Exclusive Interview: Untangling New York's True Party of Ownership Rule

Axel Bernabe responds to concerns that the TPI rules will restrict funding for the industry.

One of the architects of New York state’s new recreational cannabis market, Axel Bernabe, took a solid hour out of his day recently to speak with Green Market Report about both the market rollout itself and some of the key policies that are underpinning it.

Read part one of the interview here.

Axel Bernabe

One of the most controversial proposals has been the “true party of interest” draft rules issued in October. While the rules have yet to be finalized, some stakeholders have expressed serious concerns about their impact.

At issue: Stakeholders expect to have trouble raising capital for cannabis stores, precisely because the rules prohibit retailers from selling equity stakes to other investors or businesses that have a financial interest in other parts of the cannabis supply chain – such as growing, manufacturing, or pretty much anything that could create a conflict of interest for shops.

Some contended that the rules make no sense because they effectively choke off a major fundraising stream for small businesses, at a time when those entrepreneurs are most in need of inexpensive investment money.

But the reality isn’t necessarily that simple, according to Bernabe, the chief of staff and senior policy director at the New York Office of Cannabis Management.

The bottom line, Bernabe said, is that the TPI rules are essential for maintaining the integrity of the two-tiered market structure, which separates all retailers from their supply chain, for the broader purposes of market health.

This interview has been edited for length and clarity.

Tell me about the TPI rules in layman’s terms. What’s off limits for cannabis companies and what’s allowed, since there’s been at least some confusion about the practical effects? 

We want a fair, competitive market. What we’ve noticed is that every other market in the U.S. is an oligopoly. It’s controlled by four or five large producers that control over 80% of the market. A ridiculous number of markets, everything from like poultry to meat to electronics, it’s the nature of late-stage capitalism. It’s just highly concentrated.

This market doesn’t have to be that way. We don’t actually have to have the cheapest possible gram of weed on the street. We need the best weed.

So there’s a little bit of room to have margins, so the farmer can get a little bit more, the manufacturer can get a little bit more, maybe even pay their workers a little bit better, have union jobs, and the retailer can make a good living, and then someone at retail can pay $8-$10 a gram.

We’re going to have good growers, but relative to California and Arizona and Texas, who can outgrow us just because of environmental conditions, we’re really a demand market. We consume more than we supply.

And we set brands. We have high tourism, a lot of brand visibility, a lot of money in the state. So whatever we decide to create in New York, whatever our dispensaries decide to carry, is actually going to impact consumption patterns globally.

That’s why you hear of MSOs, they’re like, “I don’t actually want to be in the retail game in New York in the sense of owning 500 dispensaries, I just want my flagship store,” which is going to lose money. The Nike store, they lose money, but everybody leaves saying, “I need to go buy Nikes and I need to go buy this product when I go back to Iowa.”

That means that we have a responsibility to make sure that the most number of products, the greatest diversity products, gets to our dispensaries. What we’re busy creating is a model where it’s actually hyper-competitive but not concentrated. That’s what TPI and the two-tier (market structure) does.

These two tiers have to be completely separate, just like in alcohol. The original MRTA (that legalized recreational marijuana) was the ABC law, the alcohol beverage control law in this state. Essentially, (someone) just inserted the word “cannabis” in the ABC law, and said, “We’re going to have the same model as alcohol, but for cannabis.” When we redrafted when I was in the governor’s office, we clarified it a bit.

It means that anybody who’s a brand, a supplier that wants to sell to a retailer, they can’t actually give (retailers) a special deal. They can’t pay money to buy shelf space, which is what’s happening (in other state cannabis markets). They can’t give them merchandise at a discount, incentivize the sales. They can’t significantly discount to one not another. None of that.

So what does that mean? That means that the retailers, like Smacked Village and Housing Works, they control entirely what brand is going to sell. Because even if they wanted to, they can’t actually take an inducement.

That’s why you go into a wine store and they come out with some obscure (wine). They’re not getting paid at all to promote this wine. That’s what we’ve recreated. You have these entirely independent retail dispensaries, that are all looking to the supply (chain) – right now in New York, but eventually global – and saying, “What’s the best product for my consumer?”

Right now, because it’s (only) New York based on the supply side, and because we’ve limited the size you can have – so no license is bigger than 100,000 square feet of cultivation – what we’ve created is a situation where anybody can come in, anybody can cultivate a New Yorker partnership with a cultivator or process or any brand, but they can’t do anything too massive, where they blow someone out of the water, because they have half a million square feet to grow.

And they’re competing with everybody else on their product, their gummies, their flower, with an independent arbiter, which is the neutral retailer that’s going to pick the best product.

Anybody can come to New York and compete and grow the best flower, but they can’t pay their way into the retail dispensaries. They have to prove to the dispensaries that they actually have the best product. And if they do, the payout’s massive, because it’s New York state.

What do you say to the common industry complaint since November that the TPI regs have mostly made it harder for small operators to raise money? Set me straight on what’s allowed and what’s not as far as fundraising and selling equity for license holders.

So it’s true and not true at the same time, which is kind of conflicting.

The first part of the answer is, there are absolutely, unequivocally no restrictions in the ability of anyone in New York or outside New York or globally to invest in or own a cultivator license, a processor license ,or a distributor license. Anything on the supply tier is entirely wide open for anybody, be they a retailer in another jurisdiction or a supplier in another jurisdiction.

The only caveat is, we cap the size of the grow, but a bunch of other states do that.

What we’re really talking about is, does a two-tier market limit the appetite of capital to get into the retail space? Just retail.

Now, retail, it does mean dispensaries and onsite (consumption), so restaurants and bars. The reason it does (constrain fundraising for retailers), to a certain extent, is that in cannabis right now, a lot of the capital is cannabis capital. It tends to attract funds that are already invested in cannabis.

And outside of New York, they’re invested in all sorts of pieces of the supply chain. So they’re like, “Well, wait a second. I’m already in Humboldt County, I’m here and I’m there. I’d have to unwind all that if I wanted to get into retail in New York.” So existing capital funding in cannabis is going to have a harder time, and it won’t be as tasty to get into retail. That’s part of the truth.

But on the other side of the coin, what we’ve created is a really different retail market than anywhere else. That’s why the story I told you is so essential.

The role of a retail dispensary in New York is unlike anywhere else in the world. It’s closest to something like Washington state, but Washington state is a much smaller market. We’ll have retail stores, maybe up to 2,000 or 2,500, but they’ll have a 1,000-foot radius around them (prohibiting other dispensaries). They’re limited in number, they are completely autonomous.

So if you buy or invest in a retail dispensary, you don’t have to compete against the vertical that’s blowing you out because they’re cross-subsidizing with their grow operations. So it’s a much more stable and profitable market.

I would venture that, quite frankly, the retail market in New York is a much safer place to invest money than any grow site anywhere in the country. That’s a highly competitive, highly speculative, volatile market. Whereas in retail, it’s like the (New York) liquor stores.

There’s a reason most liquor stores (in New York) have been in operation for 90 years. They’re mom-and-pop stores, and you make money. We’re allowing up to three (dispensaries per retail cannabis company), so we’re actually making that three times more profitable (than liquor stores). For me, it’s actually created a tier of investment that is significantly more interesting.

Plus we created a 20% passive investor carveout, which means that you could own up to 20% of every other store in the state. You could create a fund that invests in every store. You could essentially spread your risk across the entire 2,500 retail stores in New York.

From that front, I don’t think it actually inhibits investment. I think it encourages it. Because it just gives you the stability that investors want.

And the complaints that you’re limiting capital fundraising avenues for small companies that won retail licenses? 

They’re not wrong, but also they tend to represent California growers and brands. That’s the problem.

They can come in and play and compete on the quality of their flower, but what they want to do is they want to come in and also own a retail store. Those lawyers and consultants are probably representing brands. It’s like, “Oh, my client wants to grow and be vertically integrated.”

They can still grow, they can process, they can distribute. But you’re saying that they’re choking up capital, your client can’t participate (in the New York recreational cannabis market). But they can, they just can’t participate in this one very slim part of the market.

The only thing that would really be able to change the (fundraising) dynamic fundamentally would be to allow for some sort of passive investor across the tier. So that would mean that you’re a cultivator, but it’s just financial, I just want to have a bit of an investment on the retail side to you know, reduce my risk. If you were allowed to do that, then then I’m sure people would invest across the tiers.

But how many of those financiers are really going to invest across the sector like that, and how many are actually looking to influence retailers to carry specific brands?

We haven’t thought of every possible option in every possible alternative. So by all means, if you guys have a way of having a two-tier market that can be solid and protected the way the law requires us to do, and has other bells and whistles, please, we’re dying for options.

But every time we talk to the State Liquor Authority here, in Canada, in Washington and other states, we ask them about the two-tier (structure), the first thing they say is, “bright line.” Because the moment you start saying it’s a passive investment, but they have no control, you’re chasing people all the time. “Well, I wasn’t controlling the retailer, I was just making suggestions about what brands are selling.” They’re like, forget it, you’re going to go down in flames. Bright line, bright line.

Again, TPI is a misnomer. TPI is just the mechanism we use to understand who owns the license. It’s just that we’ve created a two-tier market. That’s what really people are complaining about.

They’re saying that the two-tier market should be more porous. We’re saying we’ve never seen a successful two-tier market that’s porous. TPI is just the way we go up the chain through the corporate parent to figure out who’s behind these licenses, so that we can properly apply it to the two-tier market.

John Schroyer

Leave a Reply

Your email address will not be published. Required fields are marked *

Get the latest cannabis news delivered right to your inbox

The Morning Rise

Unpack the industry with the daily cannabis newsletter for business leaders.

 Sign up

About Us

The Green Market Report focuses on the financial news of the rapidly growing cannabis industry. Our target approach filters out the daily noise and does a deep dive into the financial, business and economic side of the cannabis industry. Our team is cultivating the industry’s critical news into one source and providing open source insights and data analysis


Recent Tweets

Back to Top

Get the latest cannabis news delivered right to your inbox

The Morning Rise

Unpack the industry with the daily cannabis newsletter for business leaders.