Building a bridge from legacy to legal cannabis market

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Six years after the legal adult use cannabis market opened in California, most consumers continue to buy their goods underground. Politico reported in October that sales on the illicit, or legacy, market in California totaled approximately $8 billion–twice the amount from the legal market. To allow the legal market to thrive in New Jersey, prominent cannabis attorney Scheril Murray Powell said that it’s “essential that legacy operators are welcomed into the legal market so that we can build a robust cannabis industry and avoid the disastrous dual market system seen in other states.”

Powell is chief operating officer of the nonprofit JUSTÜS Foundation, which aims to facilitate the entry of legacy operators into the legal cannabis market. The organization was founded in October 2021 by Steve DeAngelo, an industry pioneer and founder of the Last Prisoner Project, in response to two trends: the exclusion of legacy cannabis operators from the legal industry, and the persistence of a dual legacy-legal market following legalization.

To build a bridge from the legacy to legal market, she said that the New Jersey Cannabis Regulatory Commission should proactively try to engage legacy operators, defined by her organization and the Unified Legacy Operators Counsel as “someone who was actively commercializing cannabis for at least five years during cannabis prohibition,” and initiate policies regarding amnesty and priority.

“In order to build a robust market, you need to have amnesty for those who created the blueprint for commercializing cannabis, meaning when they’re forthcoming with their experience they will not be penalized by their disclosure. Then you’ll have more people willing to contribute and participate in the legal cannabis industry,” she said.

Prioritizing legacy operators in a legal market will help avoid a dual market by pipelining both legacy operators and consumers into the legal industry.

While no states have included legacy market amnesty in their regulatory framework, regulators are discussing its inclusion in some places, including Massachusetts. Internationally, Powell worked with St. Vincent and the Grenadines on their legal cannabis frameworks, and those bills had amnesty provisions in them. Antigua also injected amnesty into its provisions, as well as prioritization for the Rastafarian community.

“There are models that exist, and I think it would be very forward thinking and progressive for New Jersey. There should be a sense of urgency because of this northeast corridor being an epicenter of cannabis,” she said.

Larger players in the legal industry can also build the bridge for legacy operators to join their ranks, Powell said, by using their voice to ask the Legislature and CRC to recognize the importance of legacy inclusion in industry statutes and regulations. Powell said they can also volunteer with the JUSTÜS Foundation as speakers or consultants or donate to the foundation.

There are hurdles from getting the funds to those who don’t already have it, who coincidentally are the people that social equity programs are trying to bring into the cannabis industry. Most banks don’t lend money to cannabis companies due to its federal illegality; and the right investors aren’t always easy to find.

At NJBIZ’s cannabis business panel in June, RIPCO Director of Cannabis Real Estate Colby Piper opined that to support social equity applicants, New Jersey needed to establish a fund similar to New York, which earmarked $2 million to directly support social equity cannabis business applicants.

But it’s no secret that cannabis businesses are often subject to high costs and higher rents than traditional businesses, and that $2 million fund will be largely consumed by high Manhattan rents, Piper explained.

Todd Polyniak, partner in charge of the cannabis practice at Sax LLP and founder of cannabis networking organization 420Cannect, also suggested the CRC establish a way for social equity applicants to secure low interest loans.

“Think about it, you just got your license. Time is ticking, you need to find the location, raise the funds, and then you’ve got all the rest you have to do so you don’t go bankrupt before your doors open. Once you secure the property, you’ll have to pay rent or a mortgage. But that also depends on who is underwriting the mortgage, because it’s federally illegal,” he said.

Internal Revenue Code Section 280E, which prohibits write-offs on taxes for anything federally illegal and poses challenges to accounting for legal cannabis, also poses challenges to legacy operators trying to move to the legal market.

“Some people who are legacy have been coming to us and want to be legit. But guess what – they haven’t filed tax returns. And it’s like the old story about Al Capone, he got busted for not filing tax returns. The government takes this position, especially with what they consider drug trafficking,” Polyniak said.

Legacy operators pursuing a license on the legal market are faced with the decision of whether or not to stop operating their current business. If they do so, “there’s a sacrifice they have to make in terms of how they take care of their family, and for the people who work for them, it also affects their family,” Powell said.

Polyniak noted that even the savviest legacy grower or retailer likely didn’t keep traditional books and records, which they’d have to learn how to do; and while larger legacy players likely have security, it’s probably not the kind required by CRC standards. They’d probably have to write an employee manual, too.

Some legacy players have been in the business for decades, though, and have knowledge that the regulators and current legal operators could benefit from.

“My experience is they are willing to not only stop participating in the existing market [in favor of the legal market] but they also would like to proactively share their best practices for commercializing cannabis. Many legacy operators have sophisticated packaging and they have a whole system of bringing cannabis products to market that the regulators and legal operators can learn from instead of starting over from the beginning. They’re willing to share, but there’s a cost for them to educate this now emerging industry,” Powell said.

The spirit of New Jersey’s adult use legislation leaned heavily into righting the wrongs of the War on Drugs and uplifting those most affected by it, which are often people and communities of color. Part of remedying the harm, Powell said, is looking to those who already were commercializing the cannabis space.

“They created a whole marketplace for legal cannabis businesses to pursue. Legal cannabis businesses are, for the most part, not introducing cannabis to people, they’re acquiring people who consume cannabis after purchasing from the legacy operators. What the legal industry is attempting to take marketshare from the legacy operators which is fine because we see the benefits of standards and testing, but the right thing to do is to allow these legacy operators to take part in that marketplace.”