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As New York establishes its legal marijuana marketplace, investors continue to seek opportunities to back cannabis businesses and earn a return on their dollar.
Experts say such opportunities exist, but recommend a cautious approach amid regulatory uncertainty, the state’s focus on social equity, and the staying power of its legacy cannabis market.
Jonathan Miller is general counsel for the US Hemp Roundtable. He told New York Cannabis Insider that the Empire State’s policy makers “are some of the greatest supporters of hemp” in the country because New York “gives hemp farmers a lot of tools to grow.”
Dried hemp plants are sorted and trimmed at Hepworth Farms in Milton, New York, Monday, April 12, 2021. Farmers dealing with depressed prices for plants that produce CBD extract are eager to take part in a statewide marijuana market expected to generate billions of dollars a year once retail sales start. They already know how to grow and process cannabis plants, since hemp is essentially the same plant with lower levels of THC, marijuana’s active ingredient.Seth Wenig | AP Photo
Because of the way the state structured its hemp industry, “we think New York will have a booming market and lots of investment once regulatory issues are settled,” Miller said.
He cited packaging and labeling of hemp and CBD products as just one area that requires the attention of the federal Food and Drug Administration.
“Hemp has a bright future [in New York], but there will only be small steps until the FDA comes in to regulate it,” Miller said.
In mid-May, FDA Commissioner Dr. Robert Califf testified before the House Appropriations Committee regarding his agency’s budget. When questioned about the delayed regulations for hemp and CBD products, Califf testified that he was “very committed” to strengthening FDA’s ability to properly regulate such goods.
Califf also voiced appreciation for “the amazing plethora of derivatives of the cannabis plant,” which he called “quite profound and astounding.”
FDA Commissioner Dr. Robert Califf speaks at a news conference in Washington, May 5, 2016. Andrew Harnik | AP Photo
Jennifer Roselle and Charles Messina are co-chairs of the cannabis law practice at Genova Burns LLC in Newark. They practice in both New Jersey and New York, and according to the firm’s website, represent “clients in the cannabis, hemp and CBD industries” and offer advice to “investors, cultivators, processors, distributors, retailers and ancillary businesses.”
In a recent interview, Roselle noted New York’s social equity emphasis. “There is a clear dedication in New York that social justice applicants are to be first in line,” she said.
But, in performing their due diligence on potential investment targets, investors will still have their collateral requirements, she added. Will new social equity entrepreneurs be able to meet such requirements?
“Who’s going to give over that kind of money without assurances?” she observed. “This is a great opportunity to make money, but it’s about planning how you get there.”
Roselle advises investors in the New York cannabis market to “proceed with caution” since many regulations are still in their comment periods and not yet finalized.
“Enter into it with the understanding of the emphasis on social justice,” she said. “This will guide decisions of investors who want to participate in the market.”
Messina noted that the MRTA restricts partnerships with multiple business operators across the various sectors of legal cannabis.
“Proceed with caution and have an understanding of existing regulations,” he advised. “You can’t have a direct or indirect interest in more than one business, but there are options.”
Among these options, Messina said, are ancillary businesses like real estate and delivery apps. Above all, he urges potential investors to do their homework.
“Don’t disqualify yourself by who you partner with,” he said. “Make sure you have local support.”
Another expert says that the strength of New York’s entrenched illicit cannabis market will likely continue to adversely affect investment opportunities on the legal side.
Cannabis economist and analyst Beau Whitney is founder of cannabis analytics firm Whitney Economics. He is also Chief Economist for both the National Industrial Hemp Council (NIHC) and the National Cannabis Industry Association (NCIA).
Whitney observed that in “newly deployed states” like New York, there are two consumer groups – those that patronize the legal market and those that patronize the illicit market.
The idea, he said, is for the state to “incentivize the consumer conversion to the legal market” through use of legislation and regulations.
The way to do this, he told NY Cannabis Insider, is to “keep taxes relatively low so that the legal price is competitive with the illicit market. Giving access to the market equals conversion.”
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“In New York, there is not a whole lot of legal access [while] there’s an amazing amount of access on the illicit side,” Whitney said. “New York’s illicit market is emboldened, which represents how entrenched the illicit market is. The illicit market is winning on price and access. Until that changes, conversion won’t happen quickly.
“People are getting medical cards and buying cannabis on the street, but using the card as protection,” Whitney continued. “This cements how entrenched the illicit market is and how access is greater.”
And without consumer conversion to the legal market, investment opportunities in legal cannabis will remain limited.
Whitney said that New York does not yet have the “canopy” (the growing area that produces cannabis flower) to produce enough flower to satisfy demand, thus the state’s market “will have initial troubles with supply and thus price will be high, slowing down conversions.”
“Until they can fix this, the legal side will continue to struggle,” Whitney said. “This is a big deal. New York doesn’t have the growing capacity.”
He added that inviting hemp farmers to support flower growth will not produce immediate results: “It will take a year or more to ramp/license. If they could use all of the license capacity that they’ve given out so far, it would support only four percent of demand.”
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Whitney offered cautionary examples for New York’s cannabis policy makers. California’s system of high taxes and low access (only about half the state’s counties allow legal sales) “has left millions of dollars on the table” as the state’s legal market struggles to complete. In Oregon, Whitney said “they oversupplied and prices fell. And they, arguably, issued too many licenses so nobody makes money. It’s the opposite effect but similar from an investor’s point of view.”
New York’s is “a major illicit market that will take longer than usual to displace,” Whitney said. “That’s why investors should be cautious and look at the data. If you don’t do due diligence you could be in for a long slog or even lose money.”
Tom Wanamaker is a freelance reporter for NY Cannabis Insider.
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