A ‘Nightmare’ ‘Land Grab’ Come to Life: Pot’s Consolidation Problem & How to Fix It

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Steve White is CEO of Arizona-based Harvest Health, a cannabis company with a growing presence in a growing number of states. He also recognizes that the American marijuana marketplace is rapidly becoming an oligopoly, where a few very massive companies wield near-total control over. And so he’s playing the game.

In April, Harvest Health announced a pending deal to buy out Pennsylvania-based CannaPharmacy, which also holds marijuana business licenses in three other states. If the deal is finalized and isn’t kiboshed by state regulators, Harvest would have a stake of some kind in the marijuana business in 17 U.S. states — that is, Harvest would be one of the biggest cannabis companies in the country, if not the biggest.

Pennsylvania is a battleground state for the cannabis industry. Nearly every big player has a presence. California-based MedMen, which last year announced a buyout of Illinois-based PharmaCann— at the time the largest-ever cannabis business transaction — has some licenses. So does Canada-based Tilt Holdings. (Meanwhile, PharmaCann, whose merger with MedMen is not yet complete, continues to build out licensed grow sites.)

White’s company is not as well known as MedMen or Acreage Holdings— the company targeted for a Silicon Valley-style buyout and cashout by Canopy Growth — or any of the publicly-traded Canadian giants with eye-popping valuations.

But White appears to fully recognize what those companies (and everyone else rushing into the marijuana marketplace in states where restrictive licensing limits the number of entrants into the market) are doing to get there.

“This is a land grab,” White said during an April investor call, as the Philadelphia Inquirer reported this week, “and there are a discrete number of prime license opportunities.”

And so this is why he’s doing the same — grow, or die — even if it appears to flout the law.

This is, after all, what companies in other industries do in America.

Harvest runs two grows in Pennsylvania “owned” by someone else via what’s called a “management service agreement” in addition to the CannaPharmacy permit. Under such an agreement, the “manager” runs the site and grabs up to 90% of the revenue. All the “owner” does is hold the permit.

As the Inquirer noted, regulators flagged Harvest’s Pennsylvania dealings, though not from the outset.

Harvest told investors that the sale gave the company control of seven Pennsylvania cannabis permits, and thus the right to open 21 medical-marijuana dispensaries — two more than the state allows any one company.

The company apparently formed separate but similarly named LLCs to apply for various licenses. With this, in addition to the purchases and the management agreements, Harvest grew to about 14% of the total market in Pennsylvania. This apparently escaped regulators’ attention until the media got wise.

As a result, nobody aside from shareholders is happy. (And shareholders may not be pleased, either; at least one hedge fund with a stake in Canopy has publicly said the company’s purchase of Acreage is a value-killer.)

This is “a nightmare scenario come to life for patients,” NORML organizer Chris Goldstein told the newspaper, lamenting a reality in which a few very well capitalized companies control the market, thus dictating product availability as well as prices —absolute power “enjoyed” by the pharmaceutical industry’s worst players.

This doesn’t make White weed’s answer to Martin Shkreli. But it is very much an indictment of the system lawmakers set up.

In Pennsylvania, there’s a limit on how many licenses to grow, process, and sell cannabis the state will issue. Not every state has such artificial caps on the market. Oregon does not, neither does California. That is is partially why there’s so much more cannabis than the market can move in both states, but it’s also why licenses in those states are not a speculator’s dream scenario, as they are in Pennsylvania and other states where licensing is limited.

According to the Inquirer, companies who won a permit on Pennsylvania spent as much as $1 million on their applications.

Small operators might have a chance in such an atmosphere if they could obtain business loans from banks. This is cannabis, and so they can’t — and so the main source for startup capital is… big companies from another state or country, like Canopy or MedMen.

Other states like Massachusetts are also seeing “corporate shenanigans,” the newspaper reported. And in Illinois, where lawmakers just legalized cannabis but also limited the number of medical-marijuana permits. And in Ohio and Florida.

You get the idea. What’s the fix? Easy: regulation. Regulation is what limited the number of permits and regulation is what would disrupt the market again by un-limiting them, or by limiting the number of permits a company can hold rather than the total number of permits. That would not be keeping in step with most trends in American commerce, but that would be closer to marijuana policy-reform’s promise — if, of course, it was ever earnest in the first place.

TELL US, are you afraid of a big business takeover of the cannabis industry?