Rhode Island represents the smallest adult-use cannabis market in the nation, but slices of the pie are quite large for the handful of dispensaries currently capitalizing on sales. That will soon change.
The Ocean State’s cannabis market is on pace to grow 10% in 2024, with licensed dispensaries projected to ring up nearly $118 million in adult-use and medical sales this year, according to monthly figures from the Rhode Island Department of Business Regulation (DBR).
With seven retailers currently selling adult-use and medical cannabis, the average yearly revenue per store is projected to be $17 million in 2024. Rhode Island also has more than 60 licensed cultivators, according to the state’s Cannabis Control Commission (CCC).
In comparison, bordering Massachusetts has roughly 360 licensed dispensaries that have the opportunity to capitalize on a projected $1.8 billion in cannabis sales in 2024, or an average of approximately $5 million in revenue per store for the year, according to monthly data from the state’s regulatory authority.
In Rhode Island, the days of limited retail competition are numbered as state regulators finalize plans for a licensing process to add 24 adult-use dispensaries to the marketplace. The state’s three-member CCC board provided preliminary approval for a process to award these two dozen licenses during its regular meeting Sept. 6.
The approval comes nearly two years after Rhode Island launched adult-use sales in December 2022 via existing medical dispensaries that were provided an exclusive first-mover advantage. These retailers had to pay a $125,000 fee to the DBR to transition to adult-use sales as hybrid dispensaries.
Specifically, the three commissioners on the board gave the thumbs up for the CCC to move forward on drafting regulations for a “hybrid randomized selection process” in which license applications will be screened in an initial merit-based process to ensure each applicant meets baseline qualifications demonstrating an ability and readiness for licensure. Qualified applicants will then be placed into a pool for a random lottery selection.
Under the Rhode Island Cannabis Act, which Gov. Dan McKee signed into law in May 2022, the 24 adult-use dispensary licenses must be distributed equally among six geographic zones in the state. Each zone will have four licenses, including one reserved for a social equity application and another for a workers’ cooperative applicant.
However, the legislation to legalize adult-use cannabis did not include a provision requiring a specific licensing process, whether that be a lottery system or a merit-based scoring system. Instead, the act delegated powers to the CCC to establish a “process and methodology by which licenses shall be awarded.”
Mariana Ormonde, the CCC’s chief legal counsel, presented the board members with an overview during last week’s meeting that included lessons from licensing litigation in other adult-use states, notably those that utilized wholly merit-based selection processes.
In a limited-license market such as Rhode Island, Ormonde provided key considerations that she said support a randomized selection process, including reducing the risk of litigation stemming from a scoring system.
“We know anyone can sue anyone for anything,” she said. “So currently, we haven’t even begun licensing yet, and we already have lawsuits against us. And I think we do anticipate having future lawsuits. I guess from my position, it’s just to make sure that whatever process we select is defensible and does not stymie the awarding of licenses to other applicants or stop that process.”
For example, if an unsuccessful applicant files a lawsuit over the social equity license in Zone 1, the hope for state regulators is that a potential court injunction wouldn’t stop the CCC from issuing the two open licenses and/or the one workers’ cooperative license in that zone nor the licenses in the other five zones.
Ormonde’s comments came after Board Commissioner Robert Jacquard expressed concerns over using either a merit-based system or a lottery process, saying he believes the financial wherewithal of an applicant would provide advantages and disadvantages in the former system. In contrast, he said the latter system would encourage applicants only to do the minimum required to advance to the lottery.
“I think that [a lottery system] will inflate the number of applicants, which we are obviously concerned about happening, instead of limiting them,” he said. “I think that the lottery system promotes applicants who only intend to get lucky and, by doing the minimum amount required, get lucky in the lottery and then flip the license to a corporate buyer. Again, that’s another thing that we’re trying to avoid here.”
Jacquard said he believes the CCC will face litigation no matter the process but that a merit-based system would promote the highest competition among applicants.
During her presentation for the board, Ormonde provided an overview of other states’ adult-use licensing processes and listed the most common reasons to challenge a cannabis license denial:
- Unfair or unlawful licensing process: includes attacking the constitutionality of the process under the enabling act or the administration of the licensing process
- Arbitrary or capricious grading: challenges include inconsistent scoring, negligent scoring and erroneous scoring; still occurs in states that hire third-party consultants to score applications and is recognized in the industry as the most successful grounds for an appeal
- Bias and/or corruption: allegation that is often brought if state’s regulators have a close relationship with a successful applicant
Establishing a vetted application process that allows qualified applicants to enter a lottery helps eliminate the appearance of “favoritism, outside influence, inside advantage, bias and corruption,” one of the critical considerations Ormonde included in the presentation that supports a random selection process.
Ormonde also provided an overview of Rhode Island’s medical cannabis licensing process from October 2021, when the state’s Office of Cannabis Regulation approved 40 of 45 applications to enter a lottery for six available Compassion Center licenses.
However, unlike 2021, when the Medical Marijuana Act included a statutory licensing fee of $500,000, the Rhode Island Cannabis Act requires an annual $30,000 licensing fee for adult-use retailers, reducing the barrier to entry. The law requires the licensing fee to be deposited in the state’s social equity fund to benefit communities negatively impacted by the criminalization of cannabis.
CCC Board Chair Kim Ahern said that while looking at Rhode Island’s past practices for the medical market is important and constructive, she believes there will be more interest in applying for an adult-use dispensary license than there was for the state’s medical licenses.
“People that signed up for [a compassion center] were signed up for a $500,000 license,” she said. “That’s not the case in the Cannabis Act. The licensing fee is $30,000, so that’s going to bring [the barrier to entry] down quite a bit and, I think, just increase the likelihood of more applications.”
Ahern also said that the board members have heard from individuals who have expressed interest in winning one of 24 adult-use dispensary licenses and have asked the CCC to move the licensing process along more swiftly so that more stores can open. The commission did not set a date for when an application period will begin or when the licenses will be awarded.
As the commission works toward drafting, finalizing and promulgating its first set of regulations for adult-use licensure while following the state’s Administrative Procedures Act, Ahern said adopting a solely merit-based licensing system would only slow that process down.
“So, to avoid … any further delay here is to follow this recommended path from our staff,” she said.
H/T: www.cannabisbusinesstimes.com
