Multiple New York cannabis industry stakeholders criticized the a draft of retail guidelines issued by the state’s Office of Cannabis Management last Friday, saying it could backfire by limiting investment options for social equity licensees and others.
While the rules appear to be designed in order to protect mom-and-pop type companies from being overrun by more well-capitalized competitors such as multistate operators, several industry insiders said that the rules will probably make it much tougher for smaller startups.
That’s because the OCM draft rules prohibit any investor from having an ownership stake in one of the initial 175 retail permits if that investor also has any ownership whatsoever in any other type of cannabis company. Period.
“Retail dispensaries, their true parties of interest, passive investors, and any management service providers cannot have any interest in any business anywhere that cultivates, processes, or distributes cannabis,” the guidelines state.
Leaving Money on the Table
That’s a provision that New York attorney Lauren Rudick called “shocking.”
“This does feel like it’s a very big splash for a very big restriction that has not been properly vetted,” said Rudick, who has six clients currently vying for retail permits.
“A lot of these (applicants) may have already committed to certain financiers, and those financiers may have cultivation operations in Florida or California or Michigan. I am hearing that ‘We have to divest, there’s going to be a lot of regulatory divestment here,’” Rudick said.
How the draft rules will affect potential applicants depends greatly on how far along each is in executing their business plans, Rudick said.
“I was talking to a lawyer this morning, and 95% of (their) clients are affected by this, and they’re furious,” Rudick said. “But my clients are all very pleased to see the (multistate operators) squirm a little bit.”
Consultant David Feldman, CEO at Skip Intro Advisors, echoed Rudick’s concerns and said the draft rules will “create challenges, not only for successful players from out of state to come into New York, but also for investors, to decide to put money into these companies.”
“That’s my biggest disappointment, that people who have money ready to deploy are going to be severely limited in how they can do it,” Feldman said. “And to say that that somehow brings in ‘Big Cannabis,’ I don’t see how it does.”
Spokespeople for the OCM and Cannabis Control Board did not respond to a request for comment from Green Market Report, but Feldman and others said their read is the rules are intended to protect smaller companies from being gobbled up by bigger players.
“They did it intentionally, in order to make it tougher for multistate operators to come in and take these over or have any interest in them,” Feldman said. “One wonders what the long-term real benefit is of making it harder for people with money to want to help these companies grow.”
That means that all of the retail licensees looking to raise funds with which to get their companies operational may not be able to rely on a lot of the cannabis-friendly investors that have put money behind marijuana ventures in other states, Feldman said, which makes the policy potentially a double-edged sword.
“It’s challenging for all our friends who are venture capital investors … people who have helped fund this industry for the last 15 years, who are now being told, ‘Nope, if you’re an investor from Denver and you own 1% interest in a grower in Colorado, you cannot invest in a New York CAURD licensee,'” Feldman said. “I don’t see how that protects operators.”
Connecticut-based real estate cannabis investor Anthony Coniglio, CEO of NewLake Capital Partners, said his firm has stayed out of the New York market to date despite having 31 marijuana-related properties scattered across the rest of the nation.
And NewLake will stay on the sidelines for now, he said, in part because of the regulatory confusion with licensing.
“The biggest issue for us right now is the licensing. What will New York look like long term?” Coniglio said. “Given what’s going on in New York, I’d say we definitely feel like the evolution of the licensing regime has been more volatile than most of the other states.”
Coniglio said he’s taking a wait-and-see approach about the new draft rules though.
“I think a lot of what was done here was probably in that vein, of trying to close all those loopholes, and not allowing MSOs to backdoor into a sizable dispensary count,” Coniglio said, referring to the draft rules as a “much-needed step that had to be taken.”
But the impact for larger industry players and investors, Coniglio said, is to discourage them from getting involved in the New York cannabis market altogether.
“More broadly, people are believing that the commission is starting to appear hostile to the industry if you’re not a social equity licensee,” Coniglio said.
“The commission’s actions over the last 6-8 months have had a chilling effect on the interest in the New York cannabis industry from some of the larger players and midsize players. It’s the uncertainty that has held back capital formation around New York’s cannabis industry,” Coniglio said.
Rudick said her read is that New York regulators are trying to follow the liquor industry regulatory model: breaking up ownership of the cannabis supply chain and preventing existing industry investors and operators from gaining too much market control.
But, she warned, that may only drive up the cost of capital for already-undercapitalized entrepreneurs.
And, that’s also in the context of uncertainty as to whether the draft rules will be made permanent, or if they could change again, if Gov. Kathy Hochul loses her reelection bid next week, Rudick noted.
“We could have to force our financiers to divest from holdings in other states, which could then ultimately be walked back, in which case they’ve give up property to comply with a regulation that doesn’t stick around,” Rudick said.
“I have a lot of concerns about the mechanics of how that’s going to work, and envisioning deal making on a contingent basis getting very complicated and expensive.”
But, Rudick added, “This is the whole game in cannabis: adaptability and flexibility. And you either have the stamina or you don’t.”