Cannabis limits hit a bump

Despite state’s efforts, large firms take control of medical marijuana sites

When state officials wrote the rules for Maryland’s lucrative new medical marijuana industry, they were guided by a few principles. They wanted to foster local businesses, encourage competition and spread opportunity as widely as possible.

To help bring about those conditions, the rulemakers tried to limit companies to owning no more than one store to sell the drug. Their goal was to create a level playing field on which many smaller players could thrive.

But less than a year after the industry launched, some firms have gained control of multiple dispensaries. Now lawmakers are concerned the rules have left the state vulnerable to large out-of-state corporations swooping in and dominating the budding industry.

At least two companies now operate more than one store in Maryland, according to corporate records.

One, Chicago-based Green Thumb Industries, states in investment documents of “controlling ownership over five retail dispensaries” in Anne Arundel, Harford and Montgomery counties, to complement its growing and processing licenses in Maryland and other states.

“We own the booze. We own the bar,” GTI declares in an investor presentation obtained by The Baltimore Sun.

The company holds licenses or agreements in six states to grow cannabis, process it into a portfolio of brands and sell them through a retail chain of RISE dispensaries, including the five slated for Maryland. Three are now open in Joppa, Silver Spring and Bethesda.

Joy A. Strand, executive director of the Maryland Medical Cannabis Commission, called the creeping consolidation “a huge hot button.”

“We’ve had numerous calls, emails and encounters at different events with a variety of industry representatives being concerned about this issue,” she told commissioners last month. They’re asking: “How can they be doing this? What about the small independent business who’s being penalized because people are creating monopolies?”

The commission, which meets Thursday to award new dispensary licenses, is working to figure out how best to address those concerns.

GTI, which is traded publicly on the Canadian Securities Exchange, told potential investors of its controlling interests in five Maryland dispensaries in papers filed in Toronto on June 12.

Two days later, the commission issued a bulletin to alert licensed growers, processors and dispensaries that they “may only own or invest in one business within each” of those three categories.

GTI responded by telling the commission that its reading of Maryland regulations is wrong. There is “no prohibition on ownership of more than one license” in a category, the company said in a letter dated June 22.

The debate has taken state lawmakers by surprise.

“The intent of the law was absolutely that one company could control one license,” said Del. Cheryl Glenn, one of the architects of Maryland’s medical marijuana laws. “I don’t know how this has happened. I don’t know who has dropped the ball on this.”

Glenn, a Baltimore Democrat, and others have criticized the volunteer commission, which they say has lacked the resources and experience to launch and regulate a new industry that’s expected to generate nearly $500 million in sales by 2025. The rollout has been delayed for years by false starts, and more recently has been beset by litigation.

The latest disagreement centers on the meaning of a key sentence in the rules.

“Any party applying for a license shall have an interest in only one license,” regulators wrote.

Commission officials say the clause prohibits firms from owning more than one license. That interpretation is supported by the attorney general’s office.

But GTI and others say the rule applies only when companies apply for licenses — not after they have been awarded. “Maryland law restricts the number of

an entity may submit for each category of license,” GTI attorney Philip M. Andrews wrote to the commission. “[B]ut it places no restriction at all on the number of

an entity may hold in each category.” “After licenses were awarded in August 2015,” Andrews wrote, “many licensees relied on the potential to obtain interests in or acquire other licenses.”

Kevin Goldberg, a co-founder and general counsel with Green Leaf Medical, made the same argument to the commission’s policy committee last month.

“The law does not prohibit investors from investing in more than one entity,” Goldberg said.

Still, he agrees that the state’s intention was to limit companies to one dispensary. He told The Baltimore Sun that he fears an “anti-competitive” market if a few companies are permitted to “scoop” up multiple dispensaries, either through acquisitions or through management deals devised through what he called “creative lawyering.”

At the meeting last month, the policy committee was considering a new rule to require license holders to notify the commission of any new investors. Current rules require notification only when investors buy a stake of 5 percent or more.

Policy director William Tilburg said the proposal was prompted by “widespread industry concern” that companies were “violating the legal restriction on owning or investing in more than one licensee of the same license type.”

“We have received significant feedback that this is occurring underneath that 5 percent threshold,” he said. “And because there is no submission requirement to the commission we’re not finding out about it.”

In theory, an investor could gain majority control of an operation by amassing multiple stakes of less than 5 percent under separate limited-liability corporations.

Tilburg said he knew of no examples of such a maneuver. But he said the commission has rejected requests for ownership changes that have been disclosed over the 5 percent rule after the new investors were discovered to have stakes in multiple licenses.

In the commission’s June 14 bulletin asserting the restriction on multiple licenses, it directed license holders to disclose all their investors — a step aimed at alerting the commission to what it believes could be violations.

Goldberg and others said such a requirement would not address concerns about multiple ownership. Instead, they said, it would limit their ability to raise money from investors interested in purchasing less than 5 percent to maintain their privacy.

“We’re not going to be able to raise the money to finish our build-out because potential investors are not going to want us to give their names to the government,” Goldberg said.

Tilburg told the policy committee that companies are obtaining control of multiple licenses through agreements to manage operations for less experienced firms.

“There are several entities that are operating in the state that now have management agreements to manage three, four, five, six seven dispensaries where there is no equity that has been transferred, but the management agreement gets upwards of 99 percent of the revenue from the entity,” Tilburg said. “This committee and the commission should be looking if that’s a practice we want to allow and, if not, how do we address it?”

He did not name any companies. But both GTI and MPX Bioceutical Corp., which is also listed on the Canadian Securities Exchange, have disclosed such arrangements.

GTI is in discussions to manage the operations of Revolution Maryland Retail LLC, which has won pre-approval for a dispensary license in Harford County. Revolution Maryland Retail is a subsidiary of Chicago-based Revolution Enterprises. CEO Mark de Souza declined to comment on the management agreement.

GTI spokeswoman Linda Marsicano said the company “is fully compliant with all state regulations.”

“In addition to the dispensary license the Maryland Medical Cannabis Commission issued to GTI, we are working with other dispensaries to become operational,” she said. “GTI’s business relationships with those dispensaries have benefited Maryland patients by increasing access to, and ease in obtaining, the medicine they need.”

GTI, which holds a dispensary license in Silver Spring and pre-approval for a growing license, is in discussions to provide services to MGTM LLC, a pre-approved dispensary license holder in Anne Arundel County. It is providing management services to Meshow LLC for its Harford County dispensary. And it formed a joint venture to provide services to Chesapeake Alternatives’ processing license in Queen Anne’s County and its dispensary license in Montgomery County.

A subsidiary of MPX Bioceutical Corp. has agreements to manage — and options to buy — three dispensaries operated by Budding Rose in Bethesda, Greenmart of Maryland in Baltimore and LMS Wellness in Perry Hall, according to MPX CEO Scott Boyes. Records show the company would pay $2.5 million to purchase all of Budding Rose — $1.8 million in cash and the remainder in stock.

“MPX does have an option to acquire these dispensaries if, and when, the regulations are changed to permit same,” Boyes wrote in an email. “We are of the belief, as are many other companies operating in Maryland, that such arrangements are proper and have seen no evidence that current regulations in Maryland would preclude the use of management agreements similar to those employed by MPX (and others) in most other jurisdictions.”

Dr. Michael Chiaramonte, president of the Maryland Medical Dispensary Association, said the small, independent dispensary owners who hold single licenses worry they will not be able to compete with dispensaries managed by national firms that own or operate multiple outlets.

“What you see is that the grower that controls a dispensary or several will sell product at a retail price that is lower,” said Chiaramonte, who owns a dispensary.

He said many dispensary operators have been frustrated that the law is not clear. Some might want to sell, but worry the rules will not allow them to do so, or to enter into management agreements with bigger firms.

He said he and others have been approached for their licenses by Harvest Inc., a national cannabis company with a cultivator and dispensary license in Maryland.

“Harvest, Inc. is actively seeking to purchase, partner, or acquire a retail dispensary license in Maryland,” Brent Russum, senior vice president of business development for Harvest, wrote in an email obtained by The Sun. “If you have any interest in selling your license in Maryland, then call me as we will be in Maryland next week to meet in person. Also, if you know of any groups that are considering selling, I'd like to discuss this as well.”

Russum directed questions to Harvest’s media relations department, which did not return a call seeking comment.

Chiaramonte said the commission must do something to clarify the rules, as more companies are being asked to sell.

He said a grower recently told him, “Capitalism will always circumvent regulations.”

Mackie Barch is president of the Culta dispensary in Baltimore, which holds growing, processing and dispensary licenses. He’s also vice chairman of the Maryland Wholesale Medical Cannabis Association.

“Some of the large national public companies are being aggressive going after dispensary licenses,” he said. “It makes sense.”

He said the regulations were written “to keep that from happening,” but “by the letter of the law I do think it’s permissible.”

“For independent Maryland companies, it’s problematic if someone were to aggregate significant market share,” he said.

Mark Spataro, CEO of Chesacanna dispensary in Cockeysville, said he has been approached to sell his license.

“It’s not surprising,” Spataro said. “It’s a business. They want to come in and gather up as many licenses as they can.”

“We’ve been approached to see if were interested in selling the whole license or a majority stake and maintaining a minority interest,” he said. Given financial uncertainty facing the business — he opened his dispensary last week, a year after he expected — he said the offer was tempting.

But most dispensary owners “did not get into this to be wealthy,” he said. Spataro, 49, has operated a holistic health business for 20 years in Maryland. “That’s one of the reasons I haven’t sold — because I truly want to help people.”

Some lawmakers expect they will have to step in.

Glenn, a former chairwoman of the Legislative Black Caucus, said she’s concerned that the major players could consolidate their positions before black-controlled licenses get a chance to establish themselves in the marketplace.

If companies are gaining control of multiple licenses, she said, she would support legislation forcing them to divest.

“It looks like we’ll be going into session with another emergency bill,” she said. “If this is, in fact, the case, we need an emergency bill to ensure that companies can’t create monopolies.”

Glenn also expressed concern about the commission’s role. She said the agency “will be held to scrutiny” by the General Assembly and the black caucus.

Andrews, Green Thumb Industries’ lawyer, told the commission that attempts to require disclosure of all investors and to restrict license ownership could not be applied to current license holders.

“Such new policies could only be applied prospectively, not retroactively,” he wrote.