Who’s Getting Rich From Weed Legalization in New York?

A worker collects hemp flowers for processing at Hempire State Growers farm in Milton, New York. Photo: Paul Frangipane/Bloomberg via Getty Images

Money is about to grow on plants in New York. With the legalization last week of recreational marijuana for people over 21, lawmakers and industry experts predict that the weed business could rake in as much as $4.2 billion in annual revenue in the state, which is in desperate need of new business to tax. But despite efforts to ensure that this financial windfall benefits people from communities ravaged by the war on drugs, due to the nature of the weed industry, large sums of cash could still flow to large corporations.

To the credit of the Senate and Assembly leaders who wrested control of the legalization process away from Governor Andrew Cuomo, the Marijuana Regulation and Taxation Act is a major piece of progressive legislation — and not just for its robust criminal-justice measures. Forty percent of tax revenue from the sale of marijuana will be reinvested in communities disproportionately hurt by punitive drug policies. (Though the drug has been decriminalized since 2019 and use rates are similar across all racial groups, Black and Latino residents still made up 90 percent of weed arrests in the fourth quarter of 2020 in New York City.) And when dispensaries open next year, half of all business licenses will be reserved for “social equity applicants,” which includes companies owned by people of color and those with past marijuana convictions. “For me this is a lot more than about raising revenue,” Crystal Peoples-Stokes, the sponsor of the bill in the Assembly, told the New York Times. “It’s about investing in the lives of the people that have been damaged.”

The law walks the walk to provide opportunities for small growers and sellers, according to Charlie Alovisetti, a partner at Vicente Sederberg, a law firm based in Massachusetts that helps businesses navigate the peculiarities of cannabis law. “The emphasis on social and economic equity is hard-wired into the bill in a way you don’t always see,” Alovisetti says, adding that New York’s law is “several multiples as long” as regulations in other states that have legalized.

A crucial part of the equity protections involves the limitations set on big businesses known as multistate operators, which have the ground-floor advantage of effectively running New York’s medical cannabis market. While these companies have been allowed to run seed-to-sale medicinal operations in the state — an attractive option for firms that can afford the overhead — new recreational cannabis businesses cannot enjoy the tax benefits and higher profit margins that come with vertical integration. Multistate operators already running the current maximum of four medical operations in New York will also be restricted to opening four new medical locations and three adjacent recreational dispensaries. These provisions aim to curtail the near-exponential growth of billion-dollar cannabis companies in states with more permissive rules in place. Curaleaf, which describes itself as the largest retail dispensary in the U.S., will thus only be able to have a total of eight New York locations. In Florida’s medical market, they have 37.

But the way that the industry is structured nationally could result in cash flowing upstream — even if the big players don’t look like they’re dominating at the strip-mall level. Marijuana is still categorized as a Schedule I substance by the Drug Enforcement Agency, so while it can be sold legally in 16 states, federally chartered banks rarely extend credit to cannabis companies out of fear that they may be prosecuted for aiding and abetting criminal activity. There have been efforts to fix this inconsistency in the federal system: In 2019, the U.S. House passed a bill that would allow banks to work with cannabis companies that are playing by the rules in the states in which it is legal. But an administration that just fired several staffers who self-reported past marijuana use is unlikely to prioritize measures to make it easier to lend in the legal weed business over its signature legislative projects.

Because lending to a marijuana grower is considered too risky, access to capital is a major hurdle in a market with significant start-up costs. To fill that gap, the industry has become increasingly reliant on venture capital, a field in which social equity has not traditionally been a concern. As of 2019, only one percent of all VC-backed businesses were Black-owned and just 1.8 percent were Latino-owned. Thus, a green industry has turned white, with just 19 percent of cannabis firms being operated by owners or founders who are racial minorities, according to one study from 2017.

Several states with equitable intentions have run up against the reality of dicey banking options for marijuana businesses. When Massachusetts voters approved a ballot measure to legalize weed in 2016, an Economic Empowerment Program was set up to ensure business licenses for people who have been “disproportionately impacted by high rates of arrest and incarceration” for marijuana offenses. But as of 2020, two years after legal sales began in the state, zero EEP applicants had managed to open a cannabis business, as dispensary licenses were effectively auctioned off to the highest bidder by towns given the final say over whether or not they would allow sales in their community. Illinois, too, emphasized the importance of social equity in the marijuana industry, but because its law lacked the teeth to ensure it, there were no dispensaries owned by people of color 15 months after the measure went into effect.

New York’s incubator loan program could solve that problem. Big medical providers will have to pay a fee to enter the recreational market; that money will go toward low-interest loans to help equity applicants cover the considerable start-up costs. “This is a big distinction from what we’ve seen in other states,” says Melissa Moore, the New York director of the Drug Policy Alliance, which worked to help craft the law with its sponsors in the state Senate and Assembly. “Equity programs we’ve seen elsewhere are great mechanisms to have in place, but if people eligible for those licenses don’t have the means to start a business, they become a moot point.”

Some multistate operators have embraced the spirit of the program, and taken the next step by lending directly to small and minority-owned businesses in states where marijuana is legal. Thus, Big Weed has opened up an avenue to diversify the industry — and make a lot of money while doing so. Curaleaf recently announced its plans to partner in legalized states with 420 businesses representing historically disadvantaged communities over the next four years. “If a dispensary is scraping things together, coming up with the money to buy cannabis is going to be tough,” says Patrik Jonsson, the regional president of Curaleaf’s Northeast operations. “But we can give product for free up front with deferred payments to get up and running, something we’ve done over and over again in other states.”

A distributor fronting weed to a dealer might be a strategy more commonly known in the illicit market, but it makes sense for legitimate businesses too — opening access for small firms that need credit and large ones that want to expand their footprint in a state that is anxious about controlling their growth. It’s here that big firms have the opportunity to see their profits soar in one of the largest legal markets in the world. Lending, cultivating to sell to other businesses, and investing throughout the industry from day one will allow multistate operators to spread their influence far beyond the eight dispensaries they are allowed to run. Their existing operations will see increased profits, too, as they can now sell marijuana flower for medical use — which was previously banned — while still enjoying the tax benefits of the medicinal market and the vertical integration that’s been grandfathered in there.

And while New York lawmakers went to great lengths to ensure the market won’t be dominated by big companies, they still need the big players to be active, especially in the first few years of legal sales, when it’s important to avoid delays so that dispensaries pull in the tax revenue that’s being forgone in the illicit market. “To stand up a grow, that’s a yearlong project,” says Jonsson. “If everybody started from scratch, you’d be lucky if you see something by the end of next year. But we have the infrastructure in place and the compliance figured out to take off sooner.”

Between now and then, the real homework begins for the newly established, five-member Cannabis Control Board, which will write the codes to determine how the law is implemented. Among the problems they must solve are how many licenses to offer and how to distribute them across the state, and the standards for all aspects of production from seed to sale — two massive projects that will dictate just how big the market is. “Obviously the bill is super-important, but I don’t think we want to exaggerate how much you’re going to be able to tell at this point,” says cannabis attorney Charlie Alovisetti. “The guidance that’s put out by the regulators will give a better sense of what is going to happen.”

And while Alovisetti has identified a potential problem — the regulations must ensure that social-equity applicants don’t lose their protections if they attract investment from big firms — some marijuana-justice advocates see an opportunity to continue the public education and advocacy work that’s made the law a success thus far. Melissa Moore of the Drug Policy Alliance described an effort to advise lawmakers on nominees for the board to ensure the full realization of the economic sections of the law. “Together we were successful in passing a bill that people thought was not possible,” she says. “When legalization was introduced in 2013, it was considered the third rail, but since then we’ve changed the conversation to center it around justice. Now, we need to make sure those principles are grounded in the regulations.”

Who’s Getting Rich From Weed Legalization in New York?