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New York legalizing weed could mean big things for the future of the cannabis industry

New York this week became the latest state to legalize recreational cannabis, and in doing so, it’s poised to become one of the nation’s largest markets.

Another multibillion-dollar business opportunity would be lucrative for cannabis businesses, but industry members and insiders also are viewing the Empire State in a broader light. They think that having a prominent state such as New York enact legalization could ultimately influence cannabis’ future trajectory nationally and potentially help it shed its federally illicit status.

“New York is definitely a catalyst for more states to legalize and open up, as well as federal legalization,” said Ross Lipson, chief executive officer and co-founder of cannabis e-commerce marketplace Dutchie, which recently hauled in a $200 million investment from prominent tech VC firms.

“This industry really deserves to be normalized like other industries,” he added.

In 2020, it is projected that sales of medical and adult-use cannabis totaled between $16.9 billion and $20 billion, according to Marijuana Business Daily. And though it’s a large industry already, those sales will continue to snowball as existing state markets mature and new states’ programs get under way.

If cannabis is in the backyard of the world’s biggest businesses and financial institutions, they’re bound to take notice, said Chris Walsh, chief executive officer and president of trade publication Marijuana Business Daily.

“Once you get the big financial players involved and interested — with their clout, their weight, their role as a key cog in the American economy, and their influence with lawmakers — I do think that could be a game-changer,” he said.

Big market with a big upside

For the cannabis industry, the timing of New York legalizing couldn’t be better.

Cannabis was one of the few industries to go into the pandemic-dominated 2020 and come out stronger. Sales increased in places where cannabis operations were deemed essential businesses; state legalization measures made a clean sweep at the ballot box in November; and the new administration and slim Democratic majority in Congress fueled optimism about federal law changes.

And 2021, already living up to previous bullish expectations about the industry, has kicked off with a surge of investment activity and legalization efforts.

Now, New York makes at least 15 states that have legalized adult-use cannabis, and a few more, such as Virginia, New Mexico and Pennsylvania, are looking to join the crowd.

New York’s law to tax and regulate cannabis includes a host of provisions designed to create a diverse business mix of large and small operators; to funnel 40% of tax revenue into underserved communities; to expand medical marijuana access; and to allow for businesses such as delivery operations and cannabis cafes.

Early projections from advisory firm MPG Consulting pegged New York’s annual recreational sales at $1.2 billion by 2023 and growing to $4.2 billion in 2027.

MPG estimates that New York could see annual tax revenue from recreational sales climb from roughly $360 million in 2022 to $1.3 billion in 2027. A regulated adult-use market would create 76,000 jobs by 2027, according to MPG’s market analysis that was prepared for the New York Medical Cannabis Industry Association.

The law also appears favorable for New York’s existing operators, Viridian Capital Advisors wrote in a research note issued Wednesday.

“As the law stands today, existing operators will be grandfathered long-term advantages, creating an unequal playing field for new entrants,” according to Viridian, which noted that the 10 operators in the New York medical cannabis market — which include Acreage Holdings, Etain Health, Columbia Care, Cresco and Green Thumb — can have up to four stores now. Under the new law, they’d be able to add four more stores and have three of the eight for adult recreational use, while the others would be reserved for medical use. New entrants are allowed up to three recreational stores.

Curaleaf, one of the world’s largest cannabis companies, operates four medical marijuana dispensaries and a cultivation facility in New York. The company plans to double that retail presence and invest millions of dollars into increasing its production and growing capabilities, CEO Joe Bayern told CNN Business.

Curaleaf, which has positioned itself as an omnichannel consumer products business that runs its own dispensaries and sells branded products into others, sees only upside from increasing the number of operators in the market.

“For us, we want to get our products in as many dispensaries as possible,” he said.

Fixing the damage

It remains to be seen how specific regulations will shake out in New York. A newly created Office of Cannabis Management will fine-tune most of those details; plus, cities would have the ability to opt-out of allowing recreational cannabis dispensaries and on-site consumption.

And it’ll take some time. The law set April 1, 2022, as the earliest for when sales can begin; however, some lawmakers have said it could take 18 months to two years to establish regulations.

But no two state cannabis programs are exactly the same. While trailblazers such as Colorado and Washington provided a foundation for recreational cannabis regimes that followed, each state adds its unique twists and some try to improve on what came before. New York, for example, plans to have an excise tax based on THC potency.

At this early stage, New York also appears to be the most social equity-forward, said Adam Orens, managing director at MPG Consulting. Under the law, 40% of the state tax revenue would be directed to communities, and a stated goal of the social and economic equity program is to have 50% of the licenses go to minority or woman-owned businesses.

Key objectives of cannabis legalization programs include mitigating the adverse effect of the War on Drugs and absorbing the illicit market for cannabis.

“The early states had more of a substance abuse/public health focus on revenues and generally no social equity programs,” he said.

But because cannabis is federally illegal and remains a Schedule I drug alongside heroin and LSD, businesses that operate in compliance with state-level cannabis laws can’t easily bank. Legislative fixes for the disjointed federal-state dynamics — notably the recently reintroduced Secure and Fair Enforcement (SAFE) Banking Act — have been proposed in Congress over the years, but have yet to progress.

Senate Majority Leader Chuck Schumer, D-New York, tweeted Wednesday about his home state’s legalization with a nod to his and other senators’ plans to move forward on “comprehensive cannabis reform legislation.”

“I will keep working in the Senate to end the federal prohibition on marijuana and undo the damage of the War on Drugs,” he tweeted.

Article Topic Follows: Money and Business

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