NY's Cannabis Rollout Could Destroy a Legal Entrepreneur

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1:44Hello and welcome to another episode of the Oddbots podcast. I'm Tracy Alloway. And I'm Joe Weisenthal. Joe, do you remember five months ago? No. No, it's all a haze. What happened? Neither did I. I actually had to look this up. You remember on 420, so April 20th of this year, we released our first ever narrative all thought series all about the legal marijuana market in New York. Yes. And obviously, that was a fun experiment. And I hope we do something like that again. My big takeaway from that, I learned a lot about market structure. I learned a lot about the industry. But my big takeaway really from talking to everyone involved or lots of people involved in the New York attempt to legalize marijuana is that however complicated you thought it was and difficult it was to sort of bring in this new market, it's like infinitely more complicated than that.

2:43Yeah, it can always get worse, kind of. That's another way to put it. Yeah. Well, it is true. You know, there was so much excitement about this last year and then even into early this year. And fast forward to now, I have the sort of latest figures in front of me. So New York signed the law that legalized cannabis possession back in March of 2021. So it's been more than two years. And we only have like, I think it's about two dozen legal weed dispensaries, which I think is one of the lowest, if not the lowest number among all the states that have so far legalized marijuana. And meanwhile, we have like more than a thousand unlicensed dealers, which is pretty much the outcome that New York was trying to avoid.

3:31I mean, there's probably more than two dozen within a five block radius from my house in the East Village right now. And so I remember, you know, about a year ago, I think the first one opened up and it was like, there was like a 10 minute walk from me and you had to show some card to buy there. And I don't know. And then they just kept getting more. They're closer and closer. And they're all in all of the bodegas now. And now basically, even though there's supposedly all these issues with payments at the legal one, at the illegal ones, you can buy them by product with credit cards. It really is crazy.

4:03But it stems from two things, right? There was an attempt to rectify sort of past injustices of the war on drugs by giving priority to people who had been negatively impacted by the drug war when marijuana was still straight up illegal in New York state. And then in the meantime, this tension now is like, OK, you have the people who want to take the regulated legal route, and that's complicated. And then the people who just open up a shop and there's been very little enforcement of that. Absolutely. And along the way, you know, again, it's only been five months since we released this series, but there have been all these different legal developments, which we are about to get into, because I'm very pleased to say that we really do have the perfect guests to discuss this.

4:49We're bringing back Cos Marte and Alfredo Anguera. They are the CEO of ConBud and the chief compliance officer of ConBud. You might remember them from the series. They are aiming to open up their own legal weed shops. But of course, it's been far more complicated and taken a lot longer than perhaps they anticipated. So Cos and Alfredo, thank you so much for coming back on All Thoughts. Thank you for having us. Yeah, thank you for welcoming us back. Why don't we start with the basics? You know, I mentioned some of the legal issues that have taken place over the summer. Why don't you just give us the state of affairs as it exists right now in relation to New York's legal weed industry?

5:33Have you ever seen that meme with the dog in the room? It's fine. Yeah, it's fine and everything is on fire. That is literally the state of the industry right now. And I don't mean that in any kind of, you know, funny context. We just got the title of this episode, New York City Cannabis. It's fine and everything is on fire. Yeah, everything is on fire. So there's been, to say it's been a lot of flux is a grand understatement. Last time we were here, we had a lot of faith that the state, because of their vested interest in getting the tax dollars and in their vested interest and kind to trying to fix the social justice and equities, we're really going to get it right and had the opportunity to look to other states and say, well, what is it that they did wrong?

6:23And what is it that they did right? And we can make the perfect model. We have since learned that despite those best efforts, corporate interests will always rule, right? When you're talking about the country's largest cannabis market, and by way of that, the world's largest cannabis market in terms of consumption, we're talking about billions and billions of dollars. And the entities that are MSOs and the entities that are ROs aren't going to sit by the wayside, essentially. And they have been throwing every monkey wrench you can possibly imagine into the gears. So that's currently where we stand.

7:01So you mentioned corporate interests. Can you expand on that a little bit more? Because I remember, again, from speaking to you and lots of other people for the series, New York's ambition was to do it a little bit differently to other states. They wanted to create this sort of vibrant, almost like craft beer market for the weed industry where you would have all these local growers and sellers and the money would kind of be kept circulating within the state. And that seems to maybe be up in the air now or being challenged in some way. Yeah, no, it's very difficult to compete with the corporate greed.

7:43And I think that's the reality is so we were the injunction happened. We were sued. The state was sued because they wanted the veterans to move forward first. That was the veterans argument that they should have been prioritized. And it was just for veterans, not all veterans, but it's this service disabled veterans. And now in the case we were intervened by these corporations, a specific coalition of four multi-state operators that intervened into the case to basically state that we shouldn't be able to move forward. And they're stopping the whole pathway of us opening up because they want to capture as much market share as possible in the beginning.

8:31So that's what we're in. Yeah, if we look at this not as cannabis, right? Let's look at it as any industry, whether it would be alcohol or whether it be a food product, an agricultural product. And you tell Anheuser-Busch that they can't come into the market. You tell Hormel Foods that they can't come into the market. You tell Big Tobacco that they can't come in the market because you plan on doing it craft-wise, you already know you're going to be setting yourself up for a variety of legal challenges, which is where we're at. I think costs touched upon some of the cases which we are currently involved in, which were submitted to the court.

9:05The first case was an Article 78 proceeding that was led by the ROs. An Article 78 proceeding is a proceeding by which that you challenge an agency's authority. You question an agency's authority. If it was like the DMV or something like that and you want to challenge that, you file an Article 78. That was what the ROs had filed initially. Sorry, ROs stands for? Registered organizations. Okay. Yeah, I'm sorry. No, no, no, it's fine. Those are the medical operators. So if I could just step back and clarify a couple quick things. You're opening this store or attempting to open up this location, Conbud.

9:43You were granted the license in part because out of the social justice or social equity efforts of the law cost, you had served time in prison. And so you were, you know, in this attempt to sort of reverse some of the effects of the war on drugs, you were, I guess, granted one of the early licensed licenses to open this. Just real quickly, when was that a very initial grant made? So they gave us our license early April. Okay. And then real quickly, when were you hoping to have the store open? We were looking to open up on Labor Day. Okay. Now, talk specifically about the Article 78 proceedings.

10:23So there's two separate ones. There was one from a veterans group and one from the MSOs. Can you just talk about specifically what these new legal roadblocks are such that we're here in October and the store hasn't opened up? Alfredo. Yeah, so the ROs filed the Article 78 to basically say that they wanted the market opened so that the registered organizations who are these medical entities who are allowed to open up bigger places and more places than other licensees, that they should be allowed to open up immediately. Okay. And they're challenging OCM. So that was an Article 78 that was going through.

11:01That's the Office of Cannabis Management. Yes, Office of Cannabis Management. So they challenged that in the courts and they challenged OCM. Then shortly after that, plaintiffs in the case, and we're involved in the litigation, so I would just like to prefer to just refer to them as plaintiff and not individually. But not to cut you off, Alfredo, originally the law was written for justice involved individuals to be the first ones in the game. And so the medical operators, they were pushed back for three years. Now, when they put this Article 78, the OCM, the Office of Cannabis Management, responded and said, all right, we're going to allow you to move forward by a year now, which means December 30th, they were allowed to open up.

11:48Now, all they had to wait was a couple more months. And due to wanting to capture the market as much as they can, they're pushing everything back. And they're saying, it's not fair. We want to open up now. And the plaintiff's argument, who's involved in the case, the attorneys represent some service-disabled veterans. Their argument is that the MRTA, which is the law that passed cannabis in New York, that the MRTA states that all applicants will be allowed to open at the same time with certain preferences given to subgroups. So their challenge is that the entire card program, which is the conditional adult recreational dispensary licenses that were given to social justice equity individuals, that entire license subcategory is unconstitutional.

12:36And therefore, they should all be pulled. And that's why they requested an injunction and it froze all the card applicants. Got it. Now, that creates a variety of issues, right? One, there are certain applicants who've already received their license and who are already open and operational. Now we're talking about me taking away a property of yours. You have something. And the removal of that is a totally different legal procedure, right? That's like a 14th Amendment kind of thing, right? Now, absent that, there are also other individuals who are within that bucket who maybe haven't opened up and maybe haven't been processing sales yet.

13:16but have an irreparable harm. And what do I mean by that is they detrimentally relied upon the state saying, hey, you're good. You can continue to move forward, enter into these contractual agreements, enter into this lease agreement, enter into this purchasing agreement, enter into the staffing agreement. And then now it's, hey, wait, everybody has to freeze. Well, we have debts of mounting over$5 million or$250 ,000 or whatever it is. Now there's this entire other group of individuals who find themselves behind the eight ball. And it's really weird because that particular group, the social justice impacted individuals, the individuals who were over-policed, over-targeted, and came from these disproportional areas, now begged, borrowed, and steeled, and took all that money that they could from their family, their friend, their 401k, scraped everything together, they'll open up this business, did the application, followed the guidelines, did everything that you told them to do and now they're left holding the bag.

14:14It's almost like insult to injury. And it's like almost all over again, this whole thing is happening and they're being further impacted. And it's like this kind of a second war on drugs that is just going through a legal proceeding as opposed to on the streets.

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16:00Go to public.com slash market and earn an uncapped 1 % bonus when you transfer your portfolio. That's public.com slash market. Paid for by Public Investing. All investing involves the risk of loss, including loss of principal. Brokered services for U.S.-listed registered securities, options, and bonds in a self-directed account are offered by Public Investing, Inc., member FINRA, and SIPC. Crypto trading provided by ZeroHash. Complete disclosures available at public.com slash disclosures. So you have the injunction from the veterans group who think that they should also receive priority. You have the multi-state operators who also want to get into the market.

16:36Can I ask a really simple question, which is how much money have you guys spent so far on a business which isn't yet open? We've spent definitely over a million dollars. Wow. And that was all self-funded and came from our personal businesses. I know that most card applicants don't even have those resources. We are blessed enough that my business partner, Junior, and I own and operate several restaurants. Kos owns and operates a very successful gym business. The money that we put into this particular venture came at the sacrifice of our other businesses. So we've given all that we could to this.

17:19Are you currently paying rent month to month on a location that's just sitting there unused? October 1st rent was just paid. And that was for$38 ,000. So every month, it's$38 ,000 out the door. How tempted are you at this point to just go rent a van and park it in Washington Square Park like everyone else seems to? Yeah, I mean, I contemplated that. And it's like I'd rather sell state work instead of block work. just because I waited for so long. You know, I mean, I've been advocating for legalization of cannabis since 2016 and still waiting and feeling like every milestone we've reached was a success.

18:04I think we celebrated, Alfredo and I, probably about five celebrations every time we went to court or even got a license or even got into the next step. So if our application being graded is submitted and everything. So it's been dreams and nightmares for real. Okay. And how much responsibility do you think the state of New York bears in all of this? Because on the one hand, you know, they made promises saying that this was going to be a social restitution exercise, compensation for the war on drugs and things like that. But on the other hand, you know, if the veterans want to challenge the legality of that, it seems like maybe that's outside of New York's control?

18:50I guess another way of asking this is what could they be doing better? They could have codified cards. So the conditional adult use retail dispensary license could have been codified into law. I actually went up and spoke to legislators months ago about codifying card and they were like, no, the law is fine. We don't need to rectify anything. And so, So come today, in August, the injunction was placed, and now we're like, oh, we should have codified card and this would never happen and written this into law. But it didn't. And here we're at. The state is dealing with a lot right now, right? Where does this fall on their hierarchy of issues?

19:38We have asylum seekers sleeping in the streets. The city is inundated. by hundreds of thousands of individuals looking to get their slice of the American dream. Housing costs are through the roof for certain individuals. You know, we still have a budget that is busted still as a result of COVID. We can, you know, on my way here to the studio, we can see the streets in New York are nowhere near what they used to be four years ago. We have really mounting problems here. So where does this fall on the hierarchy of the state? Sure, card applicants who faced a large hill of social injustice are involved.

20:13Sure, farmers upstate are involved. Sure, there's an illicit market running rampant, but the state, like that meme, has fires all over the house, right? So what could they have done? Yes, GOS is a million percent correct. They could have codified it, and they didn't, so that would have required a special session. And to call a special session to come in to do this is not going to happen, right? So it would have had to be multiple things tied into that bill. Why didn't they codify it in the first place, right? You didn't ask it, but that's a great question. It's because there wasn't an appetite for it initially.

20:49And then they didn't feel like it needed to be because they felt the bill covered it. What do I mean by that? I mean, if Congress passes a tax law and says, okay, this is going to be the corporate tax rate, they don't go to the IRS and say, okay, bring us all the tax codes. We're going to go over this line by line with you. Congress gives kind of this broad mandate to these agencies the same way it would be to the EPA or to a variety of other agencies. They say, this is the goal we want you to get to. How you decide to get to that goal is upon the agency's discretion. We don't need to know the parts per milliliter of something in water that you find safe, or we don't need to know what the exact deductions are.

21:29We're not going to vote on every single item. We're just going to give you the mandate. And the mandate was given to the Office of Cannabis Management to fulfill this social justice equity component. And how the Office of Cannabis Management found the best way to do that was through this card program. So, you know, let me ask you the other element, you're paying all this money, you're dealing with these legal headaches that you didn't anticipate. The other thing that we were talking about a lot when we had our conversation in April was the existence of all these sort of gray market, non-licensed operators.

22:05And we were sort of premised on this idea that maybe there would be a crackdown. Not only does there not seem to have been a crackdown, it seems like there are way more than there were in April and nicer ones. So it's not just - Wait, wait, wait. A lot of the trucks are gone. You have to admit. But there are more stores, it feels like, more like brick and mortar shops. Yeah, I see fewer trucks. I see way more brick and mortar shops. I see nice brick and mortar shops. So like actually ones that were clearly not just sort of a bodega type environment, but like something that really looks like an Apple store or a Nike store.

22:38All these entities somehow allow you to pay with a credit card or some sort. What is your confidence at this point that whether it's the city or the state has some sort of way to, I guess, make sure that people who are not going down the licensed route won't be your competitors. I think we need to educate the public, you know, more, more forms like this, more forms that, you know, the media puts out in terms of what is a legal store. There is a lot of issues with these nice stores being popped up everywhere. And you walk in and you're like, oh, wow, these people got their license. It's beautiful in here.

23:18So the general public doesn't even know, you know, and I think the more we put out there and the more ads, the more marketing that the state could do, you know, we could educate the audience. But right now, it's going to be difficult. You know, I have in a thousand foot radius, there's, you know, probably 50 to 60 shops around me. And there's not supposed to be one, we're supposed to be the only one, you know, and so it's, it's going to be difficult. But I think I, we planted ourselves in the in the right neighborhood. I'm born and raised in the Lower East Side and I'm a local business owner there.

23:57And a lot, a lot of people know me. A lot of people are anticipating our opening. We've been able to really educate it through word of mouth, which the state hasn't really done successfully, but we'll see. I'd rather spend a million dollars on a legal store than an illegal store and then be shut down and have that, you know, up in the air. I remember talking to someone from the state and they were making a similar argument. Like if you build the legal weed bodega, they will come like the public will eventually have a preference for legal shops. But I guess devil's advocate question here, the longer this uncertainty goes on and the longer that you have these illegal or gray market stores, does do people get used to that option?

24:44because like I can tell you up until very recently, there was a truck parked relatively close to me and it was fairly easy to go there. And they had stuff from California that theoretically I might enjoy. If my dad is listening to this, I never went to the weed truck. But you know, like I got used to it being there. It had the same offerings every day. It seemed pretty professional. It took credit cards. That was a pretty good option. But we got to re-educate on what you're using. You know, you don't know what this is. They found a whole bunch of metals. They found a whole bunch of, you know, insane substances in this substance that's supposed to be organic and clean and safe.

25:26You don't know what you're consuming. It's like, I don't know, buying an FDA churro in the subway train. You know, like you could do it, but you might you might have to you might have the runs later. Right. You know, so you just never know. And now with this whole fentanyl scare, I mean, that's a bigger that's a bigger like, you know, solution to like educate the audience. Like, yeah, we found fentanyl in weed. You know, there's been a whole bunch of stories on that. Goss is right. Education is is crucial, but that puts the onus on the consumer. and New York City is, if the population hasn't decreased post-COVID, is about 8 million people in the greater New York region.

26:12That puts the onus on 8 million different people and that's a lot to ask of them. And while Koss is right, you eat the churro from the subway station, you may get the runs, but they're there for a reason because people purchase it. They're good too. Yeah, the people are buying it. It's worth it. Yeah, it's worth the runs later. Well, people are becoming creatures of habit to your point, right? And if I see it there every day and it may be illicit, I'm still going to go in. It puts the onus on you where you go into a bar and if a bar is open and you walk in and you order a drink, you automatically assume that they are licensed to have a liquor license.

26:47You don't say, hey, where's your liquor license number? Are you licensed by the state of New York? Because you make that assumption because we've come accustomed to that. So I think the next prong besides educating the consumer is enforcement. If I couldn't open up next to your studio and just open up next to McDonald's without a license and start selling hamburgers or start selling wine or start selling anything without somebody eventually coming and saying, hey, we got to shut you down. This doesn't meet health department requirements. This doesn't meet state liquor authority requirements. It doesn't meet construction requirements.

27:19This doesn't meet requirements that you're basically trying to market to children. You don't meet any of these things. We have to close you down. And in New York City, that has some of the most stringent building codes and has some of the most stringent laws in relation to opening up businesses, enforcement is key. And these places that are illicit, that are selling products that aren't tested, that may have a variety of heavy metals and fentanyl and a variety of other things, enforcement is key. Education and enforcement.