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For legacy-to-legal cannabis entrepreneurs, going legal is easier said than done
by Dessy Pavlova · May 24, 2022
As New York puts forth what has been described as the most progressive legal framework for social equity in cannabis legalization by far among the states that have legalized, the process to legalize may still be a complicated task for legacy businesses. The legal framework and license requirements favor rich companies over smaller legacy ones, making it difficult for legacy businesses–which comprised the industry before legalization–to make the transition to the legal market.
One reason for legalizing cannabis, aside from gradually squeezing out the black market, would be to entice some of those businesses operating in the underground and at risk of prosecution to bring their experience and know-how to the legal market without having to hide their operations. As legacy operators soon realize, applying for a license and meeting compliance can be so complicated and costly that the decision to legalize becomes less attractive, with the void being filled instead by established businesses and holding companies with clean records but little experience in the cannabis industry.
Entrepreneurs looking to go legal in NY are wary of the process for several reasons. Start-up costs are high, putting smaller community-based legacy businesses at a disadvantage against well-funded companies. Getting a New York cannabis license requires being able to show that one’s business can be successful, but the fact that cannabis is still illegal at the federal level means there is no safe way for businesses that operated illegally to show their success without essentially revealing untaxed income to the IRS. Banking is difficult for state-legal cannabis businesses, never mind legacy businesses seeking to legalize.
Since it takes so long to pay start-up costs and meet regulatory demands, would-be legacy-to-legal entrepreneurs fear there is no way to keep up with the bigger competition. If legacy companies can’t break into the market, the very social equity that New York’s legalization laws aim to promote will be undercut. Legacy operators unable to legalize can’t generate the legitime income to re-invest in their communities or give jobs complete with benefits like health care to local minorities and people in the legacy market. Minority groups are those most impacted by cannabis prohibition, and yet legalization in some states has not improved their equity. Such is the case in Washington, where since legalization in 2014, most of the cannabis businesses in the state are white-owned, with black and Latino-owned cannabis enterprises, and legacy-to-legal brands, few and far between.
The decision to go legal then becomes much more difficult for established legacy operators that believe they can remain successful either way. Challenges like the lack of capital, federal regulation, financial restrictions, and complicated licensing requirements make the prospect of continuing to operate in a tax-free, albeit illegal landscape more palatable than some officials would like–officials who want to see such operations become thriving legitimate enterprises.
What brands do you hope to see in the legal market in New York?