Hartford Business Journal

11 HARTFORDBUSINESS.COM | DECEMBER 13, 2021 company is atypical, mainly because the business is still technically prohibited by federal drug laws. That means many banks have opted not to lend to marijuana-related businesses. An entrepreneur looking to start a business in the industry, or an existing business that is interested in growing, needs to get creative when it comes to financing. "The money is an interesting question," said Bob Lickwar, a partner at accounting firm UHY Advisors, which has an office in Farmington and specializes in advising marijuana-related businesses. "Even if you can get a bank to lend you the money, you're looking at a 15 to 16 percent interest rate." In addition to the capital-raising issues, marijuana dispensaries or growers also need to be aware of specific federal tax regulations, like 280E, which prohibits drug-related operations from deducting typical business expenses. Beyond accounting issues, licensing fees are another major potential hurdle. "The reality is the license fees are probably going to be a barrier to entry," Lickwar said. For example, a medical marijuana dispensary looking to go hybrid and sell recreational marijuana needs to pay a $1 million licensing fee. That cost is reduced by half if the business creates a "social equity joint venture." Medical marijuana cultivators looking to go hybrid need to pay a $3 million licensing fee, or half that amount if they have a social equity partner. With that level of incentive, established dispensaries may be on the lookout for social equity partners to help reduce startup costs. Included in that category is Verano Holdings. "We're excited to partner with social equity applicants," said Ward, Verano's CFO. The social equity provisions in the legislation were designed to give a leg up to Black and brown communities in the state that have long shouldered the biggest burden when it comes to the nation's CT's angel investor tax credit could be key to financing marijuana businesses By Sean Teehan & Greg Bordonaro F inancing a cannabis business is no easy task, especially since traditional banks have largely shunned the industry due to the fact the federal government still considers marijuana an illegal drug. That means many cannabis businesses that form in the state to cater to the new recreational market will have to rely on private investors to get off the ground. Connecticut's new adult-use law allows investors in marijuana companies to access the state's angel investor tax credit. Robert Lickwar, a partner in accounting and consulting firm UHY Advisors' Farmington office, recently participated in a Q&A with Hartford Business Journal to discuss how prospective cannabis investors can take advantage of the tax credit program, and the impact it may have on the market. Here's what he had to say: Q: Can you explain how the angel investor tax credit works for cannabis business investors in Connecticut? Lickwar: Cannabis businesses must apply for and receive approval from Connecticut Innovations Inc. (CI) in order to receive credit-eligible investments. The angel investor tax credit program provides personal income tax credits to angel investors (i.e., investors who the U.S. Securities and Exchange Commission considers 'accredited investors') who make qualifying cash investments in eligible Connecticut businesses. This law extends the tax credit program to eligible cannabis establishments for which social equity applicants have been granted a license or provisional license (i.e., cannabis businesses). To qualify for a credit, a cannabis business must have had annual gross revenues of less than $1 million in the most recent income year; have fewer than 25 employees, not less than 75% of whom reside in Connecticut; be primarily owned by the management of the business and their families; and have received less than $2 million in cash investments eligible for the tax credits. The credit percentage is 40% of the amount invested, with a minimum investment of $25,000. The credit maximum per investor is $500,000, and it can reduce personal income tax liability to zero. Unused credits can be carried forward, but are not transferable. Q: How does this tax credit (as far as the percentage investors can write off) compare to other Connecticut tax credits? Lickwar: The credit percentage for other eligible angel investor credits is limited to 25% of the investment, and only $5 million in credits per fiscal year are allocable to these businesses. The recent legislation allocates $15 million per fiscal year for cannabis businesses, but unlike some different Connecticut tax credits, does not allow for transferability. Angel investors will also need to apply to Connecticut Innovations. Q: Do you think the tax credit is enough to quell investor concerns, and lead them to invest in a growing cannabis company? Lickwar: This is yet to be seen. The credit is a nice incentive for the investor for sure, but other issues such as federal reaction to the business and general industry will still weigh on investors' minds. The credit should prove an efficient way to raise capital for social equity applicants, but will not be the sole motivating factor for investing in such businesses. One item to be aware of is the $2 million limit on investments in any given business, which may indicate that credits in this space will be quickly gobbled up. Q: What should investors thinking about seeding a cannabis company know about the tax credit, and investing in the cannabis space in general? Lickwar: They should be cognizant of all factors they consider when making any other investment. This would include management of the company, business plans for the company, business forecasts, and federal and state developments affecting the industry. Q: Are you seeing a lot of interest among prospective investors in seeding cannabis companies in Connecticut? Lickwar: I am seeing some interest, but I expect to see much more once licenses are granted. Robert Lickwar, a partner in accounting and consulting firm UHY Advisors' Farmington office. HBJ FILE PHOTO failed drug policies. But there are people who are concerned that Connecticut's program, while good on paper, will fail to live up to its promise and continue to leave the disadvantaged behind. To that end, some groups are forming to spread awareness and education, including the recently announced Alliance for Cannabis Equity (ACE). ACE is a joint venture between two workforce and economic development agencies — The Connecticut Community Outreach Revitalization Program (ConnCORP) of New Haven and The WorkPlace of Bridgeport. Its first mission is to create a manifesto outlining the opportunities related to recreational marijuana in Connecticut and conduct informational sessions throughout the state targeting Black and brown communities. The project's initial budget is approximately $100,000, according to Joseph Carbone, president and CEO of The Workplace. "We see the enormity of the opportunity and the potential that it has," Carbone said. "We want to make sure it's not wasted." Marijuana plants dry out at CTPharma's facility. PHOTO | CONTRIBUTED

• Cover