The Deeper Dig: Can cannabis giants be contained?

Last weekend, VTDigger hosted a live interview with presidential candidate John Hickenlooper.

Jen Kimmich: Governor Hickenlooper. It's a pleasure to be here with you tonight.

Hickenlooper: You betcha.

When he was governor of Colorado, Hickenlooper led the state to establish the first retail market for recreational marijuana in the country. With Vermont lawmakers closer than ever to legalizing a retail system here, we wanted to find out what lessons we could learn from the state that led the charge. Our moderator, Jen Kimmich from The Alchemist brewery, highlighted one concern that's come up a lot.

Kimmich: Many Vermonters, including myself, want to see licensing preference given to existing small farmers in our state or young entrepreneurs. What things should we think about here in Vermont to keep out big business from coming into our state?

Hickenlooper: Well, certainly that's a good start. You know, one of the things that we made sure they couldn't do is we didn't let them vertically integrate when they came right out of the chute, just because that is another thing that will attract the big businesses.

Hickenlooper said it's one thing to prioritize small businesses, but it's more difficult to cap large ones.

Hickenlooper: Big business somehow comes in, and we have this sense that everybody deserves the right to sell their business if they want to. And people feel very strongly, I think even in Vermont, you'll find out when you try to regulate the size of these businesses, that in and of itself limits someone's ability to sell it. And you're gonna have to negotiate that yourself. Because it is difficult to navigate how to protect and motivate small businesses.

Craft breweries are the perfect case. Right? I think we can provide incentives. We have a temporary reduction in the amount of taxes that small brewers pay compared to the giant brewers. I'm all for that. I think those kinds of incentives for small businesses that are actually creating jobs make perfect sense.

At times, Colorado has struggled to keep large companies from dominating its marijuana industry. Other states with dispensaries have too, like Maryland, and California, and the most recent state to open recreational dispensaries, Massachusetts.

Beth Healy: It's kind of a two pronged thing here in Massachusetts. When you go back to 2012, when we first started doing medical marijuana here, there was this weird system that got put into place where they set up nonprofits. There was kind of this almost strange, idealistic notion that people would not try to make money at the medical marijuana companies. And so all sorts of strange structures started happening then that people have exploited and, of course, many people are trying to make money at these businesses now.

This is Beth Healy. She's a reporter with The Boston Globe Spotlight team, which has been investigating the corporate structures behind the dispensary system in Massachusetts.

Healy: When it came to recreational, which got passed in Massachusetts in 2016, the lawmakers specifically set out to try to make it so that no giant companies could come in here and dominate the field, so they picked the number three, and said no company could have more than three medical or three recreational or three combined. But what we're finding is that companies are finding ways around that.

This is maybe kind of an obvious question, but why did lawmakers do that? Why did they think that these big companies would threaten the integrity of the whole system?

Healy: A lot of them have likened it to the tobacco industry, and you know, this is also — Massachusetts is a place with a lot of sophisticated money people and investment firms, and when there's an $80 billion opportunity sitting out there, Wall Street, and private equity, and folks in those businesses are generally going to find a way to make a profit at it.

When did your team start to notice that this process wasn't really playing out as those policymakers intended?

Healy: So one of our colleagues, Dan Adams, covers the marijuana world pretty routinely here. He's the beat reporter, good reporter. And he came to us with this idea from some of his reporting and tips he'd gotten that there are some large companies here in Massachusetts trying to break into the business. And some of them are breaking and bending rules to try to control more stores than are legally allowed here. What we started to piece together fairly rapidly was these networks of companies, in particular, two companies, Sea Hunter and Acreage Holdings, were putting together so that they could exercise financial control over many more than three stores.

How were they going about that?

Healy: So they're going about it in a number of ways. One is exploiting that nonprofit rule I was telling you about. It makes it easier to hide who's in control of the company and where the money's going. Another is they're buying or setting up relationships with other companies, a series of companies, and using management contracts and loans that they have with those business people.

These management contracts we found have some really tough traits. For instance, they'll loan about a million dollars to an entrepreneur, at an interest rate as high as 18 percent. They'll require them to buy all their product from them. And they have veto power if the entrepreneur wants to sell their company. So while these big companies are saying that they don't control these entities, they're exercising an extraordinary amount of influence over them.

So it's kind of like they seem to be going against the spirit of the law, if not necessarily the letter of it?

Healy: And it may be both. Absolutely it appears to be against the spirit of the law, and we think there's a good chance it's actually breaking the law as well. And the Globe, we actually reported a follow-up, and the Cannabis Control Commission, which is our state regulator for marijuana, now claims to be investigating.

I'm guessing the motivation for these companies is just money — they want to get as large as possible to control as much of that market as possible. Is that fair to say?

Healy: That would certainly seem to be what they tell investors. Now of course in this world people also have a lot of stories to tell about, you know, the healing qualities of marijuana and various things that can help people with chronic illness. But in addition, when you read the investor pitches that they're showing folks when they're raising millions and millions of dollars, they talk about, you know, controlling large numbers of licenses.

So they're being pretty brazen about this. They might be breaking the law, but they are putting that information out there for people to see.

Healy: It's pretty brazen when you look at the investor pitches. Now, when we talk to these companies, they back away from it a bit. When they talk to us, for instance the chief executive of Sea Hunter, Alex Coleman, said to us, well, you know, in the early days of raising money, you don't pay a lot of attention to the nuance. But regulators would tell you that that's actually not the way it works. When you're becoming a public company, you do actually have to pay attention to nuance as a chief executive.

What are regulators actually doing about this? Who does this fall to in Massachusetts to manage what happens next with these companies?

Healy: So it's a little confusing. The Department of Public Health is the one that was in control of medical marijuana from the start. But they handed that over at the beginning of this year, to our new regulator, the Cannabis Control Commission, and somewhere in that hand off, the oversight of these companies that may be breaking the rules seems to have fallen a bit by the wayside. But from here, certainly it's on the shoulders of the Cannabis Control Commission to look into this, understand it, and take action if these folks are breaking the law.

Does it seem like that's something they're likely to do at this point? Like, does it seem like these companies that are applying for even more licenses are going to be curbed in some way?

Healy: You know, it's a good question. It does feel like a long process. I think they probably are coming under political pressure to look harder at this. There are lawmakers who care about this.

And you know, one thing we really saw when we went out to the small towns and cities to kind of sit through zoning board and planning board meetings where a lot of the local decisions get made on these things, it's very tough if you are the zoning board chairman in Greenfield or Athol, or the these various small towns and Massachusetts to understand the corporate entanglement that's sitting before you at that hearing table.

Sure.

Healy: And it's not really their job. It's the state regulators job to sort that out.

And you had actually reported that things like, if a company was changing its name or operating under a different name, that those localities were supposed to be informed of it and they just weren't.

Healy: Right. I mean, in Worcester, we talked to the deputy solicitor there, she found out about Acreage acquiring a company when she read about it in the paper.

Wow.

Healy: Definitely not supposed to work that way. They're supposed to acknowledge it to the locals and to the state. And in this situation, they were trying to pass it off as a name change instead of an acquisition.

And is there any penalty for that sort of thing? I mean, if they've clearly violated some portion of the law, you know, is that company — are there any repercussions for them?

Healy: I think it's an outstanding question currently. For instance, that particular company, called The Botanist, owned by Acreage, is working out their host community agreement with Worcester. And I think Worcester just wants to kind of work it out and because the store is open, and technically you can't be shouldn't be open without a valid host agreement. But I think going forward, we're really going to see what the enforcement teeth are of the state commission.

Lawmakers in Vermont have set out with similar goals in limiting the involvement of out of state cannabis companies. Senator Dick Sears is the lead sponsor of one of two tax and regulate bills being considered. And he says this proposal takes a “uniquely Vermont approach.”

Sears: I think we're we're hopeful that the regulations and social justice portion of the bill will result in something similar to the craft brewery industry in Vermont.

Sears' bill would prohibit those local host agreements Beth was talking about, which can force businesses to pay even more to cities and towns. And the bill has guidelines about who gets priority when they apply for a license.

Sears: There's a priority for small local producers to ensure a diverse marketplace that mandates one of the control board members have a background in social justice priorities given the license applicants that provide good wages, benefits and environmental and clean energy programs. Nonviolent drug offenses will not automatically disqualify applicants, regulatory requirements unique to small growers and priority for applicants that are Vermont residents.

Beth told me Massachusetts lawmakers built similar priorities into their system. But there are still barriers to smaller businesses taking advantage of them.

Healy: It takes at least a half a million dollars, most people say really a million or more to get one of these going. You can't get bank loans, because marijuana is still federally illegal, right? The banks aren't engaging with loans. So they're kind of thrown into the arms of these large private equity and investment players. These folks have the money, they're also very savvy, you know, if you've been in the private equity business for some of these folks, you know, extending money and contracts and terms, and you know, trying to help people get their business going with a lot of rules, is, it's pretty easy for them.

So it's just sort of a built-in barrier to somebody who's maybe operating on more of a small business level.

Healy: That's right.

I'm curious — if this seems to be sort of an industry-wide issue, how do you think a state like Vermont that's still trying to write these rules could set up a fair system?

Healy: Well, it does seem like enforcement is a big deal, and disclosure. So I think as long as when companies come to apply to open, if whatever state you're in, the officials are asking for all the relevant documents, you know, I think the lesson learned here is it's not enough to just say, my name is Joe Smith, no, I don't have any money from anybody else. You know, it has to be much more significant disclosure. And I'm obviously shortening for you a bit what the application is here. But in particular, they need to ask for the management contract. The management contract is the place where they disclose these big loans and where you see what the actual financial control is.

Because that control could be connected to a much broader network or a much larger entity that maybe isn't on the paperwork?

Healy: Exactly. The key is you want to know who you're actually dealing with.

What about enforcement? What do you think could be done differently?

Healy: So to be fair, this is all new for the states. Right? And they aren't getting any help federally. And I do think one of the biggest worries they have is about safety. You know, all of a sudden, you've said it's okay for people to come and line up stores and buy these edibles. and you know, these various things. So, first and foremost, they want to make sure that people are safe. And I think a lot of their resources are going to that. So perhaps part of the key is making sure that they have at least some number of people who can focus on the ownership, the money, who's really controlling this. I think one of the really interesting questions too, is, you know, I'd love to ask Massachusetts voters this, when you voted to legalize recreational marijuana, what did you envision? Did you envision some small number of dealers or various people going into this business? Or did you actually envision a giant new corporate opportunity with deep pockets opening hundreds of stores around the state? Because it's profitable, and they want to sell them someday.

Do you have a guess at what their answers will be?

Healy: Well, you know, like most places, it's a split state here. And there's still some communities that don't allow the sale of recreational, and they're still working through it. I think people might be surprised to find out how much these large, deep-pocketed companies are going to control the business. But it's also pretty natural, I guess, when, you know, it's capitalism.

That's one thing that's I think, very different in how it's being approached here in Vermont, is that we don't do voter referenda here. And so you know, our legalization law that went into place last year came through the Legislature, and if we set up a retail system, it's entirely through the work of the Legislature as well. And I'm kind of just curious how the process played out leading up to that voter referendum in Mass. What were those conversations like?

Healy: Well, it was pretty contentious. I mean, going back to medical, which really opened the door to all of it, right? So really go back to the 2012 period. When that ballot question was being developed, we spoke to one of the authors, Jack Corrigan, former staffer for Michael Dukakis, and he was one of the people who helped write that. So back in those days, one of the reasons, for instance, they made it nonprofit, is because you had to do something to mollify the feds so that they wouldn't prosecute these folks. In addition, they thought by calling it nonprofit, they would make voters and lawmakers happier, there was something easier to swallow about suddenly allowing a formerly illegal drug to be sold at the retail level, if they didn't think people were going to make money on it.

So frankly, we went into the ballot question with a few kind of flawed notions about how this whole thing would play out. And then by the time it came around to recreational, people were starting to catch on, maybe, to what was going on. And this is when you heard lawmakers start to say, well it's really important that we don't let this become the next tobacco industry, that we don't let giant out of state investors come in and make money when we really think that people of color and small businesses should have a chance to not just work in these businesses, but have ownership in them.

And that's kind of what brought you to the system that is being launched right now.

Healy: That's right. I think a lot of people think there's an element of fairness and social equity that was supposed to be baked into this, and the commission is definitely making efforts and making public comments saying that they're very dedicated to this, and they really want to work on it, but very few have gotten through the process, it's still very tough to get small businesses up and running, at least so far here in Massachusetts.

For us as reporters, or even for those who are just kind of concerned Vermonters, do you have any tips for — as things progress here, what should we be on the lookout for? You know, how do we go about figuring out what some of these structures are and who's behind them?

Healy: So absolutely, you can look in all of your various public databases, whether it's your secretary of state's office, you know, any records you can get your hands on to learn about these folks. But in addition, I got to give a plug to my colleague, Todd Wallack, who's incredible with public records. And it was Todd's relentless pushing of the CCC and the DPH to give us records that we believe should be public, many of which they have withheld, that ultimately forced them to acknowledge that they are investigating this. So I, you know, cannot overstate the importance of pressing for public records for the public good.

I am curious, what happens next? You said that, in this follow up, you're seeing a little bit more information about how those regulators are investigating. What happens now?

Healy: So we have a couple more stories coming. So keep an eye out for 'em. And we're going to be looking at the situation from a couple other angles. And we'll have some additional follow-ups as well. So more to come.

Well, thanks so much Beth for your time. I really appreciate it.

Healy: Thanks a lot, Mike.