Maryland Sees Flood of Consolidation Deals

Capital continues to pour into the marijuana industry.

According to Virdian Capital Advisors, cannabis companies reported $13.1 billion in cash raises — what the cool kids call “dealflow” — so far in 2018, outpacing last year’s investments by five times.

But here’s the thing with the American cannabis industry: There’s lots of money, and more every day, but like another rainstorm washing over an already saturated area, there’s a limited amount of places where that torrent can go.

In Maryland, this means that outside investors are coming in to swoop up state-licensed businesses. This is taking place despite a state law, intended to ensure that black Americans and other minorities hurt by the war on drugs stand a chance to profit from legalization, prohibiting just that kind of dealflow.

According to an investigation by the Baltimore Sun, “several out of state firms” have informed their investors that they’ve locked down deals to acquire state-licensed marijuana firms in Maryland.

Companies with Maryland deals or pending deals include Curaleaf, based in Massachusetts, as well as Los Angeles-based dispensary giant MedMen — which earlier this fall closed the biggest-ever deal in American marijuana history — and MPX and GTI, the newspaper reported.

Maryland is similar to other states on the East Coast to recently legalize medical marijuana, in that it has placed caps on the number of businesses that will be permitted to grow, sell, and process medical marijuana. This in turn has made each one of these precious and coveted licenses significantly more valuable.

Aware of consolidation in other states, Maryland’s medical-marijuana laws prevent companies from holding more than one license, in any one of the state’s three categories for marijuana businesses: cultivation, sales, and processing.

And also aware of the immense pressure on each license holder to sell or at least take a significant investment from an outside entity, lawmakers passed a moratorium on any license sales at all for a year on May 15.

Yet despite all that, the deals flow on — and have been conducted without the Maryland Medical Cannabis Commission, which is supposed to oversee these deals, even being aware, the Sun reported.

The deals are recorded mostly via public records filed on the Canadian Securities Exchange. Canada’s national government has for years permitted medical-marijuana businesses and recently legalized recreational marijuana, making the northern markets an especially popular venue for cannabis deals.

Still, “I don’t know how the commission is allowing this to happen,” said Del. Cheryl Glenn, a Baltimore Democrat instrumental in pushing the state’s marijuana industry to adopt practices friendly to small-business or minority ownership, in comments to the Sun. “We are adamantly opposed to large out-of-state companies coming in and buying up licenses.”

“This needs to cease and desist.”

It may be true that the companies have found a loophole in the restrictions against flipping. State law prohibits deals that allow an outside company to take over 5 percent or more of a state-licensed firm.

Fair enough. But there’s nothing outlawing a company from structuring their takeovers as a “management agreement” that allows a company to give another company all their revenues, without “actually” changing ownership, the newspaper reported.

Though some marijuana businesses interviewed by the Sun claim their deals’ structures complies with the law, both the state attorney general and marijuana-trade groups disagree.

“The intent was very clear,” J. Darrell Carrington, executive director of Maryland Cannabis Industry Association, told the newspaper. “One of the fears that the General Assembly had was creating ‘Big Cannabis,’ of having monopolies.”

Glenn and other lawmakers say that when the next legislation session opens up in January, they’ll close the loophole. It’s not clear how that would affect the deals already in play.

Glenn was also a chief proponent of provisions that reserve some Maryland marijuana industry licenses for minority ownership, the closest analog the cannabis industry has to a sort of Civil Rights Act — a necessary move, considering that the percentage of marijuana businesses owned by the people most often arrested for marijuana crimes is in the single digits.

At the same time, according to industry analysts, consolidation is a natural reaction to pressures put on the marijuana industry by federal prohibition and restrictions on banking and tax deductions.

Yet it’s relevant to note that most dispensaries and cultivation operations in well-established marijuana states, including Colorado and California, do not appear to be owned by companies with operations in multiple states. Neither does either state place a cap on the number of licenses awarded to produce or sell cannabis.

You could argue that capital is the problem. Capitalists might claim that onerous rules are the issue. Either way, modern-day marijuana companies appear more than keen to steamroll well intentioned local rules if they stand to benefit and they’re doing that at a pace that does not appear likely to slow down anytime soon.

TELL US, do you think people in Maryland should have the best chance at establishing medical marijuana businesses in their state?