RegTalk: Illinois' Proposed Recreational Retail Marketplace - 6 Things You Really Should Know

By Susan Ameel, co-founder and partner of Global Regulatory Risk Advisors.

Governor J.B. Pritzker announced the Illinois has reached a deal that will legalize marijuana sales by January 1, 2020.  We expect the Illinois Legislature to move quickly and pass the legislation by June. Illinois will hold a public hearing on the bill next Wednesday.

Here are the things that you should know about the Illinois recreational marijuana dispensary marketplace.

• Illinois provides licensing priority to medical marijuana license holders for 60 days after the effective date of the Act.  Expect the market prices for these licenses to skyrocket as firms try to find license holders that will sell.  License holders that are interested in selling should consider doing so as there will be no backlog, it will be easier to get approved, costs are lower, and market prices are higher.
• Illinois will issue 75 Conditional Adult Use Dispensary Organization Licenses before May 1, 2020.  The application will be available by October 1, 2019 with a deadline submission date of January 1, 2019.  The Act provides for a minimum number of dispensaries in 17 regions within Illinois.  Applicants must have $100,000 in guaranteed liquid assets or be a social equity applicant that applied for a grant from the state.  If granted a license, an applicant has 6 months to find a storefront.  The state regulator must inspect the storefront prior to the build out, which will subject the retailer to multiple inspections as city regulators will also inspect. The regulator may extend the storefront build out process if the applicant has difficulty obtaining real estate. The final registration fee is $60,000.  The licenses expire on even-numbered years.
• The Act permits publicly owned companies but requires all organizations to file an organizational chart and stock record with the Illinois regulator.  Public companies must disclose individuals and entities that own more than 5% of the voting stock to the extent known and disclosed in SEC filings, and related owners if they own more than 10% of the voting stock.  If an organization is controlled by another entity, the owners, managers and board members must be disclosed.
• Businesses may only own 10 dispensing licenses directly or indirectly.  The Act also appears to limit an organization to 10  contractual arrangements with dispensaries that provides payment in any form.
• The State of Illinois may provide loans and grants to social equity applicants.  We believe that the government should partner private capital with social equity applicants.  The private sector can increase the chances of success with operational guidance, infrastructure, branded products and capital.  Illinois must also ensure that local jurisdictions, especially in major cities, allocate licenses to the social equity applicants from the get-go rather than as an after thought.
• The Department of Agriculture will share oversight of the industry with the Department of Financial and Professional Regulation, which will oversee the dispensaries.  This split seems logical as the Department of Agriculture oversees the hemp program.

Overall, the legislation provides a democratized approach to allocating dispensary licenses and limits the industry’s access to capital.  The legislation raises concerns about the viability of the industry given the lack of traditional financing and capital available to dispensary applicants, and the extended timeline for setting up operations.  The State of Illinois should not be in the business of funding start-ups, and we are interested in seeing the end result.

Related Links:

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