In response to questions from The Independent, state cannabis regulators said they’ve opened an investigation into three licenses awarded last year to verify whether they ‘continue to be majority owned and operated by eligible individuals’
By REBECCA RIVAS
Missouri Independent
When John Payne was leading the campaign to legalize recreational cannabis in 2022, he faced a major hurdle.
Black business owners were largely excluded from the medical marijuana program when licenses to grow and sell cannabis were doled out by the state in 2019, and many feared history was about to repeat itself.
So to soothe the concerns and win over skeptics, Payne partnered with Black community leaders to come up with what they hoped was a solution — a social equity program, known as “microbusiness licenses,” that would diversify the industry and ensure communities most impacted by the War on Drugs were not once again left out of the burgeoning industry.
“We do know from data that the people who have been harmed by marijuana prohibition directly, Black Americans are overrepresented,” Payne, who is white, told The Independent last year.
Because marijuana prohibition did the most harm on the Black community — Black Missourians are 2.6 times more likely to be arrested for marijuana possession than white Missourians — “that should carry over into a disproportionate good impact of the microbusiness licenses,” Payne said.
But documents uncovered by The Independent show that in some cases, Payne and his business partners were the ones aiming to benefit most from the social-equity program.
Payne’s name is connected to more than 300 social-equity applications submitted earlier this year for the second round of microbusiness licenses, winning six of the 24 dispensary licenses selected through a lottery in June and officially issued on Wednesday.
For some of the applications, Payne recruited eligible Missourians and had them sign a 47-page contract that would ultimately give him and his partners 90.1% of profits and majority control of the business.
Despite only owning a fraction of the business, under state law the applicants would bear the lion’s share of the regulatory scrutiny. If they ever want to walk away from the deal, they would be required to pay a nearly $1 million fee.
In an interview with The Independent, Payne defended the contract, saying the arrangement was designed for people who wanted to get into the industry but didn’t want to put in their own money.
Payne insists the six successful applications he’s involved with this year didn’t use the contract. However, one license connected to Payne that was approved last year involved a nearly identical contract, which The Independent obtained through a public records request.
Four legal experts who reviewed the contract from this year for The Independent concluded it was unfair and potentially predatory. All four agreed state cannabis regulators should reject any license application connected to the contract because it violates the constitutional mandate requiring licenses to be “majority owned and operated” by the eligible applicant.
“If you don’t have the staying power and legal assistance, you’re going to get screwed,” said Michael Goldberg, managing partner of the Chicago-based firm Goldberg Law Group, about the 47-page contract.
Nimrod Chapel — an attorney, president of the Missouri NAACP and an outspoken critic of the 2022 legalization amendment — believes the contract meets the state’s definition of “predatory practices.”
“I find it incredibly disappointing that this section of licensees is getting monopolized by John Payne,” Chapel said, “the very person who was in the middle of the campaign for cannabis legalization and used this as a way to gain minority buy-in.”
Joseph von Kaenel, a St. Louis corporate governance attorney, likened the arrangement to companies “abusing” public contracting dollars meant to empower minority businesses by “finding a woman or minority to front the business.”
The contract states several times that, “the applicant understands that this agreement is not predatory.”
“It doesn’t mean it’s true,” said Michael Wolff, a former chief justice of the Missouri Supreme Court and dean emeritus of the St. Louis University Law School.
But the harshest criticism came from Adolphus Pruitt, president of the St. Louis NAACP who served on the committee that helped write the 2022 legalization amendment. Pruitt said he brought the idea for the social-equity licenses to Payne and spent months working alongside him publicly defending the proposal during the 2022 campaign.
“I’m insulted,” Pruitt said. “This is indentured servitude. That’s what this is.”
There are seven categories where people can qualify for a microbusiness license, ranging from a lower income level or living in an area considered impoverished to having past arrests or incarcerations related to marijuana offenses.
“When you look at the categories and the qualifications, there’s no doubt that overwhelmingly the qualifications are geared up for people who were impacted by the unjust enforcement of marijuana laws,” Pruitt said. “No one would dispute that that population, in most cases, are African Americans.”
Payne told The Independent his critics have it all wrong.
The contract The Independent obtained was used in a “relatively small number” of the more than 300 microbusiness applications that his company worked on.
“The applicants in these cases were typically personal contacts of our team members with whom we could envision a mutually beneficial long-term partnership,” Payne said.
Payne founded the cannabis consultancy group Amendment 2 Consultants and is a leader in the Missouri Cannabis Trade Association, also known as MoCann Trade. He said the trade association’s law firm — Armstrong Teasdale — wrote the contract.
Even though the firm’s name appears in the contract, Armstrong Teasdale adamantly denies preparing or providing it to Payne.
“The firm had nothing to do with that agreement,” said Jay Wager, Armstrong Teasdale’s acting chief business development director, adding that Payne is not the firm’s client.
When asked if Payne repurposed an agreement written by Armstrong Teasdale without the firm’s permission, Wager said the firm is “too busy” helping their clients to read the agreement to see if the language was theirs.
Payne did not respond to questions about Armstrong Teasdale’s comments.
In response to The Independent’s questions, the Division of Cannabis Regulation said it has opened an investigation into three microbusiness licenses awarded last October and connected to Payne in order to verify that the licenses “continue to be majority owned and operated by eligible individuals,” spokeswoman Lisa Cox said.
The Independent obtained the notices of investigation the division sent Tuesday evening to Payne, who is the designated contact for the licenses, giving him seven days to provide documents regulators need to verify ownership.
The agreement
Garrett Farley said he was approached by Payne this spring to apply for a social-equity dispensary license.
Payne said he would take care of the $1,500 application fee and do all the work to get the dispensary running — and Farley could sit back and get a paycheck when profits rolled in every quarter.
“The way he made it seem,” Farley, who is white, told The Independent, “there was like no catch.”
Farley is a cannabis union organizer — something Payne didn’t know at the time. He said he was curious about the social-equity process, but the way Payne described the deal raised red flags for him. When Payne shared the 47-page agreement, it confirmed Farley’s suspicions.
The moment Farley won a license, his contract states, he’d have to pay nearly $1 million as a “break-up fee” to walk away— even though the only investment the consultant had put in at that point was the $1,500 application fee.
He’d have to immediately set up an LLC, where he would give up almost all control of the business. So if he ever wanted to sell the license he wouldn’t have the voting power to make that choice.
Instead, he’d only get 9.9% of the profits if the license was ever sold.
He’d later have to transfer ownership to the person who would eventually loan the company $1 million in startup costs.
If he failed to do any of these steps, he’d be in breach of contract.
After reviewing the contract, the St. Louis NAACP’s Pruitt compared it to “the slave owner giving me some land to work on. It’s their company, they put up the capital, they’re preparing the applications, they’re paying the fees, they’re managing the business. And if at any time me as the slave fails to do something, I owe them.”
Payne vehemently disagreed with that assessment.
“I see it as a partnership,” Payne told The Independent. “That is an agreement for the long term.”
Payne confirmed that he never told Farley about the break-up fee when they talked about the deal, but he said that was because Armstrong Teasdale had not finished drafting the agreement.
“I did not actually write the agreement, and did not yet have it at that point,” Payne said. “I will say that if I had known that exact figure was in there, yeah, I would have explained that. But there does have to be some provision on what happens if a contract is voided.”
Von Kaenel, the St. Louis corporate governance attorney, said the amount of the breakup fee is significant.
He said the amount is “so far in excess of any damages” that are likely to occur that it “could be considered a punitive provision calculated to limit applicant’s business options.”
While Farley would be entitled to 9.9% of the company’s profits, the LLC must pay Payne a $10,000 monthly consulting fee before the applicant receives any revenue.
“Frankly, that’s a decent deal for helping to essentially manage a lot of the administrative functions of a dispensary,” Payne said. “It is not as if the applicant is on the hook, that it is the business that is on the hook for that.”
Unconstitutional?
All four of the legal experts who analyzed the agreement said it does not meet the constitutional mandate that the business is to be “majority owned and operated” by the eligible applicant.
If Farley won the license, he must set up an LLC and ask the state to approve a name change of the license. After that happens, a board with three managers would be established to make all the top-level decisions about the company.
In Farley’s case, the board would have included one of Payne’s business partners, who Payne said would also be eligible for a microbusiness license because he has a marijuana charge on his record.
The other board manager is fronting the money, Payne said, and is eligible because she lives in a qualifying ZIP code.
Von Kaenel called the board structure the agreement’s “fatal blow,” because it gives Farley only a third of the voting power and a sliver of the company’s equity.
“We pay the application fee, we are going to pay for everything to get up and running,” Payne told Farley in a meeting together. “And we’re going to basically put in the work to do that. And in exchange, we would take 90% of the equity, you will keep 10% of the equity.”
Goldberg, the Chicago attorney, said the profit distribution and company control are what the state regulators should be looking at.
“This contract should not get past the state,” he said. “Social-equity applicants are supposed to have control. They’re not supposed to have 10% or one third of the voting power. That’s the whole thing.”
Missouri cannabis law says a person or group cannot have significant voting or financial interest in more than one microbusiness license — or the state can revoke the license.
The contract is between Farley and a consultant group called Comonca LLC, with whom Payne is the registered agent in documents filed with the Missouri Secretary of State’s Office.
“The minute Mr. Applicant signs that agreement with the consultant, the consultant already has an interest in the business,” said Wolff, the former state Supreme Court judge.
That’s largely because if the applicant changes his mind and wants to get out of the deal, he owes them $995,750 in liquidated damages, or their expected value of the license, Wolff said.
And if the agreements are the same for all six dispensary licenses connected to Payne in this round, then Payne and his associates indeed have a financial interest in all of these licenses, Wolff said.
Payne told The Independent that none of the applicants with an agreement like Farley’s won a license. He could not elaborate about how many of his applications included agreements that were similar to Farley because either he wasn’t involved in that aspect for all of his clients or he signed a nondisclosure agreement.
Contracts of winning applicants will soon be publicly available now that the latest round of licenses have been issued, and the state has officially begun its post-licensure review.
Payne said he believes the agreement will win the division’s approval.
“It is going to be something that is compliant with what the department requires because I trust the standard of Armstrong’s work,” Payne said.
Up for interpretation
These are not the first licenses Payne has orchestrated — and caused a stir.
The first round of 48 microbusiness licenses – 16 of which were dispensary licenses – were selected through a lottery last August. Payne’s clients won two dispensary licenses and two wholesale licenses.
One dispensary license was under investigation by the Division of Cannabis Regulators for several months, after the division issued a letter in December stating that the application was “misleading.”
In its letter to Payne, the state said the licensee “entered an agreement that transfers ownership and operational control to another entity. This is cause for revocation… in violation of” the regulations requiring all owners to be disclosed in the application.
The nature of the agreement also did not allow the state to “verify the microbusiness license will be majority owned and operated by individuals who meet qualifications,” state regulators said in the letter.
The Independent obtained a copy of a redacted contract through a public records request, and the available language is almost identical to the contract offered to Farley.
As with Farley’s contract, last year’s contract states that, “Armstrong Teasdale LLP has no conflict of interest in drafting this agreement.” But Wager said the firm could not comment on whether it wrote the contract for this licensee.
Payne was able to submit new documents that satisfied these concerns, according to a March 21 letter from the division. The state allowed the applicant to retain the license, but this week opened a new investigation into the ownership structure – along with the two wholesale licenses where Payne is the designated contact.
Cox, the spokeswoman for the Division of Cannabis Regulation, confirmed the investigation focused on the ownership of the license holder but could not offer additional details about the inquiry.
Ownership issues led to the state revoking eight microbusiness licenses in the first round last year, she said.
“We will continue to exercise our authority at each stage of this process to ensure the microbusiness program is benefiting the individuals for whom it was so evidently designed,” Cox said.
The state recently approved this licensee’s request to change the name of the license to “Green Zebra LLC,” Cox confirmed. According to the contract, the next step would be to establish a three-member board, leaving the original applicant with one-third of the voting power.
Given the timeline, it’s possible the board structure sparked the state’s inquiry.
Payne did not respond to a request for comment on the state’s investigation, but he previously told The Independent all board members would meet the program’s eligibility requirements.
As for Farley, he never ended up signing the contract to jump into the lottery for a Missouri social-equity license, but said Payne submitted his name anyway.
He didn’t get a license, but on July 3 received a letter from Payne’s group asking him if he would like to submit his name in the Minnesota social equity cannabis license lottery.