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Dan Livingston has been seeing it since New York’s hemp program began: prospective investors approaching licensed cannabis entrepreneurs with shady deals that would cede nearly half of the company’s equity
Since the state began conditionally licensing businesses to grow, process and sell adult-use weed, it’s been getting worse.
“It’s like we’re in a kiddie pool full of sharks,” said Livingston, president of the Cannabis Association of New York. “So many people out there are trying to get as much of these license-holders’ assets as they can.”
Right now, the only legal adult-use cannabis growers, processors and retailers are conditional licensees who are largely small businesses. Amid this dynamic, predatory investment offers seem increasingly common, according to Livingston and others in and around New York’s weed industry.
And with the state’s adult-use market taking longer than expected, some licensees with little funding and limited experience dealing with finance agreements are becoming easy prey.
Livingston has watched as CANY members seeking investment after receiving AUCC, AUCP or CAURD licenses receive exploitative offers, such as a $1 million investment in exchange for 49% equity in the company. Since the state only started licensing these businesses last year, Livingston said, it’s difficult for weed business owners to decipher what is and isn’t a fair deal.
“What I’m hearing from a lot of CAURDs is they don’t know how to value what they’ve got,” Livingston said. “They don’t even know what their license is worth, they don’t know where these numbers are coming from.”
Cannabis Control Board Chair Tremaine Wright told NY Cannabis Insider that the MRTA defines and prohibits predatory investment deals. She added that licensees can access help sussing out investment offers from groups including the New York City Department of Small Business Services, local Bar associations and local development corporations.
“We offer a lot of technical assistance, which can afford people access to lawyers who will help them review any loan terms and financing agreements that they would like,” Wright said.
However, it seems like New York is experiencing a proliferation of dubious players offering small business licensees deals that might be technically allowable, but would give near-majority equity to a financier, Livingston said.
It’s difficult to say how prevalent these situations are because many licensees sign non-disclosure agreements with prospective investors before even sitting down to talk.
In some cases, investors aren’t even holding up their end of the bargain, Livingston said. He’s aware of at least one AUCC company – which he declined to name – that is suing an investor after the investor declined to pay agreed-upon money.
It doesn’t even seem like the money materializes” in a lot of cases, Livingston said. “We keep hearing that the money they were promised isn’t even coming through.”
Paula Collins, a New York CPA and tax attorney dedicated to the cannabis industry, said some of her CAURD clients have also received offers from investors (including many out-of-state) seeking up to 49% equity in their businesses.
Beyond the percentage of the company’s fortunes, some of these investors want to bring in their own team to run the store – often claiming they have special skills or connections, Collins said.
“In other words, they don’t want the licensees to have a lot of day-to-day management abilities,” she said. They’re “kind of wanting to buy out that CAURD licensee – like, ‘I’ll pay you, but I want you to go away; but don’t go away, because I still need you to have 51% on the license for as long as that’s required by the state.’”
From a business perspective, it makes sense that investors would want as much equity and control of day-to-day operations as possible, Collins said. But such deals undermine the social equity aims of the MRTA and conditional licensing.
Though, Collins’ clients who have turned down exploitative deals are often unwilling to cut off communications with these prospective investors. That’s partly because the legal weed rollout has moved at a slow and uncertain pace, Collins said, and CAURD licensees are unwilling to alienate possible investors offering shady-sounding deals because there might come a time where they have no other choice.
“People are scared, they don’t want to burn that bridge, they want to keep that discussion going,” Collins said. “They want to have that relationship to turn to in case they get in trouble.”
Ironically, cultivators seem to be bearing much of the brunt of New York’s slow retail rollout, said Hinman Straub attorney Matt Leonardo, which is making it difficult for many AUCCs to turn down any deal promising a cash injection.
“The lack of cash flow and the inability to offload product and maintain a revenue stream … has been hugely problematic,” for cultivators, Leonardo said.
Some cultivators are banding together to form collectives, which is helping to keep them afloat by sharing costs. But for some individual growers, the dearth of dispensaries that can buy their products means it’s not clear if they can last without additional funding in the short-term.
“The inability to open more shops has put a huge strain on cultivators,” Leonardo said. “If you’re an individual cultivator, it’s really challenging to get the gas to get there.”
Livingston, CANY’s president, has been advising members receiving offers from investors to speak with lawyers before signing anything: it’s better to pay legal fees for attorneys to examine a contract on the front-end than pay even heftier prices after signing a bad deal.