Global Ganja Report

The boom in "gray market" cannabis street sales in the Big Apple since legalization took effect in New York state has now reached the point of actual unlicensed and unregulated storefront dispensaries—which are apparently tolerated. This development is raising skeptical eyebrows from aspiring cannabis entrepreneurs still waiting for Albany to put a regulation structure in place.

New York state has been in a strange state of legal limbo since cannabis was legalized there last spring. Criminal penalties for simple possession have been lifted, and those for home cultivation within permitted limits are set to be removed by the end of summer 2022. But as of yet, there is no regulatory structure in place for licensing and oversight of a commercial sector.

Tremaine Wright, chair of the state's newly formed Cannabis Control Board last week told local news site Gothamist that the regulations would be issued "this winter or early spring."  

Some, however, have not been waiting. Last summer, New York City witnessed an explosion in cottage-industry (or perhaps apartment-industry) mini-businesses—with bud, edibles and other cannabis products being hawked from tables set up in the parks and on the sidewalks. Many of these were actual licensed businesses—but not licensed cannabis businesses, because no such licenses exist yet. Generally, these outfits avoided calling monetary transactions "sales," saying the cannabis product was being offered in exchange for a "donation," or as a "promotion" for purchase of other (very overpriced) merchandise.

Now, with the cold weather, actual storefront establishments on this model have started to emerge in the city. A burgeoning chain of such establishments has opened shops in two Manhattan neighborhoods. 

An unregulated chain?
This enterprise, dubbed Empire Cannabis, opened its first outlet on Eight Ave. and 17th Street in Chelsea in October, and just added a second location, at 172 Allen Street on the Lower East Side, this month. There is absolutely no sense whatsoever of flying below the radar. At the Lower East Side location, the staff wear matching T-shirts emblazoned with the name and cannabis-leaf logo of the business. Glass cases display high-quality bud identified by strain, and a wide array of edible products and cartridges, marked by THC and CBD content.

This reporter was told that the establishment operates as a private club, and was offered a $50 monthly membership to be able to make purchases. When I explained that I was a journalist on assignment, I was told that only management could speak on the record, and that someone would get back to me.

The Empire Cannabis website states: "We have taken the blessings of the New York State Legislature allowing the transfer of cannabis without profit and have setup [sic] a membership service in which the club will acquire cannabis products for its members, and only add the cost to facilitate the acquisition and transfer of said products."

And indeed, the official New York Courts website states that under the Marijuana Regulation & Taxation Act (MRTA), signed into law by then-Gov. Andrew Cuomo last March 31, "it is now legal for a person 21 years of age or older to give or transfer up to three ounces of cannabis and up to twenty-four grams of concentrated cannabis, to another person 21 years of age or older, as long as it is given without any payment."

After two days, nobody from the club's management had replied to Cannabis Now's queries. However, a report on Business Insider identifies the establishment's co-owner as Jonathan Elfand. Online searching indicates that Elfand was (or perhaps remains) chief officer of Door to Door 420 Collective, registered in 2015 in Laguna Niguel, in California's Orange County. This is identified by a registry of California businesses as a nonprofit, presumably operating on a similar model.

Competition with the regulated sector?
This strategy of conforming to the letter of the law, however narrowly, is viewed with skepticism by some.

In the Albany area, Greg Kerber, founder and CEO of Gnome Wellness (formerly Gnome Serum), is waiting to open a licensed dispensary in Colonie, a suburb of the state capital. "We've been waiting with bated breath to see the licensing process," he tells Cannabis Now, emphasizing his intention to "play within the lines."

The company is now offering wholesale and online sales of both food supplements and legal cannabis products, such as tinctures of hemp-derived CBD, often treated with terpenes for a desired effect. He envisions the storefront dispensary operating on a "Weed with Wellness" model, where customers can get both "supplements to boost your immune system amid the COVID-19 pandemic, and some weed to chill out—one-stop shopping to take care of both your health and your anxiety."

But Kerber worries that his dreams may be undercut by a proliferation of gray-market outfits before the regulatory structure is in place. "The problem is getting private equity for people who are doing it the right way, which means the added costs of seed-to-sale tracking and other likely requirements. That makes it harder for us to compete with people who aren't doing that, who are just opening stores and selling weed. Will capital come into a place where it's the wild, wild west?" 

Kerber notes an Upstate-Downstate cultural divide in New York. "There's a lot of tolerance down there—there’s a different mentality up here. A lot of counties are bowing out of the opportunity to sell cannabis. There's a still a THC-phobia reflecting the long years of propaganda."

Indeed, Upstate's Oswego County News noted last month that localities had until Dec. 31 to pass measures that opt out of allowing cannabis businesses within their limits, and more than 400 statewide did so. There are 62 counties in the state of New York, and thousands of municipalities (cities, towns or villages).   

"Will venture capital come into the marketplace if they know we're immediately competing at a disadvantage?" Kerber asks rhetorically. "Upstate is already an investment desert. Who’s going to make the investment if you're competing against someone who doesn't play by the rules? Will these storefronts be allowed to continue to conduct business? It's wait-and-see at this point, but we're hoping they're going to build a fair and equitable process here in New York state."

The California comparison
It's something of an irony that (for the moment, at least) traditionally no-nonsense New York has a more freewheeling atmosphere for cannabis than California, which first pioneered state-legal sales with the establishment of a medical-marijuana market in the 1990s, and legalized adult-use cannabis in 2016, five years before the Empire State followed suit.

But lots of illicit legacy operators persist in the Golden State, and "door to door" delivery services operate in a similar kind of "gray market"—not regulated, but basically tolerated. And play-by-the-rules operators are similarly complaining about competition from the unregulated sector.

This was noted in a recent account for Politico. "You don't have a real cannabis industry if the dominant portion of it has no interest in being legal," said Adam Spiker, executive director of the Southern California Coalition, a regional cannabis trade association. "There's no other regulated industry in the world that I know of that operates like that." 

On Dec. 17, leading California cannabis companies sent a letter to Gov. Gavin Newsom and legislative leaders in Sacramento, warning that "our industry is collapsing." As AP reported, the letter—signed by more than two dozen executives, industry officials and legalization advocates—complained of burdensome taxes and an opt-out provision under which two thirds of the state's local jurisdictions have no dispensaries. The letter stated that the current system "is rigged for all to fail."  

Meanwhile, a 2019 audit conducted by the United Cannabis Business Association counted 2,835 unlicensed retailers and delivery services operating in California. By contrast, there were only 873 licensed dispensaries in the state.

In a December interview in New York's Albany Business Review, a longtime industry leader from California, Steve DeAngelo, offered this warning for his Empire State counterparts: "I think the basic message I have right now is: Don't repeat the mistakes of California. The essence of the mistake that California made was trying to eliminate the legacy cannabis market rather than trying to integrate the legacy cannabis market."

DeAngelo, who is now on the East Coast networking with local industry players, said: "California, in 2018, started going through the same transition that New York is going through now. In California, it's really been a disaster. Today, the unregulated legacy market in California is three times the size of the regulated legal market in California. The reason for that is pretty simple. The cannabis in California was overtaxed and over-regulated."