Can States Police Their Own Pot Markets?

Sunday, May 19th 2019
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Five years into the state experiments with legal recreational marijuana, it’s becoming harder to believe states can capably enforce their own marijuana laws. Two recent examples help to illustrate why:

As part of an effort to support smaller, homegrown cannabis businesses, Massachusetts doesn’t allow any company to control more than three recreational dispensary licenses. However, in March, the Boston Globe’s Spotlight team reported that two large multi-state cannabis companies, “have offered investor pitches that seem to look right past Massachusetts license limits.”

The article describes how the companies, Acreage Holdings and Sea Hunter Therapeutics (part of the conglomerate Tilt Holdings), “are trying to multiply the ‘rule of three’ out over a much larger network. They have been buying or backing a series of businesses that each, in turn, is seeking to control up to three licenses.” (New York-based Acreage claims to be the largest U.S. cannabis company; Former Republican Speaker of the House John Boehner sits on the Acreage board.)

“You can’t control more than three licenses, whether it’s direct or indirect, through subsidiaries or holding companies or shadow companies,” Massachusetts’ top regulator Steven Hoffman, a former partner at consultancy Bain & Co., told the Globe.

Both Acreage and Sea Hunter denied they were breaking or bending the law. While they both anticipate earning revenue from about a dozen Massachusetts stores, each said they did not control more than three.

In an April 2019 securities filing, Acreage provides more detail (P# 42) on how its “management services agreements” can work in Massachusetts and other states with similar ownership limits, such as Florida, Maryland and New Jersey:

“The company believes that, where such restrictions apply, it may still capture significant share of revenue in the market through wholesale sales, exclusive marketing relations, provision of management or support services, franchising and similar arrangement [sic] with other operators.”

After the Boston Globe story came out, Massachusetts regulators said they were investigating whether either company violated state license limits. “Tilt is in compliance with all Massachusetts statutes and regulations,” a company spokesperson told me. Acreage declined to comment for this story.

The second example comes from Colorado, which is reputedly among the best-regulated state marijuana markets.

For years, Colorado pot companies have felt stymied by the state’s relatively strict rules surrounding how they can raise money. Colorado marijuana licenses can’t be owned by publicly-traded companies. Last year, the industry criticized Gov. John Hickenlooper for vetoing a bill to loosen Colorado’s investment rules. (Today, a similar bill awaits Gov. Jared Polis’ likely signature.)

In April, the Denver Post reported publicly-traded firm MJardin had claimed to manage seven Colorado dispensaries, under the brand Buddy Boy, in a presentation to investors. (MJardin went public in November 2018 on the Canadian Securities Exchange, where Acreage and Tilt also trade.)

While not speaking about MJardin specifically, Colorado cannabis lawyer Daniel Garfield told the Post, “There’s not really a black and white line there, but if a publicly traded company is managing a store in the usual sense of the word, then it probably has some sort of control over the licensed entity and that would not be permitted.”

MJardin executive Jeannette Harkin told the Post, the company “consults, advises and assists” Colorado-licensed businesses, but does not own or operate them.

Further complicating the picture -- and not mentioned in the Post story -- in January 2018, MJardin paid C$49.7M (US$40M) to acquire “debt, consulting contracts, real estate and intellectual property of Buddy Boy Brands” according to Canadian securities filings.

In an email to me, Harkin wrote, “MJardin did acquire some assets from Buddy Boy and also was assigned certain contracts of Buddy Boy, but the licensed marijuana business of the company operating as Buddy Boy is still owned by that company which is independent of MJardin. MJardin provides services to that company through its contractual relationship with it.” She said MJardin is fully compliant with Colorado marijuana laws.

"Currently, the ownership structure for all marijuana businesses is subject to evaluation, during renewals and at any other time as warranted by our regulatory analysis." A spokesperson for Colorado’s Marijuana Enforcement Division told me and that, "There is an 'open and ongoing' investigation into MJardin." Harkin declined to comment on the investigation.

In every legal state, there are laws pot companies are going to consider inconvenient, especially since it’s so hard to run a profitable weed business. The Post and Globe stories both suggest that to succeed, companies are exploring strategies which aren’t in the “spirit” of state laws. No doubt, numerous other companies are trying to find an edge via similar methods.

The Colorado and Massachusetts investigations may eventually clear Acreage, Tilt and MJardin. However, it’s impossible to know how well regulators are attuned to similar practices at other companies, some of which could cross the line into impropriety.

Unlike Acreage, Tilt and MJardin, the vast majority of marijuana companies, including all 1,400 or so in Colorado, are privately held, and reveal much less information to the public. (Colorado regulators have repeatedly refused to discuss my reporting on Ebbu, a private company whose assets were acquired by Canadian giant Canopy Growth last year.)

Voters forced states to create and police freestanding industries for a controlled substance. It’s a gargantuan task. Now the states have to keep up with how sophisticated companies work within those laws. The results of the Colorado and Massachusetts investigations won’t conclusively answer whether the states can effectively regulate weed. But they could clarify what regulators think is the spirit of their laws.

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