Requiring state and federal background checks to obtain a marijuana license isn’t a new practice. States have been using background checks for years, but the results have been varied.

In 2016, it was discovered that two marijuana growers from New York with criminal histories managed to obtain licenses despite having background checks. As David Robinson of USA Today reported at the time, records of the two growers’ criminal activities were missing from the grower’s company application. The company, Etain, hired the two growers as marijuana cultivation experts, and a lot of information about them, the value they brought to the company, and their experience was included in the 1,375 pages of application documents submitted by Etain.

According to Robinson’s article, Etain claimed that all employees underwent background checks as required by state law, including the two growers (even though they were not company employees). Interestingly, Etain earned the fourth highest score of the original 43 companies that submitted applications to grow and sell marijuana in New York.

As the story of Etain shows, federal background checks weren’t a perfect science when it comes to marijuana license applications back in 2016, and they’re still not perfect today. However, that hasn’t stopped states from requiring them in the marijuana license application process. In fact, most states require both state and federal background checks today.

The Effect of Background Checks on Marijuana License Values

When thinking about how background checks affect marijuana license values, there are two distinct schools of thought: they increase the value or they decrease the value. Let’s look at each argument.

Increasing the Value of a Marijuana License

Federal background checks ensure that only serious, reputable growers and sellers are allowed to participate in the marijuana economy. For investors, a business run by people without criminal records is typically a safer investment than one run by individuals who have committed crimes in the past.

However, as we learned in the Etain story, even a background check process doesn’t ensure people with criminal records don’t get licenses or work or consult with companies with marijuana licenses.

Whatever the employment relationship with Etain and the two growers was, they were heavily relied upon within the company’s application documents as expert growers whose additions to the company were integral to its success. Background checks didn’t keep them out then and probably wouldn’t keep them out today.

Decreasing the Value of Marijuana Licenses

Federal background checks add one more level of red tape that delays the licensing process and limits the market. Only certain people are granted access to the marijuana economy when these checks are required and patients have to wait to get the medicinal marijuana they need.

This happened in Hawaii in April 2016 when marijuana licenses for dispensaries were delayed in Hawaii because the Hawaii Department of Health couldn’t set up a fingerprinting system or process background checks in a timely manner.

Many states have disclaimers written into their license application instructions notifying applicants that delays in obtaining background checks could result in abandoned applications with no recourse for applicants. For example, Ohio’s dispensary application instructions warn applicants:

“All background check results must be received by the State Board of Pharmacy before dispensary provisional licenses are awarded; if they are not received prior to the award of provisional licenses, the application will be considered abandoned. The Board is not responsible for delays in receiving background checks or errors in submitting fingerprints. The Board recommends submitting fingerprints for BCI&I [Ohio Bureau of Criminal Identification and Investigation] and FBI background checks as early as possible.”

It could be argued that limiting the playing field also limits the growth potential of the businesses in it and the industry as a whole. This is a topic that Seattle City Attorney Pete Holmes discussed at the April 2016 Cannabis Science and Policy Summit in New York City. During a session about state legalization, he identified barriers to the industry, such as felony checks, as factors in what he referred to as “institutionalized racism” since minorities are disproportionately represented.

In other words, background checks decrease the value of marijuana licenses. But again, we saw with Etain that background checks don’t necessarily work.

The Bottom-Line

While it may seem that requiring federal background checks on marijuana license applicants should have some effect on marijuana license values, the story of Etain shows that might not be the case at all despite the massive amount of information investigated through state and federal background checks.

To give you an idea of what’s investigated, here is a list of what is required for application pre-qualification in Michigan for a state background check of the individual and business:

• Name
• Contact information
• State-approved identification and percentage of interest for persons or businesses with an interest in the license
• Documentation on business status, financial position, regulatory compliance, criminal history information, litigation history and taxation history
• Company bylaws, business registration documents, prior or existing regulatory licenses, W2s, financial institution statements, bankruptcy information, tax compliance and fingerprints

What do you think? Given that background checks are imperfect, do they affect the value of marijuana licenses? What if background checks did work perfectly? Would you change your answer? Leave a comment and share your thoughts.

Originally published 4/30/2016. Updated 8/13/18.