New Colorado law boon for cannabis capital, but concerns remain for minority businesses

Colorado Gov. Jared Polis was lauded in May when he signed into law legislation allowing outside money to be invested in the state’s cannabis industry.

Since the law went into effect Nov. 1, outside capital has already begun flowing into Colorado marijuana businesses.

For example:

  • Denver-based Medicine Man Technologies through the year announced an almost $300 million series of acquisitions in the state anticipating the new law and boosted by funding from Florida-based private equity group Dye Capital.
  • New York-based multistate operator Columbia Care said on Nov. 5 it planned to buy Colorado dispensary chain The Green Solution for $140 million.

“It’s going to happen quickly because of economic realities,” said Christian Hageseth, CEO of marijuana franchising company One Cannabis and founder of vertically integrated Green Man Cannabis, both based in Denver. “There is a lot of interest in the cannabis space and a lot of public multistate operators with money.”

But for all those who stand to benefit from the influx of out-of-state investment, there will be others who likely won’t – not the least of which are minority owners of Colorado cannabis businesses who might find it difficult to compete in such an environment, several industry insiders told Marijuana Business Daily.

Noting the difficulty for Colorado cannabis companies to find investment capital before the law was passed – until then, businesses had largely been reliant on wealthy local individuals to back their operations – Brooks Lustig, owner of Denver-based operator Seed & Smith, said “it is exciting to see the interest in funding the industry.”

But, Lustig conceded, the addition of new money doesn’t necessarily bode well for a level playing field.

Well-run companies with a strong handle on their operating expenses will have an edge, but the real money will remain in the hands of the few, observers note.

“Unfortunately, most of the money – as in most of the U.S. industry – is controlled by one group of people,” Lustig said, referring to white entrepreneurs.

Not a fair fight

Hageseth, who is a proponent of improved social equity measures within the industry, agrees minorities will likely be largely frozen out.

Because of the lack of social equity programs in the Colorado marijuana space, minorities were not encouraged to become part of the state’s cannabis industry in its infancy – and the new law will do even more to enforce that, said Wanda James, owner and founder of Simply Pure, a dispensary based in Denver.

She believes, for example, that it simply isn’t a fair fight with no restrictions on the number of dispensaries a single group can own.

“The money coming in was absolutely necessary, you can’t build a business without capital,” she said. “But the lack of control the state of Colorado has put on this means the industry in Colorado will be fully hedge fund- and white-owned by the end of 2020.”

Such a prospect has James looking at moving her business out of Colorado – where she and her family have called home for most of her life – to look at other opportunities in places such as Massachusetts, Missouri and New Jersey.

Dahlia Mertens, owner and founder of Telluride, Colorado-based cannabis topicals company Mary Jane’s Medicinals, voiced similar concerns.

“The new law will make it harder for everyone who is marginalized to get into the industry,” she said.

Echoing James’ sentiments, Barrington Rutherford, senior vice president of real estate and community integration at Chicago-based multistate operator Cresco Labs, argues the initial laws in Colorado contained few provisions for social equity programs.

“What we would love to see from states when they are considering new legislation around cannabis is that they take a position similar to Illinois,” said Rutherford, who also is on the board of the Minority Business Cannabis Association.

“That is, strongly in favor of social equity programs. You have to start from that as the basis and work back from that.”

Illinois differs in its social equity approach by getting both existing and new license holders to bankroll a fund to help finance the program.

The fund, currently totaling about $12 million but expected to at least double over time, includes license transfer money and a percentage fee levied on license dues that companies pay to be able to operate.

Cresco, though not currently active in Colorado, could consider an investment in the state if it helped advance the cause of social equity, Rutherford added.

Antitrust measures to limit big players?

Mark Grindeland, co-founder and CEO of Denver-headquartered edibles company Coda Signature, which has products in about 640 stores in Colorado as well as roughly 120 in California, agrees that social equity has not been a major focus of the state’s industry and that the new law is unlikely to help.

However, he does believe antitrust scrutiny, which has been a major focal point in the U.S. cannabis industry in 2019, will prevent too much power from being in the hands of too few companies.

“Things still have to go through regulatory bodies, including the federal government and this (law) is not going to eliminate the other requirements you have to get to go through approval,” Grindeland said. “So, it’s not going to necessarily result in massive investments gobbling up Colorado.”

The industry will also have to continue to grapple with the trend of declining capital in general. While that situation won’t last forever, the current contraction has put a damper on the passage of the law, Grindeland said.

“This (law) absolutely is a positive,” he added. “It is unfortunate just because of the timing with capital contracting. This is tempering the excitement.”

Nick Thomas covers financial news for Marijuana Business Daily and can be reached at [email protected]

Margaret Jackson contributed to this report.

Interested in investing in the Colorado cannabis industry or learning about other potential targets in the state? Check out this analysis from MJBizDaily’s Investor Intelligence.

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