When Minnesota’s recreational marijuana bill was being written in 2023 and revised in 2024, it was established by sponsors on a few basic policy pillars.
It would replace as much as possible an illegal market with a legal, regulated and taxed market; it would stress social equity to help those most harmed by illegality to benefit by legality; and it would try to foster a home-grown business modeled on the craft beer industry. That is, as much as was legally possible, the state model was to keep out large, out-of-state companies that could use their size and wealth to overwhelm the market.
Two of those pillars were on display last week in a Ramsey County courtroom — at least a Zoom version of one. There, a whole passel of lawyers representing a varied collection of social equity certified license applicants were asking a judge to order the state to delay a lottery to award the first 280 cannabis licenses.
Why? They all had been informed the previous week that they were being denied entry into that lottery and would have to reapply next year for tickets to the much-larger lottery pool for all applicants.
But while some said they were certified social equity applicants kicked out for reasons they deemed technical and inexplicable, at least two plaintiffs raised a different and separate issue. They, say the state Office of Cannabis Management, were excluded because they fit the profile of what the state was trying to avoid:
They were affiliated with a large out-of-state operator who OCM alleges was using some social-equity applicants as straw purchasers to win licenses and then get them to sell the licenses to them.
They submitted multiple applications — perhaps as many as 200 — as a way of “flooding the zone” to increase their odds in the lottery.
Both activities are explicitly prohibited under the state’s recreational cannabis law. Changes made in May attempt to make applicants show what is termed the “true party of interest,” a legal term that means they must prove they are the entity that will actually own and control the new business. The May law also says there can only be one license application per legal entity — a sole proprietorship, partnership or corporation. The exception to that one-per-applicant rule is a retailer can also be licensed to deliver cannabis products to customers.
And while the law was loosened somewhat to allow those who win social equity licenses to sell their businesses, they must either sell to another social equity qualified purchaser or wait three years. Any transfers must be reviewed by OCM, though the rules governing such approvals have not yet been drafted.
In Aranguiz and Connolly v. Office of Cannabis Management, a pair of social equity certified applicants say they were wrongly denied entry into the lottery. While the stated reason was that Cristina Aranguiz has failed to provide the state with partnership agreements or promissory notes (Jodi Connolly received no official reason), the two plaintiffs represented by the large Minneapolis law firm of Lockridge Grindal Nauen (Locklaw) said in their lawsuit that the real reasons were different. Quoting from a MinnPost article on OCM’s denial of two-thirds of social equity applicants, the suit says OCM interim director said many applicants were denied because they were hiding the true party of interest and “flooding the zone” with multiple applications.
“Plaintiffs’ only guess about the real reasons for the denials is that the OCM may have denied their applications because they, like many other social equity applicants, were able to apply for licenses by selling options for future ownership interest in their licensed entity in exchange for application assistance and for payment of $100,000 if the options are exercised,” the lawsuit stated.
As guesses go, this was a pretty good one. According to its reply to the Aranguiz and Connolly suit — in a section titled “Plaintiff’s Straw Applicant Scheme” — the state Office of the Attorney General attempts to make the case that the pair are connected with an Iowa company, called the “Iowa Cannabis Company,” that is owned by Tate Kapple along with members of his family and Aranguiz herself. It also found other applications connected to Kapple that came from the same email domain, used the same file-naming conventions and even included “identical information about the anticipated first year earnings of the companies.”
Acting on a tip
Under its stated procedures, OCM would not have gone into this level of detail on ownership and connections until after an entity “won” the lottery. Such a win only gives an applicant an opportunity to get a social equity license and first subjects them to more-rigorous background checks. But OCM received a tip from someone who was involved in the scheme, the state’s legal response stated.
“This communication stated that an out-of-state cannabis operator had recruited hundreds of persons to apply on its behalf,” the state motion stated. Because the tipster said the business was based in Iowa, OCM looked at applications with Iowa connections and found the pattern, including the use of MNcanna.org in email addresses.
“OCM also matched many of the names of the MNcanna.org applicants to current employees of Tate Kapple’s companies, including Plaintiff Christina Aranguiz, Zen Springs, and Tate Kapple, and multiple members of the Kapple family,” the state response said. “The email address used by Jodi Connolly in her submissions to OCM also came from the MNcanna.org domain.”
OCM then found that each of the applicants had signed option agreements with Kapple to sell their companies for $100,000 should they win the lottery, it stated.
“Based on the foregoing facts, OCM identified 120 retail and 120 delivery applications associated with this scheme, each containing an MNcanna.org email address, and denied each of the MNcanna.org applications for failing to disclose the $100,000.00 transfer agreements,” the state asserted.
While these 240 license applications were only some of the 1,200 applications that were denied entry to the lottery, they received the bulk of the attention at the court hearing.
After the denial notices were sent out, OCM received a letter from an attorney from the Vicente law firm, which has a national cannabis law practice, that acknowledged the option agreements and included copies of those agreements.
“As you may be aware, Mr. Kapple’s credit card was used to pay the companies’ application fees, a fact that may have given rise to incorrect assumptions and served as a pretext for OCM’s denial of the applications,” wrote Minnesota-based Vicente attorney Jason Tarasek. He acknowledged that the fees were covered by Kapple “as consideration … for options to acquire her membership interest in the companies.”
But the letter argued that such option agreements are not specifically prohibited by OCM and do not justify the stated reasons for denial because they are not partnership agreements, operating agreements or shareholder agreements.
While the purchase options signed by the license applicants are at Kapple’s discretion, “the options are only exercisable if and when permitted by OCM,” stated the letter from Tarasek. Until then, Aranguiz is the only “true party of interest” and did not violate state requirements to share documents that would show otherwise.
The option agreements, however, go on to limit how Aranguiz and the signers of the other agreements with Tate Kapple’s company can operate their businesses before a sale. They cannot, for example, enter into any agreements that bring in other investors, incur any debt or commence any legal proceedings. They also designate the holder of the option as the business’s attorney in fact.
In her affidavit, Aranguiz asserts that she is “not a ‘straw applicant’” and is the sole owner of the companies applying for the retail and delivery licenses.
“I am a first-generation Latina entrepreneur and cannabis industry pioneer,” she states. But race is not a factor in determining social-equity status. Because OCM and bill sponsors were concerned about recent court cases that blocked the use of race to provide certain benefits, it crafted work-arounds. Veterans qualified as did people who had been convicted of cannabis crimes or were the offspring of people who were. The state also created a mapping tool that would allow applicants to type in an address where they live and have lived for at least five years. If that neighborhood had a disproportionate level of enforcement during cannabis prohibition or high poverty rates, they could qualify as a social equity applicant.
The differences can seem arbitrary. For example, the North Loop area of downtown Minneapolis qualifies while the Mill District neighborhood does not. Still, location mattered and both Aranguiz and Kapple were given social equity status based on an apartment in downtown Spokane, Washington, OCM asserted in an affidavit by its general counsel Eric Taubel.
H/T: www.minnpost.com
