For Pot, Inc., the Rush Begins

Greener Culture November 1, 2014 0
For Pot, Inc., the Rush Begins

More than a year before the first legal dose of marijuana will be dispensed in New York, a group of entrepreneurs gathered at the Marriott Marquis hotel in Times Square in late October to discuss strategy with an influential state lawmaker. It was the weekly meet-up of the Cannabis and Hemp Association, which formed in May to get a jump on future business.

The mood among the 18 people at the table was one of excitement. Oleg Maryasis, 30, a former financial adviser, said he had just met with a group of investors who were eager to sink tens of millions of dollars into the New York cannabis trade.

The group’s organizer, Scott Giannotti, a bald, heavyset 35-year-old from Long Island whose résumé includes selling cellphones and rapping, and who now sells LED grow lights from China, questioned the meeting’s special guest, State Senator Diane J. Savino. Ms. Savino, a Democrat who represents parts of Brooklyn and Staten Island, was a sponsor of the medical marijuana bill that New York passed last summer, 18 years after it was first proposed; her efforts led Elle magazine to name her one of its “13 most potent women in the pot industry now.”

“Senator,” Mr. Giannotti said, “what can we do to help you out?”

Ms. Savino offered some cautionary words. The State Health Department, she said, had not yet written guidelines for the medical marijuana program, and the licenses available for companies keen to participate would be few and costly. And, she added, legalized recreational use, as proposed by State Senator Liz Krueger, a Manhattan Democrat, was unlikely any time soon.

Still, Ms. Savino called the legislation a turning point, for the state and the industry. “We can probably take in a couple hundred million dollars a year, minimally,” she said, referring to potential tax revenue. “You’re going to have patients who are acclimated to medical marijuana, doctors who recognize it, communities who realize that if they have a dispensary it’s not the end of the world. Then you’re going to have more demand. In a state this size, the potential is huge.”

When Gov. Andrew M. Cuomo signed the Compassionate Care Act in July, it gave the Health Department 18 months to come up with regulations and choose up to five companies to grow and dispense medical marijuana.

Now, for the state’s would-be growers, private equity investors, labor unions, lawyers, lobbyists, consultants, branding firms, suits, stoners and hucksters, the rush is on.

This is the moment when old-guard legalizers meet a new breed of capitalist.

In October, 900 people flocked to a hotel in Midtown Manhattan for a $900-a-head, three-day East Coast Cannabis Business Expo, Educational Conference and Regulatory Summit, the first of its kind in New York. The event’s organizers were two veterans of the tanning salon business; the crowd ranged from venture capitalists to chocolatiers to people currently growing illegally, with a smattering of doctors and representatives of at least one nursing home conglomerate. There were vendors of supply-chain tracking software, security services and malpractice insurance, as well as a manufacturer of precision-grade scales from the diamond district. Not a single bong in the house.

“This is sexy, this is drugs,” one speaker, Adam Bierman, a managing partner of MedMen, a California-based consulting company, told a crowded conference room. “This is something there’s already demand for. This is selling pot.”

Under New York’s law, licensed companies will grow and sell their own product, from “seed to sale.” Doctors can recommend, but not prescribe, it to treat a limited set of conditions, including cancer, multiple sclerosis and AIDS. Though federal law still prohibits the sale and possession of marijuana, the Justice Department advised its prosecutors in 2013 that if state laws to legalize the substance properly limited its spread, and if companies complied with state laws, they should not be prosecuted.

Because banks and credit-card companies are federally regulated, the purchase and sale of cannabis has so far been a cash business. New York’s health commissioner will set the price of the drug, probably based on the street value.

New York’s law is among the most restrictive to be passed by the 23 states that have legalized marijuana use in some form. The 20 dispensaries set to open in a state of nearly 20 million people are likely to be high-volume centers, located away from schools or houses of worship, where patients or caregivers with state identification cards can get up to a month’s supply of non-smokable product.

The emerging industry has drawn people from unlikely precincts. Patrick McCarthy, a lobbyist who spent the last three years pushing legalization for cannabis companies, was once an aide to Gov. George E. Pataki and the executive director of the New York Republican State Committee. Dean Petkanas, who plans to seek a state license, was a chief financial officer at Stratton Oakmont, the penny-stock boiler room operation depicted in “The Wolf of Wall Street”; Mr. Petkanas now runs a “phyto-medical company” called KannaLife Sciences that hopes to get F.D.A. approval of a cannabis-based treatment for two types of brain encephalopathy. At the conference, he wore a pinstripe three-piece suit and spoke in torrents.

“I did a lot of pharmaceutical work on Wall Street when I was in boutique investment banking,” he said, skipping over his time at Stratton Oakmont. “I spent a lot of time in merchant banking. I really dug in hard.” Shares of KannaLife’s parent company, Medical Marijuana Inc., have fallen by more than half since earlier this year.

The competition to acquire the five available licenses will be fierce and expensive. Application costs alone could run to several hundred thousand dollars; start-up costs could top $20 million. “I would suggest that anyone who wants to be serious be prepared to spend at least a million dollars” on an application, said Evan Nison, 24, a lobbyist and consultant for cannabis companies and a founder of the New York Cannabis Alliance, which advocates changing the state’s marijuana laws. Richard N. Gottfried, a Democratic state assemblyman from Manhattan who led the long fight to legalize medical marijuana, cited an unwritten formula of government regulation. “When you make a statute very restrictive — and the governor did that in the last hours — you raise the stakes and create a need for more lawyers and consultants,” he said.

Out-of-state firms able to show they have run successful cannabis operations elsewhere will have an edge in the licensing process. But any hope for quick profits will be limited by the small number of conditions for which New York is allowing the drug’s use.

Still, the arrival of medical marijuana opens the door to a potentially huge market, said Derek Peterson, 40, a former senior vice president at Morgan Stanley Smith Barney. Mr. Peterson now heads Terra Tech, a publicly traded company that already operates a five-acre hydroponic growing facility in New Jersey turning out basil, kale and other produce while awaiting the opening of more local dispensaries, which Gov. Chris Christie opposes.

“We don’t love the way the New York policy works, but over time the legislation can change,” Mr. Peterson said. “Even if you can’t make a significant profit now, you can invest in it for the future.” He compared New York to Nevada, where Terra Tech had already spent “hundreds of thousands of dollars” to apply for a license and hired Senator Harry Reid’s son Rory as a lobbyist. The cost of applying in New York, he said, might run in the high six figures. Cannabis industry cash has begun to flow into New York. Ms. Savino said her campaign donations from out-of-state growers were “around $10,000 or $15,000 — not much.”

The amount of money at stake has attracted investors from across the spectrum; from Wall Street to High Times magazine, the 40-year-old counterculture survivor that earlier this year announced that it planned to create a private equity High Times Growth Fund to invest in the cannabis businesses.

Unions have also claimed a share. In New York, all licensees will be union shops, a result of two years of lobbying by the United Food and Commercial Workers International Union, which has also been successful in other states. Cannabis is a rare growth sector for organized labor. “We saw around the country that these jobs had the potential to be real middle-class jobs if the workers were organized,” said Ed Draves, a lobbyist with Bolton St. Johns who led the push for the union. “Here in New York, you saw the home health care industry develop, where a lot of the workers were health care workers who couldn’t attain health care or pension benefits. We didn’t want to see that as we developed this industry.”

For investors, the business strikes a familiar chord, with the potential for huge growth and high risk. “There are a lot of parallels that I draw to what happened in the technology space in the late ’90s and early 2000s,” said Al Foreman, a former managing director of J.P. Morgan’s growth equity fund Highbridge Principal Strategies. Since leaving Wall Street last December, Mr. Foreman helped start a private equity group called Tuatara Capital that plans to invest in cannabis industries across the Americas. “For lack of another term,” Mr. Foreman said, “it’s a new frontier.”

Tuatara has not yet started raising money, and Mr. Foreman declined to say how much it hopes to amass. But he said there was already interest among investors. And, he added, the nascent cannabis industry is ahead of where the technology sector was 20 years ago.

Because people have been buying marijuana for years, he said, “it’s a more easily identifiable consumer base than what you might have seen in the early days of the Internet, when people were still trying to figure out how to get paying customers. We’re talking about an industry with real assets and markets where there is existing demand.”

Mr. Foreman noted that the cultural gap between Wall Street and the purveyors of products like Ghost Train Haze and Holy Grail Kush is not what it once was. Money changes everything. “When I took a trip to Denver to walk the halls and the plants and the factories, you realize that these are not kids in the basement,” he said. “The stereotype is shattered by the level of professionalism. Some of these companies will grow into really large companies.”

High Times hopes to grow with them, said Michael Kennedy, its controlling owner. Mr. Kennedy, a criminal lawyer who at the magazine’s inception represented its founder in an investigation into smuggling charges, said High Times was close to launching its private equity fund with two partners — so close that he would not discuss previously disclosed details for fear of violating government rules against soliciting business ahead of a launch. An interview with Mr. Kennedy published by Bloomberg Businessweek in June cited a target of $300 million for the fund.

On a recent day, Malcolm MacKinnon, the magazine’s silver-haired editor, presided over a staff of more than two dozen, with ages ranging from their 20s to their 60s, as they worked quietly on the February issue (the cover story: a showdown between cannabis sativa and cannabis indicia). Professionally, Mr. MacKinnon uses the pseudonym Dan Skye, an artifact from less cannabis-friendly times, when he was raising children and coaching Little League.

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With its run-of-the-mill cubicles, the office felt more like the law firm that shares space with the magazine than the partying High Times suggested by its pages. Asked whether the staff smoked in the office, Mr. MacKinnon replied with a note of sarcasm, “Gee, we wouldn’t do that because it’s illegal.”

The private equity fund continues the magazine’s efforts to merge with the mainstream. These days, High Times organizes a sprawling trade show and smoke-off called the Cannabis Cup. Once limited to a single annual event in Amsterdam, where competitors vied to provide the most potent herb, the Cannabis Cup is now a domestic affair that draws tens of thousands of attendees to multiple locations. Versions were held in five cities in the United States this year, with speakers and vendors of everything a contemporary cannabis consumer might fancy, except, in some places, cannabis.

High Times is now a legacy business, with four decades of experience in a field many are just entering, Mr. MacKinnon said.

“Everybody wants to talk to us now.”

That group may include people like Ari Hoffnung, 40, who hopes to get one of the New York licenses. He named his fledgling company Fiorello Pharmaceuticals Inc., in tribute to New York mayor Fiorello H. LaGuardia, who opposed the Marihuana Tax Act of 1937, when the substance was still legal. For now, Mr. Hoffnung has formed an investor group, while seeking to forge partnerships with companies that have grown and dispensed marijuana in other states.

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Mr. Hoffnung is a former managing director at Bear Stearns, and was a deputy comptroller when John C. Liu served as the city comptroller. He said he became interested in medical marijuana after seeing “folks in my family with A.L.S. and other conditions where cannabis has been proven helpful to relieve pain and suffering.”

But he had another interest in legal cannabis. While working for Mr. Liu, he took part in a study that asked how many city residents might benefit from the legalization of marijuana, and how much money the city might reap. The numbers were big: 100,000 patients for medical cannabis, and tax revenue of $400 million if recreational use were legalized.

The figures, Mr. Hoffnung acknowledged, will not be realized until well into the future, if ever. But the current regulatory conditions, with each state setting its own laws and no distribution across state lines, might be an advantage for smaller companies like his.

“No major companies want to create a business model and have to replicate it in 23 states,” he said. “That doesn’t allow economies of scale.”

That could change, especially as businesses press state and federal legislators harder. In New York, the public is already on board, said Mr. McCarthy, the lobbyist, citing polls that show support for medical marijuana at 83 percent in the state, up from just 58 percent a few years ago. The support, he said, is widespread. “There’s no drop off from a senior in Buffalo to an independent soccer mom in Suffolk.”

In the meantime, at the Cannabis and Hemp Association meeting, the aspiring moguls had a regulatory request for Ms. Savino. They wanted more regulation, not less. Specifically, Mr. Giannotti worried about over-the-counter remedies being sold as non-psychoactive hemp oil or CBD oil (CBD, or cannabidiol, is one of the active ingredients in cannabis). Such products are largely unregulated and sell for as much as hundreds of dollars for a small amount. The attendees worried that such companies might taint the industry. Could the state crack down on them?

Ms. Savino pulled a bottle of something called Green Cures CBD Oil from her purse, eying it skeptically. “People believe what they want to believe,” she said. “It’s hard to protect people from what they think will help.”

Mr. Maryasis said he hoped the over-the-counter products, which were plentiful at the recent trade show, were not a sign of things to come, especially before regulated medical marijuana becomes available.

“This sets a bad standard for the industry,” he said. “We want to lead with genuineness, and not just opportunism.”

He added: “If we do this right, we can be an example to the nation. We don’t have to be the first ones to legalize it. We just have to do it right.”

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