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New York’s cannabis market continues to cause trouble

Plus, an NBA star gets in on cannabis wellness

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Today’s Cultivated Daily is about 1,397 words, or about an 8 minute read.

💡What’s the big deal?

New York’s cannabis market continues to vex

What happened: New York’s decision to partner with an outside private equity firm, Chicago Atlantic, on a $200 million fund for social equity entrepreneurs has amounted to more of a handout to Chicago Atlantic than the entrepreneurs themselves, reports The City NY’s Rosalind Adams.

The state initially sought to fully commit the $200 million as equity through a public-private partnership. When they couldn’t raise the money, Chicago Atlantic agreed to loan the fund $50 million at 15% rate. The loans would be fully guaranteed by the state (read: taxpayers), per The City. 

We should note that most cannabis companies aren’t able to get loans on favorable terms and the other nuts-and-bolts of financing a new business because cannabis is federally illegal, so the state had to do something. 

But the terms of the loan may favor Chicago Atlantic far more than they favor the entrepreneurs the state is trying to help:

THE CITY reviewed the terms of the agreement with a dozen lawyers and consultants with expertise in private lending and the cannabis industry, nearly all of them agreed that the terms of the deal were poor for the state and the licensees that some even likened the agreement to the junk bonds of the 1980s or distressed debt lending. The difference, however, is that those loans were not also guaranteed with taxpayer dollars.

The City NY

What they’re saying: “There’s no wiggle room for the borrower,” Neil Kaufman, a cannabis and securities lawyer based in Long Island told The City. “It’s tightly structured to protect the investor on the downside — which is exactly what you would expect for this type of speculative lending. It bears a lot of resemblance to distressed debt lending.”

And: “Everyone is worried about defaulting because of the rules and regulations of this loan,” Roland Conner, the owner of Smacked, a Manhattan legal dispensary. 

Our quick take: Lending to cannabis firms is risky, and perhaps more so for social equity licensees, given federal illegality and the competitive market. 

Firms like Chicago Atlantic are wise to protect from that downside risk. The rate social equity entrepreneurs are getting from Chicago Atlantic is likely more favorable than anything they’d get on the open market.

But it’s up to the state to negotiate for the most favorable terms possible and to protect taxpayers from bearing the brunt of default. It’s especially egregious to use too-rosy projections, as the story alleges. 

Coherent federal legislation like the SAFER Banking Act, a bill that would let cannabis companies access the banking system, could help solve this issue, by freeing up small business loans. 

But until then, social equity entrepreneurs, and potentially New York’s taxpayers, will be the ones who get hurt from this untenable financial situation. 

Let’s back up: The rollout of legalization in New York has been everything from a missed opportunity to an abject disaster, depending on who you ask.

Since the Marijuana Regulation and Taxation Act (MRTA) was passed in 2021, only a few dozen legal stores have managed to open in the state. Meanwhile, several thousand bodegas sell cannabis, most of it either illegally grown, or illegally transported across state lines, without much enforcement.

Many, though not all, of these challenges stem from New York’s bold and laudable decision to center social and economic justice in the rollout of legalization, by giving those impacted by the War on Drugs — either with a conviction or a close family member with a conviction under previous cannabis laws — first crack at the market through the Conditional Adult Use Retail Dispensary (CAURD) program. 

The rollout has been tied up with various lawsuits, as everyone from big, publicly traded medical cannabis firms to small mom-and-pop shops, want in on the potentially multibillion-dollar market. 

Change may be coming, as Gov. Kathy Hochul is aware of the problem. In March, she called the rollout a “disaster,” and ordered a 30-day review of the Office of Cannabis Management to speed up the delayed licensing process

Why it matters: New York is a prime example of what we’ve written are the elemental questions of cannabis policy: Who is legalization for? Who deserves to benefit? What is the government’s job in deciding this? 

Can cannabis really be a vehicle for economic justice, or is it just another commodity at the end of the day? 

Ultimately, using cannabis as a salve to solve the inter-related issues of decades of racialized policing and the lack of economic opportunity for New Yorkers of color was always going to be quite difficult, if not impossible. 

It can certainly be part of the solution, but the complexity of creating a robust, legal market in a state as populous as New York means legalization can never be a silver bullet. 

The final word: Think of the consumers, too. 

While New York centering legalization on social equity and economic opportunity may be laudable, the execution has been anything but. 

It’s unacceptable that purchasing cost-competitive legal cannabis is still difficult in New York City, over three years into legalization. 

Ultimately, every day consumers, as well as entrepreneurs that have been promised “generational wealth,” from legalization are the ones that lose out with the long-delayed rollout of the legal market.

At the end of the day, if consumers can’t buy the products they like cheaply and easily, all of the high-minded social and economic justice goals from New York’s lawmakers are just lip service. 


🗨️ Quote of the day

“It didn’t hurt me a bit,” Former Minnesota Gov. Jesse Ventura told Marijuana Moment’s Ben Adlin about supporting legalization during his campaign. “It actually, I think in the end, strengthened me because it showed the public I have balls enough to bring up topics that were real in life and not be the typical politician and sweep them under the rug and run from them.”

Quick hits

Cannabis legalization isn’t associated with an uptick in teen use, according to a new study published in the Journal of the American Medical Association Psychiatry. It’s a crucial finding — concerns over adolescent use are one of the primary arguments anti-legalization groups use.

Senate Majority Leader Chuck Schumer said in a press briefing he wants to pass the SAFER Banking Act, a cannabis banking bill, in a “bipartisan way.” 

The German government wants to restrict any commercial activity from the country’s newly-legal cannabis clubs, which are set to begin distributing cannabis to members on July 1, per draft legislation leaked to a German publication

📊 Chart of the day

Cannabis stocks are growing quickly and are undervalued on an EV/EBITDA ratio basis, essentially a shorthand for comparing two companies regardless of how they’re financed and how much tax they pay, per a new report from cannabis focused investment firm Viridian Capital Advisors

The cost of capital, especially debt, for cannabis companies is quite high — and so are the associated tax burdens, because US cannabis companies are unable to deduct regular business expenses.

🤝 Deals, launches, partnerships

Minnesota Timberwolves star Rudy Gobert is partnering with cannabis company LEEF Brands as a “brand ambassador,” for the company’s wellness products — and a portion of proceeds will go to Gobert’s Rudy’s Kids Foundation. 

🏃 People moves

Canadian cannabis firm Village Farms International is expanding its executive team, appointing Ann Gillin Lefever as chief operating officer, John Harloe as general counsel for global cannabis, and Paul Furfaro as president of global medical cannabis.

📰 What we’re reading

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