for cultivation or output by weight; and (3) a reasonable fee for licensure as a craft marijuana cultivator cooperative;
So, we will draw from this language that the legislature wished to provide a license type that encouraged “full participation” by farmers and small businesses by (1) inhibiting monopolies, (2) maintaining the character of small farms, and (3) lowering the financial barriers to entry.
The Cannabis Control Commission (CCC) then promulgated regulations under 935 CMR 500.000, and we will use the most recent version (still in draft form) for this blog.
A Craft Marijuana Cooperative is defined by the regulations as a Marijuana Cultivator comprised of residents of the Commonwealth and organized as a limited liability company, limited liability partnership, or cooperative corporation under the laws of the Commonwealth. A cooperative is licensed to cultivate, obtain, Manufacture, Process, package, brand and Transfer Marijuana or Marijuana Products to Marijuana Establishments, but not to Consumers.
A Co-op is considered an Expedited Applicant and is eligible for expedited application review prior to other General Applicants. So, you should get your license sooner if you’re seeking to be a Co-op. Craft Co-ops also get priority access to the Social Consumption licenses (once those come online).
What can a Co-op do?
A Craft Co-op can only have one license, but it can cultivate, manufacture, package, brand, and transfer products to retailers. Co-ops cannot sell directly to consumers. Cultivation is limited to 100,000 square feet but it can be spread out over multiple locations and in different towns. One catch is that the Co-op must acquire a separate Host Community Agreement from each town it wishes to operate in. Each location must comply with the regulations for cultivation. At this time, there is no way for homegrowers to contribute their product into a Co-op.
Legal Structure and Membership Restrictions?
The regs say that a Co-op “may be organized as a limited liability company, limited liability partnership, or a cooperative corporation under the laws of the Commonwealth.” It’s worth noting that this seems to imply that a C-Corp is not a permissible form. But since a C-Corp can be organized through its bylaws to function as a cooperative, and since LLCs and LLPs are not necessarily going to function as cooperatives, there appears to be room for interpretation here.
This raises an additional question of what is a “cooperative corporation under the laws of the Commonwealth”? For anyone who stopped reading the business law statutes at chapter 156D, you are invited to read further to chapters 157 and 157A, which describe Cooperative Corporations and Employee Cooperative Corporations, respectively.
The Commonwealth has a history of leading the way with cooperative corporation statutes. Both 157 and 157A were some of the first of their kind in the United States. The cooperative association statute that became chapter 157 was enacted in 1866, paving the way for large varieties of agricultural and industrial Co-ops. The worker cooperative statute (chapter 157A) was enacted in 1982. Under a 157A worker cooperative, members are employees and get one membership share in the Co-op, which entitles the member to one vote. Earnings and losses are to be apportioned in accordance with “patronage”, or the amount of work performed by the member. The Co-op may establish internal capital accounts which is an accounting system that helps make membership available to more people, preserves democracy, and helps give people and their labor control over capital instead of vice versa. Worker Co-ops may only consolidate or merge with other worker Co-ops, which helps preserve a small Co-op’s independence and autonomy, in the face of market forces.
According to the Craft Marijuana Cooperative license regulations, members or shareholders of the cooperative shall be residents of the Commonwealth for the 12 months preceding the filing of an application for a license. Clearly the CCC wants the Co-op to be run by locals. But we will suggest that it is unclear whether this restriction is intended to limit members to natural persons, or if a corporate citizen of the Commonwealth may also be a Co-op member. This ambiguity may only increase as we work through the regulations (And this matters because it could potentially limit the types of Co-ops that may seek this special license). For instance, “the Craft Marijuana Cooperative shall have One Member that has filed a Schedule F (Form 1040), Profit or Loss from Farming, within the five years prior to application for licensure, or an agreement to lease land wholly owned by a person or entity that has filed a Schedule F.” This is obviously intended to provide opportunities for participation to farmers. We believe this is a good goal. It is worth noting that while some entities, not just individuals, can file a Schedule F, a corporation engaged in farming cannot file a Schedule F. So, does this mean that a small family farm that happens to be organized as a C-Corp cannot be a member of a Craft Marijuana Cooperative? Or that it’s not sufficient without also having a member who has filed a Schedule F? These interpretations have not yet been tested by any applicants.
Additional restrictions:
Members may not be a person or entity having direct or indirect control in any other Marijuana Establishment. We firmly believe that ownership restrictions (like MA’s rule of three) are crucial for limiting monopolization and preserving opportunities for small businesses. However, because every member of a Co-op has “control” over the Co-op with their Vote, this restriction (unintentionally) prevents an individual from working at multiple worker Co-ops; whereas it would likely be possible for an individual to be a member of a Co-op and work as an employee in a non-cooperative cannabis corporation. We do not believe this is the intended outcome of the regulation since it would violate the letter and spirit of the Seven Principles.
Function as a Cooperative?
The regs state that the Craft Marijuana Cooperative “shall operate consistently with the Seven Cooperative Principles established by the International Cooperative Alliance in 1995.” This appears to be the only mandate that the Craft Marijuana Cooperative actually function as a cooperative. But the Seven Principles are, shall we say, aspirational. This regulatory requirement begs the questions of how will this be enforced? What are the criteria to determine compliance?
The Seven Cooperative Principles are:
1) Voluntary and Open Membership
a. Co-ops are open to all who can use their services and accept the responsibilities of ownership without discrimination
2) Democratic Member Control
a. Co-ops are controlled by the Members, usually on a one member, one vote basis.
3) Member Economic Participation
a. Membership typically involves a buy-in (you’re expected to have some skin in the game), and surplus revenue is allocated to members in proportion to their transactions with the Co-op.
4) Autonomy and Independence
a. Co-ops are autonomous and controlled by their members. Contractual relationships with third parties and fundraising efforts are conducted in ways to maintain autonomy and democracy.
5) Education, Training, and Information
a. Education of both the members and the general community.
6) Cooperation among Cooperatives
a. Although Co-ops are autonomous, they function best within a cooperative ecosystem, each one working to support other Co-ops.
7) Concern for Community
a. Co-ops recognize that they are part of a community and they have a responsibility towards that community.
It is obvious that a regulatory body will have difficulty assessing and enforcing compliance with principles of this nature. More specific regulations may only come about once challenges are made to the non-cooperative operation of a license holder.
Why is Money an Issue?
Getting any type of cannabis license in Massachusetts is expensive. If you already own land, that can make all the difference. But the land must be zoned correctly and happen to be in a town that will sign a host community agreement with you. Otherwise, you may have to pay rent starting before you even submit an application, which means that years could pass before you’re able to generate any revenue.
That’s a problem faced by any company seeking a cannabis license in Massachusetts, but Co-ops face unique and additional difficulties in raising money because they are intentionally designed to prevent outsiders from buying the profit and control of the company. The same structures that make Co-ops favorable for democracy and equity also make them distasteful to traditional investors. It is clearly more difficult to finance a Co-op, but we believe it is absolutely possible. It requires perseverance, passion, and creativity.
What Kind of Co-op Does this License Create?
It’s not entirely clear. We might speculate that the regulators did not have a clear model in mind when the regulations were drafted. Can this license support a worker co-op? We say Yes. Can it support an agricultural producer co-op? Maybe, with some creative lawyering.
At first glance, the current regulations do not seem to live up to the Commonwealth’s history of enacting model co-op laws. The regulations appear to be written as somewhat of an afterthought for an industry that has proven itself most friendly to large corporations, not small farmers. But, as no final co-op licenses have yet been issued, this is just the beginning, and this blog believes that those who participate in the industry will have the opportunity to shape the regulations.
Can this license accomplish the goals of encouraging “full participation” by farmers and small businesses by (1) inhibiting monopolies, (2) maintaining the character of small farms, and (3) lowering the financial barriers to entry? Maybe. We believe this will require some brave souls to venture forth as entrepreneurs and embrace the values of a cooperative business.as an advantage, not a hindrance.
Why Bother if it’s Hard?
If you believe that anything good takes effort, and that you have to work hard to create the kind of world you want to live in, then you already understand why. Cooperative businesses are a great way to enact the values of freedom, democracy, justice, and equality in a world that is desperately in need of such things.