False promises and pitfalls of New York’s social equity fund 👀

NY, NY
The New York Times investigates the failures of the state’s social equity fund

Driving the news: When New York legalized cannabis in 2021, it charted, or at least attempted to, a different path from other states.

Instead of immediately opening the industry up to big, out-of-state publicly traded cannabis corporations, the state sought to use the economic opportunity provided by legalization as a form of race and socio-economic based reparations for those harmed by the War on Drugs.

That meant giving so-called “social equity” licenseholders —  people with cannabis convictions or close family members with convictions under previous laws — the first crack at the burgeoning market.

But those lofty goals bumped up against economic and political reality. The proliferation of unlicensed cannabis shops quickly filled consumer demand, while legal dispensaries had to jump through multiple bureaucratic hoops to get stores open. 

And few investors and banks were willing to lend capital to cannabis operators, given federal illegality and elusive profits in other states.

To remedy this, the state set up a $200 million social equity fund backed by investment firm Chicago Atlantic and secured by state taxpayers in order to provide capital to these entrepreneurs. 

Several lawmakers, including in the highest levels of Albany and the state’s Office of Cannabis Management (OCM), portrayed the social equity fund as a “generational wealth opportunity.”

It turned out to be anything but. 

The fund left many entrepreneurs, such as Roland Conner, the owner of the dispensary Smacked, in a “debt trap,” that made doing business nearly impossible, The New York Times’ Ashley Southall reports. 

That fact belies the broader recent success in the New York market, which crossed $1 billion of sales last year.

What’s in the story: Southall, who I should note is a friend-of-the-newsletter, interviewed entrepreneurs, attorneys, investors, and former OCM officials for the investigation. 

Her reporting shows that of the 150 stores projected to open under the fund, only 22 are operational. And the fund is now subject to an investigation by the state.

“The situation exposes how an experiment in reparations that sought to lift people disproportionately harmed by prior enforcement against marijuana not only failed but also helped derail the rollout of legal cannabis in New York,” Southall writes.

“Essentially, Governor Hochul made big promises based on an unrealistic expectation that investors would be willing to take lopsided risks even as the cannabis industry struggled elsewhere. Instead, the rush of investors never materialized, causing the legal market in New York to lose ground to the rapid proliferation of illicit dispensaries.”

What they’re saying: “They didn’t just drop the ball — the ball was weaponized,” Damian Fagon, the OCM’s former chief equity officer, and a recent guest on Cultivated Live, said. 

And: “They just put in your ear that this is going to be life-changing,” Alex Ortecho, the owner of Bronx Joint, a social equity dispensary said. 

The final word: Southall’s story is a useful, if cautionary, tale for other states like Minnesota that similarly want to use cannabis legalization as a vehicle for social justice and economic development. 

Ultimately, capital will remain scarce for cannabis industry entrepreneurs as long as federal illegality persists. It’s time for Congress to act, and pass sensible, bipartisan cannabis reform legislation like the SAFER Banking Act, if the appetite to legalize isn’t there under a Republican majority in both chambers — and the White House. 

A thriving, legal, and well-regulated cannabis market is good for everyone: Social equity entrepreneurs, investors, and for the broader public.

Read more: How a plan for reparations became a debt trap for marijuana retailers.

-JB

“We’ve seen things differently from our peers for a long time.... And we are not optimistic about changes in DC. Look at the appointees and look at Kennedy’s (RFK JR’s) total 180. So instead, we’re going to play offense… We love the product, we love the brands and we think the people in DC are out to lunch. We think the DEA is corrupt and misguided and out to lunch. So it's not a popular opinion,” Green Thumb Industries CEO Ben Kovler said on the company’s Wednesday evening earnings call. 

This quote has been lightly abridged for clarity.

Listen to it here.

Green Thumb Industries crushes earnings 📈

What happened: Cannabis firm Green Thumb Industries (GTI) is leading the pack with arguably the best balance sheet among its US cannabis peers, posting a positive net income for the fourth quarter and the last fiscal year.

The company reported its results on Wednesday evening. 

The results: For the last fiscal year, GTI reported a $73 million net income on $1.1 billion of revenue, up 8%. That’s under GAAP, or Generally Accepted Accounting Principles, and inclusive of the firm’s high tax bill under 280E (which prevents cannabis firms from taking regular business deductions). That amounts to 30 cents of earnings per share, a key metric of financial performance.

For the fourth quarter, GTI reported $13 million of net income on $294 million, up 6% over the same quarter the year prior. The company had $172 million of cash on hand at the end of the quarter.

Read the full results. 

What they’re saying: “We’ve been left at the altar in the past two years... At the moment, it’s hard to think anything will fundamentally change, given many of the new Administration’s appointees who seem to be descendants of the ‘Just Say No’ campaign of the 80’s and early 90’s,” GTI President Anthony Georgiadis on Wednesday’s earnings call. 

The final word: Most of GTI’s competitors lose money quarter-over-quarter. That’s been the story of the cannabis public markets to-date, as the lack of federal reform makes profits elusive and tax burdens onerous. 

But GTI has remained focused on profitability and controlling what it can control, CEO Ben Kovler said on yesterday’s earnings call. GTI recently purchased Agrify, which has a coveted Nasdaq listing, and signed partnerships with well-known consumer brands like DoorDash and Barstool to bring its hemp-derived drinks and other cannabis products to more consumers. 

Still, he said that the next quarter might be “softer,” given the regulatory challenges of the cannabis industry in the US. 

This has been updated to reflect that the quote should be attributed to Anthony Georgiadis.

-JB

Cookies wins $18 million in legal dispute with investors 🤝

Cookies, the notable California cannabis brand started by rapper Berner, won an $18 million preliminary award in an ongoing legal dispute with investors, SF Gate reports. Both Cookies founders and investors have attacked each other in court, with each side demanding over $100 million. The investors accused Berner, real name Gilbert Anthony Milam Jr., of fraud. Berner then accused them of being “predatory.” Attorneys for the investors vowed to continue fighting.

New York Office of Cannabis Management leader testifies 🗽

Felicia A.B. Reid, the interim leader of New York’s Office of Cannabis Management, testified yesterday afternoon in front of the state’s Joint Legislative Budget Hearing on Economic Development. Reid was questioned over the state’s social equity fund, staffing at the agency, and priorities going forward. Reid is Gov. Kathy Hochul’s pick to lead the agency on a permanent basis. 

Ohio Senate Republicans pass bill altering cannabis law 🥊

Ohio’s Senate passed a Republican-led bill to reign in the state’s cannabis regulations, including eliminating the state’s social equity program, adding new penalties for cannabis use — such as a three-day jail sentence for smoking in a car — and reducing the number of plants residents are able to grow at home, reports The Cincinnati Enquirer. The bill now goes to the state’s House. 

Cannabis bills fail to pass in Indiana 🌽

Several cannabis bills failed to advance in Indiana’s Republican-controlled legislature, including a bill that would establish a legal, regulated cannabis market in the state, as well as a bill that would establish a medical program, MJBizDaily reports.

Trulieve gets into hemp-derived THC beverages 🍹

If you can’t beat ‘em, join ‘em: Florida-based Trulieve is launching a line of ‘Farm Bill’ compliant hemp-derived THC beverages, following in the footsteps of competitors like Curaleaf, Green Thumb Industries, and Tilray. 

As cannabis reform stalls at the federal level, firms like Trulieve are pivoting to deriving THC from hemp, which is technically legal under the 2018 Farm Bill and able to be sold outside of dispensaries — and perhaps most crucially, in states like Florida that rejected legalization. It’s a far larger addressable market than the traditional state-legal dispensary channel, and comes with far less regulations and taxes. 

Trulieve, which spent over $140 million supporting the failed ballot measure to legalize cannabis in Florida, is now joining its opponents in that fight as the state’s hemp industry aligned with Gov. Ron DeSantis in opposing legalization last November.

-JB

Medical cannabis registrants decline steeply after recreational markets open, reports MJBizDaily. Many medical patients switch to over-the-counter dispensary products after legalization — but that reduces the options available to patients over time.

It’s worth noting Marijuana Policy Project’s Karen O’Keefe’s recommendations on LinkedIn, that medical cannabis businesses be allowed to convert to dual-use so patients can continue to access products they depend on. 

Read the full story. 

A hazy legal landscape means people can get high on hemp products, even where pot is prohibited | The Conversation