Several applicants in the first round of Maryland’s social equity license lottery appear to be backed by the same equity owner or consultant, despite the fact that Maryland’s application rules prevent the same applicant from applying for more than one license in the first social equity licensing round.
The six similarly named applicants were denied eligibility for the lottery earlier this year due to errors in their proposed business proformas, and collectively filed a pair of lawsuits, which resulted in the postponement of lottery draws in Calvert and Talbot counties until a state judge rules on requests for a preliminary injunction.
On March 19, KG Wellness #1, #2, #3, #5, #6 and #8 sued the Maryland Cannabis Administration (MCA) claiming a computation error of their financial information in their applications was immaterial, and, therefore, their applications should not have been denied for the lotteries in those two counties.
This lawsuit followed one filed in February by KG Wellness #4, which alleged that because of the MCA’s failure to communicate with the majority social equity owner and a computer glitch with the agency’s website, her application was late and, therefore, denied.
While each KG Wellness applicant is structured as a limited liability company with a different majority social equity owner, all the plaintiffs are represented by the same attorneys, Stuart Cherry and Barry Gogel of Rifkin Weiner Livingston in Baltimore and David F. Standa of Greenspoon Marder in Chicago.
At least six of the seven applicants provided the exact same financial information – including anticipated startup costs for the first year and $10 million in first-year revenue – resulting in the same $181,000 error in projected profits. Four of the applicants are seeking dispensary licenses in Calvert County, and two applied for Talbot County.
Concerns of lottery stuffing with straw owners
Examples of attorneys, consultants and equity investors seeking out individuals to serve as straw social equity applicants in states launching cannabis marketplaces have been a rising concern. State officials recognize that the economically disadvantaged people they are trying to give an advantage to in the emerging cannabis industry will likely need a financial partner to front large startup costs and provide business expertise. However, there have been more reports of companies targeting eligible individuals through ads to apply for social equity licenses and then cutting them out once the business starts becoming profitable.
To avoid this, states such as Maryland and Missouri have written rules to prevent cannabis businesses held by the same owner.
Missouri’s Division of Cannabis Regulation recently revoked eight social equity microbusiness licenses that had the same owner in violation of their rules. On April 4, as it begins to launch a second round of social equity microbusiness licenses, it warned applicants of “predatory” companies.
“DCR has become aware of solicitation efforts by companies to apply for a microbusiness licenses [sic] on behalf of qualified individuals with promises of future ownership in the license,” the agency said in the news release. “Eligible individuals should exercise caution in accepting such arrangements as some of the solicitations may be predatory in nature – using individuals’ identifying information and circumstances to acquire a license with no agreements in place that would actually result in the eligible individuals being the owners of the license.”
The DCR said examples of predatory arrangements included:
- Applicants are promised a 51% ownership stake of the license and a fair market value buyout for that 51%.
- Applicants are promised a payment when the license is initially issued, then receive a salary for 3-5 years that is equal to the remaining 51% of the license value or some other payment arrangement.
- The solicitor does not ask for any payment and offers to pay for upfront application and business costs.
- The solicitor promises they will provide their own money, resources and time to run the day-to-day business operations so that the applicant owner does not need to invest their own money, resources or time.
In Maryland, a qualified social equity applicant must own 65% of a cannabis business and meet certain socioeconomic criteria. The state’s social equity application rules said “an individual or an entity” may not be associated for the same license type in multiple regions and with no more than two applications across all licensing categories in the first licensing round.
Out of more than 1,500 qualified applications in the first round, 84% reported to be minority and women-owned businesses. There were 193 applications that failed to qualify.
On March 14, the MCA held lottery draws and selected 174 applicants for various business licenses. These selected applicants will have to provide additional information to verify control and ownership of each company.
However, lotteries were not held in Talbot and Calvert counties. The MCA agreed to hold those lotteries in abeyance until a judge with the Circuit Court for Anne Arundel County rules on KG Wellness’ motions for a preliminary injunction, according to an exhibit attached to the motion filed by KG Wellness #1 et al. vs. Maryland Cannabis Administration.
KG Wellness connections
According to court documents, some of the applicants appear to be connected with Kana Grove, a Toronto-based cannabis business investor. Kana Grove currently holds active licenses in Illinois and has a conditional cultivation license in Clifton, N.J., according to the CRB Monitor licensing database. Its website claims to also have dispensaries in California and Connecticut.
In September 2020, two Kana Grove entities, Kana Grove North Illinois and Kana Grove South Illinois, were part of a lawsuit filed by 21 failed social equity applicants in Illinois alleging the state improperly scored their applications for a lottery. That case was settled within the month. Kana Grove North Illinois currently has two active licenses, while Kana Grove South Illinois has none.
According to the complaint for KG Wellness #4 LLC vs. Maryland Cannabis Administration, Kalil Traore is the 65% owner and social equity applicant for a standard dispensary license in Talbot County. Her partner investor is Shivana Persuad.
Mountaga Traore is the majority owner of KG Wellness #1 and social equity applicant for a dispensary in Calvert County. In an exhibit to the preliminary injunction filed by this business, the MCA sent the lottery disqualification email to mountaga@kanagrove.com. But it was addressed to Ryan Atkinson, the primary contact for the company.
Two other applicants had emails at kanagrove.com. But the disqualification email sent to Haimanot Teka, social equity owner of KG Wellness #2, was addressed to Sean Persaud, with a slightly different spelling of the last name than Shivana Persuad. Teka was seeking a dispensary in Calvert County.
The primary contact for KG Wellness #5 is Ashley Persaud. However, the disqualification email was sent to social equity owner Sage Winn’s gmail account. Winn applied for a dispensary license in Talbot County.
Winn’s denial letter was forwarded to two women at AAVA Consulting in Sacramento, Calif. Ariana Van Alstine is an attorney licensed in California. Rebecca Sterling is a project coordinator for AAVA Consulting in the San Francisco Bay Area, according to her LinkedIn page.
When CRB Monitor emailed both asking about their connection to KG Wellness, Van Alstine replied, “Thank you for your inquiry. We will not comment on the ongoing litigation.”
KG Wellness attorney Stuart Cherry declined to comment on the record about the lawsuits. He said he didn’t know whether a KG Wellness #7 exists. Emails to Kana Grove were unreturned.
The MCA also did not respond to an email asking about the connections between the companies or whether they have seen evidence of lottery stuffing by the same companies generally. A spokeswoman for the Maryland Attorney General’s office, which is defending these lawsuits, declined to comment.
Currently, the plaintiffs’ attorneys are seeking to have the preliminary injunction hearings for both cases held on the same day. As of April 12, the state has not responded to either complaint.
