Why (And How) States Are Minting Marijuana Millionaires

Why (And How) States Are Minting Marijuana Millionaires

Strict permitting in new medical marijuana states is bad for consumers, but great for the lucky few who become state-ordained marijuana millionaires.

Anyone with a combination of money and interest in marijuana has been staring for months at the state of Ohio, where more than 185 groups of entrepreneurs have staked fortunes and their futures on the outcome of a process beyond their control.

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This sounds like bad business. Worse — it sounds like straight-up gambling, like stuffing all of your investors’ cash into a slot machine, crossing your fingers, and pulling the handle, leaving the path towards perfidy or fortune up to the one-armed bandit — until you consider that their wager is banking on the promise of government-guaranteed munificence: Membership in an official marijuana millionaires oligopoly.

The Ohio model

The national bellwether, the decider of presidential contests, Ohio has also been a point of national obsession in cannabis circles since it decided to serve as judge, jury, and award presenter in a high-stakes game of “Who wants to be a guaranteed marijuana millionaire?”

You may channel David Byrne for a second and wonder how we got here. It’s like this: Scared straight by the threat of marijuana-friendly voters going too far with a ballot initiative, Ohio lawmakers took the unusual step of legalizing medical marijuana through the legislative process in 2016. (Most states do not do this.)

Going that route allowed the state to go slow — the first medical-marijuana dispensaries won’t open for business until September 2018 — and for state authorities to choose the cannabis industry’s entrants carefully, from a large pool of contestants, the best of whom would be selected based on their appearance on paper and granted a license.

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Carefully … and selectively. Under the “strictly regulated” medical-marijuana plan Gov. John Kasich signed into law — the same John Kasich who’s dealing with an apocalyptic opiate crisis and believes cannabis has no role in pain management — licenses to grow cannabis will be rarer in Ohio than Jim Harbaugh sympathizers.

A total of only 24 licenses to cultivate marijuana throughout the state of Ohio will be issued under the current scheme. And even these chosen few won’t have to worry about competition. Permits are all regional. No more than two dozen companies will receive the right to service a select and discrete portion of a population of more than 11 million. Like loyal feudal lords receiving bounteous fiefdoms from the king, each best-sounding company would be given the right to cultivate for a specific region, without fear or worry of trouble from an unexpected quarter.

Winner(s) take all

Befitting the high-roller table at Caesar’s Palace, this was a high-stakes game not everyone was invited to play. Non-refundable application fees cost as much as $20,000 — plus the time, energy, and lawyers and consultants required to put the application together. (Just like a casino, the house already won big.) For the winners, that ante will pay itself back many times over.

Business publications noted that the competition for the chance at entering a “multi-million dollar industry” was fierce. That only tells part of the story. This wasn’t competition — that’s something that happens on the free market. This was pre-competition, a political and popularity contest, in order to enter a controlled market without much competition.

The first 14 winners were announced on Nov. 3. Eleven companies won licensing; one company won the right to grow cannabis exclusively in three regions. They’ll now have nine months to get up and running.

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Ohio officials insist the process wasn’t rigged. And they may be right — companies were selected based on how their proposals met certain criteria, a process anyone who’s bid for a public contract would recognize. But not unlike the two-man energy company briefly tasked with rebuilding hurricane-ravaged Puerto Rico, all these companies have something in common: They’ve never done this before. And unless they commit some terrible crime or fail miserably at delivering their goods, they’ll have plenty of runway. Hard to worry too much about a good product when all the other producers are relegated to the black market.

Florida's license stranglehold 

There is some precedent. In most of the states legalizing medical marijuana in the past decade, authorities have strictly limited the number of permits awarded to some arbitrary number. The results are predictable to anyone familiar with how artificially constricted markets work. Think housing in California. 900-square foot bungalows aren’t going for a $1 million because of the view. Scarcity means speculators are going wild, man.

As of August, Florida’s estimated $1 billion medical-marijuana market was controlled by only seven moguls. Realizing what it had done — enriched private enterprise through public action, textbook regulatory capture — the state hurried to add a few more licenses, but not before the artificially scarce marijuana licenses were valued at $200 million each, according to the investment in one made by a Canadian marijuana giant.

Let’s be frank: Chestnut Hill Tree Farm, the Florida company in which Canadian company Aphria made that significant investment, did not have $200 million worth of fungible “stuff” on hand. It did not have $200 million worth of real estate, property, or patents. That was an option bet, a calculated risk based on the company having a giant slice of legal business all to itself thanks to government regulation.

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And this is the same roadmap Ohio is following. And in Pennsylvania, where the same script is playing out as if it was rehearsed. And Arkansas, where permits to grow will be limited to five.

Why do states follow this model?

By now, you, a reasonable and sane person, is probably asking, “Why?? What purpose does strictly limited permitting serve?”

The answer is one you know by heart. It’s reefer madness, my dear. Most states approaching weed with great trepidation, only after caving to the will of voters — not because they want to, but because they have to. You could blame Jeff Sessions and the feds, but this was going on when Hillary Clinton staffers were still ordering office furniture for the State Department jobs they were sure were theirs.

No, this is because Americans might love the idea of weed, but maybe not so much in practice. They fear it. They don’t understand it — and they think that by limiting it while still allowing it, they check all the boxes. Enough weed to help sick people, not too much weed to let in “an unsavory element.” It’s great policy, if you’re one of the lucky few to win a permit. Less great if you’re a patient stuck with all the consumer choice of a town where the only retail option is a Wal-Mart. In that way, this monopoly-creating approach to weed is very familiar.