Inside, we found ourselves surrounded by dance studio-style mirrors and marijuana-themed flags. Myriad merchandise adorned the walls. The owner watched us from another room as the budtender, a young man wearing a marigold puffer jacket up to his tattooed neck, began to explain the “gifting” process.

Unlicensed marijuana dispensaries like this one have been popping up across New York. Operators exploit a legal loophole in the Marijuana Regulation and Taxation Act (MRTA)—the state’s cannabis legalization law, passed on March 31, 2021—by “gifting” marijuana to customers who purchase stickers or other placeholder products of little-to-no value. New York’s regulator, the Office of Cannabis Management (OCM), has attempted to crack down on these gray market businesses. So far, it has issued at least 52 cease-and-desist letters.

Nationwide, corporate capture has superseded states’ attempts to enact progressive cannabis legislation.

Licensed marijuana dispensaries are expected to start opening by early 2023. But as the legal industry starts to take shape in New York, regulators find themselves at the forefront of a new chapter in drug-legalization history. Nationwide, corporate capture has superseded states’ attempts to enact progressive cannabis legislation—stymieing less well-financed, more disadvantaged entrepreneurs’ chances.

Throughout North America, the emergence of the likes of CuraLeaf, Green Thumb Industries, Cresco Labs and Verano Holdings has made it harder for (licensed) smaller cannabis cultivators and distributors to become established. Canada’s cannabis industry has come to be dominated by multinational cannabis manufacturers, and states like Illinois and Massachusetts are laboring to fulfill their promises of equity.

New York could be among the first to change that. And the state’s legal cannabis market, as Insider reported, “has the potential to be worth $7 billion once fully established.”

In January, New York Governor Kathy Hochul proposed a $200 million equity fund to assist people directly affected by the drug war who want to set up shop. And in March, she announced the Seeding Opportunity Initiative, which would allocate $1 billion in bonds for social equity licensees to access a fund to help cover operating costs.

On top of that, if you want to be among the first licensed retailers in the state, either you or a family member must have been convicted on a cannabis-related charge, or be from a geographical area impacted by the “disparate enforcement of cannabis prohibition during a certain time period,” according to the OCM.

Melissa Moore, civil systems reform director at the Drug Policy Alliance (DPA), said that although New York has the country’s strongest model for adult-use legalization at this point, there’s still more work to be done.

The position of well-established legacy players who grow, process and distribute weed is precarious.  

“In New York, you know, there’s this intention to try to kind of crack that nut for the first time and actually be able to solve the capital problem [for disadvantaged entrepreneurs],” she told Filter. “Without some sort of capital support behind it, it’s basically just a piece of paper that ends up being fairly meaningless [if] people don’t have the access to the funds they need.”

But those who already operate in the gray or illicit market fear those measures might not be enough. New York’s OCM has insisted that cracking down on illegal businesses is necessary for a fair and sustainable market. As everyone from individual investors and private equity firms to corner stores and head shops vies for a spot in the marketplace, the position of well-established legacy players who grow, process and distribute weed is precarious.  

A Dilemma for Gray-Market Operators

First, our budtender showed us a print-out chart that indicated the prices of each tier of stickers, which cost anywhere from $30 to $450. Each of the three tiers had a corresponding number of grams, with the products’ quality ranging from low to high. An array of strains was available: Cherry Pie, Purple Punch, Guava Jam, Gumbo, Ghost OG, Diablo OG and Khalifa Kush. All transactions were cash-only. On the windowsill was a plastic jar that received donations from customers for people displaced by the Bronx fire. A pile of clothing and bedding—essentials donated to Bronx fire survivors and their families—could be found on the opposite side of the store.

The budtender was thorough, and as we looked at our options, he answered all of our questions, speaking about cannabis in the way a sommelier talks about wine. He said that selling wasn’t just about making a quick buck.

“There’s more to it than that,” he told us. “We’re trying to give back to the community.”

The OCM begs to differ.

“Illicit operators are putting at risk their ability to obtain a license for the legal market while also facing fines and possible criminal penalties.”

“These so-called ‘gifting’ transactions are considered sales, where there is a remuneration being provided, whether directly or indirectly as a result of that transaction,” Aaron Ghitelman, an OCM spokesperson, told Filter. “Businesses cannot reasonably or realistically claim these are ‘gifts’ unrelated to a transaction. As such, these are illegal as there are no licensed adult-use cannabis sales at this time in the State of New York and we will work with our partners to enforce the law.”

According to the OCM, “illicit operators [are] putting at risk their ability to obtain a license for the legal market while also facing fines and possible criminal penalties.”

This all has troubling implications for current entrepreneurs who are eligible for the state’s social equity program, which seeks to prioritize people disproportionately impacted by the criminalization of marijuana.

Unlicensed dispensaries have been subject to raids by police. For instance, the Tioga County Sheriff’s Office raided a sticker store in February. It’s unclear whether OCM issued the owner—Bartholomew Miller, or “B Millz” —a cease-and-desist letter beforehand.

“New York State is building a legal, regulated cannabis market that will ensure products are tested and safe for consumers while providing opportunities for those from communities most impacted by the overcriminalization of cannabis prohibition,” Ghitelman told Gothamist in April. “Illegal operations undermine our ability to do that.”

New York, then, is going after cannabis sellers to compensate for potential losses to its tax revenue from legal marijuana businesses, which could suffer if the legacy market gets too large. These efforts, ironically, are antithetical to the systemic problem that the state is trying to resolve: the drug war’s disproportionate impacts on mostly Black and Brown communities.

“Trying to move opportunistically … could potentially be damaging to the social equity program overall.”  

Still, New York State has—for the most part—pursued business-level enforcement over police sweeps and criminalization.

And some who are completely opposed to criminalization still believe that unlicensed operators could harm the goal of equity in the cannabis industry, no matter how much they claim to be giving back to their communities.

“During this window when the regulations have yet to be determined and the licenses have yet to be awarded… [illicit operators are] trying to move opportunistically… something that could potentially be damaging to the social equity program overall,” Moore said.  

Micro-Business Licenses and Equity Concerns

To try to resolve these issues, the OCM has proposed a micro-business license under the MRTA, which has a total of nine license types. If implemented, this particular license would apply to small-scale legacy players and could be instrumental to laying the foundation for an equitable industry.

“The aim is for those to be able to provide entry points for people who are legacy market operators to be able to come into the licensed and regulated space,” Moore told Filter. “The micro-business license, in particular, is one that we haven’t seen the regulations for yet, but it’s likely to be one of the best bridge points for people from the legacy space because that actually allows people to cultivate the process and then be able to sell—whereas most of the other license types you’re sort of in one lane or the other.”

Thousands of miles west, the Bureau of Cannabis Control—California’s regulatory agency—opted for the opposite approach: relaxing penalties against unregulated operations. California’s cannabis industry has also been dominated by gray market operators. As of April 2022, the unregulated market for marijuana in the Golden State is worth an estimated $8 billion; in 2021, Capitol Weekly reported that the legal market was worth around $4.4 billion.

“Local government opposition, high taxes and competition from unlicensed businesses are complicating California’s push to build a thriving legal market,” Politico reported in October 2021. “Many of those factors are baked into California law, including rules allowing city leaders to shut out licensed cannabis enterprises.” 

Since New York State made marijuana legal for adult use, hundreds of municipalities across the state have prohibited marijuana sales. According to the Rockefeller Institute of Government’s “Marijuana Opt-Out Tracker,” 764 of the state’s 1,520 municipalities have done so.

“Local control has, let’s just be honest, crippled the California market and prevented it from reaching its potential,” Hirsh Jain, founder of cannabis consulting firm Ananda Strategy, told Politico.

The goals of legalization’s architects will only be realized if an equitable marketplace takes shape.

Some New York retailers and farmers, though, are taking matters into their own hands.

Gully is one unlicensed business. Its founder, Gully Man, who requested a pseudonym to protect himself from prosecution, has cultivated a distinct brand for his sophisticated marijuana and merchandise distribution network. Defined by its matte-black and flashy-gold color scheme, Gully—in collaboration with unlicensed dispensaries—has become well-established in central New York. In fact, Gully recently displayed its line of products at the Finger Lakes CannaMarket, a local showcase frequented by marijuana cultivators and users in the area. When he’s not trying to recruit young men in bars to expand the business, you can find him decked out, head to toe, in full black Gully gear—a thick-rimmed cap, sweatshirt and sweats and shoes—and occasionally giving out eighths of weed for free.

The marijuana business in New York is changing rapidly, but the goals of legalization’s architects will only be realized if an equitable marketplace takes shape.

“It’s going to be messy,” Moore said. “I think New York is taking a big swing in terms of establishing the social equity program … and really having it be groundbreaking—a national model.”

Many smaller entrepreneurs see it similarly, even as they pursue an unregulated approach.

“Every small business adds up,” the budtender said. “You can’t just have corporations running everything.”

This may ring true, but preemptively entering, or continuing to operate in, the cannabis industry could have serious implications for smaller players in the future. Like the OCM, Moore noted that such operators’ actions during this brief window where regulations are still being implemented could have significant impacts on their likelihood of being able to ultimately get a license—compromising their ability to become legally established and give back to the community long-term.

Legacy players, in Black and Brown communities especially, face unenviable choices.

“I think it’s a matter of weighing the opportunity of a few months’ time versus [the] opportunity of years and years,” she said. “If you’re a smaller entity that’s received a cease-and-desist [letter]… that’s the moment to talk to OCM and try to figure out what’s feasible.”

But legacy players, in Black and Brown communities especially, face unenviable choices as the OCM struggles to reel in a surging gray market.

“If nothing changes, those communities face two scenarios,” Tavian Crosland, a Brooklynite cannabis consultant, warned in the Nation. “They risk losing an important source of income as an entire economy shifts into the hands of a predominately white workforce, or they risk getting stuck in a parallel unlicensed and illegal market, in which they’ll keep being criminalized for doing the same things white people do in wide-open freedom.”

Photograph by Heath Alseike via Flickr/Creative Commons 2.0

The Influence Foundation, which operates Filter, previously received a restricted grant from DPA to support a Drug War Journalism Diversity Fellowship.

The post New York’s Gray-Market Cannabis Businesses Face Hard Choices appeared first on Filter.